COVER SHEET

P W - 9 4 SEC Registration Number

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

S U B S I D I A R I E S

(Company‟s Full Name)

7 t h F l o o r , A l l i e d B a n k C e n t e r

6 7 5 4 A y a l a A v e n u e , M a k a t i C i t y

(Business Address: No. Street City/Town/Province)

Jorge Ma. S. Sanagustin 817-8710 (Contact Person) (Company Telephone Number)

0 3 3 1 1 7 - A Month Day (Form Type) Month Day (Fiscal Year) (Annual Meeting)

Not Applicable (Secondary License Type, If Applicable)

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings 6,599 Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

S T A M P S Remarks: Please use BLACK ink for scanning purposes.

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SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-A ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SECTION 141 OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended March 31, 2013

2. SEC Identification Number PW- 94 3. BIR Tax Identification No. 430-000-707-922

4. Exact name of registration as specified in its charter PAL HOLDINGS, INC.

5. Philippines 6. (SEC Use Only) (Province, country or other jurisdiction of Industry Classification Code: incorporation or organization)

7. 7/F Allied Bank Center, 6754 Ayala Avenue, Makati City 1200 Address of principal office Postal Code

8. (632) 817-8710 Registrant‟s telephone number, including area code

9. Not Applicable Former name, former address, former fiscal year, if changed since last report

10. Securities registered pursuant to Section 8 and 12 of the SRC

Number of Shares of Common Stock Title of Each Class Outstanding and Amount of Debt Outstanding

Common Stock 22,421,512,096 shares

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

Yes [ X ] No [ ]

Philippine Stock Exchange Common Stock - 5,421,567,685 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 [ X ] No [ ]

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

Yes [ X ] No [ ]

13. As of March 31, 2013, the aggregate market value of the voting stock held by non-affiliates of the registrant is P=608,692,043.

14. Not applicable

DOCUMENTS INCORPORATED BY REFERENCE

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PART I - BUSINESS AND GENERAL INFORMATION

Item 1. Business a) Corporate History

PAL Holdings, Inc., (the Company), was incorporated on May 10, 1930 as “Baguio Gold Mining Company”. On September 23, 1996, the 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 May 30, 1997, the stockholders approved the increase in the Company‟s authorized capital stock from 200.00 million common shares to 4.00 billion common shares both at P=1 par value per share. On April 13, 1998, the stockholders amended the increase in the Company‟s authorized capital stock from 4.00 billion common shares to 2.80 billion common shares and 1.20 billion preferred shares both at P=1 par value per share. On August 30, 1999, the stockholders further amended the authorized capital stock from 2.80 billion common shares and 1.20 billion preferred shares to 400.00 million common shares at P=1 par value per share this which was approved by the SEC on October 2, 2000.

On July 26, 2006 and September 19, 2006, at separate meetings, the Board of Directors (BOD) and the stockholders approved the increase in authorized capital stock of the Company from P=400.0 million divided into 400.0 million common shares with a par value of P=1 per share to P=20.0 billion divided into 20.0 billion common shares.

On August 17, 2006, the BOD approved the acquisition of the following holding companies which collectively control 84.67% of Philippine Airlines, Inc. (PAL, or the Airline); Pol Holdings, Inc., Cube Factor Holdings, Inc., Ascot Holdings, Incorporated, Sierra Holdings & Equities, Inc., Network Holdings & Equities, Inc., and Maxell Holdings Corporation (collectively, the Six Holding Companies).

On January 19, 2007 the Philippine SEC approved the increase in authorized capital stock and change in corporate name of Baguio Gold Holdings Corporation to PAL Holdings, Inc.

On August 13, 2007, the Company acquired directly from the Six Holding Companies 8,823,640,223 shares in PAL, which is equivalent to 81.57% of the issued and outstanding common shares in the Airline. At the same time, it acquired from the 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.

On August 14, 2007, the Company assigned its shares in each of the Six Holding Companies to Trustmark Holdings Corporation (Trustmark).

On October 16, 2007, the Philippine SEC approved the Amended By-Laws of the Company, which consist of the deletion of outdated provisions and the inclusion of the provisions required under the Code of Corporate Governance provided by the SEC.

On October 17, 2007, the Philippine SEC approved the equity restructuring of the Company. This allowed the Company to wipe out the deficit as of March 31, 2007 amounting to P=253.73 million

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using the Additional Paid-In Capital amounting to P=4.03 billion subject to the condition that the remaining additional paid-in capital will not be used to wipe out losses that may be incurred in the future without prior approval of the SEC.

In April 2012, San Miguel Equity Investments Inc. (SMEII), a wholly owned subsidiary of San Miguel Corporation, acquired 49% equity interest in 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.

In July 2012, PAL presented for review to the SEC its application for the increase in authorized capital stock from P=20.0 billion divided into 20.00 billion shares to P=23.00 billion divided into 23.00 billion shares which was approved by the SEC on January 17, 2013, while the Company had sought the approval of its increase in capital from its shareholders on September 28, 2012 and obtained approval from SEC on December 12, 2012. The additional shares issued in favor of Trustmark, thereby increased its share interest in the Company from 97.71% to 99.45%.

On February 4 and March 15, 2013, the BOD and the stockholders, respectively, approved the increase in authorized capital stock from P=23.00 billion divided into 23.00 billion shares to P=30.00 billion divided into 30.00 billion shares which the Philippine SEC approved on June 28, 2013 to accommodate the respective subscriptions of independent investors and consequently, to comply with the minimum public ownership requirement of the Philippine Stock Exchange (PSE). 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 March 31, 2013, PAL's route network covered 32 points in the Philippines (including 23 points under codeshare with Air Philippines Corporation (“PAL Express”)) and 31 international destinations (including 5 points under joint service/codeshare arrangements).

PR Holdings, Inc.

PR was organized by a consortium of investors for the purpose of bidding for and acquiring the shares of stock of PAL in accordance with the single-buyer requirement of the bidding guidelines set by the seller, the National Government of the Republic of the Philippines. PR acquired on March 25, 1992, 67% of the outstanding capital stock of PAL.

PR was partially dissolved or liquidated on November 9, 1998 with a decrease in its authorized capital stock and retirement of some of its shares in exchange of PAL shares to retiring stockholders as return of capital.

As a holding company, PR‟s primary purpose is to purchase, subscribe, acquire, hold, use, manage, develop, sell, assign, exchange or dispose of real and personal property, including shares of stocks, debentures, notes and other securities of any domestic or foreign corporation.

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Principal products or services and their markets indicating their relative contributions to sales or revenues of each product or service:

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

PAL's operations for FY2012-13 are described as follows:

During the year, PAL carried an average of 20,886 passengers (10,284 domestic and 10,602 international) and 358 tons of cargo (162 tons domestic and 196 tons international) per day.

Systemwide Operations: FY2012-13

Net Passenger Revenues (in millions) P=62,203.4

Net Cargo Revenues (in millions) P=5,350.9

Revenue Passenger Kms („000) 17,725,731 Available Seat Kms (ASKs) („000) 25,407,368 Passenger Load Factor 69.77%

Number of Passengers 7,623,392 Freight Kilograms 130,750,000

Net Revenues by Route

Based on the results of operations for FY2012-2013, FY2011-2012 and FY2010-2011, the comparative revenue contribution by route is shown below:

FY2012-2013 FY2011-2012 FY2010-2011 Transpacific 32.7% 31.1% 32.4% Asia & Australia 50.6% 51.4% 47.3% Total International 83.3% 82.5% 79.7% Total Domestic 16.7% 17.5% 20.3% Total System 100.0% 100.0% 100.0%

International Passenger Services

As of March 31, 2013, PAL's international route network covered 31 cities (including 5 under joint service/code share arrangements with other international carriers) in 16 countries.

26 on-line points: Guam, Honolulu, Los Angeles, San Francisco, Toronto, Vancouver, Melbourne, Sydney, Delhi, Fukuoka, Nagoya, Osaka, Tokyo, Pusan, Seoul, Hong Kong, Macau, Beijing, Shanghai, Xiamen, Taipei, Bangkok, Saigon, Singapore, Jakarta, Denpasar Bali

5 points under joint Abu Dhabi, Bahrain, Doha, Dubai, Kuala Lumpur service/codeshare arrangements:

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Transpacific

During the year, PAL flew an average of 23 flights a week to North America utilizing B747-400s and A340-300s: 9 times weekly non-stop flights to Los Angeles; 7 times weekly non-stop services to San Francisco; and 7 times a week to Vancouver, 3 of which fly onward to Toronto and back. Technical stops either in Guam or Honolulu are required on the return flights of Transpacific services at certain times of the year to compensate for adverse wind conditions.

In addition, PAL also operates a regular thrice weekly direct service to Honolulu while Guam is served 5 times a week.

The Airline is entitled to fly to 33 other U.S. cities for unlimited frequencies under certain terms and conditions of the Philippines-U.S. bilateral air transport agreement. However, the Category II rating imposed on the Philippines Government regulatory authorities by the U.S. Federal Aviation Administration prevents PAL from increasing the number of flights it operates into the U.S. at this time.

India

PAL flew three times a week to Delhi via Bangkok.

Asia and Australia

PAL operated 185 departures per week out of Manila and Cebu to 9 countries in Asia and Australia. The Airline flew 35 times a week to Hong Kong; 21 times a week to Singapore; 18 times a week to Seoul; 14 times a week to Bangkok; 13 times a week to Tokyo; 8 times a week to Beijing; 7 times a week each to Jakarta, Macau, Nagoya, Osaka, Pusan, Saigon, Shanghai, and Xiamen; 6 times a week to Taipei; 5 times a week to Fukuoka; and 2 times a week to Bali.

To and from Australia, PAL operates 4 times weekly non-stop service to Sydney route and 3 times weekly non-stop to Melbourne.

Domestic Passenger Services

PAL‟s domestic network covered 32 cities and towns in the Philippines, including 23 points under joint service/codeshare arrangments with Air Philippines Corporation (PAL Express). In FY2012-2013, it flew about 3.8 billion ASKs on its domestic routes which represented 14% of the Airline's total capacity. PAL operated its jet aircraft (B747-400, B777-300ER, A340-300, A330-300, A320-200, and A319-100) on its domestic routes. It served the following domestic destinations: Bacolod, Cebu, Davao, General Santos, Iloilo, Kalibo, Laoag, Manila, and Tagbilaran. Domestic routes operated by partner carrier, PAL Express include Basco, Butuan, Busuanga, Cagayan, Calbayog, Catarman, Caticlan, Cotabato, Dipolog, Dumaguete, Jolo, Legazpi, Masbate, Naga, Ozamiz, Pagadian, Puerto Princesa, Roxas, Surigao, Tacloban, Tawi- tawi, Tuguegarao and Zamboanga.

Joint Services and Code Share Agreements

The Airline continues to employ tactical codesharing alliances to broaden its route network and establish a presence in cities where it does not fly.

PAL maintains codeshare agreements with Malaysia Airlines (in place since February 1999) covering a total of 28 weekly flights between Kuala Lumpur and Manila; with Emirates Airlines (in place since September 1999) on 21 times weekly non-stop flights between Dubai and Manila;

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with Cathay Pacific (in place since November 2001) on daily services between Hong Kong and Cebu; with Qatar Airways (in place since August 2002) on 14 times weekly service between Doha and Manila; with Gulf Air (in place since March 2006) on 7 times weekly services between Bahrain and Manila; and with Etihad Airways (in place since October 2007) on 14 times weekly services between Abu Dhabi and Manila.

PAL's daily services between Manila and Saigon are operated under a codeshare agreement with Vietnam Airlines (in place since 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 PAL Express (in place since May 2002) on regular domestic services which the latter operates, while PAL Express likewise codeshares on domestic flights operated by PAL.

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.

Mabuhay Miles Elite or Premier Elite members enjoy exclusive travel privileges including priority reservation waitlist, dedicated reservation telephone lines, priority check-in, additional free luggage allowance, priority luggage handling, access to Mabuhay Lounges and participating VIP lounges, and additional discounts and amenities from program partners.

The SportsPlus Card is a privilege card designed for sports enthusiasts, which grants members the benefit of extra free baggage allowance for sports equipment.

(ii) Distribution Methods of Products or Services

PAL maintains a total of 12 sales and ticket offices in Manila, 21 in other cities in the Philippines, and 30 located in foreign stations. There are 30 general sales agents in selected international points, Billing Settlement Plan member agents in 25 countries, Airline Reporting Corporation member agents in the United States, 11 domestic sales agents and 322 agents under the domestic ticketing program that handle the promotions and sales of PAL's products and services.

PAL payment centers are now available in Petron kiosks and 7-11 stores.

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 site, www.philippineairlines.mobi, allows web-enabled mobile phones to access

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flight schedules, track Mabuhay Miles mileage, and know more about the latest PAL news, advisories, travel information, and promos.

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

PAL aircraft have well maintained interiors, and are equipped with state-of-the-art seats, and the latest in inflight entertainment.

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. Overnight kits and the „Junior Jetsetter‟ activity kits are offered in long haul international flights.

The Fiesta Boutique is a selection of duty free products offered in all international flights. The service provides the convenience of duty free shopping during the flight. Products for sale include imported and local liquor, cigarettes, perfumes, and other high quality gift items.

PAL Mabuhay Lounges are available in selected international and domestic stations for Mabuhay class passengers and Mabuhay Miles Elite and Premier Elite members. Passengers can unwind, dine, and freshen up in these facilities before boarding their flights.

The PAL Swingaround and PALakbayan are the Airline's tour programs which continue to offer holiday packages in PAL's international and domestic destinations.

PAL's RHUSH (Rapid Handling of Urgent Shipments) is the airport-to-airport cargo service which provides the fastest way to ship cargo domestically or overseas. It offers high priority in cargo, guaranteed space, and quick acceptance and release time.

Express check-in counters for senior citizens and up to 2 traveling companions with no check-in baggage are offered in Manila and Cebu.

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

PAL continues to maintain a strong market share in its international routes despite competition with flag carriers of the host countries where PAL flies and with the 'sixth freedom' carriers which fly passengers to the Philippines from various countries via their home airports.

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:

Market Capacity Share Share Airline Competitors Transpacific 36.8% 36.9% Hawaiian Airlines, Air Canada, Korean Airlines, Asiana Airlines, Japan Airlines, Cathay Pacific, Eva Airways, China Airlines, Continental/Delta Airlines Asia and Australia 28.8% 32.3% Japan Airlines, Cathay Pacific, Singapore Airlines, Thai Airways, Korean Air, Asiana Airlines, Qantas Airways, China Southern Airlines, Dragon Air, Delta Airlines, Royal Brunei, Kuwait Airways, Jeju Airlines, Air

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China, Tiger Airways, Cebu Pacific, All Nippon Airways, Jetstar Asia, Jetstar Airways, Air Asia, Zest Air, Sea Air

PAL competes with the biggest carriers in the airline industry. Continental/Delta Air Lines, China Southern Airlines, Air China, United Airlines, and Qantas Airways are among the world‟s biggest in terms of passengers carried. Japan Airlines, Air China, Qantas Airways, Cathay Pacific, China Southern Airlines, Singapore Airlines, Korean Air, and Thai Airways are still the leading carriers in the Asia and Pacific region. Most of these international airlines belong to the largest alliances in the industry (including the Star Alliance, Sky Team and One World).

PAL held a 25% share in the domestic market in the fiscal year ending March 2013. Competitors include Cebu Pacific, Zest Air, and Southeast Asian Airlines.

The continuous enhancement of products and services, competitive fares, and an excellent safety record enables PAL to hold its market leadership. In the Transpacific market, PAL has the advantage of providing the only nonstop service from the Philippines to mainland U.S.A. and Canada. The distinct Filipino flavor of the PAL inflight service, which appeals strongly to Filipino ethnic passengers, is another advantage over the non-Filipino carriers.

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

PAL‟s jet fuel suppliers are: Air BP Limited, Petron Corporation, Pilipinas Shell Petroleum Corporation, Chevron Products Company, PT Pertamina (Persero), World Fuel Services (Singapore) Pte. Ltd., Win Both International Corporation, PTT Public Co. Ltd., China National Aviation Fuel Supply Co., LTD., Shanghai Pudong International Airport Aviation Fuel Supply Co. Ltd., Hyundai Oilbank Co. Ltd, S-Oil Corporation, Singapore Petroleum Co. Ltd., Sinopec (HK) Petroleum Co. Ltd., IP&E Holdings, LLC (dba. IP&E Guam), Morgan Stanley Capital Group, Inc., JX Nippon Oil and Energy Corporation (Formerly Japan Energy Corporation), Vitol Aviation Co. (Formerly Pacific Fuel Trading Corporation), Indian Oil Corporation Ltd., Saudi Arabian Oil Company (SAUDI ARAMCO), STX Corporation, Shell Aviation and Lubwell Corporation.

PAL‟s inflight catering requirements are provided by Sky Kitchen Philippines Inc., for all domestic flights and outgoing flights ex- Manila and for Manila incoming flights originating from Hong Kong (HKG), Macau (MFM), Singapore (SIN), Saigon (SGN), Taipei (TPE), depending on the type of aircraft utilized. For other incoming flights, the major suppliers include Flying Food Group (SFO), HACOR Inc. (LAX), International In-Flight Catering Co. Ltd. (HNL), Gate Gourmet Svcs. Pty. Ltd. (SYD), Q Catering (MEL), CLS Catering Services Ltd. (YVR), TAJ SATS Air Catering Ltd., (DEL), Cebu Pacific Catering Services Inc. (CEB), Fukuoka Inflight Catering (FUK), AAS Catering Services, (KIX), Nagoya Air Catering Co. Ltd. (NGO), TFK Corporation (NRT), Korean Air Catering (ICN and PUS), Shanghai Eastern Air Catering Co. Ltd. (PVG), Beijing Airport Inflight Kitchen Ltd. (BJS), Cathay Pacific, Catering Services Ltd. (HKG), China Pacific Catering Services (TPE), Xiamen Fliport Catering Ltd (XMN), LSG Sky Chefs (Thailand) Ltd. (BKK), Aerofoods ACS CGK (CGK), LSG Sky Chefs Guam (GUM) SATS Catering Pte. Ltd. (SIN), Aerofoods ACS DPS (DPS) and Brahims Airline Catering (KUL).

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

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

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

The Company‟s significant transactions with related parties are described in detail in Note 18 of the Notes to Consolidated Financial Statements.

(viii) Patents, trademarks, licenses, franchises, concessions, royalty, agreements or labor contracts, including duration;

PAL has a General Terms Agreement (GTA) with Lufthansa Technik Philippines (LTP) and an Aircraft Maintenance Agreement (AMA) with Taikoo (Xiamen) Aircraft Engineering Company for the maintenance, repair and overhaul services covering its fleet of commercial aircraft. PAL's Aircraft Engineering Department (AED) undertakes planning, monitoring and control of all maintenance activities and technical compliance of aircraft, engines and accessories with airworthiness standards and industry accepted standards for safety, reliability, and customer acceptability.

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 the original equipment manufacturers which include Airbus Industries, Boeing, General Electric, CFM International, Honeywell, Goodrich, Nordam Singapore, Panasonic Aviation, Recaro Aircraft Seating, and Thales Avionics, among others.

The PAL Fleet is maintained in accordance with a Continuous Airworthiness Maintenance Program (CAMP) that is approved by the Civil Aviation Authority of the Philippines (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, making them safe and reliable. AED established the General Maintenance Manual (GMM) which describes the processes required to achieve the intent of the CAMP, as required by the CAAP.

PAL subcontracts the maintenance of its aircraft to competent Maintenance Repair Organizations (MRO), mostly to LTP for line and base maintenance in the Philippines and to TAECO for base maintenance in Xiamen, China. Line maintenance in overseas destination stations is subcontracted to other service providers. Shop maintenance and overhaul services of engines are provided by SR Technics Switzerland Ltd., Lufthansa Technik in Hamburg, Germany (LHT), MTU Maintenance Hannover (Germany), KLM, Air France Industries and Evergreen Aviation Technologies Corporation (EGAT) while the same services for the Auxiliary Power Units (APUs) are provided by Honeywell, Triumph Air Services Asia Ltd. and H+S Aviation. Fan thrust reversers are provided by Societe Air France for Airbus fleet. Component maintenance services are handled by LHT for the Boeing fleet and SR Technics for the Airbus fleet. Landing gear overhaul programs are being done by Goodrich-Messier Inc., Messier Bugatti, Aircraft Maintenance Engineering Corporation (AMECO) and LHT.

LTP and the other service providers have to follow the requirements of PAL‟s Maintenance Schedule and GMM and AED exercises oversight responsibilities to ensure compliance.

LTP‟s responsibilities as PAL‟s Maintenance, Repair and Overhaul service provider (MRO) include the management and procurement of materials and spare parts and subcontracting service for maintenance of certain types of PAL aircraft engines and most components.

Engineering functions are mostly performed by AED with MRO related functions being handled by LTP.

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PAL also operates a small fleet of trainer aircraft that is managed by the PAL Aviation School. Maintenance of these aircraft is performed by another MRO, Asian Aeronautics Services, Inc. (AASI). PAL has a Technical Services Agreement with AASI that was signed in November 2010. AED assists the Aviation School in its oversight of the maintenance activities of the trainer fleet.

Development Plans

PAL aims to re-establish the Airline‟s leadership in the aviation sector and make its operations more competitive and profitable.

PAL will modernize the fleet, increase the regional and international route networks, and invest in aviation infrastructure. PAL will continue to focus on delivering consistent and excellent customer services.

To improve its margins, PAL will also restructure its organization, optimize flight and ground operations, and manage costs, without compromising safety and customer satisfaction.

Franchise

PAL operates under a franchise, which extends up to the year 2034, granted by the Philippine Government under Presidential Decree No. 1590. As provided for under the franchise, the Parent Company is subject to:

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

b. franchise tax of 2% of the gross revenue derived from nontransport, domestic transport and outgoing international transport operations, whichever is lower, in lieu of all other taxes, duties, fees, and licenses of any kind, nature, or description, imposed by any municipal, city, provincial or national authority or government agency, except real property tax.

As further provided for under its franchise, PAL can carry forward as a deduction from taxable income, net loss incurred in any year up to 5 years following the year of such loss (see Note 23 of the Notes to the Consolidated Financial Statements). In addition, the payment of the principal, interest, fees, and other charges on foreign loans obtained by PAL, and all rentals, interest, fees and other charges paid by PAL to lessors for the lease of aircraft, engines, spares, other flight or ground equipment, and other personal property are exempt from all taxes, including withholding tax, provided that the liability for the payment of said taxes is assumed by PAL.

On May 24, 2005, the Expanded-Value Added Tax (E-VAT) law was signed as Republic Act (RA) No. 9337 or the E-VAT Act of 2005. The E-VAT law took effect on November 1, 2005 following the approval on October 19, 2005 of Revenue Regulation (RR) No. 16-2005 which provides for the implementation of the rules of the E-VAT law. Under the provisions of RA No. 9337, the franchise tax of PAL was abolished and PAL shall be subjected to the corporate income tax. PAL remains exempt from any taxes, duties, royalties, registration license, and other fees and charges, as may be provided by PAL‟s franchise.

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

PAL‟s operations are regulated by the Philippine Government through the Civil Aeronautics Board (CAB) with regard to new routes, tariffs, and schedules; through the Civil Aviation Authority of the Philippines (CAAP), formerly the Philippine Air Transport Office, for aircraft

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and operating standards; and through airport authorities for airport slots. PAL also conforms to the standards and requirements set by different foreign civil aviation authorities of countries where the airline operates.

In coordination with the different government air transport agencies - the CAAP and the Department of Transportation and Communications (DOTC) - PAL initiates improvement programs for facilities in the country's domestic and international airports to conform with international standards and enhance safety of the Airline's operations. 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. PAL is likewise cooperating with CAB, DOTC, and the Department of Industry in efforts to better define and/or enhance passenger rights and protections.

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

The U.S. Department of Transportation‟s Federal Aviation Administration (FAA) had previously assessed the CAAP in September 2002 and found it in compliance with the international safety standards set by the International Civil Aviation Organization (ICAO). However, after consultation in November 2007, the FAA determined that the Philippines was no longer overseeing the safety of its airlines in accordance with international standards. The Philippines safety rating has been lowered from Category 1 to Category 2 under the FAA‟s International Aviation Safety Assessment program. A Category 2 rating means a country either lacks laws or regulations necessary to oversee air carriers in accordance with minimum international standards, or that civil aviation authority - equivalent to the FAA - is deficient in one or more areas, such as technical expertise, trained personnel, record-keeping or inspection procedures. This subpar ratings negatively affected PAL particularly on its planned flight expansions. Because the country is in Category 2 status, PAL is prohibited from increasing its flights to the U.S. and from changing the type or number of aircraft used in these services. Finally, the ICAO Significant Safety Concern (SSC) finding on the Philippines remains in place, as does the European Union (E.U.) Blacklist. Similarly to FAA Category 2, the ICAO SSC and the E.U. Blacklist constitute findings by the said bodies that the CAAP does not meet minimum international aviation safety standards. Subject to the exception noted below, airlines from countries under the E.U. Blacklist are completely prohibited from operating commercial flights to/from Europe. Unlike FAA Category 2 - where airlines that already fly to the U.S. at the time Category 2 is imposed are permitted to continue operating such flights under enhanced FAA surveillance - an airline flying to/from Europe at the time its home country is placed on the blacklist must cease all such flights unless the airline is able to obtain a specific exemption from the E.U. that permits it to continue (or resume) such flights.

However, in March 2013, through efforts of the DOTC and the CAAP and with the cooperation of the various stakeholders including PAL, the ICAO Significant Safety Concern (SSC) finding on the Philippines has been lifted.

(xi) Estimate of the amount spent during each of the last three fiscal years on research and development activities, and if applicable the extent to which the cost of such activities are borne directly by customers;

NOT APPLICABLE

(xii) Cost and effects of compliance with environmental laws

PAL has fully complied with the following major environmental laws:

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

Php 142,500 for the annual Stationary Source Emission Test for 15 generator sets from Inflight Center (IFC), Maintenance Base Complex (MBC) and Data Center Building (DCB)

2. DENR Administrative Order (AO) No. 34, “Revised Water Usage and Classification”

No cost to PAL for period covering FY2012-2013

3. DENR Administrative Order No. 35, “Revised Effluent Regulations of 1990”

Cost: Php 60,843.16 annually for water quality analysis; approximately Php1,200,000/annum for electricity consumption for operation of the sewage treatment plant (STP); Php720,000/annum for enzyme used to dissolve grease in the catering/kitchen area, control odor and enhanced STP biological reaction

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

No cost to PAL for period covering FY2012-2013

5. Presidential Decree No. 1586, “Establishing an Environmental Impact Assessment System” and DENR Administrative Order No. 96-37

No cost to PAL. Certificate of Non-Coverage issued to Inflight Center (IFC), Maintenance Base Complex (MBC) and Data Center Building (DCB)

6. Republic Act No. 6969 “Toxic and Hazardous Waste Management” and DENR Administrative Order No. 90-29

Cost: Php 128,979.20 for disposal of busted fluorescent lamps and Php 4,914 for the disposal of medical wastes

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

Cost: Php 5,005.50 for renewal of annual Water Permit

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

No cost to PAL due to solid wastes with recyclable materials are segregated and recycled by the service provider

9. Department of Health (DOH) Administrative Order 29, s. 2000 “License to Operate an Industrial X-ray Facility”

Cost: Php 6,400 permit application for 8 X-ray facilities nationwide (PAL Cargo Terminal, Mactan-Cebu, Davao and General Santos Cargo Services)

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

1. Regulatory compliance 2. Resource utilization 3. Waste generation reduction 4. Environmental cost reduction

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5. Improved public image and community relations 6. Improved positive perception of regulators and NGOs 7. Enhancing the Company‟s commitment to continually improve its environmental performance in all aspects of its operations 8. Appreciation and recognition from the DENR for the company‟s participation in Earth Day, Environment Month and International Coastal Cleanup celebrations 9. Cost cutting through energy and resource conservation

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

The Company has 5 compensated officers as of March 31, 2013. The Company does not have any plan of hiring additional employees within the ensuing 12 months.

PAL Employees:

As of March 31, 2013, PAL has a total workforce of 4,831 as follows:

Classification Number of Employees Ground Employees Philippine 2,414 Foreign 228 Flight Crew Pilots 499 Cabin Crew 1,690

PAL recognizes two local labor unions, one for the rank and file ground employees and another for the cabin crew. In addition, it also recognizes foreign labor unions in the United States, Singapore and Japan.

PAL has 1,165 rank and file ground employees in the Philippines, United States, Singapore and Japan; and 1,690 cabin crew who are covered by a collective bargaining agreement (CBA).

The 10 year moratorium on the PAL-PALEA CBA ended in September 2008, after which, PAL reached an agreement with PALEA that any improvement on concerns/proposals on the CBA will be discussed/implemented after October 2009. A new CBA is due for negotiation but this has not been finalized due to intervening events (such as PAL‟s losses due to the financial crisis and the spin-off issue involving the outsourcing of non-core airline functions for airport services, catering and reservations), which PALEA elevated to the CA after receiving unfavorable rulings from the Department of Labor and Employment (DOLE) and the Office of the President. PAL maintains that DOLE and the Office of the President were correct in its earlier rulings recognizing the planned spin-off as a valid exercise of management prerogative and that any CBA negotiation will eventually cover only those to be left behind. PALEA reacted by filing a Notice of Strike on the ground of unfair labor practice (refusal to bargain) which was eventually certified by the DOLE Secretary to the NLRC for compulsory arbitration. The NLRC dismissed the certified case for lack of merit and the subsequent motion for reconsideration filed by PALEA was denied.

On April 16, 2013, a Memorandum of Agreement was entered into by PAL and FASAP to form part of the 2010-2015 PAL-FASAP CBA. Among other provisions, retroactive salary increases of Php4,000 and Php2,000 were extended to Flight Pursers and Flight Attendants, respectively, enjoying regular status as of the effectivity dates of the increases, i.e. July 16, 2010, July 16, 2011 and July 16, 2012. On or before July 16, 2013, PAL and FASAP agree to meet and discuss terms and conditions that shall govern the last 2 years, July 16, 2013 to July 15, 2015 of the CBA.

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Meanwhile, the CBA for PAL – International Association of Mechanists and Aerospace Workers, which covers employees in the United States, expired on June 30, 2011. The parties are now in the process of negotiations for the renewal of the CBA. The Airline concluded its CBA with the Singapore Manual and Mercantile Workers‟ Union, which covers employees in Singapore and will cover the period from January 1, 2012 to December 31, 2014. The CBA with Airline‟s Labor Union – Japan expired on May 31, 2013 and the Company will renegotiate a new CBA.

In FY 2012-2013, the Company gave its employees all benefit entitlements in accordance with stipulations in the respective CBAs.

Major risk/s involved in each of the businesses of the Company and subsidiaries and the procedures being undertaken to identify, assess and manage such risks.

Investment risk - the Company has available-for-sale investment which has unpredictable market prices.

Price risk- price fluctuations in cost of fuel which is based primarily in the international price of crude oil. Substantial increases in fuel costs or the unavailability of sufficient quantities of fuel is harmful to the business.

Regulatory risk - PAL is subject to extensive regulations which may restrict growth or operations or increase their costs.

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

Security and safety risk - the impact of terrorist attacks on the airline industry severely affects the overall air travel of passengers.

Financial market risk - fluctuations of interest and currency rates.

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

Procedures undertaken to manage risks

- PAL continues to comply with applicable statutes, rules and regulations pertaining to the airline industry in order to maintain the required foreign and domestic governmental authorizations needed for their operations.

- Increase in fuel cost and shortage in fuel can sometimes be offset by increase in passenger fares or the curtailment of some scheduled services.

- Airlines have been required to adopt numerous additional security measures in an effort to prevent any future terrorist attacks, and are required to comply with more rigorous security guidelines.

- PAL sees to it that it has remain competitive in the areas of pricing, scheduling (frequency and flight times), on-time performance, frequent flyer programs and other services.

- Proper fund management and monitoring is being done to avoid the adverse effects in the results of operations of the Company, cash flows and financial risks are managed to provide adequate liquidity to the Company.

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Item 2. Properties

The Company does not own any properties and equipments. It has an annual lease contract for its office space with a monthly rental of P=28,014. The lease contract was renewed for another 2 years, which expires in May 2015. The Company has no plans of acquiring any property in the next 12 months.

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

PAL‟s fleet as of March 31, 2013 consists of:

Owned: Airbus 320-200 2 Airbus 340-300 2 Airbus 330-300 1 Bombardier DHC 8-400 5 Bombardier DHC 8-300 4 Under Finance Lease: Boeing 747-400 4 Boeing 777-300ER 2 Airbus 340-300 2 Airbus 330-300 7 Airbus 320-200 8 Under Operating Lease: Boeing 747-400 1 Boeing 777-300-ER 2 Airbus 320-200 20 Airbus 319-100 4 Total 64

Aircraft covered by finance lease agreements that transfer substantially all the risks and give rights equivalent to ownership are treated as if these had been purchased outright, and the corresponding liabilities to the lessors, net of interest charges, are classified as obligations under finance leases included under the caption long term obligations in the Consolidated Statements of Financial Position. The finance leases provide for quarterly or semi-annual installments, generally ranging over 6 to 16 years including balloon payments for certain capital leases at the end of the lease term, at fixed rates and/or floating interest rates based on certain margins over three-month or six-month London Interbank Offered Rate (LIBOR), as applicable.

Aircraft covered by operating lease agreements contain terms ranging from 6 to 12.3 years. Total operating lease payments amounted to Php 5,046.3 million for 2013 and Php 3,867.1 million for 2012.

Previously covered by finance lease agreements, PAL took ownership of two (2) Airbus 320-200 aircraft after exercising its purchase option. PAL also owns four (4) Bombardier DHC 8-300 aircraft and five (5) Bombardier DHC 8-400 aircraft which were dry leased to PAL Express. Currently, there are thirteen (13) A320-200 aircraft subleased to PAL Express with lease terms ranging from 60 to 90 months.

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

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 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)

B. Foreign Properties

1. Glenn County, San Francisco, California 83 acres (walnut farm) 2. Hongkong 977 sq.ft and 3,701 sq.ft. (condominium units) 3. San Mateo, Daly City, California 1,760 sq.ft. and 1,193 sq.ft. (condominium units) 4. Singapore 85 sq.m.; 126 sq.m., and 68 sq.m. (office units) 5, Singapore 65 sq.m. (shop unit) 6. Sydney, Australia 177 sq.m. and 229 sq.m. (office units)

In addition, the Company 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.

The land where these buildings are situated are leased from CAAP.

PAL‟s existing ground facilities service the Airline‟s own requirements and some of the requirements of the foreign airlines that fly to the Philippines. These major ground facilities as of March 31, 2013 are as follows:

The PAL Learning Center (PLC) in Ermita, Manila is a modern training facility. The Center aims to continue to provide world-class training to every employee regardless of area of specialization, reinforce the culture of service, and develop every employee into a total PAL professional committed to the Airline‟s corporate values.

The facility serves as the home for the Airline‟s Human Resource Training & Development Sub- Department, with the Airline‟s four training units, namely: Commercial Training & Development Division, Inflight Services Training Division, Management & People Development Division, External Training Administration & Logistics Division.

Likewise, the PLC is the headquarters of PAL‟s sales offices under the Office of the Country Manager-Philippines, i.e., Passenger Sales Philippines, Agency Sales, Metro Manila and Luzon Sales & Services, Corporate Sales Office and the Ticket Office.

The PLC boasts of new and modern training equipment and facilities, such as Frasca 172R simulator

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room; inflight service simulators for B747, A340, B737 and cabin safety simulator; a grooming room, a speech laboratory for personality development; and 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 Sky Kitchen Philippines Inc., 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 entire flight operation is housed in one terminal for the first time since it was founded 71 years ago. This gives PAL a genuine hub for its operations where passengers from domestic flights can connect seamlessly onto international flights and vice versa.

The terminal boasts of complete facilities for PAL‟s passengers‟ comfort and convenience; two Mabuhay Lounges – one each for domestic and international passengers, a big ticket office and spacious check-in and pre-departure areas.

It is also the home of the Airport Services Department and other support offices, i.e., Fleet Control Center, Fuels, Ticket Office, Treasury, and Medical office.

Various airport support offices servicing PAL‟s foreign airline customers were retained at the NAIA Terminal 1 (NAIA 1), together with the Sampaguita Lounge.

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 core of one of the most extensive computer systems in the Philippines. It houses 2 Mainframe Computers, 120 Unix systems, and PC servers. These equipment run the sophisticated systems like Airline‟s Reservations and Departure Control used in the daily operation of the airline. The DCB is also the center of applications development and maintenance, housing close to 90 analysts and programmers. It is the hub of PAL‟s domestic network, connecting the various PAL ticket offices and airports.

The DCB, comprising 3,588.35 sq.m. with 3,806.69 sq.m. open 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. Other facilities located in the MBC include Flight Operations and

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the Flight Simulator Building, Aircraft Engineering, Quality Safety and Security, Communications Operations, Fuel Management, Employee Benefits, Medical, Sports Complex, Corporate Logistics & Services, Operations Accounting, Ground Property, Material Sales Management, Comat Handling, Ground Equipment Management, Communications Maintenance, Network Management & Telecom System, Construction and Facilities Management, General Materials Warehouse, Central Finance Records Warehouse, Aircraft Records Warehouse, Integrated Operations Control Center, Ground Technical Training, 1 cockpit mock-up trainer (CMT) room, 1 flight management system (FMS-747), 3 flight management guidance system trainer (FMGS-Airbus), Aviation School, Computer Based Training (CBT) and other support offices. MBC also houses the K-9 Kennel Facility.

PAL‟s head office is located at the PNB Financial Center along President Macapagal Avenue, Pasay City. It houses the Executive Offices, Commercial Group, Finance Group, Legal, Corporate Secretary‟s Office, Human Resources, Corporate Audit, Corporate Communications, Government Relations, Domestic and International Ticket Offices, Facilities Management Division, Satellite Office and Security Office of PAL. Total area being leased from the Philippine National Bank is 15,080.08 sq.m.

Item 3. Legal Proceedings

In 2007, the U.S. Department of Justice (U.S. DOJ) based in Washington D.C. commenced an investigation on airlines operating to/from the U.S. for possible violation of U.S. Anti-trust laws for both passenger and cargo services covering the period January 1, 1999 to July 11, 2007. For its part, PAL received subpoenas from the U.S. DOJ in 2007. While the investigations remain pending to date, the U.S. DOJ has not communicated with PAL since the early part of 2010. PAL is also a defendant in a case entitled In re Transpacific Air Transportation Antitrust Litigation, a putative class action also for possible violation of U.S. Anti-trust laws brought before the Northern District of California against air carriers operating passenger air services to and from the U.S. Possible violations of U.S. Anti-trust laws may carry fines over US$100 million or imprisonment not exceeding 10 years or both.

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 aviation fuel and commissary items used for operations, involving the total amount of Php 3,229.0 million and Php 121.0 million, respectively. In its Decisions promulgated on April 17, 2012 and May 18, 2012, the CTA has ordered the refund to PAL excise taxes involving importation of commissary items from July 2005 to February 2006 and October 2006 amounting to Php 2.1 million. The BIR has appealed said and is expected to appeal all other similar decisions relating to the other excise tax refund cases of PAL to the CTA En Banc, and ultimately to the Supreme Court, if denied by the CTA En Banc.

In line with its claims for refund of the foregoing taxes, 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.” PAL obtained a Preliminary Injunction issued by the Regional Trial Court (RTC) against the Department of Finance (DOF) and Department of Energy (DOE), enjoining the latter from implementing the 2002 DOE Certification. Presently, the case is pending review before the SC for resolution.

A similar case filed by PAL for the issuance of Preliminary Injunction and Declaration of Nullity of Revenue Regulations No. 2-2012, which requires all importers of petroleum and petroleum products to first pay VAT and excise taxes due on the said importation as a condition sine qua non for the importation‟s release from the Bureau of Customs has however, been unfavorably dismissed by the RTC.

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There is a remaining deficiency Minimum Corporate Income Tax (MCIT) assessment amounting to Php 326.8 million pertaining to 31 March 2000, pending before the SC since 2007.

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 Php 1,503.9 million (10% of its total current assets) for fiscal year ended March 31, 2013.

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

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 31, 2013.

PART II - OPERATIONAL AND FINANCIAL INFORMATION

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

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

1. Market Information

The market for the registrant‟s common equity is the Philippine Stock Exchange. The high and low sales prices for each quarter for the past three years are as follows:

HIGH LOW 2012 Php Php Fourth Quarter 6.90 4.50 Third Quarter 7.83 6.90 Second Quarter 8.58 7.05 First Quarter 8.28 6.80

2011 Fourth Quarter 7.43 5.85 Third Quarter 7.15 4.60 Second Quarter 5.65 4.49 First Quarter 7.94 4.00

2010 Fourth Quarter 5.65 3.90 Third Quarter 5.60 3.00 Second Quarter 3.10 2.65 First Quarter 3.70 2.70

As of December 28, 2012, the latest practicable trading date, the Company‟s shares were traded at P 4.90. On January 1, 2013, the Company was suspended from trading by the Philippine Stock Exchange (PSE) until it complies with the Minimum Public Ownership Requirement.

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2. Holders

The number of shareholders of record as of June 30, 2013, is 6,723 and common shares outstanding as of the same date were 24,836,512,096.

The top 20 stockholders as of June 30, 2013 are as follows:

Stockholders‟ Name No. of Shares Held % to Total 1 Trustmark Holdings Corporation 22,297,280,230 89.7762% 2 Top Direct Investments Ltd. 1,023,350,000 4.1203% 3 Fast Accurate Investments Ltd. 459,650,000 1.8507% 4 City Trade Investments Ltd. 392,000,000 1.5783% 5 Corporate Supreme Ltd. 382,000,000 1.5381% 6 One Corporate Grand Tours, Inc. 80,000,000 0.3221% 7 Principal Grand Tours Int‟l, Inc. 80,000,000 0.3221% 8 Wonderoad Corporation 10,251,679 0.0413% 9 COL Financial Group, Inc. 6,419,081 0.0258% 10 Lucky Securities, Inc. 6,195,550 0.0249% 11 Abacus Securities Corp. 5,659,434 0.0228% 12 BPI Securities Corp. 2,484,576 0.0100% 13 Tower Securities, Inc. 1,488,208 0.0060% 14 B.H. Chua Securities Corp. 1,434,960 0.0058% 15 Arvin Ting 1,283,100 0.0052% 16 Sytengco &/or Necisto Sytengco 1,195,100 0.0048% 17 Ansaldo, Godinez Co., Inc. 1,081,496 0.0044% 18 Mandarin Securities Corp. 990,882 0.0040% 19 Aylene Sytengco 932,200 0.0038% 20 Ned Bryan Sytengco 932,200 0.0038% * The Company has no preferred shares.

3. Dividends

a. The Company did not declare any cash dividends during the past 3 years in the period ended March 31, 2013. 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 Securities

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and Exchange Commission approved PAL‟s use its functional currency, the US dollar, as its presentation currency. Accordingly, effective April 1, 2005, PAL proceeded in measuring its results of operations and financial position in US dollar.

Since the functional and presentation currency of the Company is in Philippine peso, for purposes of combination of the financial statements in accordance with PAS 27, Consolidated and Separate Financial Statements, there is a need for PAL and its subsidiaries to restate its financial statements to the Philippine Peso.

Consolidation

The consolidated financial statements referred to consist of the financial statements of the Company and its subsidiaries. The financial statements of the subsidiaries are prepared as of March 31 of each year using consistent accounting policies as those of the Company. Companies included in the consolidation are PAL and PR. As a result of the Company‟s restructuring and capital infusion of SMEII (see Notes 2 and 3 to the consolidated financial statements), the Company still owns 98.27% of PAL, through a direct ownership in 97.92% 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. 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

FY 2013 vs FY 2012

The Company‟s financial performance for the fiscal year ended March 31, 2013, showed a total comprehensive loss of Php 4,133.0 million, an improvement of 6% from the previous fiscal year‟s total comprehensive loss of Php 4,379.3 million.

Total revenues for the current fiscal year amounted to Php 74,022.7 million, down by Php 30.4 million or 0.04% over last year‟s figure of Php 74,053.1 million. The drop in revenues was brought mainly by the effect of the Peso-Dollar exchange rate fluctuations in converting the U.S. Dollar based figures to Philippine Peso, from an average exchange rate of Php 43.1203 per US$1.00 in 2012 to Php 41.6379 per US$1.00 in 2013. Had the exchange rate remained at the 2012 level, passenger and cargo revenues would have increased by Php 1,351.5 million and Php 137.1 million, respectively. The upward movement in passenger revenues was attributed mainly to the improved yields generated from passenger seat offerings. Cargo revenues, likewise, was better versus the same period the year before as a result of the increase in cargo traffic. Other revenues rose to Php 6,468.3 million or by 15.9% brought about mainly by the lease income recognized from aircraft operating lease arrangements with an entity under common control and ancillary revenues relative to passenger transport services and charters.

Total expenses-net for the fiscal year ended March 31, 2013 is slightly lower by 2.1% or Php 1,628.1 million from last year‟s figure of Php 79,387.5 million. The decrease in expenses was brought about mainly by the appreciation of the Philippine peso vis a vis the US$ from an average exchange rate of Php 43.1203 per US$ 1.00 in 2012 to Php 41.6379 per US$ 1.00 in 2013. This had the effect of reducing flying operations, aircraft and traffic servicing, passenger service and reservation and sales costs offset in part by the increase in maintenance and general and administrative expenses. Reduction in other charges, likewise contributed to the decrease in expenses.

Decrease in flying operations by Php1,639.1 million or 3.5% over the last year‟s figure of Php 46,652.2 million, was mainly attributable to the reduction in fuel expenses and depreciation of

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flight equipment offset by the increase in aircraft lease rentals. Fuel costs declined by Php 1,811.3 million or 5.4% over the year ago figure of Php 33,332.3 million as a result of the decrease in average jet fuel prices per barrel from US$ 132.97 in 2012 to US$ 131.73 in 2013. The effect of two (2) B744 aircraft fully depreciated during the latter part of the previous fiscal year reduced aircraft depreciation charges by Php 918.7 million versus last year‟s total of Php 6,393.1 million. The delivery of eleven (11) A320 aircraft, seven (7) of which were subleased to an entity under common control in part had the effect of increasing aircraft lease rentals by Php 2,971.6 million over last year‟s same figure total of Php 2,074.6 million.

Lower flights operated accounted for the drop in aircraft and traffic servicing expenses by 5.5% over the year ago level of Php 9,642.2 million.

Lower passengers carried had the effect of reducing passenger service cost by 3.5% from a total of Php 5,295.4 million of the previous fiscal year.

The effect of Peso-Dollar fluctuations in converting the U.S. Dollar based figures to Philippine Peso caused the decrease in the reservation and sales account by Php 22.3 million over the previous year‟s figure of Php 4,361.7 million. Had there been no change in the exchange rate, reservation and sales should have increased by 3.0 % as a result of higher advertising expenses recognized related to the launching of a new route as well as expenses incurred related to the above transportation service provided.

Higher aircraft, engine and component repair costs incurred during the current fiscal year contributed to the increase in maintenance expenses by 11.6% from last year‟s total of Php 8,900.2 million.

Costs incurred for various consultancy, legal and management services increased general and administrative expenses by 6.6% or Php 190.4 million compared to previous year‟s figure of Php 2,866.2 million.

The Company recognized “Other Income” of Php 148.5 million in the current fiscal year versus “Other Expenses” of Php 303.7 million in the previous fiscal year. The improvement in income was brought about mainly by the effect of the derecognition in 2012 of accrued interest, related to finance lease agreements with entities under common control, pertaining to three (3) Airbus 330-300 aircraft and the reversal of impairment loss on certain investment property in accordance with the results of its recently concluded property appraisal.

As a result of the reassessment done on deferred tax assets and liabilities on all deductible temporary differences in accordance with PAS 12, Income Taxes, the Company recognized net income tax benefit of Php 99.6 million for the period.

In fiscal year ended March 2013, the Company recognized “Other Comprehensive Loss” of Php 495.9 million. The effect of foreign exchange translation contributed to the loss, however, it was slightly reduced by the increase in carrying values of certain ground properties, net of related deferred income tax, following the latest appraisal report as of March 31, 2013.

FY 2012 vs FY 2011

For the fiscal year ended March 31, 2012, the Company showed a total comprehensive loss of Php 4,379.3 million, a significant decline from the total comprehensive income of Php 3,098.1 million of the same period last year.

Total revenues for the current fiscal year totaled Php 74,053.1 million down by Php 554.2 million or 0.7% lower than last year‟s same period figure of Php 74,607.3 million. The decrease in total revenues

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was primarily brought about by the effect of the appreciation of the Philippine Peso versus the U.S. Dollar in converting the U.S. Dollar based figures to Philippine Peso from an average rate of Php 44.54 per US$1.00 in 2011 to Php 43.12 per US$1.00 in 2012. Had there been no change in the exchange rate, total revenues would be up by Php 1,893.0 million, attributable mainly to the increase in passenger revenues as a result of higher yields generated from passenger seat offerings. Cargo revenues on the other hand, dropped by Php 536.9 million over the same period last year as a result of the decrease in cargo traffic. Revenues also include lease income arising from aircraft operating lease arrangements with an entity under common control.

Total expenses rose by 10.9% or Php 7,819.7 million from a total of Php 71,567.8 million in FY 2011 to Php 79,387.5 million in FY2012. This was primarily due to higher expenses related to flying operations, aircraft & traffic servicing, passenger service, maintenance, general and administrative expenses and other operating charges offset by the reduction in financing charges.

The increase in flying operations by 15.8% was attributable mainly to higher fuel expenses and aircraft lease rentals. Fuel, which remains to be the Airline‟s biggest operating expense, registered a 21.3% increase over last year‟s figure of Php 27,468.3 million. The increase was a result of the escalation in jet fuel prices per barrel from an average of US$ 102.89 in 2011 to US$ 132.97 in 2012. Likewise, the delivery of five (5) A320-200 aircraft subleased to an entity under common control in part had the effect of decreasing aircraft lease charges by Php 1,495.8 million.

More international flights operated in 2012 contributed to the upward movement in Aircraft and Traffic Servicing expenses by Php 317.7 million or 3.4% above the fiscal year 2011 figure of Php 9,324.5 million.

Growth in passenger traffic particularly on international flights operated had the effect of increasing expenses related to passenger service to Php 5,295.4 million or 8.5%.

Higher aircraft, engine and component repair costs incurred during the current fiscal year increased the maintenance cost by 1.7% to Php 8,900.2 million.

Costs incurred for the country to regain full compliance with International Aviation Safety Standards as well as fees incurred related to certain loans contributed mainly to the increase in general and administrative expenses by Php 220.2 million or 8.3% from the year ago‟s figure of Php 2,646.0 million.

In the current fiscal year, the Company incurred “Other Expenses” of Php 303.7 million versus “Other Income” of Php 384.7 million recognized during the last fiscal year. The reduction in income by Php 688.4 million was accounted for primarily by lower unrealized gains resulting from changes in the fair valuation of outstanding derivative instruments which did not qualify for hedge accounting. The decrease in other income, also, was brought about by the derecognition of accrued interest on related finance lease agreements with entities under common control pertaining to three (3) Airbus 330-300 aircraft and net reversal of provisions on probable claims and other litigations. These, coupled with the recognition of income from the sale of PAL‟s Greenbelt property in 2011 likewise contributed to the decrease in other income.

Debt servicing of various long term obligations resulted in lower financing charges of Php 295.8 million or a reduction of 17.8%.

The reassessment done on deferred tax assets and liabilities on all deductible temporary differences in accordance with PAS 12, Income Taxes during the current fiscal year, resulted in the recognition of a net income tax benefit of Php 1,045.6 million.

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Other Comprehensive Income dropped by 186% as compared with the previous year‟s same period total of Php 105.2 million. This was principally on account of the change in profile in the Company‟s fuel derivative instruments. Currently, there are no fuel derivative instruments that are designated as cash flow hedges. All unrealized gains or losses resulting from changes in the fair valuation of these derivative instruments are recognized directly under “Other Expenses” in the Consolidated Statement of Comprehensive Income. Revaluation increment in property arising from results of an updated appraisal increase in 2011 likewise, had the effect of decreasing “Öther Comprehensive Income” account.

Financial Condition

FY 2013 vs FY2012

As of March 31, 2013 the Company‟s total assets amounted to Php 99,867.6 million or Php 28,083.7 million higher than the March 31, 2012 balance of Php 71,783.9 million. The difference was primarily brought about by the upward movement in total noncurrent assets by Php 26,566.3 million or 45.5% over the March 31, 2012 balance of Php 58,349.2 million. This was mainly driven by the increase in the property and equipment balance due to the acquisition of two (2) Boeing 777-300ER aircraft delivered in June and November 2012 as well as predelivery payments made for Airbus aircraft commitments. Effect of additional collaterals required under operating lease agreements for certain aircrafts contributed to the growth in “Other Non Current Assets” balance by 15.1% from the March 31, 2012 figure of Php 4,506.5 million.

Total current assets rose by 11.3% over the March 31, 2012 balance of Php 13,434.7 million. This was attributable to the net increase in cash and cash equivalents balance by 17.0% as a result of the flow down of funds to the Company of the proceeds from the investment of SMEII to Trustmark. The growth in receivable balance mainly from related parties also contributed to the increase in total current assets.

Total liabilities increased by Php 15,308.6 million over the March 31, 2012 balance of Php 70,777.8 million. The increase was principally due in part to the availment of loans to finance the delivery of two (2) Boeing 777-300ER aircraft in June and November 2012 and of various short term loans for working capital purposes.

As of March 31, 2013, the consolidated stockholders‟ equity balance improved dramatically at Php 13,781.2 million, up by Php 12,775.2 million from the March 31, 2012 balance of Php 1,006.0 million. While the increase in Company‟s deficit by 19.4% and other components of equity by 16.7% showed a negative impact on total equity, it was offset by 313.6% increase in capital stock. Trustmark‟s additional subscription of 17 billino shares caused the increase in capital stock. The Company‟s increase in authorized capital stock from Php20 billion to Php23 billion was approved by SEC on December 12, 2012.

FY 2012 vs FY2011

As of March 31, 2012, PAL Holdings‟ total consolidated assets amounted to Php 71,783.9 million, lower by 1.1% from the March 31, 2011 balance of Php 72,565.4 million . The variance was mainly attributable to the effect of the appreciation of the Philippine Peso vis a vis the U.S. Dollar from Php 43.408 per US$ 1.00 in 2011 to Php 42.934 per US$ 1.00 in 2012. Had there been no change in the exchange rate, the total consolidated assets balance would be slightly higher.

The increase in total current assets by Php 31.5million from the March 31, 2011 figure of Php 13,403.2 million was due in part to the increase in the receivables balance by 34.3% as a result of higher ticket and cargo airway bill sales. These increases, however, were partly reduced by the

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decrease in cash and cash equivalents by 34.4% due to servicing of debts and effect of lower cash earnings generated from operations. Lower fuel inventory, likewise had the effect of decreasing the expendable parts, fuel, materials and supplies balance by 10.2%.

Total noncurrent assets on the other hand, decreased by Php 813.0 million over the balance as of March 31, 2011 of Php 59,162.2 million. The difference was mainly the result of the reduction in other non current assets by 35.5% brought about by the reclassification of aircraft lease deposits as part of the cost of the aircraft for three (3) Airbus 330-300 aircrafts thereby recognizing the related depreciation expense, and derecognition of corresponding accrued interest on lease deposits. This was offset in part by the additional standby letters of credit which serve as security deposits for various aircraft under operating leases. This was further countered by the increase in property and equipment by Php 640.7 million brought about by the aforementioned reclassification and increase in deferred tax assets of Php 1,072.5 million or 129.8% resulting from the company‟s reassessment of its deferred tax position as of March 31, 2012.

Total liabilities rose to Php 70,777.8 million, from the March 31, 2011 balance of Php 67,188.4 million or 5.3%. This was attributable mainly to availment of various loans for working capital purposes as well as to finance aircraft and aircraft related acquisitions thus increasing notes payable by 6.9% and long-term obligations by 11.7%. These were offset in part by payments made for other existing loans which resulted to the decrease in current portion of long-term obligations by 14.7%.

As of March 31, 2012, the Company‟s stockholders‟ equity balance amounted to Php 1,006.0 million, down by 81.3% from the March 31, 2011 balance of Php 5,377.0 million. The decrease was brought about mainly by the net loss recognized during the current fiscal year which increased deficit by 24.5%.

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TOP FIVE KEY PERFORMANCE INDICATORS OF PAL

Mission Statement Key Performance Indicator Measurement Methodology

To maintain aircraft with the Aircraft Maintenance Check Number of checks performed highest degree of airworthiness, Completion less number of maintenance reliability and presentability in delays over number of checks the most cost-effective manner performed

To conduct and maintain safe, Number of aircraft related By occurrence and reliable, cost and effective flight accidents/incidents monitoring by Flight operations Operations Safety Office

To achieve On-Time Performance Percentage Deviation from Number of flights operated on all flights operated Industry Standards (OTP less number of flights delayed Participation) over total flights operated

To provide safe, on time, quality Number of safety violations Number of incidents of safety and cost effective inflight service incurred by cabin crew violation incurred by cabin for total passenger satisfaction crew per month

To maximize revenue generation Net Revenues generated from Percentage Deviation from in passenger and cargo sales passengers and cargoes carried Budget/Forecasted Revenues through increased yields by diversifying market segments and efficient management of seat inventory and cargo space

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In addition to the Qualitative Key Performance Indicators of PAL, the following comprise its Quantitative Financial Ratios:

03/31/13 03/31/12 Profitability Factors:

1. Return on Total Assets Net loss/Average Total Assets -4.24% -5.96%

2. Percentage of Operating Income Operating Income/Total Revenues -3.89% -5.50%

Asset Management:

3. Receivable Turnover

Net Sales/Average Trade Receivables 12.12 13.71

4. Number of Days Sales in Receivables ( General Traffic)

# of Days in a year/Receivable turnover 30.10 26.69

Financial Leverage:

5. Interest Coverage Ratio

Earnings Before Interest & Taxes/Interest Charges -2.13 -2.98

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. 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 Php 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. On October 4, 2011, the SC issued an En Banc resolution recalling the September 7, 2011 resolution and for the Supreme Court En Banc to take cognizance of the case. To date, PAL is still awaiting the En Banc decision of the SC.

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 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 Php 1,800 to Php 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. To date, the Petition is pending resolution before the CA.

In the interim, mediation conferences were called by the DOLE Secretary on the reinstatement aspect for decision and other undisputed matters. On June 27, 2011, PAL agreed to pay the retro and prospective rice allowance starting July 16, 2011; to issue the guidelines in crediting pregnancy and maternity leave in the length of service of cabin attendants as well as in the computation of related Company benefits and to commence preliminary talks on the 2010-2015 CBA negotiation on July 2011. On August 23, 2011, PAL agreed to release the back wages for one year specifically July 16, 2007 to July 15, 2008 at the end of September 2011. On August 31, 2011, without prejudice to the petition pending before the CA, PAL made the following commitments before the DOLE as follows: 1.) backwages from July 16, 2008 to July 15, 2009 will be released at the end of October 2011 and 2.) backwages from July 16, 2009 to July 15, 2010 will be distributed at the end of November 2011. On September 21, 2011, FASAP requested for the release of back wages for the period July 16, 2010 up to the present including the add-on benefits. On October 3, 2011, PAL manifested during the conciliation conference before the DOLE to release on or before December 31, 2011 the adjustments on the cabin attendants‟ respective salary increases based on the December 23, 2010 decision of DOLE. On December 21, 2011, PAL manifested before DOLE seeking a rescheduling of the payment. FASAP agreed to the request for rescheduling of payment as follows: January 6, 2012 - release of back wages equivalent to 7 months; March 2012 and May 2012 - release of the remaining 13.5 months at 50% per release not later than the end of each month. As of June 26, 2012, the total backwages for the period July 16, 2010 up to December 31, 2011 were already paid. Effective January 2012, cabin attendants‟ salaries have been adjusted to the level based on the December 23, 2010 DOLE Decision.

PAL also agreed to release the back wages of the 13 reinstated flight pursers who were retired/resigned after December 23, 2010. On March 12, 2012 DOLE issued an Order granting with qualification FASAP‟s motion for issuance of writ of execution. The writ shall cover only the reinstatement of FASAP members who were retired at ages 45 and 55 starting July 16, 2007, subject to the grooming standards under the CBA and for as long as they have not yet reached the age of 60. Further, they are entitled to adjusted back salaries and other incidental benefits in accordance with the December 23, 2010 and April 1, 2011 DOLE Decisions, subject to offsetting of retirement benefits already received. Accordingly, PAL moved for reconsideration of the March 12, 2012 DOLE Order. On March 22, 2012, PAL filed before the CA a Manifestation and Urgent Motion reiterating the prayer for the issuance of a temporary restraining order/writ of preliminary injunction. On June 11, 2012 FASAP filed a Supplement to their Motion for Issuance of Writ of Execution seeking the enforcement of the March 12, 2012 DOLE Order. On May 3, 2013, the DOLE denied PAL‟s Motion for Reconsideration. PAL intends to file a Petition for Certiorari with the Court of Appeals to question such denial.

In April 2010, PAL released a memorandum informing its employees and the general public of its

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plan to spin-off/outsource PAL‟s non-core airline functions for inflight catering, airport services and call center reservations operations. Members of the employees‟ union lobbied for reconsideration to the DOLE. On June 15, 2010, PAL received a favorable decision from the DOLE confirming the legality of the said spin-off/outsourcing program. On October 29, 2010, DOLE affirmed its earlier ruling on PAL‟s right to spin-off/outsource its Inflight Catering, Airport Services and Call Center operations. On December 15, 2010, the Office of the President assumed jurisdiction over the PAL-PALEA labor dispute. Accordingly, PALEA‟s Petition for Presidential Intervention, the DOLE Secretary‟s Orders dated June 15, 2010 and October 29, 2010 as well as all matters relating to the PAL-PALEA labor dispute were deemed submitted to the jurisdiction of the Office of the President. On March 25, 2011, PAL received a copy of the decision of the Office of the President of the Philippines affirming the October 29 , 2011 order of the DOLE Secretary with the modification increasing the additional gratuity from Php 50,000.00 to Php 100,000.00. On April 12, 2011, PALEA filed a motion for reconsideration. On August 11, 2011 the Office of the President issued a resolution denying the motion for reconsideration of PALEA and reaffirming its March 25, 2011 decision upholding the validity of PAL‟s spin-off/outsourcing program. On August 24, 2011, notices of separation were sent to the affected employees of in- flight catering, airport services and call center reservations operations. On October 1, 2011, PAL implemented the spin-off/outsourcing program and the workers of the outsourced operations ceased to be PAL employees. On October 14, 2011, PAL commenced the release of the separation package of affected workers. On March 13, 2013, the CA rendered a Decision upholding the Decision and Resolution of the Office of the President in its entirety. PALEA moved for reconsideration and the same is pending resolution of the CA.

Currently, there are other ongoing legal proceedings involving PAL (refer to Legal Proceedings on page 20). 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. 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

On October 30, 2006, PAL finalized a Purchase Agreement with Boeing wherein the Company placed a firm order for two (2) Boeing 777-300ER aircraft for delivery in fiscal year 2010 to fiscal year 2011 and purchase rights for two (2) additional aircraft.

In May 2007, PAL finalized a supplemental agreement with Boeing relating to its exercise of purchase rights for two (2) Boeing 777-300ER aircraft for delivery in fiscal year 2012. On June 2, 2009, PAL and Boeing agreed to reschedule the deliveries of four (4) Boeing 777-300ER aircraft from their original delivery schedules of fiscal year 2010, 2011 and 2012 to fiscal years 2013 and 2014. On June 20, 2012, November 6, 2012 and April 29, 2013, PAL took delivery of three (3) of the four (4) Boeing 777-300ER aircraft.

In June 2011, PAL signed operating lease agreements for the lease of two (2) Airbus A320-200 aircraft which PAL took delivery in March and May 2012. In November 2011, PAL entered into operating lease agreements for the lease of additional two (2) Airbus 320-200 aircraft which PAL took delivery in October and November 2012.

In August 2012, PAL entered into 2 separate Purchase Agreements with Airbus. The first Purchase Agreement is for firm order of forty four (44) Airbus “A320 family” aircraft and options for twenty (20) Airbus “A320 family” for delivery in fiscal years 2014 to 2020. The other Purchase Agreement is for a firm order of ten (10) Airbus A330-300 aircraft and options for ten

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(10) aircraft for delivery in fiscal years 2014 to 2016. In September 2012, PAL exercised its right to purchase all of the ten (10) Airbus A330-300 option aircraft for delivery in fiscal years 2014 to 2016.

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 is no significant element of income that did not arise from continuing operations.

vi. The causes for any material change from period to period which shall include vertical and horizontal analyses of any material item:

Results of our Horizontal (H) and Vertical (V) analyses showed the following material changes:

1. Cash and cash equivalents- H- 17% 2. Receivables-net- H- 11% 3. Expendable parts, fuel, materials & supplies- H- 6% 4. Other current assets- H- 7% 5. Property, plant and equipment-net- H- 50%; V- 6% 6. Available-for-sale- investment- H - (7%) 7. Investment properties- H- 53% 8. Other non-current assets- H- 15% 9. Notes payable- H- 87% 10. Current portion of long-term obligations- H- 83% 11. Accrued liabilities- H- 10% 12. Unearned transportation revenue- H- 5% 13. Long-term obligations- net of current portion- H- 11% 14. Accrued employee benefits- H- 10% 15. Reserves and other noncurrent liabilities- H- 8% 16. Share capital- H- 314%; V- 15% 17. Additional paid-in capital- V- (7%) 18. Other components of equity- H- 17% 19. Deficit- H- 19% 20. Non-controlling interests - H- 87% 21. Other revenue- H- 16% 22. Loss before income tax- H- (30%) 23. Benefit from income tax- H- (90%) 24. Net loss- H- (15%) 25. Total Other Comprehensive loss- H- 448% 26. Total Comprehensive loss- H- (6%) All of these material changes were explained in the management‟s discussion and analysis of financial condition and results of operations stated above. vii. PAL experiences a peak in holiday travel during the months of January, April, May, June and December.

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Information on Independent Accountant and other Related Matters

(1) External Audit Fees and Services

a. Audit and Audit-Related Fees

a. The audit of the Company‟s annual financial statements or services that are normally provided by the external auditor in connection with statutory and regulatory filings or engagements for 2013 and 2012.

FY2013 - Estimated at Php 500,000 inclusive of out-of-pocket expenses for the audit of 2013financial statements.

FY2012 - Php 615,664 audit fee and out-of-pocket expenses for the audit of 2012 financial statements.

b. Tax Fees - None

c. All Other Fees

FY2013 - Php 147,560 professional fees and out-of-pocket expenses pertaining to Agreed Upon Procedures (AUP) in relation to the increase in authorized capital stock.

d. The audit committee‟s approval policies and procedures for the above services:

Upon recommendation and approval of the audit committee, the appointment of the external auditor is being confirmed in the annual stockholders‟ meeting. On the other hand, financial statements should be approved by the Board of Directors before its release.

Item 7. Financial Statements

See accompanying Index to Financial Statements and Supplementary Schedules

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

There are no changes in, and disagreements with the Company‟s accountants on any accounting and financial disclosure during the 3 most recent fiscal years in the period ended March 31, 2013 or in any subsequent interim period.

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PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Company Registrant

1. Directors, Executive Officers, Promoters and Control Persons

At present, the Company has eleven (11) directors. Hereunder are the Company‟s incumbent directors and executive officers, their names, ages, citizenship, positions held, term of office as director/officer, period served as director/officer, business experience for the past five years, and other directorships held in other companies:

Name/ Current Affiliations and Business Term of Office / Age Position Citizenship Experience in the last 5 years Period Served Lucio C. Tan/ 78 Filipino Chairman of Philippine Airlines, Inc., 1 year/ served as Chairman Trustmark Holdings Corporation, Zuma Chairman since Holdings and Management Corporation, 30 October 2000 Asia Brewery Inc., Fortune Tobacco Corp., PMFTC Inc., The Charter House, Inc., Grandspan Development Corp., Himmel Industries Inc., Lucky Travel Corp., Eton Properties Philippines, Inc., Eton City, Inc., Belton Communities, Inc., FirstHomes, Inc., LT Group, Inc., Tanduay Distillers, Inc., Tanduay Brands International, Inc., Absolut Distillers, Inc., Progressive Farms, Inc., Manufacturing Services & Trade Corp., REM Development Corp., Foremost Farms, Inc., Basic Holdings Corp., Dominium Realty & Construction Corp., Shareholdings, Inc., Sipalay Trading Corp., and Fortune Tobacco International Corp.; Director of Philippine National Bank and Air Philippines Corporation, majority stockholder of Allied Banking Corp., and Maranaw Hotels & Resort Corp.

Ramon S. Ang/ 59 Filipino President, Chief Operating Officer and 1 year/ Elected Director, President Director of Philippine Airlines, Inc., on 20 April and Chief Trustmark Holdings Corporation, and 2012 Operating Officer Zuma Holdings and Management Corporation; Director of Air Philippines Corporation; Vice Chairman, President and Chief Operating Officer of San Miguel Corporation; Chairman of San Miguel Brewery Inc., San Miguel Brewery Hong Kong Limited (Hong Kong), Petron Corporation, Sea Refinery Corporation, SMC Global Power Holdings Corp., San Miguel Foods, Inc., San Miguel Yamamura

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Name/ Current Affiliations and Business Term of Office / Age Position Citizenship Experience in the last 5 years Period Served Packaging Corporation, San Miguel Properties, Inc., and Anchor Insurance Brokerage Corporation; Vice Chairman of Ginebra San Miguel, Inc. and San Miguel Pure Foods Company, Inc.; Director of Top Frontier Investment Holdings Inc.; Chairman of Liberty Telecoms Holdings Inc., Philippine Diamond Hotel & Resort, Inc., Philippine Oriental Realty Development, Inc., Atea Tierra Corporation and Cyber Bay Corporation; Vice Chairman and Director of Manila Electric Company; and Independent Director of Philweb Corporation. Mr. Ang has held directorships in various domestic and international subsidiaries of San Miguel Corporation in the last five years.

Harry C. Tan/ 67 Filipino Chairman of Air Philippines 1 year/served Director and Corporation; Vice Chairman of Eton as Director Treasurer Properties Philippines, Inc., Eton City, since 30 Inc., Belton Communities, Inc., October 2000 FirstHomes, Inc., Pan Asia Securities, Inc., Lucky Travel Corp., and LT Group, Inc.; Managing Director of The Charter House, Inc.; Director/Chairman for Tobacco Board of Fortune Tobacco Corp., Director/President of Maranaw Hotels & Resort Corp.; Director of Allied Banking Corp., PMFTC Inc., Asia Brewery Inc., Basic Holdings Corp., Philippine Airlines, Inc., Trustmark Holdings Corporation, Zuma Holdings and Management Corporation, Foremost Farms, Inc., Himmel Industries, Inc., Absolut Distillers, Inc., Progressive Farms, Inc., Manufacturing Services & Trade Corp., REM Development Corp., Grandspan Development Corp., Dominium Realty & Construction Corp., Fortune Tobacco International Corp., Shareholdings, Inc., Sipalay Trading Corp., Tanduay Brands International, Inc., and Tanduay Distillers, Inc.

Lucio K. Tan Jr./ 47 Filipino Director/President of Tanduay Distillers, 1 year/served Director Inc., Director/EVP of Fortune Tobacco as Director Corp.; Director of AlliedBankers since 26 July Insurance Corp., Philippine Airlines, 2006

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Name/ Current Affiliations and Business Term of Office / Age Position Citizenship Experience in the last 5 years Period Served Inc., Trustmark Holdings Corporation, Zuma Holdings and Management Corporation, Philippine National Bank, Eton Properties Philippines, Inc., LT Group, Inc., MacroAsia Corporation, PMFTC Inc., Lucky Travel Corp., Air Philippines Corporation, Tanduay Brands International, Inc., Absolut Distillers, Inc., Eton City, Inc., Belton Communities, Inc., FirstHomes, Inc., Asia Brewery, Inc., Foremost Farms, Inc., Himmel Industries, Inc., Progressive Farms, Inc., The Charter House, Inc., REM Development Corporation, Grandspan Development Corporation, Dominium Realty & Construction Corp., Manufacturing Services & Trade Corp., Fortune Tobacco International Corp., and Shareholdings, Inc.

Michael G. Tan/ 47 Filipino Director/President of LT Group, Inc.; 1 year/served Director Director/Chief Operating Officer of Asia as Director Brewery, Inc., Director and Treasurer of since 26 July Air Philippines Corporation, Director of 2006 Eton City, Inc., Allied Banking Corporation, AlliedBankers Insurance Corp., Eton Properties Philippines, Inc., PMFTC Inc., Grandway Konstruct, Inc., Lucky Travel Corp., Philippine Airlines, Inc., Philippine Airlines Foundation, Inc., Tanduay Brands International, Inc., Absolut Distillers, Inc., Shareholdings, Inc., and Victorias Milling Company, Inc.

Iñigo U. Zobel / 56 Filipino Director of Philippine Airlines, Inc.; 1 year/ Elected Director President, Chief Operating Officer and on 20 April 2012 Director of Air Philippines Corporation; Director of San Miguel Corporation; Chairman of Top Frontier Investment Holdings Inc.; Vice Chairman of SMC Global Power Holdings Corp.; President and Chief Executive Officer of E. Zobel, Inc.; President of Ayala España S.A., Calatagan Golf Club, Inc. and Hacienda Bigaa, Inc.; and a Director of Calatagan Resort, Inc., Calatagan Bay Realty, Inc., and MERMAC, Inc. He was previously the President of Diamond Star Agro Products, Inc. and formerly an

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Name/ Current Affiliations and Business Term of Office / Age Position Citizenship Experience in the last 5 years Period Served Independent Director of San Miguel Brewery Inc., San Miguel Pure Foods Company, Inc., San Miguel Properties, Inc., and Ginebra San Miguel, Inc.

Roberto V. Ongpin/ 76 Filipino Director of Philippine Airlines, Inc., 1 year/ Elected Director San Miguel Corporation, Petron on 20 April 2012 Corporation, Top Frontier Investment Holdings Inc. and Ginebra San Miguel, Inc.; Chairman of PhilWeb Corporation, ISM Communications Corporation, Alphaland Corporation, Philippine Bank of Communications, Atok-Big Wedge Co., Inc., and Acentic GmbH; Non-Executive Director of Forum Energy PLC (UK) and Shangri-la Asia Limited (Hong Kong); and Deputy Chairman of South China Morning Post (Hong Kong).

Ferdinand K. 61 Filipino Director of Philippine Airlines, Inc.; 1 year/ Elected Constantino/ Senior Vice President, Chief Finance on 20 April 2012 Director Officer, Treasurer, and Director of San Miguel Corporation; President of Anchor Insurance Brokerage Corporation; Director of San Miguel Brewery Inc., San Miguel Yamamura Packaging Corporation, SMC Global Power Holdings Corp., Top Frontier Investment Holdings Inc., Petron Corporation, Ginebra San Miguel Inc. and San Miguel Foods Inc. Mr. Constantino previously served as Chief Finance Officer and Treasurer of San Miguel Brewery Inc.; Director of San Miguel Pure Foods Company, Inc.; Director of San Miguel Properties, Inc.; and Chief Finance Officer of Manila Electric Company. In addition, he has held directorships in various domestic and international subsidiaries of San Miguel Corporation during the last five years.

Aurora T. 59 Filipino Director of Philippine Airlines, Inc., 1 year/ Elected Calderon/ Trustmark Holdings Corporation, Zuma on 20 April 2012 Director Holdings and Management Corporation, and Air Philippines Corporation; Senior Vice President-Senior Executive Assistant to the President and Chief Operating Officer of San Miguel

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Name/ Current Affiliations and Business Term of Office / Age Position Citizenship Experience in the last 5 years Period Served Corporation; Director of Petron Corporation, Petron Marketing Corporation, Petron Freeport Corporation, SMC Global Power Holdings Corp., Sea Refinery Corporation, Thai San Miguel Liquor Co., Ltd., NVRC, Las Lucas Construction and Development Corp., and Kankiyo Corporation; President and Director of Total Managers, Inc. In addition, Ms. Calderon holds directorships in various domestic and international subsidiaries of San Miguel Corporation. Ms. Calderon previously served as a consultant of San Miguel Corporation reporting to the Chief Operating Officer and Director of Manila Electric Company.

Antonino L. 74 Filipino Chairman of An-Cor Holdings, Inc.; 1 year/served Alindogan, Jr./ Chairman/President of Landrum as Independent Independent Holdings, Inc.; Independent Director of Director since Director Philippine Airlines, Inc., Eton 17 September Properties Philippines, Inc., Rizal 2007 Commercial Banking Corp., LT Group, Inc., House of Investments, Inc., Great Life Financial Assurance Corp., and Bankard Inc.

Enrique O. Cheng/ 80 Filipino Chairman of Landmark Corporation; 1 year/served Independent Chairman/President of Philippine Trade as Independent Director Center; Director/Vice-Chairman of Director since Hideco Sugar Milling, Co., Inc.; 17 September Independent Director of Philippine 2007 Airlines, Inc.

Estelito P. 83 Filipino Director of San Miguel Corporation, Appointed on 20 Mendoza/ Petron Corporation, Manila Electric April 2012 Corporate Company, Philippine National Bank Secretary and Philippine Airlines, Inc., and Chairman of Prestige Travel, Inc. Atty. Mendoza heads the E.P. Mendoza Law Office and is a former Chairman of Dutch Boy Philippines, Inc. and Alcorn Petroleum and Minerals Corporation, and Director of East-West Bank.

Ma. Cecilia L. 60 Filipino Corporate Secretary Allied Savings Appointed on 20 Pesayco/ Bank, Eton Properties Philippines, April 2012 Assistant Inc., Eton City, Inc., Belton Corporate Communities, Inc., FirstHomes, Inc.; LT

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Name/ Current Affiliations and Business Term of Office / Age Position Citizenship Experience in the last 5 years Period Served Secretary Group, Inc., Flor De Caña Shipping, Inc., and East Silverlane Realty and Dev‟t Corp.; Assistant Corporate Secretary of Air Philippines Corporation, Trustmark Holdings Corporation, and Zuma Holdings and Management Corporation

Irene M. Cipriano/ 38 Filipino Assistant Corporate Secretary of Appointed on 20 Assistant Philippine Airlines, Inc. and Trustmark April 2012 Corporate Holdings Corporation; Associate Legal Secretary Counsel in San Miguel Corporation‟s Office of the General Counsel; Corporate Secretary and Assistant Corporate Secretary of various subsidiaries of San Miguel Corporation.

Jorge Ma. S. 59 Filipino Chief Financial Officer of Trustmark Appointed as Sanagustin/ Holdings Corporation, Philippine Chief Finance Chief Finance Airlines, Inc., Zuma Holdings and Officer on Officer Management Corporation, and Air January 8, 2013 Philippines Corporation; Former Managing Partner of KPMG; Former Executive Vice President of Crown Equities, Inc.; Former Special Assistant to the President and First Vice President for the Textile Group of JG Summit Holdings, Inc. (*Note: Unless otherwise indicated or qualified, the term “Director” refers to a regular director of the corporation. Corporations written in bold font style are Listed Companies)

2. Significant Employees

There is no employee or person who is not an executive officer who is expected to make a significant contribution to the business.

3. Family Relationship

Chairman Lucio C. Tan is the father of Mr. Lucio K. Tan Jr. and Mr. Michael Tan while Messrs. Lucio C. Tan and Harry C. Tan are brothers.

4. Pending Legal Proceedings (last 5 years)

The Directors and Executive Officers of the Corporation are not involved in any bankruptcy petition by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; any conviction by final judgment, including the nature of the offense, in a criminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses; being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring suspending or otherwise limiting his involvement in any type of business, securities, commodities or banking activities; and

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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 Compensated Executive Officers

A fixed basic monthly salary was provided for the Corporation‟s Chairman and CEO, President and Chief Operating Officer and other officers of the Corporation and shall continue to be given in 2013. The Corporation has no contract with any of its executive officers. ii. Directors and Executive Officers

The directors of the Corporation are entitled to a per diem of P=25,000.00 for their attendance in every board meeting and at the Annual Stockholders‟ Meeting. Additionally, the Independent Directors are granted monthly transportation and representation allowances of P=30,000.00 while other directors are given the monthly director‟s 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. The directors and executive officers receive no other remuneration in cash or in kind. None of the directors and executive officers holds any outstanding warrant or option.

Summary Compensation Table

Year Salary Bonus Others CEO and Top Four (4) 2013 1,512,500 N/A N/A Management (Estimate) 2012 1,375,000 N/A N/A 2011 1,955,000 N/A N/A All other officers and 2013 346,500 N/A 3,206,500 directors as a group (Estimate) unnamed 2012 315,000 N/A 2,915,000 2011 N/A N/A 3,730,000

The following constitute the Corporation‟s 4 most highly compensated executive officers (on a consolidated basis):

1. Mr. Lucio C. Tan is the Chairman of the Board of Directors and Chief Executive Officer of the Corporation. 2. Mr. Ramon S. Ang is the President and Chief Operating Officer of the Corporation. 3. Mr. Harry C. Tan is the Treasurer of the Corporation. 4. Mr. Estelito P. Mendoza is the Corporate Secretary of the Corporation.

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.

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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 Chief Executive Officer, 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 Chief Executive Officer, executive officers and all officers and directors as a group.

Item 11. Security Ownership of Certain Beneficial Owners and Management as of June 30, 2013

1. Security Ownership of Certain Record and Beneficial Owners of more than 5%

Title of Name, address of record owner Name of Citizenship No. of Shares Percent class and relationship with Issuer Beneficial Held Owner and Relationship with Record Owner Common Trustmark Holdings Filipino 22,297,280,230 89.78%** Corporation* SMI Compound, C. Raymundo * Ave., Maybunga, Pasig City/(Shareholder)

* Trustmark Holdings Corp. (Trustmark) is 51% owned by Buona Sorte Holdings, Inc. (BSHI) and 49% by San Miguel Equities Investments, Inc. effective April 20, 2012. Any two of Messrs. Lucio C. Tan, Ramon S. Ang and Harry C. Tan, acting jointly, are authorized to vote the shares on behalf of Trustmark. Mr. Lucio Tan is expected to exercise the voting power of all the shares in BSHI.

** On June 28, 2013, the SEC approved the Company’s increase in authorized capital stock from Php 23 billion to Php 30 billion. Additional 2.415 billion shares were subscribed by public investors thereby reducing the percentage ownership of Trustmark from 99.45% to 89.78% in the Company.

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2. Security Ownership of Management as of June 30, 2013

Amount and Name of nature of Percent of Title of class Position Citizenship Beneficial Owner record/beneficial Class ownership * Common Lucio C. Tan Chairman/ 1,000 Filipino Nil CEO (R) Direct Common Ramon S. Ang Director/ 1,000 Filipino Nil President and COO (R) Direct Common Harry C. Tan Director/ 1,000 Filipino Nil Treasurer (R) Direct Common Inigo U. Zobel Director 1,000 Filipino Nil (R) Direct Common Lucio K. Tan Jr. Director 1,000 Filipino Nil (R) Direct Common Michael G. Tan Director 1,000 Filipino Nil (R) Direct Common Roberto V. Ongpin Director 500 Filipino Nil (R) Direct Common Aurora T. Calderon Director 500 Filipino Nil (R) Direct Common Ferdinand K. Constantino Director 500 Filipino Nil (R) Direct Common Antonino L. Alindogan Jr. Independent 500 Filipino Nil Director (R) Direct Common Enrique O. Cheng Independent 1,000 Filipino Nil Director (R) Direct * All shares held by management are of record.

Security ownership of all directors and officers as a group is 9,000 representing 0.00016% 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.

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Item 12. Certain Relationships and Related Transactions

In addition to Note 18 of the Notes to the Consolidated Financial Statements on pages 106 to 110, 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 lease and stock transfer agency agreement with the said bank at prevailing rates. There are no preferential treatment in any of its transactions with the Bank. There are no special risk or contingencies involved since the transactions are done under normal business practice.

Business purpose of the arrangements:

We do business with related parties due to stronger ties which is based on trust and confidence and easier coordination.

Identification of the related parties transaction business and nature of relationship:

Philippine National Bank - deposits, rental and stock transfer services MacroAsia Corporation - investments

Transaction prices are based on prevailing market rates.

Transactions have been fairly evaluated since the Company adheres to industry standards and practices.

There are no any ongoing contractual or other commitments as a result of the arrangement.

1.) Not applicable - there are no parties that fall outside the definition of “related parties” with whom the Company or its related parties have a relationship that enables the parties to negotiate terms of material transactions that may not be available from other, more clearly independent parties on an arm‟s length basis.

2.) Not applicable - the Company has no transactions with promoters.

PART IV - EXHIBITS AND SCHEDULES

Item 13. Exhibits and Reports on SEC Form 17-C

(a) Exhibits - The other exhibits, as indicated in the Index to Exhibits are either not applicable to the Company or require no answer.

(b) Reports on SEC Form 17-C

SEC Form 17-C (Current Reports) which have been filed during the year are no longer filed as part of the exhibits.

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LIST OF ITEMS REPORTED UNDER SEC FORM 17-C (DURING THE LAST 6 MONTHS) - OCTOBER 2012 TO MARCH 2013

Date of Report Subject Matter Disclosed October 1, 2012 1. The matters approved during the Annual Stockholders‟ Meeting held last September 28, 2012 a. the increase in the authorized capital stock of the Corporation from P=20,000,000,000.00 divided into 20,000,000,000 shares with a par value of P=1.00 per share to P=23,000,000,000.00 divided into 23,000,000,000 shares with a par value of P=1.00 per share; b. amendment of Article VII of the Amended Articles of Incorporation to reflect the aforementioned increase in the Company‟s authorized capital stock; c. issuance of 17,000,000,000 shares to Trustmark in support of the aforementioned increase in authorized capital stock and the subsequent listing thereof with the Philippine Stock Exchange; d. waiver of the Rights/Public Offering in relation to the 17,000,000,000 shares to be issued to Trustmark; and e. the election of the directors of the Company for the fiscal year 2012 to 2013 2. The matters approved during the Organizational Meeting of the Board of Directors held on September 28, 2012 a. Election of Officers; b. Appointment of Members of Board Committees; and c. Appointment of Sycip Gorres Velayo & Co. as external auditors of the Corporation for the fiscal year 2012 - 2013 November 19, 2012 Further to our disclosures dated 27 June 2012 and 28 September 2012, please be advised that the Company‟s application for increase in authorized capital stock from P=20,000,000,000.00 divided into 20,000,000,000 common shares with a par value of =P1.00 per share to P=23,000,000,000.00 divided into 23,000,000,000 common shares with a par value of P=1.00 per share was filed with the SEC on 16 November 2012 December 14, 2012 Further to our disclosure dated 27 June 2012 regarding the Company‟s subscription to 85,000,000,000 shares of PAL at P=0.20 per share out of an increase in the authorized capital stock of PAL, please be advised that on 12 December 2012, PAL filed the following applications with the Securities and Exchange Commission: 1. Decrease in authorized capital stock from P=16 billion divided into 20 billion shares with a par value of P=0.80 per share to =P4billion divided into 20 billion shares with a par value of P=0.20 per share; 2. Increase in authorized capital stock from =P4billion divided into 20 billion shares with a par value of P=0.20 per share to P=20billion divided into 100 billion shares with a par value of P=0.20 per share December 20, 2012 Further to our disclosure dated 19 November 2012, please be advised that the Company‟s application for increase in authorized capital stock from P=20,000,000,000.00 divided into 20,000,000,000 common shares with a par value of P=1.00 per share to =P23,000,000,000.00 divided into 23,000,000,000 common shares with a par value of =P1.00 per share was approved by the SEC on 12 December 2012. January 8, 2013 The results of the Board of Directors‟ Meeting held on January 8, 2013:

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Date of Report Subject Matter Disclosed 1. The acceptance of the resignation of Mr. Daniel L. Ang Tan Chai as Chief Finance Officer of the Corporation; and 2. The election of Mr. Jorge Ma. Sanagustin as the New Chief Finance Officer of the Corporation. January 24, 2013 Further to our disclosure dated 14 December 2012, please be advised that the following applications of PAL. were approved by the SEC on 17 January 2013: 1. Decrease in authorized capital stock from =P16billion divided into 20 billion shares with a par value of P=0.80 per share to P=4 billion divided into 20 billion shares with a par value of =P0.20 per share; 2. Increase in authorized capital stock from =P4 billion divided into 20 billion shares with a par value of P=0.20 per share to P=20 billion divided into 100 billion shares with a par value of P=0.20 per share. February 4, 2013 The results of the Board of Directors‟ Meeting held on February 4, 2013: 1. Change in the accounting period from fiscal year ending March 31 to calendar year ending December 31; 2. Amendment of the By-Laws to reflect the change in the accounting period; 3. Increase of its authorized capital stock from P=23,000,000,000.00 divided into 23,000,000,000 common shares with a par value of P=1.00 per share to =P30,000,000,000.00 divided into 30,000,000,000 common shares with a par value of =P1.00) per share; 4. Amendment of Article Seven of the Company‟s Amended Articles of Incorporation to reflect the increase in the authorized capital stock; 5. Calling of a Special Stockholders‟ Meeting to be held on March 15, 2013 for purposes of securing stockholders‟ approval of the proposed increase in the authorized capital stock and the amendment of the Amended Articles of Incorporation; and 6. All shareholders in good standing at the close of business on the record date of February 15, 2013 shall be entitled to notice of, and to vote at, the meeting and any adjournment thereof

March 15, 2013 The results of the Special Stockholders‟ Meeting held on March 15, 2013: 1. Increase of the Corporation‟s authorized capital stock from =P 23,000,000,000.00 divided into 23,000,000,000 common shares with a par value of P=1.00 per share to =P30,000,000,000.00 divided into 30,000,000,000 common shares with a par value of P=1.00 per share; 2. Issuance of up to 2,415,000,000 shares to support the increase in capital and the subsequent listing of the said shares with the Philippine Stock Exchange; and 3. Amendment of Article Seventh of the Company‟s Amended Articles of Incorporation to reflect the aforementioned increase in the authorized capital stock of the Company.

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PART V - CORPORATE GOVERNANCE

Item 14. Evaluation System

The Compliance Officer is currently in charge of evaluating the level of compliance of the Board of Directors and top-level management of the Corporation. The implementation of the Corporate Governance Scorecard allows the Company to properly evaluate compliance to the Company‟s Manual on Corporate Governance.

Item 15. Measures undertaken to Fully Comply

The Company has amended its Manual on Corporate Governance in accordance with SEC Memorandum Circular No. 6, Series of 2009 to fully comply with the adopted leading practices on good corporate governance.

Item 16. Deviations

The Company is substantially compliant with its Revised Manual on Corporate Governance Manual.

Item 17. Plan to improve

The Company continues to improve its Corporate Governance when appropriate and warranted, in its best judgment.

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47

PAL HOLDINGS, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES SEC FORM 17-A

Page No.

FINANCIAL STATEMENTS

Statement of Management‟s Responsibility for Financial Statements 49-50 Report of Independent Auditors 53-54 Consolidated Statements of Financial Position - March 31, 2013 and 2012 55-56 Consolidated Statements of Comprehensive Income for the Period Ended March 31, 2013, 2012 and 2011 57-58 Consolidated Statements of Changes in Equity for the Years Ended March 31, 2013, 59-60 2012 and 2011 Consolidated Statements of Cash Flows for the Years Ended March 31, 2013, 2012 61-62 and 2011 Notes to Consolidated Financial Statements 63-133

SUPPLEMENTARY SCHEDULES

Report of Independent Auditors on Supplementary Schedules 134

A. Financial Assets 135 B. Amounts Receivable from Directors, Officers, Employees, Related Parties, and Principal Stockholders (Other than Related Parties) 136 C. Amounts Receivable from Related Parties which are Eliminated during the Consolidation of Financial Statements 137 D. Intangible Assets and Other Assets 138 E. Long- Term Obligations 139 F. Indebtedness to Related Parties 140 G. Guarantees of Securities of Other Issuers 141 H. Capital Stock 142 I. Reconciliation of Retained Earnings Available for Dividend Declaration 143 J. Relationships between & among the Group and its parent 144 K. List of Philippine Financial Reporting Standards Effective 145-149 As At March 31, 2013 L. Financial Soundness Indicators 150 M. Index to Exhibits *

* 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.

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49

50

PAL Holdings, Inc. (A Subsidiary of Trustmark Holdings Corporation) and Subsidiaries

Consolidated Financial Statements March 31, 2013 and 2012 and Years Ended March 31, 2013, 2012 and 2011 and

Independent Auditors’ Report

SyCip Gorres Velayo & Co.

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COVER SHEET

P W - 9 4 SEC Registration Number

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

(Company‟s Full Name)

7 t h F l o o r , A l l i e d B a n k C e n t e r

6 7 5 4 A y a l a A v e n u e , M a k a t i C i t y

(Business Address: No. Street City/Town/Province)

Jorge Ma. S. Sanagustin 817-8710 (Contact Person) (Company Telephone Number)

0 3 3 1 A A C F S Month Day (Form Type) Month Day (Fiscal Year) (Annual Meeting)

Not Applicable (Secondary License Type, If Applicable)

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings 6,599 Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

S T A M P S Remarks: Please use BLACK ink for scanning purposes.

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53

54

PAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in Thousands)

March 31 2013 2012

ASSETS

Current Assets Cash and cash equivalents (Notes 5, 18, 27 and 28) P=3,486,795 P=2,980,945 Receivables (Notes 7, 18, 27 and 28) 8,026,140 7,214,887 Expendable parts, fuel, materials and supplies (Note 8) 1,684,594 1,591,606 Other current assets (Notes 9, 27 and 28) 1,754,664 1,647,235 Total Current Assets 14,952,193 13,434,673

Noncurrent Assets Property and equipment (Notes 10, 13, 15, 18, 24 and 25) At cost 75,309,211 50,055,463 At appraised values 845,489 568,446 Available-for-sale investments (Notes 6, 18, and 28) 487,666 522,723 Investment properties (Notes 11 and 13) 1,221,280 797,585 Deferred income tax assets - net (Note 23) 1,864,347 1,898,499 Other noncurrent assets (Notes 12, 18, 27 and 28) 5,187,461 4,506,481 Total Noncurrent Assets 84,915,454 58,349,197

TOTAL ASSETS P=99,867,647 P=71,783,870

LIABILITIES AND EQUITY

Current Liabilities Notes payable (Notes 13, 18, 27 and 28) P=11,166,277 P=5,979,805 Accounts payable (Notes 18, 27 and 28) 6,978,010 6,698,829 Accrued expenses (Notes 14, 16, 18, 27 and 28) 14,240,773 12,958,898 Unearned transportation revenue 8,887,308 8,502,864 Current portion of long-term obligations (Notes 15, 18, 25, 27 and 28) 10,955,672 5,981,264 Total Current Liabilities 52,228,040 40,121,660

Noncurrent Liabilities Long-term obligations - net of current portion (Notes 15, 18, 24, 25, 27 and 28) 25,972,373 23,444,111 Accrued employee benefits (Note 21) 5,391,478 4,891,943 Reserves and other noncurrent liabilities (Notes 16 and 18) 2,494,566 2,320,110 Total Noncurrent Liabilities 33,858,417 30,656,164 Total Liabilities P=86,086,457 P=70,777,824 (Forward)

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March 31 2013 2012

Equity Attributable to the equity holders of the parent company: Capital stock (Notes 2 and 17) P=22,421,568 P=5,421,568 Additional paid-in capital (Notes 2 and 18) 17,912,233 18,008,373 Other components of equity (Note 17) (5,090,994) (4,364,140) Deficit (Notes 2, 17, and 19) (21,720,853) (18,198,384) Treasury stock - at cost (Note 17) (56) (56) 13,521,898 867,361 Non-controlling interests 259,292 138,685 Total Equity 13,781,190 1,006,046

TOTAL LIABILITIES AND EQUITY P=99,867,647 P=71,783,870

See accompanying Notes to Consolidated Financial Statements.

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PAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands, Except Earnings Per Share)

Years Ended March 31 2013 2012 2011

REVENUES Passenger P=62,203,388 P=63,066,430 P=62,667,001 Cargo 5,350,928 5,404,378 5,941,290 Others (Notes 18 and 20) 6,468,347 5,582,301 5,999,029 74,022,663 74,053,109 74,607,320

EXPENSES AND OTHER CHARGES (INCOME) (Note 20) Flying operations (Note 18) 45,013,148 46,652,228 40,301,308 Maintenance (Note 18) 9,930,109 8,900,202 8,754,940 Aircraft and traffic servicing (Note 18) 9,112,394 9,642,216 9,324,494 Passenger service (Note 18) 5,107,570 5,295,429 4,881,594 Reservation and sales 4,339,392 4,361,718 4,382,572 General and administrative (Note 7) 3,056,623 2,866,213 2,646,022 Financing charges (Notes 13, 15 and 18) 1,348,685 1,365,785 1,661,570 Others - net (Notes 10, 11, 15, 16, 18 and 27) (148,530) 303,721 (384,713) 77,759,391 79,387,512 71,567,787

INCOME (LOSS) BEFORE INCOME TAX (3,736,728) (5,334,403) 3,039,533 INCOME TAX BENEFIT (EXPENSE) (Note 23) 99,554 1,045,581 (46,615)

NET INCOME (LOSS) (3,637,174) (4,288,822) 2,992,918

OTHER COMPREHENSIVE INCOME (LOSS) (Note 19) Increase in revaluation increment due to appraisal, net of deferred income tax (Note 10) 267,045 – 453,087 Net changes in fair values of available-for-sale investments, net of deferred income tax (Note 6) (22,010) (35,114) 39,934 Net changes in fair values of cash flow hedges, net of deferred income tax (Note 28) – – (277,077) Effect of foreign exchange translation* (740,900) (55,375) (110,743)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (495,865) (90,489) 105,201

TOTAL COMPREHENSIVE INCOME (LOSS) (P=4,133,039) (P=4,379,311) P=3,098,119

Net income (loss) attributable to: Equity holders of the parent company (P=3,574,320) (P=3,631,943) P=2,533,394 Non-controlling interests (62,854) (656,879) 459,524 (P=3,637,174) (P=4,288,822) P=2,992,918 (Forward)

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Years Ended March 31 2013 2012 2011

Total comprehensive income (loss) attributable to: Equity holders of the parent company (P=4,061,987) (P=3,713,955) P=2,628,538 Non-controlling interests (71,052) (665,356) 469,581 (P=4,133,039) (P=4,379,311) P=3,098,119

Basic/Diluted Earnings (Loss) Per Share** Computed based on Net Income (Loss) (P=0.3405) (P=0.6699) P=0.4673 Computed based on Total Comprehensive Income (Loss) (0.3869) (0.6850) 0.4848

* 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 =P40.918, =P42.934 and =P43.408 to US$1 as of March 31, 2013, 2012 and 2011, respectively, and the monthly average exchange rates for the years then ended. As of July 5, 2013, the applicable exchange rate to US$1 is =P43.409.

**Computed using the weighted average number of issued and outstanding shares of stock of 10,498,280,014 in 2013 and 5,421,512,096 in 2012 and 2011 (see Note 17).

See accompanying Notes to Consolidated Financial Statements.

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PAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED MARCH 31, 2013, 2012 and 2011 (Amounts in Thousands)

Other Components of Equity (Note 17) Net Changes Total Equity Additional Cumulative in Fair Values Attributable Capital Paid-in Translation of Available- Revaluation Effect of to Equity Stock Capital Adjustment for-sale Increment Change in Deficit Treasury Holders of Non- (Notes 2 (Notes 2 (Notes 19 Investments (Notes 10 Ownership (Notes 2, 17 Stock the Parent Controlling and 17) and 18) and 28) (Note 6) and 11) Interest Subtotal and 19) (Note 17) Company Interests Total

P= BALANCES AT APRIL 1, 2010 P=5,421,568 17,517,283 (P=4,342,769) P=66,440 P=1,309,159 P=– (P=2,967,170) (P=18,595,127) (P=56) P=1,376,498 P=319,034 P=1,695,532 Net income for the year – – – – – – – 2,533,394 – 2,533,394 459,524 2,992,918 Other comprehensive income (loss) (Note 19) – – (328,363) 39,883 383,624 – 95,144 – – 95,144 10,057 105,201 Total comprehensive income (loss) for the year – – (328,363) 39,883 383,624 – 95,144 2,533,394 – 2,628,538 469,581 3,098,119 Reclassification of revaluation increment deemed cost (Note 11) – – – – (1,120,877) – (1,120,877) 1,120,877 – – – – Conversion of amounts due to a stockholder into additional paid-in capital (Note 18) – 481,090 – – – – – – – 481,090 – 481,090 Net effect of transfer of portion of revaluation increment in property realized through sale and depreciation, net of deferred income tax and foreign exchange adjustment – – – – (240,723) – (240,723) 327,328 – 86,605 15,682 102,287

BALANCES AT MARCH 31, 2011 5,421,568 17,998,373 (4,671,132) 106,323 331,183 – (4,233,626) (14,613,528) (56) 4,572,731 804,297 5,377,028 Net loss for the year – – – – – – – (3,631,943) – (3,631,943) (656,879) (4,288,822) Other comprehensive loss (Note 19) – – (46,885) (35,127) – – (82,012) – – (82,012) (8,477) (90,489) Total comprehensive loss for the year – – (46,885) (35,127) – – (82,012) (3,631,943) – (3,713,955) (665,356) (4,379,311) Conversion of amounts due to a stockholder into additional paid-in capital (Note 18) – 10,000 – – – – – – – 10,000 – 10,000 Net effect of transfer of portion of revaluation increment in property realized through sale and depreciation, net of deferred income tax and foreign exchange adjustment – – – – (48,502) – (48,502) 47,087 – (1,415) (256) (1,671)

P= BALANCES AT MARCH 31, 2012 P=5,421,568 18,008,373 (P=4,718,017) P=71,196 P=282,681 P=– (P=4,364,140) (P=18,198,384) (P=56) P=867,361 P=138,685 P=1,006,046

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Other Components of Equity (Note 17) Net Changes Total Equity Additional Cumulative in Fair Values Attributable Capital Paid-in Translation of Available- Revaluation Effect of to Equity Stock Capital Adjustment for-sale Increment Change in Deficit Treasury Holders of Non- (Notes 2 (Notes 2 (Notes 19 Investments (Notes 10 Ownership (Notes 2, 17 Stock the Parent Controlling and 17) and 18) and 28) (Note 6) and 11) Interest Subtotal and 19) (Note 17) Company Interests Total

BALANCES AT MARCH 31, 2012 P=5,421,568 P=18,008,373 (P=4,718,017) P=71,196 P=282,681 P=– (P=4,364,140) (P=18,198,384) (P=56) P=867,361 P=138,685 P=1,006,046 Net loss for the year – – – – – – – (3,574,320) – (3,574,320) (62,854) (3,637,174) Other comprehensive loss (Note 19) – – (728,082) (22,010) 262,425 – (487,667) – – (487,667) (8,198) (495,865) Total comprehensive loss for the year – – (728,082) (22,010) 262,425 – (487,667) (3,574,320) – (4,061,987) (71,052) (4,133,039) Subscription during the period, net of direct costs of P=11.14 million 17,000,000 (11,140) – – – – – – – 16,988,860 – 16,988,860 Share issuance costs of a subsidiary – (85,000) – – – – – – – (85,000) – (85,000) Effect of change in ownership interest – – (757,890) 128 45,409 520,769 (191,584) – – (191,584) 191,584 – Net effect of transfer of portion of revaluation increment in property realized through sale and depreciation, net of deferred income tax and foreign exchange adjustment – – – – (47,603) – (47,603) 51,851 – 4,248 75 4,323

BALANCES AT MARCH 31, 2013 P=22,421,568 P=17,912,233 (P=6,203,989) P=49,314 P=542,912 P=520,769 (P=5,090,994) (P=21,720,853) (P=56) P=13,521,898 P=259,292 P=13,781,190

See accompanying Notes to Consolidated Financial Statements.

60

PAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands)

Years Ended March 31 2013 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax (P=3,736,728) (P=5,334,403) P=3,039,533 Adjustments for: Depreciation, amortization and impairment losses (Notes 10, 11 and 20) 5,821,727 6,327,996 7,342,159 Increase (decrease) in reserves and other noncurrent liabilities (Note 16) 100,425 (1,366,622) 119,156 Financing charges (Note 20) 1,348,685 1,365,785 1,661,570 Net increase (decrease) in accrued employee benefits (Note 21) 258,900 (456,841) 377,819 Unrealized foreign exchange loss (gain) - net 359,227 (190,971) 231,470 Dividend income (171,816) (106,038) (187,774) Realization of non-hedge derivatives (Note 28) (85,858) 72,714 (248,626) Interest income (51,707) (47,721) (240,163) Loss (gain) on disposal of property and equipment, and others (496,769) 1,921,825 (203,414) Operating income before working capital changes 3,346,086 2,185,724 11,891,730 Decrease (increase) in: Receivables (591,000) (1,594,805) 639,280 Expendable parts, fuel, materials and supplies (92,988) 180,309 (537,418) Other current assets (361,833) 269,234 (328,214) Increase in: Accounts payable 229,185 733,853 138,342 Accrued expenses 649,305 946,399 1,938,766 Due to related parties – – 10,000 Unearned transportation revenue 384,444 1,683,728 821,883 Net cash settlement on derivative transactions 332,750 (198,502) (481,321) Net cash generated from operations 3,895,949 4,205,940 14,093,048 Financing charges paid (1,096,359) (1,195,937) (1,360,746) Interest received 35,545 43,936 38,181 Income taxes paid (including final and withholding taxes) (219,065) (204,143) (174,402) Net cash flows from operating activities 2,616,070 2,849,796 12,596,081 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (Notes 10 and 24) (24,155,521) (6,374,367) (3,098,601) Investments in available-for-sale investments (2,506) (2,460) (358) Proceeds from disposal of: Property and equipment 62,368 204,885 1,823,016 Available-for-sale investments 2,518 2,596 – Dividend received 171,816 106,038 187,774 Payments for security deposits (931,449) (901,505) (1,786,421) Return of various deposits 158,355 400,078 111,077 Proceeds from return of predelivery payments (Notes 10 and 13) – – 709,958 Net cash flows used in investing activities (24,694,419) (6,564,735) (2,053,555)

(Forward) 61

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Years Ended March 31 2013 2012 2011

CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of capital stock (Note 17) P=16,988,860 P=– P=– Availments of: Notes payable (Note 13) 8,630,101 2,122,350 – Long-term obligations (Notes 15, 18 and 24) 4,142,800 8,595,150 – Payments of: Notes payable (Note 13) (3,241,774) (1,082,000) (280,836) Long-term obligations (Notes 15, 18 and 24) (3,935,620) (7,508,366) (9,256,954) Net cash flows from (used in) financing activities 22,584,367 2,127,134 (9,537,790)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (168) 28,171 138,822

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 505,850 (1,559,634) 1,143,558

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,980,945 4,540,579 3,397,021

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 5) P=3,486,795 P=2,980,945 P=4,540,579

See accompanying Notes to Consolidated Financial Statements.

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PAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

PAL Holdings, Inc. (the Parent Company) was incorporated in the Philippines on May 10, 1930 under the name “Baguio Gold Mining Company” originally to engage in mining and other mineral exploration activities. On 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. On September 23, 1996, the Parent Company changed its primary purpose to that of engaging in the business of a holding company and changed its corporate name to Baguio Gold Holdings Corporation.

The Parent Company‟s Board of Directors (BOD) and its stockholders approved the change of the Parent Company‟s name to PAL Holdings, Inc. in separate meetings held on October 20 and December 13, 2000, respectively. The change of the Parent Company‟s name was approved by the Philippine SEC on January 19, 2007.

The Parent Company and its subsidiaries (collectively referred to herein as “the Group”), through Philippine Airlines, Inc. (PAL), the Philippine national flag carrier and the major subsidiary of the Parent Company, is primarily engaged in air transport of passengers and cargo within the Philippines and between the Philippines and several international destinations. The Parent Company is 99.45% (97.71% in 2012) owned by Trustmark Holdings Corporation (Trustmark). Trustmark is 51% (100% in 2012) owned by Buona Sorte Holdings, Inc. (BSHI). BSHI and Trustmark were likewise incorporated in the Philippines and are part of the Lucio Tan Group of Companies (LTGC). In April 2012, San Miguel Equity Investments Inc. (SMEII), a wholly- owned subsidiary of San Miguel Corporation, acquired 49% of the shares of stock of Trustmark through an investment agreement with BSHI.

The Parent Company‟s registered office address is 7th Floor, Allied Bank Center, 6754 Ayala Avenue, Makati City.

The consolidated financial statements as at March 31, 2013 and 2012 and for each of the three years in the period ended March 31, 2013 were authorized for issue by the BOD on July 5, 2013.

2. Status of Operations and Reorganizations

a. Increases in capital stock of the Parent Company

On July 26 and September 19, 2006, at separate meetings, the Parent Company‟s BOD, by a vote of at least a majority of its entire membership, and the stockholders of at least two thirds (2/3) of the outstanding shares of stock, approved the increase in authorized capital stock of the Parent Company from P=400.00 million divided into 400 million shares with par value of P=1.00 per share to P=20.00 billion divided into 20 billion shares with par value of P=1.00 per share. Out of the increase in the authorized capital stock, 5.02 billion shares with a total par value of P=5.02 billion have been subscribed and in payment thereof, the Parent Company agreed to convert to equity a part of its debt to Trustmark, in the amount of P=9.04 billion, at a rate of P=1.80 per share. As a result of the conversion, Trustmark‟s ownership over the Parent Company increased from 69.16% to 97.71%. 63

The increase in authorized capital stock was approved by the Philippine SEC on January 19, 2007.

As a result of the above transactions, the Parent Company had a P=4.02 billion additional paid-in capital as of March 31, 2007. On October 17, 2007, the Philippine SEC approved the Parent Company‟s request to undergo equity restructuring to wipe out the deficit of the Parent Company as of March 31, 2007 amounting to P=253.73 million against the additional paid-in capital.

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=20.00 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 of the Company 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. b. Group reorganizations

Transactions in Fiscal Year 2007

In fiscal year 2007, the Parent Company undertook the following business restructuring activities that were accounted for under the pooling of interests method:

On August 17, 2006, the BOD of the Parent Company approved the acquisition of 100% of the total voting shares of its then subsidiaries, Cube Factor Holdings, Inc., Ascot Holdings, Incorporated, POL Holdings, Inc., Sierra Holdings & Equities, Inc., Network Holdings & Equities, Inc. and Maxell Holdings Corp. (collectively, the Holding Companies) for P=136.00 million from the individual stockholders representing interests of LTGC (Nominees of the LTGC). The Holding Companies collectively owned 81.57% of PAL. These Holding Companies also owned 82.33% of PR Holdings, Inc. (PR), 3.76% owner of PAL.

Also on August 17, 2006, the Parent Company‟s BOD approved the Parent Company‟s assumption of a portion of the liabilities of the Holding Companies to Trustmark aggregating to about P=9.04 billion. The BOD of Trustmark accepted the said assumption by the Parent Company on August 18, 2006.

On October 2, 2006, the Nominees of the LTGC assigned their interests in the Holding Companies to the Parent Company. Following the assignment, the Parent Company effectively owned 84.67% of PAL through the Holding Companies and PR.

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Transactions in Fiscal Year 2008

In fiscal year 2008, the Parent Company‟s management, realizing that the 2007 restructuring may not have resulted in a corporate structure that is in line with their strategy, executed the following additional series of corporate restructuring actions:

On June 27, 2007, the BOD of the Parent Company approved the assumption by the Parent Company of the outstanding liability of the Holding Companies to Trustmark, amounting to P=14.08 billion as of June 27, 2007. Trustmark agreed to convert such receivable from the Parent Company (after the assumption) into additional paid-in capital of the Parent Company.

On July 19, 2007, the Parent Company‟s BOD approved the Parent Company‟s acquisition of the 81.57% aggregate ownership of the Holding Companies in PAL, and their 82.33% ownership in PR. This gave the Parent Company the same effective ownership of 84.67% in PAL that existed as of March 31, 2007.

As approved by the BOD, the acquisition will be made by way of a dacion en pago to pay-off P=12.12 billion out of the P=23.12 billion liabilities of the Holding Companies to the Parent Company (after the assumption by the Parent Company of the P=14.08 billion receivable of Trustmark from the Holding Companies). The remaining receivable of the Parent Company from the Holding Companies after the dacion en pago, amounting to P=11.00 billion, will be converted into additional paid-in capital in the Holding Companies. The additional paid-in capital resulting from the conversion into equity of the Parent Company‟s obligation to Trustmark will be used to wipe out the Parent Company‟s deficit.

On August 2, 2007, the BOD of the Parent Company resolved to amend the June 27, 2007 resolution so that the Parent Company only assumes P=3.08 billion (instead of P=14.08 billion) out of the P=23.12 billion liabilities of the Holding Companies, as originally planned on June 27, 2007. The remaining liabilities of the Holding Companies amounting to P=11.00 billion are thus retained with the Holding Companies as a result of the amendment.

Pursuant to the approval of the BOD on July 19, 2007 to acquire direct ownership in PAL and PR, the Parent Company and the Holding Companies entered into various deeds of assignment on August 13, 2007 for the Holding Companies to assign to the Parent Company their respective ownerships in PAL and PR. As a result thereof, the Holding Companies assigned to the Parent Company their respective investments in PAL and PR aggregating to P=12.44 billion and P=108.66 million, respectively, in exchange for the full payment of the Holding Companies‟ liabilities to the Parent Company totaling P=12.12 billion, including the P=9.04 billion receivables of the Parent Company from the Holding Companies, as of March 31, 2007. This resulted in the recognition of a liability to Maxell Holdings Corp. (Maxell), one of the Holding Companies, amounting to P=431.60 million as of March 31, 2008.

On August 2, 2007, the BOD approved, upon concurrence of Trustmark, that the Parent Company shall sell/assign its shares in the Holding Companies to Trustmark. In payment thereof, Trustmark agreed to assume the obligations of the Parent Company to the previous stockholders of the Holding Companies aggregating to P=136.00 million.

On August 14, 2007, the Parent Company and Trustmark executed a memorandum of agreement and entered into a deed of assignment effecting the assignment of shares to and assumption of liabilities by Trustmark.

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As a result of the restructuring in fiscal year 2008, the Parent Company still owns 84.67% of PAL, through direct ownership of 81.57% and an indirect ownership of 3.10% through PR. The Parent Company owns 82.33% of PR, which in turn owns 3.77% of PAL shares.

The release of the investments in the Holding Companies to Trustmark was accounted for as a disposal of “legal rights” to the Holding Companies as said investee companies did not have assets that were derecognized in the process other than the investment in shares of stock of PAL that has no carrying value at consolidated level. The disposal though relieved the Group with the liabilities that were settled as they were assumed by Trustmark, the ultimate parent company. Accordingly, the transaction was accounted for as an equity transaction where the reduction in consolidated liabilities was treated as an additional equity investment (or additional paid-in capital of the Parent Company) by Trustmark.

c. Status of PAL’s rehabilitation and operations

On June 7, 1999, the Philippine SEC confirmed its approval of PAL‟s Amended and Restated Rehabilitation Plan (Rehabilitation Plan) dated March 15, 1999.

On September 14, 2007, the members of the Permanent Rehabilitation Receiver endorsed PAL‟s application for exit from rehabilitation to the Philippine SEC and PAL went out of rehabilitation, on September 28, 2007.

PAL incurred consolidated total comprehensive loss of P=4.11 billion and P=4.34 billion in 2013 and 2012, respectively, and generated consolidated total comprehensive income of P=3.06 billion in 2011. Moreover, PAL reported a consolidated deficit of P=12.15 billion and P=8.57 billion, and excess of consolidated total current liabilities over consolidated total current assets by P=37.19 billion and P=26.69 billion as of March 31, 2013 and 2012, respectively. To improve its financial condition and results of operations, PAL has lined up various revenue enhancement programs, cash generation strategies and cost control initiatives.

In 2013, PAL entered into a five-year agreement with an associate of a stockholder who shall oversee and monitor its day-to-day operations.

3. Summary of Significant Accounting and Financial Reporting Policies

Basis of Preparation The consolidated financial statements have been prepared using the historical cost convention, except for buildings and improvements which are carried at revalued amounts, and available-for-sale (AFS) investments and derivative financial instruments which are carried at fair value. The consolidated financial statements are presented in Philippine peso, the Parent Company‟s functional currency, and rounded to the nearest thousands, except when otherwise indicated.

Statement of Compliance The consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS).

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Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial years except for the adoption of the following amendments to existing standards effective beginning April 1, 2012.

Amendment to PFRS 7, Financial Instruments: Disclosures - Transfers of Financial Assets. The amendments require additional disclosures about financial assets that have been transferred but not derecognized to enhance the understanding of the relationship between those assets and their associated liabilities. In addition, the amendments require disclosures about continuing involvement in derecognized assets to enable users of financial statements to evaluate the nature of, and risks associated with, the entity‟s continuing involvement in those derecognized assets. The amendment affects disclosures only and has no impact on the Group‟s financial position or performance (see Notes 4 and 15).

Amendment to Philippine Accounting Standards (PAS) 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets. The amendment clarifies the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40, Investment Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a „sale‟ basis. The presumption is rebutted if the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time („use‟ basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset. The adoption of the amendment did not have any impact on the financial position or performance of the Group as the Group does not have investment properties at fair value and non-depreciable property and equipment under the revaluation model.

Future Changes in Accounting Policies The following new and amended accounting standards, improvements in accounting standards and Philippine Interpretations become effective subsequent to fiscal year 2013. The Group has not early adopted these standards, interpretations and amendments to existing standards. Unless otherwise indicated, the Group does not expect the adoption to have a significant impact on the consolidated financial statements. The relevant disclosures will be included in the consolidated financial statements when these become effective.

Effective in fiscal year 2014

Amendments to PFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities. These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32, Financial Instruments: Presentation. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format, unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period.

a. the gross amounts of those recognized financial assets and recognized financial liabilities; b. the amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the consolidated statement of financial position; 67

c. the net amounts presented in the consolidated statement of financial position; d. the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and ii. amounts related to financial collateral (including cash collateral); and e. the net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendment affects disclosures only and has no impact on the Group‟s financial position or performance.

PFRS 10, Consolidated Financial Statements. This standard replaces a portion of PAS 27, Consolidated and Separate Financial Statements, that addresses accounting for consolidated financial statements. It also addresses issues raised in Standing Interpretations Committee - 12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities and will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent compared with the requirements that were in PAS 27. A reassessment of control was performed by the Company on all its subsidiaries in accordance with the provisions of PFRS 10. Following the reassessment, the Company determined that there will be no additional entities that need to be consolidated nor are there subsidiaries that need to be deconsolidated when this new standard becomes effective.

PFRS 11, Joint Arrangements. This standard requires an entity to account for joint arrangements based on its rights and obligations arising from the arrangements rather than based on the structure of the arrangement as required in PAS 31, Interests in Joint Ventures. It has also removed the option to account for jointly controlled entities using either proportionate consolidation or equity method. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the equity method. The Group does not have any jointly controlled entities so the adoption of this new standard will have no significant impact on the financial statements of the Group.

PFRS 12, Disclosure of Interests in Other Entities. This standard prescribes all the disclosure requirements for interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. It includes all of the disclosures that were previously in PAS 27, PAS 28, Investment in Associates and PAS 31. The adoption of PFRS 12 will affect disclosures only and will have no impact on the Group‟s financial position or performance.

PFRS 13, Fair Value Measurement. This standard establishes a single source of guidance for fair value measurement and eliminates inconsistencies dispersed in various existing PFRS. It does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. The Group is currently assessing the impact of this standard on its financial position and performance.

Amendment to PAS 1, Presentation of Financial Statements - Presentation of Items of Other Comprehensive Income. The amendment changes the grouping of items presented in other comprehensive income. Items that could be reclassified (or recycled) to profit or loss at a future point in time would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Group‟s financial position or performance.

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Amendments to PAS 19, Employee Benefits. The amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. Upon adoption, the Group has to apply the amendments retroactively to the earliest period presented.

The Group reviewed its existing employee benefits and determined that the amended standard has significant impact on its accounting for retirement benefits. The Group obtained the services of an external actuary to compute the impact to the consolidated financial statements upon adoption of the amendments to the standard.

The retrospective application of the amendments to PAS 19 is estimated to increase accrued retirement benefits by P=3,381.76 million and P=1,063.73 million (increase in deferred tax asset by P=1,014.53 million and P=319.09 million), decrease other components of equity by P=2,674.87 million and P=1,012.77 million, and decrease deficit by P=307.64 million and P=268.13 million as of March 31, 2013 and April 1, 2012, respectively. The adoption of the amendments is also estimated to decrease net loss by P=39.46 million in 2013 (increase by P=295.15 million in 2012) and decrease other comprehensive income (net of deferred tax effect) by P=1,662.09 million in 2013 (decrease by P=1,012.77 million in 2012).

Amendment to PAS 27, Separate Financial Statements. As a consequence of the new PFRS 10 and PFRS 12, PAS 27 was amended to contain requirements relating only to accounting for subsidiaries, jointly controlled entities and associates in separate financial statements.

Amendments to PAS 28, Investments in Associates and Joint Ventures. The standard was amended and renamed as a consequence of the issuance of the new PFRS 11 and PFRS 12. The amendment describes the application of the equity method to investments in joint ventures in addition to associates.

Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine. This interpretation applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine (“production stripping costs”) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset.

Annual Improvements to PFRS (2009 to 2011 cycle)

The Annual Improvements to PFRS (2009 to 2011 cycle) contain non-urgent but necessary amendments to PFRS. These amendments are effective for annual periods beginning January 1, 2013 and are applied retrospectively. Earlier application is permitted.

PFRS 1, First-time Adoption of PFRS - Borrowing Costs. The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Group as it is not a first-time adopter of PFRS.

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PAS 1, Presentation of Financial Statements - Clarification of the Requirements for Comparative Information. The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third statement of financial position (which are mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The amendments will affect disclosures only and will have no impact on the Group‟s financial position or performance.

PAS 16, Property, Plant and Equipment - Classification of Servicing Equipment. The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory, if otherwise. The amendment will not have any significant impact on the Group‟s financial position or performance.

PAS 32, Financial Instruments: Presentation - Tax Effect of Distribution to Holders of Equity Instruments. The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes.

PAS 34, Interim Financial Reporting - Interim Financial Reporting and Segment Information for Total Assets and Liabilities. The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entity‟s previous annual financial statements for that reportable segment. The amendment will affect disclosures only and will have no impact on the Group‟s financial position or performance.

Effective in fiscal year 2015

Amendments to PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities. These amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendment is expected not to have any impact on the net assets of the Group, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. The Group is currently assessing the impact of the amendments to PAS 32.

Effective in fiscal year 2016

PFRS 9, Financial Instruments: Classification and Measurement. PFRS 9, as issued, reflects the first phase of the work on the replacement of PAS 39, Financial Instruments: Recognition and Measurement, and applies to the classification and measurement of financial assets and financial liabilities as defined in PAS 39. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 70

requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through other comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability‟s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO.

The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Group‟s financial assets but will potentially have no impact on classification and measurement of financial liabilities. The Group, however, has yet to conduct a quantification of the full impact of this standard. The Group will quantify the effect of this standard in conjunction with the other phases, when issued, to present a more comprehensive picture.

Deferred

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The Philippine SEC and the Financial Reporting Standards Council have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. The adoption of the interpretation, when it becomes effective, will not have any impact on the consolidated financial statements.

Basis of Consolidation The consolidated financial statements consist of the financial statements of the Parent Company and its subsidiaries as at March 31, 2013 and 2012. The financial statements of the subsidiaries are prepared using consistent accounting policies as those of the Parent Company.

The subsidiaries and the related percentages of ownership (see Note 2) of the Parent Company as of March 31 are as follows:

2013 2012 Direct Indirect Direct Indirect PAL 97.92% 0.35% 81.57% 3.10% Abacus Distribution Systems Philippines, Inc. (ADSPI) – 81.56% – 70.23% Synergy Services Corporation (SSC) – 62.89% – 54.19% Pacific Aircraft Ltd. – 98.27% – 84.67% Pearl Aircraft Ltd. – 98.27% – 84.67% Peerless Aircraft Ltd – 98.27% – 84.67% PR 82.33% – 82.33% –

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The subsidiaries‟ operations and principal activity are as follows: ADSPI engages in development and marketing of computerized airline reservation system; SSC engages in sanitation and janitorial services; and Pacific Aircraft Ltd., Pearl Aircraft Ltd. and Peerless Aircraft Ltd., used to be the trustor or beneficiary in the lease of aircraft prior to the refinancing of the lease. ADSPI and SSC are domiciled in the Philippines. The three other subsidiaries were incorporated in the Cayman Islands.

Subsidiaries are consolidated from the date on which control is transferred to the Parent Company and cease to be consolidated from the date on which control is transferred out of the Parent Company. All intercompany accounts and transactions with subsidiaries are eliminated in full.

Noncontrolling interest represents the interest in a subsidiary, which is not controlled, directly or indirectly through subsidiaries, by the Parent Company. Noncontrolling interests represent the interests in PAL and PR not held by the Parent Company.

The equity and net income attributable to noncontrolling interests of the consolidated subsidiaries are recognized and, where material, are shown separately in the consolidated statements of financial position and consolidated statements of comprehensive income, respectively.

Changes in the Parent Company's ownership interest in its subsidiaries that do not result in the loss of control over its subsidiaries are recognized as equity transactions.

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisition and that are subject to an insignificant risk of changes in value. Cash and cash equivalents exclude any restricted cash (presented as “Other noncurrent assets”) that is not available for use by the Company and therefore is not considered highly liquid, such as cash set aside to collateralize various surety bonds.

Financial and Derivative Instruments The Group recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date the Group commits to purchase the assets. Regular way purchases or sales are purchases or sales of financial assets that require the delivery of assets within the period generally established by regulation or convention in the market place.

The fair value of financial instruments including derivatives, traded in active markets at the reporting date is based on their quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction is used since it provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include discounted cash flow methodologies, comparison to similar instruments for which market observable prices exist, option pricing models, and other relevant valuation models. In the absence of a reliable basis of determining fair value, investments in unquoted equity securities are carried at cost, net of any impairment.

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Financial instruments are classified as debt or equity in accordance with the substance of the contractual arrangement. Interests, dividends, gains, and losses relating to a financial instrument classified as a debt, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity.

Financial assets are classified as either financial assets at fair value through profit or loss (FVPL), loans and receivables, held-to-maturity investments (HTM) or AFS investments, as appropriate. Financial liabilities are classified as either financial liabilities at FVPL or other financial liabilities.

When financial assets and financial liabilities are recognized initially, they are measured at fair value. In the case of financial assets not classified as at fair value through profit or loss and other liabilities, fair value at initial recognition includes any directly attributable transaction cost. The Group determines the classification of its financial instruments upon initial recognition and, where allowed and appropriate, reevaluates this designation at every reporting date.

“Day 1” difference Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and the fair value (a “Day 1” difference) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where data used is not observable, the difference between the transaction price and model value is only recognized in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the “Day 1” difference amount.

Financial Assets and Financial Liabilities at FVPL Financial assets and financial liabilities at FVPL include financial instruments held for trading, derivative financial instruments or those designated upon initial recognition as at FVPL.

Financial assets and financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on investments held for trading are recognized in profit or loss. Interest earned or incurred and dividend income is recorded when the right to receive payment has been established.

Where a contract contains one or more embedded derivatives, the hybrid contract may be designated as financial asset at FVPL, except where the embedded derivative does not significantly modify the cash flows or it is clear that separation of the embedded derivative is prohibited.

Financial instruments may be designated as at FVPL by management on initial recognition if any of the following criteria are met:

The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognizing gains or losses on them on a different basis; The assets or liabilities are part of a group of financial assets or financial liabilities, or both financial assets and financial liabilities, which are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

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The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets and financial liabilities classified under this category are carried at fair value in the consolidated statement of financial position, with any gain or loss being recognized in profit or loss.

The Group accounts for its derivative transactions (including embedded derivatives) under this category with fair value changes being reported directly to consolidated profit or loss, except when the derivative is treated as an effective accounting hedge, in which case the fair value change is reported in profit or loss with the corresponding adjustment from the hedged transaction (fair value hedge) or deferred in equity (cash flow hedge) under “Cumulative translation adjustment” account.

Loans and Receivables Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest rate method. Gains and losses are recognized in profit or loss when the loans and receivables are derecognized or impaired, and through the amortization process. Loans and receivables (or portion of loans and receivables) are included in current assets if maturity is within 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

The Group classified its cash and cash equivalents, receivables, margin deposits and lease deposits as loans and receivables as at March 31, 2013 and 2012.

HTM Investments Quoted nonderivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold them to maturity. Investments intended to be held for an undefined period are not included in this classification. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. Other long-term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortized cost. This cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between the initially recognized amount and the maturity amount. This calculation includes fees paid or received between parties to the contract that are an integral part of the effective interest rate, issuance costs and all other premiums and discounts. For investments carried at amortized cost, gains and losses are recognized in the consolidated profit or loss when the investments are derecognized or impaired, and through the amortization process. Assets under this category are classified as current assets if maturity is within 12 months from the statement of financial position date. Otherwise, these are classified as noncurrent assets.

The Group has no HTM investments as of March 31, 2013 and 2012.

AFS Investments AFS investments are nonderivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition, AFS investments are measured at fair value with gains or losses being recognized as other comprehensive income and as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in consolidated profit or loss. The effective yield and (where applicable) results

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of foreign exchange restatement for available-for-sale debt investments are reported immediately in the consolidated 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 from the statement of financial position date.

Available-for-sale investments as at March 31, 2013 and 2012 represent the Group‟s investment in shares of stock of MacroAsia Corporation (MAC) and other equity instruments as shown in Note 6.

Other Financial Liabilities Other financial liabilities pertain to financial liabilities that are not held for trading nor designated as at FVPL upon the inception of the liability. These include liabilities arising from operations (e.g., payables and accruals) or borrowings (e.g., long-term obligations).

The liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest rate method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs. Other financial liabilities (or portion of other financial liabilities) are included in current liabilities when they are expected to be settled within 12 months from the reporting date or the Group does not have an unconditional right to defer settlement of the liabilities for at least 12 months from the reporting date.

Included under this category are the Group‟s accounts payable, accrued expenses, notes payable, obligations under finance leases, other long-term obligations and other noncurrent liabilities.

Derivatives and Hedge Accounting Freestanding derivatives For the purpose of hedge accounting, hedges are classified primarily either as: (a) a hedge of the fair value of an asset, liability or a firm commitment (fair value hedge); (b) a hedge of the exposure to variability in cash flows attributable to an asset or liability or a forecasted transaction (cash flow hedge); or (c) hedge of a net investment in a foreign operation. The Group did not designate its derivative transactions as cash flow or fair value hedge for the fiscal year ended March 31, 2013 and 2012.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument‟s effectiveness in offsetting the exposure to changes in the hedged item‟s fair value or cash flows attributable to the hedged risk. Such hedges are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

In cash flow hedges, changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are included in other comprehensive income, net of related deferred income tax. The ineffective portion is immediately recognized in consolidated profit or loss.

For cash flow hedges with critical terms that match those of the hedged items and where there are no basis risks (such as the pay-fixed, receive-floating interest rate swaps), the Group expects the hedges to exactly offset changes in expected cash flows relating to the hedged risk (e.g., fluctuations in fuel price and benchmark interest rates). This assessment on hedge effectiveness is performed on a quarterly basis by the Group by comparing the critical terms of the

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hedges and the hedged items to ensure that they continue to match and by evaluating the continued ability of the counterparties to perform their obligations under the derivative contracts.

For cash flow hedges with basis risks (such as crude oil derivatives entered into as proxy hedges for forecasted jet fuel purchases), the Group assesses the effectiveness of its hedges (both on a prospective and retrospective basis) by using a regression model to determine the correlation of the percentage change in prices of underlying commodities used to hedge jet fuel to the percentage change in prices of jet fuel over a specified period that is consistent with the hedge time horizon or 30 data points whichever is longer.

If the hedged cash flow results in the recognition of an asset or a liability, gains and losses initially recognized in equity are transferred from equity to profit or loss in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affect the consolidated profit or loss.

When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In this case, the cumulative gain or loss on the hedging instrument that has been reported directly in equity is recognized in the consolidated profit or loss.

For derivatives that are not designated as effective accounting hedges, any gains or losses arising from changes in fair value of derivatives are recognized directly in the consolidated profit or loss.

Embedded derivatives Embedded derivatives are separated from the hybrid contracts and accounted for at fair value through profit or loss when the entire hybrid contracts (composed of the host contract and the embedded derivative) are not accounted for at fair value through profit or loss, the economic risks of the embedded derivatives are not closely related to those of their respective host contracts, and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative.

Changes in fair values are included in consolidated profit or loss. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

The Group assesses whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flows on the contract.

Derecognition of Financial Assets and Financial Liabilities A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:

the contractual right to receive cash flows from the asset has expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or,

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the Group has transferred its right 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 nor retained substantially all the risks and rewards of ownership of the asset, but has transferred control of the asset.

When the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group‟s continuing involvement in the asset.

A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such modification is treated as a derecognition of the carrying value of the original liability and the recognition of a new liability at fair value, and any resulting difference is recognized in consolidated profit or loss.

Impairment of Financial Assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset may be impaired. If such evidence exists, any impairment loss is recognized in the consolidated profit or loss.

Financial assets carried at amortized cost For financial assets carried at amortized cost, whenever it is probable that the Group will not collect all amounts due according to the contractual terms of receivables, an impairment loss has been incurred. The amount of the loss is measured as the difference between the asset‟s carrying amount and the present value of estimated future cash flows discounted at the financial asset‟s original effective interest rate. The carrying amount of the asset is reduced either directly or through the use of an allowance account. Any loss determined is recognized in consolidated profit or loss.

The Group initially assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

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 Group will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through the use of an allowance account. Impaired receivables are derecognized when they are assessed as uncollectible.

If, in a subsequent period, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in consolidated profit or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

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Assets carried at cost If there is objective evidence that an impairment loss on financial assets carried at cost such as an unquoted equity instrument that is not carried at fair value because its fair value cannot be measured reliably, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset‟s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

AFS investments In case of equity investments classified as AFS investments, impairment would include a significant or prolonged decline in the fair value of the investments below their cost. Where there is evidence of impairment loss, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in income, is removed from the consolidated equity and recognized in the consolidated profit or loss. Impairment losses on equity investments are not reversed through income. Increases in fair value after impairment are recognized as other comprehensive income in the consolidated statement of comprehensive income and consolidated statement of changes in equity.

In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount cash flows for the purpose of measuring impairment loss. If, in subsequent year, the fair value of a debt instrument increases and the increase can be related objectively to an event occurring after the impairment loss was recognized against income, the impairment loss is reversed through consolidated profit or loss.

Offsetting of Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position.

Expendable Parts, Fuel, Materials and Supplies Expendable 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 moving weighted average method. Net realizable value represents the amount expected to be realized from the use of the expendable parts, fuel, materials and supplies, considering factors such as age and physical condition of these assets.

Prepayments Prepayments include advance payments of various materials, various rentals and other services that are yet to be delivered and from which future economic benefits are expected to flow to the Group within the normal operating cycle or within 12 months from the reporting date. They are initially measured at the amount paid in advance by the Group for the purchase of goods and services and are subsequently decreased by the amount of expense incurred.

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Property and Equipment Property and equipment (except buildings and improvements) are stated at cost less accumulated depreciation and any impairment in value. Buildings and improvements are stated at revalued amounts less accumulated depreciation and any impairment in value. Revalued amounts were determined based on valuations performed by various qualified and independent appraisers. Revaluations are made every three to five years such that the carrying amount does not differ materially from that which would be determined using fair value at the end of reporting period. The latest appraisal reports are as of March 31, 2013.

For subsequent revaluations, the accumulated depreciation at the date of the revaluation is eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. Any resulting increase in the asset‟s carrying amount as a result of the revaluation is recognized as other comprehensive income credited directly to equity as “Revaluation increment”, net of the related deferred income tax. Any resulting decrease is directly charged against the related revaluation increment to the extent of the revaluation increment previously recognized in respect of the same asset and any excess is charged against consolidated profit or loss.

The initial cost of property and equipment comprises its purchase price, any related capitalizable borrowing costs attributed to predelivery payments incurred on account of aircraft acquisition and other significant assets under construction and other directly attributable costs of bringing the asset to its working condition and location for its intended use. Manufacturers‟ credits that reduce the price of the aircraft, received from aircraft and engine manufacturers are recorded upon delivery of the related aircraft and engines. Such credits are applied as a reduction from the cost of the property and equipment (including those under finance lease).

Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance costs, are normally charged to income in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional cost of property and equipment.

Depreciation, which commences when the asset is available for its intended use, is computed on a straight-line basis over the following estimated useful lives of the assets:

Number of Years Passenger aircraft (owned and under finance lease) 12 to 20 Spare engines 12 to 20 Other aircraft 5 to 10 Buildings and improvements 8 to 50 Rotable and reparable parts 3 to 18 Ground property and equipment 3 to 8

Leasehold improvements are amortized over the term of the lease or life of the improvements, whichever is shorter.

Expenditures for heavy maintenance on aircraft‟s airframe and landing gear are capitalized at cost and depreciated over the estimated number of years until the next major overhaul or inspection. Generally, heavy maintenance visits are required every six to eight years for airframe and 10 to 12 years for landing gear. Engine overhauls are expensed as incurred.

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The estimated useful lives, depreciation and amortization method and residual values are reviewed periodically to ensure that the periods, method of depreciation and amortization and residual values are consistent with the expected pattern of economic benefits from items of property and equipment. Any changes in estimate arising from the review are accounted for prospectively.

The portion of “Revaluation increment, net of deferred income tax effect” is transferred to deficit when these are realized through depreciation or upon the disposal or retirement of the property.

When assets are sold or retired, their costs, accumulated depreciation and amortization, any impairment in value and related revaluation increment are eliminated from the accounts. Any gain or loss resulting from their disposal is recognized as income and included in the consolidated profit or loss.

“Construction in progress” represents aircraft modifications in progress and buildings and improvements and other ground property under construction while “Predelivery payments” represents advance payments under construction. “Construction in progress” and “Predelivery payments” are not depreciated until such time when the construction of the relevant assets is completed and available for their intended use.

Asset Retirement Obligation (ARO) PAL is required under various aircraft lease agreements to restore the leased aircraft to their original condition and to bear the cost of dismantling and restoration at the end of the lease term. PAL provides for these costs over the terms of the leases through contribution to a maintenance reserve fund, (MRF), based on aircraft hours flown until the next scheduled checks. If the estimated cost of dismantling and restoration is expected to exceed the cumulative MRF, an additional obligation is recognized over the remaining term of the leases. The amount of obligation is carried at amortized cost using the effective interest rate method.

Investment Properties Investment properties include parcels of land and building and building improvements not used in operations.

Investment properties are measured initially at cost, including any transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an investment property. Investment properties (except land) are subsequently measured at cost less accumulated depreciation (except land) and any impairment in value. Land is subsequently carried at cost less any impairment in value.

Depreciation and amortization of depreciable investment properties is calculated on a straight-line basis over the estimated useful lives ranging from six to eight years.

Transfers are made to investment properties when, and only when, there is a change in use, evidenced by cessation of owner-occupation, commencement of an operating lease to another party or completion of construction or development. Transfers are made from investment properties when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale.

When an item of property and equipment previously carried at revalued amount is transferred to investment properties, the carrying value at the date of reclassification is retained as the new cost of the investment property. The related revaluation increment is closed to retained earnings.

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Investment properties are derecognized when they are either disposed of or permanently withdrawn from use and no future economic benefit is expected from their disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated profit or loss in the year of retirement or disposal.

Impairment of Property and Equipment and Investment Properties The carrying values of property and equipment and investment properties are reviewed for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash generating units are written down to their recoverable amounts. The recoverable amount is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Impairment losses, if any, are recognized as expense in the consolidated profit or loss.

Leases The determination of whether the arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfillment of the arrangement depends on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease if any of the following applies: (a) there is a change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term; (c) there is a change in the determination of whether fulfillment is dependent on a specified asset; or (d) there is substantial change to the asset.

Where the reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c), or (d) above, and at the date of renewal or extension period for scenario (b).

Group as Lessee Finance leases, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Obligations arising from aircraft under finance lease agreements are classified in the consolidated statement of financial position as part of “Long-term obligations”.

Lease payments are apportioned between financing charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Financing charges are charged directly against consolidated profit or loss.

Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease expense is recognized in the consolidated profit or loss on a straight-line basis over the terms of the lease agreements.

A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. If a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is at fair value, any profit or loss is recognized immediately. If the sale price is below fair value, any profit or loss is recognized immediately except that, if the loss is compensated for by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is

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above fair value, the excess over fair value is deferred and amortized over the period for which the asset is expected to be used. If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount is deferred and amortized over the lease term.

Group as Lessor Leases where the Group does not transfer substantially all the risks and rewards of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Provisions and Contingencies Provisions are recognized when (a) the Group has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pretax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense.

Contingent liabilities are not recognized in the consolidated statement of financial position. They are disclosed in the notes to consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the consolidated statement of financial position but disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable. If it is virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the consolidated financial statements.

Equity Capital stock is measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax.

When the shares are sold at premium, the difference between the proceeds and the par value is credited to the “Additional paid-in capital” account.

Deficit represents the cumulative balance of net income or loss, net of any dividend declaration and other capital adjustments.

Revenue and Related Commissions Passenger ticket and cargo waybill sales, excluding portion relating to awards under the Frequent Flyer Program, are initially recorded as “Unearned transportation revenue” in the consolidated statement of financial position until recognized as “Revenue” in the consolidated profit or loss when the transportation service is rendered (e.g., when passengers and cargo are flown/lifted). Revenue from charter, mail, excess baggage and other transport-related revenue are recognized upon completion of services rendered. Revenue from in-flight sales are recognized upon delivery to and acceptance of the goods by customers. Revenue is measured at fair value of the consideration received or receivable, excluding sales taxes, discounts and commissions. Revenue also includes recoveries from surcharges during the year.

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The related commission is recognized as expense in the same period when the transportation service is provided and is included as part of “Reservation and sales” in the consolidated profit or loss.

Liability Under Frequent Flyer Program PAL operates a frequent flyer program called “Mabuhay Miles”. A portion of passenger revenue attributable to the award of frequent flyer miles, estimated based on expected utilization of these benefits, is deferred until utilized. The miles expected to be redeemed are measured at fair value which is estimated using the applicable fare based on the historical redemption. The deferred revenue is included under “Reserves and other noncurrent liabilities” in the consolidated statement of financial position. Any remaining unutilized benefits are recognized as revenue upon redemption or expiry.

Other Comprehensive Income Other comprehensive income comprises items of income and expense (including items previously presented under the consolidated statement of changes in equity) that are not recognized in the consolidated profit or loss for the year in accordance with PFRS. Other comprehensive income of the Group includes gains and losses on changes in fair value of AFS investments, any effective portion of gains and losses on hedging instruments designated as cash flow hedges and changes in revaluation increment of property and equipment.

Interest, Dividend and Lease Income Interest on cash, cash equivalents and other short-term cash investments is recognized as interest accrues using the effective interest rate method. Dividend income from available-for-sale equity investments is recognized when the Group‟s right to receive payment is established. Lease income is recognized on a straight-line basis over the lease term.

Retirement Benefits Cost and Other Long-Term Employee Benefits Retirement benefits cost under the defined benefit plan is actuarially determined using the projected unit credit method. This method reflects services rendered by employees up to the date of valuation and incorporates assumptions concerning employees‟ projected salaries. Actuarial valuations are conducted with sufficient regularity with option to accelerate when significant changes to underlying assumptions occur. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for the plan at the end of the previous reporting period exceeded 10% of the higher of the present value of defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan.

Past service cost is recognized as an expense on a straight-line basis over the average period when the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, the retirement plan, past service cost is recognized immediately.

Retirement benefits cost includes current service cost, interest cost, amortization of unrecognized past service costs, actuarial gains and losses, experience adjustments, effect of any curtailment or settlement and changes in actuarial assumptions over the expected average remaining working lives of covered employees. The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized, reduced by past service cost not yet recognized, and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plans or reductions in the future contributions to the plan.

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Where the Group is demonstrably committed to make a significant reduction in the number of employees covered by the plan, a curtailment gain or loss is recognized. The amount of curtailment gain or loss shall comprise any resulting change in the present value of the defined benefit obligation, change in the fair value of the plan assets and any related actuarial gains and losses and past service cost that were previously unrecognized.

Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. All other borrowing costs are expensed as incurred.

Expenses Expenses are recognized when incurred. These are measured at the fair value of the consideration paid or payable.

Income Taxes Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amounts are those that have been enacted or substantively enacted as of end of the reporting period.

Deferred income tax Deferred income tax is provided, using the liability method, on all temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, including asset revaluations. Deferred income tax assets are recognized for all deductible temporary differences, carry forward benefits of unused tax credits from the excess of minimum corporate income tax (MCIT) over the regular corporate income tax and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient future taxable profits will be available against which the deductible temporary differences and carry forward benefits of unused tax credits and unused NOLCO can be utilized. Deferred income tax, however, is not recognized when it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

Deferred income tax liabilities are not provided on nontaxable temporary differences associated with investments in domestic subsidiaries and associates. With respect to investments with other subsidiaries and associates, deferred income tax liabilities are recognized except where the timing of reversal of the temporary differences can be controlled by the parent or investor and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at each reporting period and reduced to the extent that it is no longer probable that sufficient future taxable profits will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each statement of financial position date and are recognized to the extent that it has become probable that sufficient future taxable profits will allow the deferred income tax asset to be recovered.

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Deferred income tax assets and deferred income tax liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted as at the end of reporting period.

Income tax relating to items recognized directly in equity is recognized in the consolidated statement of changes in equity and not included as part of the consolidated profit or loss for the period.

Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current income tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

Functional Currency and Foreign Currency-denominated Transactions and Translations Transactions in foreign currencies are initially recorded using the functional currency rate at the date of the transaction. Outstanding monetary assets and liabilities denominated in foreign currencies are translated using the functional currency rate of exchange at the end of reporting period. All differences are taken to other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Each entity in the Group determines its own functional currency and the items included in the separate financial statements of each entity are measured using the determined functional currency. The results of operations and financial position of all Group entities (none of which has the functional currency of a hyperinflationary economy) that have functional currencies different from Philippine peso, which is the functional and presentation currency of the Parent Company, are translated to Philippine peso as follows: a. assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of reporting period; b. comprehensive income items for each statement of comprehensive income presented are translated at the monthly average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); c. capital stock and other equity items resulting from transactions with equity holders (i.e., additional paid-in capital) and equity items resulting from income and expenses directly recognized in equity (i.e., revaluation increment in property) are translated using the rates prevailing on the transaction dates; and d. all resulting exchange differences are recognized as other comprehensive income and a separate component of the consolidated equity, in the account “Cumulative translation adjustment”.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken to the consolidated equity and recorded as other comprehensive income. When a foreign operation is sold or disposed of, exchange differences that were previously recorded in the consolidated equity are recognized in the consolidated profit or loss.

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Basic/Diluted Earnings (Loss) Per Share Basic earnings (loss) per share (EPS) is calculated based on net income (loss) and total comprehensive income (loss) for the year. EPS is calculated by dividing net income (loss) before other comprehensive income or total comprehensive income (loss) for the year by the weighted average number of issued and outstanding shares of stock during the year, after giving retroactive effect to any stock dividends declared or stock rights exercised. The Group has no dilutive potential common shares.

Events After the Reporting Date Post year-end events that provide additional information about the Group‟s position at the reporting date (adjusting events), if any, are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material.

4. Summary of Significant Accounting Judgments, Estimates and Assumptions

The preparation of the consolidated financial statements in accordance with PFRS requires the Group‟s management to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements. These judgments, estimates and assumptions are based on management‟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 they become reasonably determinable. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments In the process of applying the Group‟s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on amounts recognized in the consolidated financial statements.

Determination of functional currency Judgment is exercised in assessing various factors in determining the functional currency of each entity within the Group, including prices of goods and services, competition, cost and expenses and other factors including the currency in which financing is primarily undertaken by each entity. Additional factors are considered in determining the functional currency of a foreign operation, including whether its activities are carried as an extension of that of the Parent Company rather than being carried out with significant autonomy.

The Parent Company, based on the relevant economic substance of the underlying circumstances, has determined its functional currency to be Philippine peso. It is the currency of the primary economic environment in which it operates. The functional currency of PAL, its major subsidiary, has been determined to be the US dollar (USD).

Classification of financial instruments The Group exercises judgment in classifying a financial instrument, or its component parts, on initial recognition as either a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, a financial liability or an equity instrument. The substance of a financial instrument, rather

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than its legal form, governs its classification in the consolidated statement of financial position. The classification of the Group‟s financial assets and financial liabilities are presented in Note 28.

Derecognition of accounts receivable In fiscal year 2012, the Group sold its rights to the cash flows arising from its credit card receivables including future credit card receivables to a third party for a payment of P=2.11 billion ($50.00 million). The Group has determined that substantially all the risk and rewards of the portfolio have been retained and consequently, the receivables were not derecognized. The Group accounted for the transaction as a collateralized borrowing and recorded the cash received as a financial liability. The carrying value of this financial liability amounted to P=909.28 million and P=1.67 billion as of March 31, 2013 and 2012, respectively (see Note 15).

Impairment of available-for-sale equity investments The Group treats available-for-sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Group considers the decline in value as significant when the value generally decreased by 20% or more and prolonged if the decline persisted for a period greater than 12 months for quoted equity securities. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equity shares and financial performance of the investee company for unquoted equity shares. No impairment on available-for-sale equity investments was recognized in 2013 and 2012.

The carrying value of the Group‟s AFS equity investments amounted to P=487.67 million and P=522.72 million as of March 31, 2013 and 2012, respectively (see Note 6).

Classification of leases - Group as lessee Management exercises judgment in determining whether substantially all the significant risks and rewards of ownership of the leased assets are transferred to the Group. Lease contracts, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased items are classified as finance leases. Otherwise, they are considered as operating leases.

The Group has lease agreements covering some of its aircraft where the lease terms approximate the estimated useful lives of the aircraft or the present value of the minimum lease payments amount to at least substantially all of the fair value of the leased aircraft, which indicate the risks and rewards related to the assets are transferred to the Group. These leases are classified as finance leases. The net carrying value of these aircrafts under finance lease amounted to P=36.53 billion and P=28.20 billion as of March 31, 2013 and 2012, respectively (see Notes 10 and 25).

The Group also has lease agreements covering some of its aircraft and engines where it has determined that the risks and rewards related to the properties are retained with the lessors (e.g., no bargain purchase option and transfer of ownership at the end of the lease term). The leases are, therefore, accounted for as operating leases (see Notes 18 and 25).

Classification of leases - Group as lessor The Group has lease agreements where it has determined that it has retained substantially all the risks and rewards incidental to ownership of the leased assets. These leases are classified as operating leases (see Notes 18 and 25).

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Contingencies The Group is involved in various labor disputes, litigations, claims, and tax assessments that are normal to its business. Based on the opinion of the Group‟s legal counsels on the progress and legal grounds of these cases, the Group believes that it may have a present obligation arising from a past event but that their likely outcome and estimated potential cash outflow cannot be determined reasonably as of this time. As such, no provision was made for these contingencies.

Estimates The key assumptions concerning the future and other key sources of estimation and uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Estimation of allowance for doubtful accounts The Group maintains allowances for doubtful accounts at a level considered adequate to provide for uncollectible receivables. The Group reviews the age and the status of receivables, designed to identify account with objective evidence of impairment, and provide the appropriate allowance for impairment.

The allowance for doubtful accounts relating to receivables which were individually assessed as impaired is estimated as the difference between the carrying amount of the receivables (at amortized cost) and the present value of estimated future cash flows (using the original effective interest rate). Accounts which were not subject to specific impairment are collectively assessed for impairment and the amount of allowance is determined based on historical loss rate and age of receivables. The amount and timing of recorded expenses for any period could therefore differ based on the estimates made.

The carrying value of receivables, net of allowance for doubtful accounts, as of March 31, 2013 and 2012 amounted to P=8.03 billion and P=7.21 billion, respectively. The allowance for doubtful accounts as of March 31, 2013 and 2012 amounted to P=4.71 billion (see Note 7).

Application of effective interest rate method of amortization and impact of revisions in cash flow estimates The Group carries certain financial assets and financial liabilities at amortized cost, which is determined at inception of the instrument, taking into account any fees, points paid or received, transaction costs and premiums or discounts, along with the cash flows and the expected life of the instrument. In cases where the Group revises its estimates of cash flow receipts or payments and projection of change in its financial assets or financial liabilities, the Group adjusts the carrying amounts to reflect actual and revised estimated cash flows. The Group recalculates the carrying amount by discounting the estimated future cash flows using the financial asset or financial liability‟s original effective interest rate, with the resulting adjustment being recognized in profit or loss. The carrying amounts of these financial assets and financial liabilities are summarized in Note 28.

Determination of fair value of financial instruments (including derivatives) The Group initially records all financial instruments at fair value and subsequently carries certain financial assets and financial liabilities at fair value, which requires use of accounting estimates and judgment. Valuation techniques are used particularly for financial assets and financial liabilities (including derivatives) that are not quoted in an active market. Where valuation techniques are used to determine fair values (e.g., discounted cash flow, option models), they are periodically reviewed by qualified personnel who are independent of the trading function. All models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practicable, models use only observable data as valuation inputs. However, other inputs

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such as credit risk (whether that of the Group or the counterparties), forward prices, volatilities and correlations, require management to develop estimates or make adjustments to observable data of comparable instruments. The amount of changes in fair values would differ if the Group uses different valuation assumptions or other acceptable methodologies. Any change in fair value of these financial instruments (including derivatives) would affect either profit or loss or other comprehensive income.

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: (a) Level 1 - quoted (unadjusted) prices in active markets for identical assets or liabilities; (b) Level 2 - other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and (c) Level 3 - techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

The fair values of the Group‟s financial assets and financial liabilities are presented in Note 28.

Determination of net realizable value of expendable parts, fuel, materials and supplies The Group‟s estimates of the net realizable values of expendable parts, fuel, materials and supplies are based on the most reliable evidence (e.g., age and physical condition of the inventory) available at the time the estimates are made, of the amount that these assets are expected to be realized. A new assessment is made of the net realizable value in each subsequent period. When the circumstances that previously caused expendable parts, fuel, materials and supplies to be written down below cost no longer exist or when there is a clear evidence of an increase in net realizable value because of change in economic circumstances, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised net realizable value. The carrying amount of expendable parts, fuel, materials and supplies as of March 31, 2013 and 2012 amounted to P=1.68 billion and P=1.59 billion, respectively (see Note 8).

Valuation of property and equipment under revaluation basis The Group‟s buildings and improvements are carried at revalued amounts, which approximate their fair values at the date of the revaluation, less any subsequent accumulated depreciation and any accumulated impairment losses. The valuations of property and equipment are performed by professionally qualified independent appraisers using generally acceptable valuation techniques and methods. Revaluations are made regularly to ensure that the carrying amounts do not differ materially from those which would be determined using fair values at end of reporting period.

The resulting revaluation increment, net of related deferred income tax, in the valuation of these assets based on appraisal reports amounted to P=542.91 million (net of non-controlling interests‟ share amounting to P=51.94 million) and P=282.68 million (net of non-controlling interests‟ share amounting to P=51.19 million) as of March 31, 2013 and 2012, respectively (see Note 17). This is presented under “Other components of equity” in the equity section of the consolidated statement of financial position and the portion transferred to deficit resulting from its realization and change in classification (e.g., reclassification to investment property) in the consolidated statement of changes in equity. Increase in the value of property resulting from revaluation is treated as other comprehensive income. The carrying value of property and equipment carried at appraised value amounted to P=845.49 million and P=568.45 million as of March 31, 2013 and 2012, respectively (see Note 10).

Recognition of ARO Property and equipment includes the excess of estimated cost of heavy maintenance on the leased aircraft required on the redelivery to the lessor over the cumulative MRF contribution. The amount of obligation is carried at amortized cost using the effective interest rate method. ARO

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included as part of “Reserves and other noncurrent liabilities” amounted to P=72.82 million as of March 31, 2012 (nil in 2013) (see Note 16).

Estimation of useful lives and residual values of property and equipment and investment properties The Group estimates the useful lives of property and equipment and investment properties based on internal technical evaluation and experience with similar assets. The estimated useful lives and residual values are reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical and commercial obsolescence and other limits on the use of the assets. The carrying amount of property and equipment, net of accumulated depreciation, amounted to P=76.15 billion and P=50.62 billion as of March 31, 2013 and 2012, respectively (see Note 10). The depreciable investment properties have been fully depreciated as of March 31, 2013 and 2012 (see Note 11).

Impairment of property and equipment and investment properties The Group determines whether its property and equipment and investment properties are impaired when events or changes in circumstances indicate that the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amounts. The recoverable amount is the greater of the asset‟s fair value less cost to sell and value-in-use. Determination of impairment requires an estimation of the value-in-use of the cash-generating units to which the assets belong. Estimating the value-in-use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and applying an 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 way that the market would assess the specific risks associated with the cash flow and exclude risks that are not relevant to the cash flow. Other assumptions used in projecting the future cash flows include passenger load factor, passenger yield, fuel surcharge rate and fuel costs, among others. As of March 31, 2013 and 2012, the aggregate net carrying value of the Group‟s property and equipment and investment properties amounted to P=77.38 billion and P=51.42 billion, respectively (see Notes 10 and 11). No impairment loss was recognized in 2012. In 2013, the Group reversed impairment losses previously recognized amounting to P=483.87 million due to increase in market value of the related investment properties (see Note 11).

Estimation of liability under the Frequent Flyer Program A portion of passenger revenue attributable to the award of frequent flyer miles is deferred until they are utilized. The deferment of the revenue is estimated based on historical trends of breakage and redemption, which is then used to project the estimated utilization of the miles earned. Any remaining unredeemed miles are recognized as revenue upon expiration. The remaining unredeemed miles is measured at fair value estimated using the applicable fare based on the historical redemption. Changes in the estimates of expected redemption could have a significant effect on the Group‟s financial results. Deferred revenue included as part of “Reserves and other noncurrent liabilities” amounted to P=84.05 million and P=132.54 million as of March 31, 2013 and 2012, respectively (see Note 16).

Estimation of retirement and other long-term employee benefits cost The Group‟s retirement and other long-term benefits cost relating to its defined benefit plan are actuarially computed. These entail using certain assumptions like salary increases, return on plan assets and discount rates. Accrued employee benefits as of March 31, 2013 and 2012 amounted to P=5.39 billion and P=4.89 billion, respectively. Unrecognized net actuarial loss amounted to P=3.38 billion and P=1.06 billion as of March 31, 2013 and 2012, respectively (see Note 21).

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Provisions The Group provides for present obligations (legal or constructive) where it is probable that there will be an outflow of resources embodying economic benefits that will be required to settle the said obligations. Management exercises judgment in assessing the probability of the Group becoming liable. An estimate of the provision is based on known information at the end of reporting date. The amount of provision is being reassessed at least on an annual basis to consider new and relevant information. Provisions recognized amounted to P=1.96 billion and P=1.60 billion as of March 31, 2013 and 2012, respectively (see Note 16).

Recognition of deferred income tax assets The Group assesses at the end of each reporting date and recognizes deferred income tax assets to the extent of probable future taxable profits and reversing taxable temporary differences that will allow the deferred income tax assets to be utilized. Management uses judgment and estimates in assessing the probability of future taxable profits, including the timing of reversal of deferred income tax liability, aided by forecasting and budgeting techniques. Deferred income tax assets recognized amounted to P=3.40 billion and P=4.27 billion as of March 31, 2013 and 2012, respectively (see Note 23).

5. Cash and Cash Equivalents

2013 2012 (In Thousands) Cash on hand and in banks (Note 18) P=2,466,464 P=2,630,045 Cash equivalents (Note 18) 1,020,331 350,900 P=3,486,795 P=2,980,945

Cash in banks and cash equivalents earn interest at the respective bank deposit rates totaling P=35.45 million, P=21.73 million and P=37.41 million in 2013, 2012 and 2011, respectively (see Note 20).

6. Available-for-sale Investments

The Group‟s AFS investments include investments in MAC (amounting to P=224.40 million and P=246.40 million as of March 31, 2013 and 2012, respectively), certain quoted equity investments and club shares (amounting to P=6.63 million and P=6.96 million as of March 31, 2013 and 2012, respectively) and unquoted equity investments (amounting to P=256.64 million and P=269.36 million as of March 31, 2013 and 2012, respectively) and earned interest totaling P=0.25 million in 2013, P=0.30 million in 2012 and P=0.33 million in 2011 (see Note 20).

The carrying value of these investments includes accumulated unrealized loss of P=49.31 million and P=71.20 million (net of related deferred income tax) as of March 31, 2013 and 2012, respectively, that is presented under “Other components of equity” in the equity section of the consolidated statements of financial position (see Note 17).

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The movements in “Net changes in fair values of available-for-sale investments - net of deferred income tax effect” pertaining to quoted equity investments and club shares are as follows:

2013 2012 2011 (In Thousands) Balance at beginning of year P=71,340 P=106,454 P=66,520 Mark-to-market gain (loss) recognized as other comprehensive income (22,010) (35,114) 39,934 49,330 71,340 106,454 Less share of non-controlling interests 16 144 131 Balance at end of year P=49,314 P=71,196 P=106,323

The fair values of investments in MAC were determined based on published prices in the active market while other quoted equity investments were determined based on quoted prices and published club share quotes that are publicly available from the local dailies and from the website of club share brokers. Available-for-sale investments with no market prices are measured at cost, net of impairment losses, if any. The unquoted equity investments include the Group‟s investments in shares of stocks of various companies. The Group has no intention to dispose these investments in the near future.

Dividend received from investments in MAC amounted to P=5.72 million in 2013, 2012 and 2011, included as part of “Others” in the revenue section of the consolidated statements of comprehensive income (see Notes 18 and 20).

7. Receivables

2013 2012 (In Thousands) General traffic: Passenger P=4,497,584 P=4,682,253 Cargo 757,760 847,689 International Air Transport Association (IATA) 255,042 330,077 Others 41,900 37,438 Receivable from related parties (Note 18) 1,595,917 941,500 Non-trade* 5,584,572 5,083,643 12,732,775 11,922,600 Less allowance for doubtful accounts 4,706,635 4,707,713 P=8,026,140 P=7,214,887 * Non-trade receivables include accounts under litigation, accounts of defaulted agents, dividend receivable and receivables from lessors.

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Movements in allowance for doubtful accounts, presented by class, are as follows:

2013 General Traffic Receivable from related Passenger Cargo Others parties Non-trade Total (In Thousands) Balance at beginning of year P=458,320 P=255,199 P=37,182 P=57,360 P=3,899,652 P=4,707,713 Charges for the year 16,321 44,341 3,706 226,619 226,994 517,981 Reversal and other adjustments (192,728) (12,074) (167) (541) (88,641) (294,151) Foreign exchange difference (18,483) (12,538) (1,807) (6,586) (185,494) (224,908) Balance at end of year P=263,430 P=274,928 P=38,914 P=276,852 P=3,852,511 P=4,706,635

Collective impairment P=98,121 P=108,637 P=– P=57,613 P=173,125 P=437,496 Individual impairment 165,309 166,291 38,914 219,239 3,679,386 4,269,139 Balance at end of year P=263,430 P=274,928 P=38,914 P=276,852 P=3,852,511 P=4,706,635

2012 General Traffic Receivable from related Passenger Cargo Others parties Non-trade Total (In Thousands) Balance at beginning of year P=131,309 P=278,462 P=45,319 P=5,469 P=3,939,840 P=4,400,399 Charges for the year 335,174 11,642 43 52,176 37,170 436,205 Reversal and other adjustments (5,304) (31,952) (7,719) − (34,324) (79,299) Foreign exchange difference (2,859) (2,953) (461) (285) (43,034) (49,592) Balance at end of year P=458,320 P=255,199 P=37,182 P=57,360 P=3,899,652 P=4,707,713

Collective impairment P=129,403 P=96,086 P=37,182 P=48,344 P=114,977 P=425,992 Individual impairment 328,917 159,113 − 9,016 3,784,675 4,281,721 Balance at end of year P=458,320 P=255,199 P=37,182 P=57,360 P=3,899,652 P=4,707,713

Impairment assessment The main considerations for impairment assessment include whether any payments are overdue or if there are any known difficulties in the cash flows of the counterparties. The Group assesses impairment into two areas: (a) individually assessed allowances and (b) collectively assessed allowances.

The Group determines allowance for each significant receivable on an individual basis. Among the factors that the Group considers in assessing impairment is the inability to collect from the counterparty based on the contractual terms of the receivables. Receivables included in the specific assessment are the accounts that have been endorsed to the legal department, nonmoving accounts receivables, accounts of defaulted agents and accounts from closed stations.

For collective assessment, allowances are assessed for receivables that are not individually significant and for individually significant receivables where there is no objective evidence of individual impairment. Impairment losses are estimated by taking into consideration the age of the receivables, collection experience and other factors that may affect collectability.

The net provision for (reversal of) impairment losses on the receivables (excluding recoveries of previously written-off accounts) recognized in the consolidated statements of comprehensive income under “General and administrative expenses” amounted to P=223.83 million, P=356.91 million and (P=476.68 million) in 2013, 2012 and 2011, respectively.

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8. Expendable Parts, Fuel, Materials and Supplies

2013 2012 (In Thousands) At cost: Fuel P=1,058,181 P=968,033 Materials and supplies 196,447 229,568 Expendable parts 390,685 290,620 1,645,313 1,488,221 At net realizable value - expendable parts (Note 20) 39,281 103,385 P=1,684,594 P=1,591,606

The cost of expendable parts carried at net realizable value amounted to P=165.76 million and P=275.08 million as of March 31, 2013 and 2012, respectively.

9. Other Current Assets

2013 2012 (In Thousands) Prepayments - net of allowance for probable losses of P=3,242 in 2013 and P=2,881 in 2012 (Notes 10 and 18) P=1,138,290 P=968,679 Deposits 300,367 298,032 Derivative assets (Notes 27 and 28) 145,259 380,524 Others 170,748 – P=1,754,664 P=1,647,235

Prepayments pertain to advance payments of materials and supplies, various prepaid rentals and miscellaneous prepayments.

10. Property and Equipment

2013 Foreign April 1, Disposals/ Reclassifications Exchange March 31, 2012 Additions Retirements and Others Difference 2013 (In Thousands) At Cost Cost: Passenger aircraft (Notes 15 and 25) P=85,896,681 P=12,530,733 (P=976,114) P=2,054,864 (P=4,436,955) P=95,069,209 Other aircraft 432,989 3,528 – 2,733 (20,413) 418,837 Spare engines (Note 15) 6,500,079 161,138 (61,267) 676,908 (315,888) 6,960,970 Rotable and reparable parts (Notes 13 and 15) 8,167,507 769,679 (461,096) (29,223) (384,589) 8,062,278 Ground property and equipment 8,885,363 256,951 177,753 17,868 (774,002) 8,563,933 109,882,619 13,722,029 (1,320,724) 2,723,150 (5,931,847) 119,075,227

(Forward)

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2013 Foreign April 1, Disposals/ Reclassifications Exchange March 31, 2012 Additions Retirements and Others Difference 2013 (In Thousands) Accumulated Depreciation: Passenger aircraft (P=51,996,809) (P=4,534,399) P=834,070 P=420,494 P=2,503,758 (P=52,772,886) Other aircraft (311,787) (36,061) – (2,733) 15,381 (335,200) Spare engines (4,036,826) (398,072) 20,295 (414,315) 203,465 (4,625,453) Rotable and reparable parts (4,832,909) (486,531) 350,850 (1,632) 233,104 (4,737,118) Ground property and equipment (7,694,460) (289,821) 173,378 (640) 363,321 (7,448,222) (68,872,791) (5,744,884) 1,378,593 1,174 3,319,029 (69,918,879) Net book value 41,009,828 7,977,145 57,869 2,724,324 (2,612,818) 49,156,348 Construction in progress 79,170 529,491 – 3,277 (7,497) 604,441 Predelivery payments (Notes 13 and 25) 8,966,465 22,219,567 – (5,055,792) (581,818) 25,548,422 Total P=50,055,463 P=30,726,203 P=57,869 (P=2,328,191) (P=3,202,133) P=75,309,211 At Appraised Value Buildings and improvements: Appraised value P=651,094 P=– P=– P=228,290 (P=29,476) P=849,908 Accumulated depreciation and amortization (82,648) (76,843) – 152,481 2,591 (4,419) Net Book Value P=568,446 (P=76,843) P=– P=380,771 (P=26,885) P=845,489

2012 Foreign April 1, Disposals/ Reclassifications Exchange March 31, 2011 Additions Retirements and Others Difference 2012 (In Thousands) At Cost Cost: Passenger aircraft (Notes 15 and 25) P=84,562,691 P=422,856 (P=179,785) P=2,211,202 (P=1,120,283) P=85,896,681 Other aircraft 437,856 – – 32 (4,899) 432,989 Spare engines (Note 15) 4,851,278 – – 1,706,962 (58,161) 6,500,079 Rotable and reparable parts (Notes 13 and 15) 7,256,906 679,117 (506,847) 805,840 (67,509) 8,167,507 Ground property and equipment 9,538,474 634,712 (1,200,420) 13,515 (100,918) 8,885,363 106,647,205 1,736,685 (1,887,052) 4,737,551 (1,351,770) 109,882,619 Accumulated Depreciation: Passenger aircraft (46,091,005) (5,200,159) 179,785 (1,417,268) 531,838 (51,996,809) Other aircraft (280,112) (35,185) – 185 3,325 (311,787) Spare engines (2,589,374) (338,182) – (1,142,536) 33,266 (4,036,826) Rotable and reparable parts (3,874,598) (405,375) 226,047 (826,152) 47,169 (4,832,909) Ground property and equipment (8,709,034) (269,551) 1,187,536 11,060 85,529 (7,694,460) (61,544,123) (6,248,452) 1,593,368 (3,374,711) 701,127 (68,872,791) Net book value 45,103,082 (4,511,767) (293,684) 1,362,840 (650,643) 41,009,828 Construction in progress 149,454 41,612 – (111,462) (434) 79,170 Predelivery payments (Notes 13 and 25) 4,076,141 4,948,541 – – (58,217) 8,966,465 Total P=49,328,677 P=478,386 (P=293,684) P=1,251,378 (P=709,294) P=50,055,463 At Appraised Value Buildings and improvements: Appraised value P=675,515 P=– P=– (P=17,125) (P=7,296) P=651,094 Accumulated depreciation and amortization (21,009) (79,544) – 17,441 464 (82,648) Net Book Value P=654,506 (P=79,544) P=– P=316 (P=6,832) P=568,446

Property and equipment used to secure notes payable and obligations under finance leases are described in Notes 13 and 15.

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Outstanding liabilities pertaining to purchase of property and equipment, excluding obligations under finance leases, amounted to P=992.83 million and P=321.40 million as of March 31, 2013 and 2012, respectively.

Fleet (see Notes 15, 18 and 25)

2013 2012 Owned: Bombardier DHC 8-400 5 5 Bombardier DHC 8-300 4 3 Airbus 340-300 2 2 Airbus 330-300 1 1 Airbus 320-200 2 – Under finance lease: Boeing 777-300ER 2 – Boeing 747-400 4 4 Airbus 340-300 2 2 Airbus 330-300 7 7 Airbus 320-200 8 10 Under operating lease: Boeing 777-300ER 2 2 Boeing 747-400 1 1 Airbus 320-200 20 15 Airbus 319-100 4 4 64 56

Bombardier DHC 8-300 In December 2012, PAL purchased one Bombardier DHC 8-300 aircraft. In the same year, this aircraft was leased to Air Philippines Corporation (APC), an entity under common control, under an operating lease arrangement (see Note 18).

Airbus 320-200 In 2013 and 2012, PAL accepted the delivery of five and six Airbus 320-200 aircraft, respectively, under operating leases. Two and five of these Airbus 320-200 aircraft acquired in fiscal years 2013 and 2012, respectively, were subleased to APC, upon delivery (see Notes 18 and 25).

In August and November 2012, ownership of two Airbus 320-200 aircraft under finance lease were transferred to PAL upon settlement of the remaining obligations and exercising PAL‟s purchase option (see Note 15).

Airbus 340-300 and Airbus 330-300 On July 30, 2011, upon settlement of remaining obligations and exercising its purchase option, PAL assumed ownership of two Airbus 340-300 aircraft and one Airbus 330-300 aircraft under finance leases (see Note 15).

Boeing 777-300ER In June and November 2012, PAL accepted the delivery of two Boeing 777-300ER aircraft under finance lease. These aircraft formed part of PAL‟s operating fleet (see Note 15).

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Boeing 737-300 In November 2011, PAL sold its Boeing 737-300 aircraft to a third party for P=112.65 million, resulting in a gain of P=6.85 million recognized in “Others - net” in the 2012 statement of comprehensive income.

Buildings and Improvements Buildings and improvements are carried at appraised values determined based on valuations performed by various qualified and independent appraisers. In the valuation process, the appraisers compared the fair market value of similar assets and considered the best use of the properties at hand. The additional revaluation increase, net of deferred income tax, recorded in 2013 amounted to P=267.05 million. Amount presented under “Increase in revaluation increment due to appraisal” in the 2013 consolidated statement of comprehensive income is net of the related deferred income tax of P=115.75 million.

If buildings and improvements were carried at cost less accumulated depreciation, the amounts as of March 31 would be as follows:

2013 2012 (In Thousands) Cost P=7,120 P=7,471 Accumulated depreciation (4,419) (4,036) P=2,701 P=3,435

11. Investment Properties

2013 April 1, Recovery of Foreign Exchange March 31, 2012 impairment Difference 2013 (In Thousands) Cost Land (Note 13) P=1,281,451 P=– (P=60,171) P=1,221,280 Buildings and improvements 34,133 – (1,603) 32,530 1,315,584 – (61,774) 1,253,810 Accumulated Depreciation and Impairment Losses Land (483,866) 483,866 – – Buildings and improvements (34,133) – 1,603 (32,530) Net Book Value P=797,585 P=483,866 (P=60,171) P=1,221,280

2012 Foreign Exchange April 1,2011 Difference March 31,2012 (In Thousands) Cost Land (Note 13) P=1,295,599 (P=14,148) P=1,281,451 Buildings and improvements 34,509 (376) 34,133 1,330,108 (14,524) 1,315,584 Accumulated Depreciation and Impairment Losses Land (489,209) 5,343 (483,866) Buildings and improvements (34,509) 376 (34,133) Net Book Value P=806,390 (P=8,805) P=797,585

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Investment properties pertain to assets not used in operations and are carried at cost. The aggregate fair value of investment properties amounted to P=1.82 billion and P=856.02 million as of March 31, 2013 and 2012, respectively. These have been determined based on valuations performed by various qualified and independent appraisers. The valuation undertaken considered the sales of similar or substitute properties and related market data and established estimated value by processes involving comparison.

Direct costs related to these investment properties (e.g., depreciation, property taxes, etc.) amounted to P=3.37 million, P=3.28 million and P=3.56 million in 2013, 2012 and 2011, respectively.

Investment properties with carrying values of P=1.18 billion and P=751.56 million as of March 31, 2013 and 2012, respectively, are used to secure notes payable as described in Note 13.

In 2011, PAL recognized an impairment loss amounting to P=483.87 million for an investment property with carrying value higher than their fair values. Moreover, revaluation increment amounting to P=1.42 billion on certain properties previously carried at revalued amounts in property and equipment, treated as deemed cost upon its reclassification to investment properties, were transferred to “Deficit”, net of the related deferred income tax of P=92.60 million.

In fiscal year 2013, the Group reversed impairment losses amounting to P=483.87 million (included under “Others - net” in the 2013 statement of comprehensive income) due to increase in the market value of the related investment property.

12. Other Noncurrent Assets

2013 2012 (In Thousands) Long-term security deposits (Note 18) P=4,667,721 P=4,134,114 Derivative assets (Notes 27 and 28) 160,153 – Deposits on aircraft leases (Notes 18, 25, 27 and 28) 21,809 22,240 Others 337,778 350,127 P=5,187,461 P=4,506,481

As of March 31, 2013 and 2012, long-term security deposits include cash and cash equivalents amounting to P=813.25 million and P=819.35 million, respectively, set aside to collateralize various surety bonds issued (as required under the legal proceedings) in connection with certain litigations and earned interest totaling P=14.03 million, P=22.20 million and P=1.00 million in 2013, 2012 and 2011, respectively (see Note 20). PAL has short-term standby letters of credit amounting to P=635.91 million and P=355.06 million as of March 31, 2013 and 2012, respectively, and earned interest totaling P=1.79 million, P=2.31 million and P=2.85 million in 2013, 2012 and 2011, respectively (see Note 20). In 2013, PAL was required under certain lease agreements to provide security deposit to cover qualifying maintenance events amounting to P=361.92 million. This entire amount remained outstanding as of March 31, 2013.

Other noncurrent assets include miscellaneous receivable from aircraft manufacturer and option fees for aircraft purchases.

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13. Notes Payable

PAL has outstanding notes payable with entities under common control amounting to P=1.18 billion and P=3.66 billion as of March 31, 2013 and 2012, respectively (see Note 18). These notes payable include an omnibus credit facility that is covered by a mortgage on some real properties and chattel mortgage on some rotable and reparable parts having an aggregate net carrying value of P=1.18 billion and P=3.30 billion as of March 31, 2013 and P=751.56 million and P=3.18 billion as of March 31, 2012, respectively (see Notes 10 and 11).

Notes payable as of March 31, 2013 and 2012 also includes short-term loans from other local banks. Total outstanding notes payable with these local banks amounted to P=9.98 billion and P=2.32 billion as of March 31, 2013 and 2012, respectively.

PAL availed of additional loans amounting to P=8.63 billion in 2013 and P=2.12 billion in 2012. Matured loans renewed amounted to P=2.57 billion in 2013 and P=3.88 billion in 2012 for another one-year term, and P=598.93 million in 2012 for four-year term (see Note 15).

Interest rates on these notes payable range from 3.60% to 8.00% in 2013 and 3.19% to 8.00% in 2012. The related interest expense pertaining to all notes payable amounted to P=279.35 million in 2013, P=342.03 million in 2012 and P=342.02 million in 2011. Interest payable relating to short-term notes payable amounting to P=27.42 million and P=14.94 million as of March 31, 2013 and 2012, respectively, is included in “Accrued expenses - others” (see Note 14).

14. Accrued Expenses

2013 2012 (In Thousands) Landing and take-off fees and ground handling charges (Note 16) P=5,849,883 P=6,338,175 Maintenance (Note 18) 5,488,863 3,833,577 Derivative liabilities (Notes 27 and 28) 236,711 117,553 Others (Notes 13 and 18) 2,665,316 2,669,593 P=14,240,773 P=12,958,898

Other accrued expenses pertain to accruals for the following expenses: passenger food/supplies, salaries and wages, foreign station expenses, interest expense and other operating expenses.

15. Long-term Obligations

2013 2012 (In Thousands) Obligations under aircraft finance leases (Notes 18 and 25) P=23,912,356 P=16,399,800 Long-term debts (Note 18) 13,015,689 13,025,575 36,928,045 29,425,375 Less current portion 10,955,672 5,981,264 P=25,972,373 P=23,444,111

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Note 27 presents the undiscounted contractual maturity analysis of financial liabilities, including long-term obligations.

Obligations Under Aircraft Finance Leases

Boeing 747-400 Aircraft In fiscal year 2009, PAL sold all of its four owned Boeing 747-400 aircraft and immediately leased them back under finance lease agreements with maturities until fiscal year 2015. PAL recognized P=4.69 billion liability arising from the four Boeing 747-400 aircraft under finance leases. Interests on the finance leases are paid based on three-month LIBOR plus margin. Annual principal payments amounted to P=660.05 million and P=699.27 million in 2013 and 2012.

Boeing 777-300ER Aircraft On October 30, 2006, PAL finalized a Purchase Agreement with The Boeing Company (Boeing) wherein PAL placed a firm order for two Boeing 777-300ER aircraft for delivery in fiscal years 2010 to 2011 and purchase options for two additional aircraft. In May 2007, PAL finalized a supplemental agreement with Boeing relating to its exercise of purchase options for two Boeing 777-300ER aircraft for delivery in fiscal year 2012. On June 2, 2009, PAL and Boeing agreed to reschedule the deliveries of the four Boeing 777-300ER aircraft from their original delivery schedules of fiscal years 2010, 2011 and 2012 to fiscal years 2013 and 2014. In June and November 2012, PAL accepted delivery of two of the four aircraft under finance lease arrangement and recognized P=10.88 billion obligations under finance lease. Interest paid on these finance leases are based on fixed rates of 1.89% to 2.50%. Principal payments amounted to P=399.07 million for fiscal year 2013.

Airbus 340-300 and Airbus 330-300 Aircraft Finance lease agreements pertaining to two Airbus 340-300 and seven Airbus 330-300 aircraft provide for semi-annual installments, with restructured maturities of 15 years, including balloon payments for certain finance leases at the end of the lease term, at fixed rates ranging from 7.71% to 7.96% and/or floating interest rates based on certain margins over six-month LIBOR, as applicable.

As a result of the restructuring of the finance leases, the differences between the actual amount of principal and interest under the original agreements and the principal, including capitalized interest payable amounting to an aggregate of P=5.21 billion, were treated as a separate tranche. Interests on these amounts are paid based on three-month or six-month LIBOR plus margin. Contractual interest rates under the original agreements remain unchanged.

PAL assigned to the lessor its rights and interest over the Japanese yen (JPY)-denominated deposits with the initial deposit amount aggregating to JPY6.39 billion (P=2.80 billion and P=3.43 billion as of March 31, 2013 and 2012, respectively), and all interest accruing thereon maintained by PAL to secure the payment of the obligations for Japanese Leveraged Lease (JLLs) on two Airbus 340-300 and one Airbus 330-300 aircraft.

PAL paid in full the remaining obligations under finance lease related to the two Airbus 340-300 and one Airbus 330-300 aircraft. In July 2011 PAL exercised its purchase option, consequently, ownership of these aircraft were transferred to PAL (see Note 10).

Airbus 320-200 Aircraft Obligations under finance leases as of March 31, 2013 and 2012 include obligations covering eight Airbus 320-200 aircraft acquired under the Purchase Agreement signed with Airbus as discussed in Note 25. These finance leases require rental payments over the lease term of 12 100

years. The finance lease agreements covering the Airbus 320-200 aircraft provide for aircraft purchase or remarketing options. It also provides for quarterly or semi-annual installments, with maturities generally ranging from 12 to 15 years, including balloon payments for certain finance leases at the end of the lease term, at fixed rates ranging from 2.30% to 6.58% and/or floating interest rates based on certain margins over three-month or six-month LIBOR, as applicable.

In 2013, PAL paid in full the remaining obligations under finance lease related to two Airbus 320 aircraft. In August and November 2012, PAL exercised its purchase option on these two aircraft, consequently, ownership of these aircraft were transferred to PAL (see Note 10).

The original lease agreements contain, among others, provisions regarding merger and consolidation and disposal of all or substantially all of PAL‟s assets and ownership.

The present value of minimum lease commitments for PAL‟s obligations under finance leases are as follows:

Year Ending March 31 2013 2012 (In Thousands) 2013 P=– P=2,856,528 2014 8,137,608 7,478,072 2015 2,766,016 1,817,010 2016 2,090,910 1,107,826 2017 and thereafter 13,696,359 5,128,810 Minimum lease payments 26,690,893 18,388,246 Interest and others (2,778,537) (1,988,446) P=23,912,356 P=16,399,800

As of March 31, 2013 and 2012, the current portion of obligations under finance lease amounted to P=7.60 billion and P=2.32 billion, respectively (see Note 25).

Long-term Debts

2013 2012 (In Thousands) Secured loans (Note 18) P=8,105,529 P=11,737,555 Other unsecured loans (Note 18) 4,910,160 1,288,020 13,015,689 13,025,575 Less current portion 3,358,427 3,661,841 P=9,657,262 P=9,363,734

Secured Loans $125 million syndicated loan Long-term debts totaling P=5.66 billion ($125.00 million) pertain to loans obtained from a local bank and a syndicate of local banks in 2009. The loan from a local bank amounting to P=2.86 billion ($66.50 million) consists of two tranches [P=2.72 billion ($63.25 million) for tranche one and P=138.59 million ($3.25 million) for tranche two] and is secured by aircraft and various aircraft engines with total carrying value of P=2.01 billion and P=2.34 billion as of March 31, 2013 and 2012, respectively (see Note 10). The loan agreement requires quarterly payments of principal and interest based on three-month LIBOR plus margin. The first and second tranche will mature in fiscal years 2016 and 2014, respectively, inclusive of a two-year grace period.

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The loan with the syndicate of local banks (including affiliate banks, see Note 18) amounting to P=2.51 billion ($58.50 million) also requires quarterly payments of principal and interest based on three-month LIBOR plus margin and will mature in September 2015. Aircraft and various aircraft engines with carrying value of P=1.36 billion and P=1.54 billion as of March 31, 2013 and 2012, respectively, were used as collateral for this syndicated loan.

As of March 31, 2013 and 2012, the outstanding balance of the loan amounted to P=3.45 billion and P=4.32 billion (including P=1.51 billion and P=4.32 billion with affiliate banks, see Note 18) with current portion amounting to P=644.87 million and P=699.91 million, respectively. Total financing charges related to this loan amounted to P=150.81 million in 2013, P=181.67 million in 2012 and P=209.50 million in 2011.

$120 million syndicated loan On various dates from September 2011 to October 2011, PAL obtained loans from a syndicate of local banks (including affiliate banks, see Note 18) totaling P=5.15 billion ($120.00 million) to finance predelivery payments related to the acquisition of three Boeing 777-300ER aircraft due for delivery in November 2012, April 2013 and November 2013. In 2013 and 2012, portion of these loans were used to finance predelivery payments amounting to P=1.24 billion and P=3.71 billion, respectively (see Notes 10 and 25). The loans are secured by aircraft, various aircraft engines, and certain real properties with aggregate carrying value of P=7.15 billion and P=7.51 billion as of March 31, 2013 and 2012, respectively. These loans require quarterly principal and interest payments based on three-month LIBOR plus spread with maturity in September 2015. Interests relating to these loans amounted to P=229.12 million and P=133.27 million in 2013 and 2012, respectively, of which P=149.23 million and P=77.45 million were capitalized as part of property and equipment in the same respective years (see Note 10).

As of March 31, 2013 and 2012, outstanding balance of this loan amounted to P=3.27 billion and P=5.15 billion (including P=0.95 billion and P=1.50 billion with affiliate banks, see Note 18) with current portion amounting to P=1.43 billion and P=1.72 billion, respectively.

The loans, as discussed above, provide for certain affirmative and negative covenants such as the use of the proceeds of the loan, maintenance of a certain ownership percentage and prior approval by the creditors for new loans where net debt to earnings before income tax, depreciation and amortization ratio exceeds a specified number, among others. As of March 31, 2013 and 2012, PAL has complied with the covenants.

$50 million loan with foreign bank On July 11, 2011, PAL obtained P=2.11 billion ($50.00 million) loan from foreign bank for additional working capital. The loan is secured by future collections from passenger sales made in the United States through designated credit card companies. The loan agreement requires equal monthly installments until July 11, 2014 with a fixed interest rate. As of March 31, 2013 and 2012, the outstanding pledged receivables amounted to P=197.60 million and P=139.06 million, respectively. The receivables collected through the credit card companies will be applied against the monthly installment due.

As of March 31, 2013 and 2012, outstanding balance of this loan amounted to P=909.28 million and P=1.67 billion, respectively (with current portion amounting to P=681.98 million and P=715.58 million in 2013 and 2012, respectively). Total financing charges related to this loan amounted to P=91.52 million and P=100.82 million in 2013 and 2012, respectively.

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$13.95 million loan with local bank In fiscal year 2012, PAL renewed P=598.93 million of its short-term notes with a local bank for four-year term. The loan requires quarterly principal and interest payments based on three-month LIBOR plus spread and will mature in September 2015. Aircraft and various aircraft engines with carrying value of P=1.91 billion and P=2.43 billion as of March 31, 2013 and 2012, respectively, were partially used as collateral for this loan.

As of March 31, 2013 and 2012, the outstanding balance of this loan amounted to P=475.67 million and P=598.93 million, with current portion amounting to P=190.27 million and P=99.82 million, respectively. The related financing charges amounted to P=29.19 million and P=16.21 million in 2013 and 2012, respectively.

Unsecured Loans $30 million loan with a related party In August 2011, PAL obtained a long-term loan from a related party for additional working capital amounting to P=1.27 billion ($30 million). The loan is payable equally in three years with the first equal installment due on August 1, 2012. The loan is subject to interest of 2.0% per annum. As of March 31, 2013 and 2012, the outstanding balance of the loan amounted to P=0.82 billion and P=1.29 billion, respectively. The related interest charges in 2013 and 2012 amounted to P=31.48 million and P=5.74 million, respectively (see Note 18).

$100 million loan with a related party On October 24, 2012, PAL obtained a long-term loan from a related party bank amounting to P=4.09 billion ($100 million), which remained outstanding as of March 31, 2013, to finance pre-delivery payments related to various Airbus aircraft to be delivered in 2014. The loan agreement requires one time principal payment at maturity in April 2014 with interest of 3 months LIBOR plus margin per annum. In 2013, interest incurred in relation to the loan amounted to P=53.15 million, which was capitalized as part of property and equipment in the same year (see Note 18).

Unsecured claims (including Terminated Operating Lease Claims) The restructured unsecured claims are noninterest-bearing and constitute 100% of the principal and 100% of accrued but unpaid interest as of June 23, 1998.

In accordance with the Rehabilitation Plan, PAL terminated 26 operating leases relating to Boeing 747-200, Airbus 340-200, Airbus 300-B4, Fokker 50, and Shorts 360 aircraft. Any claims, net of security deposits and maintenance reserves held by the lessors, resulting from the termination of operating leases were treated as unsecured claims.

For purposes of valuation of the unsecured claims (including Terminated Operating Lease Claims), PAL used a discount rate of 12% per annum (PAL‟s estimated borrowing cost for instruments of similar type and tenor at the time of the deemed issuances of the restructured unsecured claims) to restate the unsecured claims (including Terminated Operating Lease Claims) to present value. Adjustments in present value resulting from the passage of time and the interest portion of prepayments made amounted to P=24.71 million in 2012 and P=165.80 million in 2011 and were recognized as part of “Financing charges” in the consolidated statements of comprehensive income.

All unsecured claims were fully paid on June 7, 2011 in accordance with the restructured schedule.

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Excess Cash Flow Recapture Mechanism of the Rehabilitation Plan

Under the Excess Cash Flow Recapture mechanism of the Rehabilitation Plan, at the end of any six-month period starting September 30, 1999, any Excess Cash Flow (the remaining cash balance, excluding certain funds, in excess of the greater of $50 million and the average of the preceding six months‟ revenue of PAL) will be used to prepay Eligible Creditors on a pro rata basis. Such prepayments in respect of indebtedness will be applied in inverse order of maturity of claims.

PAL made prepayments under the Excess Cash Flow Recapture mechanism totaling P=7.52 billion (covering the years 2001, 2003, 2006, 2007 and 2008). The last payment relating to the Excess Cash Flow Recapture mechanism amounted to P=2.34 billion in 2008. There were no similar payments made in fiscal years 2013, 2012 and 2011.

PAL‟s obligations under the Excess Cash Flow Recapture mechanism shall terminate on the last to occur of: (a) June 7, 2004 (five years after the implementation date of the Rehabilitation Plan); (b) PAL‟s public offering (as defined in the Rehabilitation Plan) of its shares; and (c) the end of the fiscal year in which PAL has achieved profits calculated on a cumulative basis over the preceding three fiscal years. With respect to each participating creditor class, rights to receive prepayments under the Excess Cash Flow Recapture mechanism would also terminate on the date on which creditors of that creditor class have been returned to their original pre-restructuring repayment profiles.

16. Reserves and Other Noncurrent Liabilities

2013 2012 (In Thousands) Provisions P=1,957,804 P=1,598,261 Other noncurrent liabilities (Note 18) 536,762 721,849 P=2,494,566 P=2,320,110

Provisions Provisions consist substantially of probable claims and other litigations involving PAL. The timing of the cash outflows of these provisions is uncertain as it depends upon the outcome of PAL‟s negotiations and/or legal proceedings, which are currently ongoing with the parties involved.

In 2013, additional provision amounted to P=435.99 million (P=302.88 million in 2012), reversal of provisions recognized in prior years amounted to P=68.49 million (P=951.06 million in 2012) and settlement of cases amounted to P=0.13 million (P=723.78 million in 2012). Revaluation due to difference in exchange rates decreased the balance of provisions by P=7.83 million (P=69.47 million in 2012).

Disclosure of additional details beyond the present disclosures may seriously prejudice PAL‟s position and negotiating strategy. Thus, as allowed by PAS 37, Provisions, Contingent Liabilities and Contingent Assets, only general descriptions were provided.

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Claims by Manila International Airport Authority (MIAA) PAL and MIAA entered into a Compromise Agreement on November 14, 2006, which was approved by the Court of Appeals on March 26, 2007. Under the Compromise Agreement, PAL agreed to pay MIAA the total amount of P=2.93 billion, including the related Value-Added Tax (VAT), through equal monthly installments over a period of seven years. These payments will serve as full and final settlement of MIAA‟s claim against PAL for landing and take-off fees, parking fees, lighting charges and tacking charges for the period December 1, 1995 to March 31, 2006.

As of March 31, 2013 and 2012, accrued expenses payable to MIAA, excluding the related VAT, amounted to P=437.82 million and P=802.27 million, respectively. Of the amount, P=403.33 million and P=667.62 million was included as part of “Accrued expenses - landing and take-off fees and ground handling charges” (see Note 14) classified under “Current liabilities”, and P=34.49 million and P=134.64 million was included as part of “Other noncurrent liabilities” in the consolidated statements of financial position as of March 31, 2013 and 2012, respectively.

17. Equity Items

The following summarizes the capital stock account as of March 31, 2013 and 2012:

2013 2012 (In Thousands) Authorized - 23.0 billion shares in 2013 and 20.0 billion shares in 2012 at P=1 par value per share P=23,000,000 P=20,000,000 Issued and outstanding - 22,421,567,685 shares in 2013 and 5,421,567,685 shares in 2012 P=22,421,568 P=5,421,568 Treasury stock - 55,589 shares, at cost (56) (56) Issued and outstanding P=22,421,512 P=5,421,512

a. The issued and outstanding shares are held by 6,599 and 6,635 equity holders as of March 31, 2013 and 2012, respectively.

b. The Parent Company has 55,589 treasury shares amounting to P=0.06 million. Future earnings are restricted from dividend declaration to the extent of the cost of these treasury shares.

c. Details of other components of equity are as follows:

2013 2012 (In Thousands) Cumulative translation adjustment (Notes 19 and 28) (P=6,203,989) (P=4,718,017) Net changes in fair values of available-for-sale investments - net of related deferred income tax (Note 6) 49,314 71,196 Revaluation increment - net of related deferred income tax (Notes 10 and 11) 542,912 282,681 Effect of change in ownership interest 520,769 – (P=5,090,994) (P=4,364,140)

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d. The Parent Company‟s track record of registration of securities under the Securities Regulation Code is as follow:

Date of approval Number of Shares Licensed Issue/Offer Price August 2, 1930 18,000 P=100.00 August 2, 1930 2,000,000 0.10 January 6, 1951 7,000,500 0.10 December 4, 1957 30,000,000 0.10 March 25, 1970 200,000,000 0.10 April 14, 1975 5,000,000,000 0.01 March 7, 1977 12,500,000,000 0.01

In 1996, the SEC approved the Parent Company‟s decrease in authorized capital stock from 20 billion shares to 200 million shares while the par value was increased from P=0.01 per share to P=1.00 per share. In 2000, the SEC approved an increase in the Parent Company‟s authorized capital stock from 200 million shares to 400 million shares with P=1.00 par value per share. Further, as discussed in Note 1, the Parent Company‟s authorized capital stock was again increased from 400 million shares to 20 billion shares in 2007 and to 23 billion shares in 2013.

The Parent Company‟s BOD and stockholders approved the increase in the authorized capital stock from P=20.00 billion divided into 20.0 billion shares at P=1 par value per share to P=23.00 billion divided into 23.0 billion shares at P=1 par value per share in separate meetings held on June 26, 2012 and September 28, 2012, respectively. The increase in authorized capital stock and the amended Articles of Incorporation were approved by the SEC on December 12, 2012.

The Parent Company incurred filing fees of P=6.09 million and documentary stamp tax of P=85.00 million which was recognized as a reduction from additional paid-in capital.

e. On June 26, 2012, the BOD approved the subscription of Trustmark to 17 billion shares at P=1.00 per share amounting to P=17.00 billion, of which 14,578,487,904 shares were issued out of the present unissued capital stock of the Parent Company, and the balance of 2,421,512,096 shares were issued out of the increase in the authorized capital stock.

f. On March 15, 2013, the stockholders approved the increase in the Parent Company‟s authorized capital stock from P=23.00 billion divided into 23.00 billion shares at P=1 par value per share to P=30.00 billion divided into 30.00 billion shares at P=1 par value per share 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 the SEC on June 28, 2013.

18. Related Party Transactions

Enterprises and individuals that directly, or indirectly through one or more intermediaries, control or are controlled by or under common control with the Group, including holding companies, subsidiaries and fellow subsidiaries, are related parties of the Group. Associates and individuals owning, directly or indirectly, an interest in the voting power of the Group that gives them significant influence over the enterprise, key management personnel, including directors and officers of the Group and close members of the family of these individuals, and companies associated with these individuals also constitute related parties. In considering each possible

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related entity relationship, attention is directed to the substance of the relationship and not merely the legal form.

The following tables present the amounts and outstanding balances of the Group‟s transactions with its related parties.

2013 Outstanding Transactions Volume Balance Terms and Conditions (In Thousands) Entities under common control Cash and money placements, including interest income (Notes 5, 12 and 20) P=142,244,781 P=2,810,739 Unsecured; unimpaired Notes payable and long-term obligations Bears interest based on (Notes 13 and 15) prevailing market rates; Principal – (6,125,629) partially secured; payable in various terms Financing charges (225,844) (30,034) Aircraft lease income (Notes 7, 20 and 25) 2,479,786 95,912 Receivable monthly based on fixed and variable rates; unimpaired Aircraft security deposit 43,428 (353,736) Refundable at the end of lease term Sales and other income (Notes 7 and 20) 2,834,291 1,928,384 Receivable in 30 days; with impairment Aircraft maintenance and other charges (Note 20) 1,457,243 (688,200) Payable after 30 days Entities under significant shareholder group Long-term obligations (see Note 15) Bears interest based on Principal 4,163,789 (4,091,800) 3 months LIBOR plus Financing charges 54,088 (23,201) margin; payable quarterly; unsecured Aircraft maintenance and other charges (Note 20) 13,857,840 (4,668,867) Payable after 15 to 30 days Sales and other income (Notes 7 and 20) 119,459 104,955 Receivable in 30 days; with impairment

2012 Outstanding Transactions Volume Balance Terms and Conditions (In Thousands) Entities under common control Cash and money placements, including interest income (Notes 5, 12 and 20) P=65,199,681 P=1,967,322 Unsecured; unimpaired Notes payable and long-term obligations Bears interest based on prevailing (Note 13) market rates; partially secured; Principal 4,915,719 (10,133,841) payable in various terms Financing charges 262,991 (34,175) Aircraft lease income (Notes 7 and 20) 1,793,246 113,260 Receivable monthly based on fixed and variable rates; unimpaired Aircraft security deposit (Note 16) 64,249 (326,384) Refundable at the end of lease term (Forward)

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2012 Outstanding Transactions Volume Balance Terms and Conditions Sales and other income (Notes 7 and 20) P=172,568 P= 1,617,410 Receivable in 30 days; with impairment Aircraft maintenance and other charges 3,937,146 (1,931,472) Payable after 30 days (Note 20) Entities under significant shareholder group Aircraft maintenance and other charges 13,874,919 (3,629,382) Payable after 15 to 30 days (Note 20) Sales and other income (Notes 7 and 20) 133,501 107,807 Receivable in 30 days; with impairment a. On February 28, 2012, advances from Trustmark amounting to P=10.00 million as of March 31, 2011, that were used for working capital purposes were converted to additional paid-in capital. b. As of March 31, 2013 and 2012, the Parent Company owns 88 million common shares (7.04% equity interest) of MAC. Certain members of the Parent Company‟s BOD are also officers and members of the BOD of MAC. Dividends received from this investment amounted to P=5.72 million in 2013, 2012 and 2011 (see Note 6). c. Accounting, statutory reporting and compliance, and administrative services are provided by an entity under the LTGC at no cost to the Parent Company. d. As of March 31, 2013 and 2012, cash and cash equivalents (included under “Cash and cash equivalents” and “Other noncurrent assets” in the consolidated statements of financial position) with banks under common control amounted to P=2.81 billion and P=1.97 billion (including accrued interest of P=2.91 million and P=2.83 million), respectively. The related interest income on these investments and cash deposits amounted to P=26.21 million in 2013, P=24.29 million in 2012 and P=15.01 million in 2011. These cash and cash equivalents with entities under common control include money placements for standby letters of credit amounting to P=161.26 million and P=168.09 million as of March 31, 2013 and 2012, respectively.

The retirement funds of PAL are being managed by an entity under common control (see Note 21). e. As of March 31, 2013 and 2012, PAL has outstanding short-term notes payable, obligations under finance lease and long-term term debt (included under “Long-term obligations”), which bear interest based on prevailing market rates, with entities under common control (see Notes 13 and 15). The related financing charges on these loans obtained from entities under common control amounted to P=225.84 million, P=225.61 million and P=181.83 million in 2013, 2012 and 2011, respectively. The accrued interest on these loans amounted to P=30.03 million and P=25.72 million as of March 31, 2013 and 2012, respectively (see Note 14).

PAL‟s obligations under finance lease with entities under common control cover three Airbus 330-300 aircraft (see Note 15). In 2012, deposits on leases of the said aircraft amounting to P=1.37 billion were classified as part of the cost of the aircraft while the remaining accrued interest was derecognized.

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As discussed in Note 15, PAL has an outstanding loan from a bank under significant shareholder group amounting to P=4.09 billion as of March 31, 2013, with related financing charges of P=54.09 million in 2013. The accrued interest on this loan amounted to P=23.20 million as of March 31, 2013 (see Note 14). f. The transactions with APC, an entity under common control, include joint services and code share agreements, and endorsements of passengers during flight interruptions. PAL has net receivable from APC (shown as part of “Receivable from related parties”) amounting to P=1.16 billion and P=0.77 billion as of March 31, 2013 and 2012, respectively (see Note 7).

In June 2010, PAL sold to APC the spare engines, rotable and reparables, expendable parts and maintenance tools of Bombardier aircraft for a consideration equal to its net book value amounting to P=1.13 billion, excluding the related VAT. On March 31, 2011, the same spare engines and maintenance tools and all rotable and reparable parts as of such date were bought back from APC for consideration amounting to P=826.97 million, excluding the related VAT.

In 2012, PAL and APC entered into a Reciprocal Free Flow Code Share Agreement covering certain sectors identified by the parties. Under the agreement, the operating party shall operate scheduled flights on the identified sectors and the marketing party may sell seats on such identified code share flights.

As of March 31, 2013 and 2012, PAL has outstanding operating lease agreements with APC covering Airbus 320-200 aircraft, Bombardier DHC 8-300 aircraft and Bombardier DHC 8-400, for a period of 60 to 92 months (see Notes 10 and 25). The related deposit from APC amounted to P=353.74 million and P=326.38 million as of March 31, 2013 and 2012, respectively, (included under “Reserves and other noncurrent liabilities” in Note 16). g. PAL has an operating lease agreement with an entity under common control for the lease of a portion of the PNB Financial Center Building. There is no outstanding rental liability relating to the said lease contract as of March 31, 2013 and 2012 (see Note 25). h. PAL sources its Jet A-1 fuel requirements for a number of its domestic routes from an entity under significant shareholder group (see Note 14). i. PAL has a Technical Services Agreement (TSA) with Lufthansa Technik Philippines (LTP), an entity under significant shareholder group, which took effect on September 1, 2000 and was effective for a period of 10 years until September 1, 2010, including the Heavy Maintenance Service Agreement.

Upon expiration of the TSA in 2010, PAL and LTP entered into a General Terms and Agreement for Maintenance, Repair and Overhaul Services (GTA) effective September 2010. Under the GTA, the scope of LTP‟s service was limited to line maintenance, component maintenance, C check of certain aircraft and other support services. The GTA was for a period of one year, renewable upon consent of both parties. The latest renewal was made for another year ending in August 2013.

In February 2009, PAL and LTP also entered into an Engine Maintenance Services (EMS) for CFM56-5B Engines agreement for a period of twelve years. LTP has the option to extend the agreement for another two years by giving six month prior notice. Total LTP-related maintenance and repair costs charged to operations amounted to P=4.01 billion, P=4.64 billion and P=5.73 billion in 2013, 2012 and 2011, respectively. In addition, related expendable parts sold to LTP amounted to P=6.33 million in 2013, P=11.13 million in 2012 and P=26.33 million in

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2011. As of March 31, 2013 and 2012, PAL has outstanding amounts payable to and estimated unbilled charges from LTP totaling P=2.76 billion and P=2.69 billion, respectively, net of revolving fund, unapplied credits from and advance payments to LTP amounting to P=761.73 million and P=51.69 million as of March 31, 2013 and 2012, respectively.

In connection with the sale of maintenance and engineering facilities to LTP in 2000, PAL and LTP entered into several transition services agreements whereby PAL will render to LTP various services such as training and medical services, among others. Revenue earned from the said transition services agreements (included under “Others” in the revenue section of the consolidated statement of comprehensive income) amounted to P=91.69 million in 2013, P=75.03 million in 2012 and P=66.28 million in 2011. Receivables from LTP amounted to P=87.57 million and P=95.61 million as of March 31, 2013 and 2012, respectively.

j. PAL and Macroasia Catering Services, Inc. (MCSI), an entity under significant shareholder group, entered into a catering and service agreement effective December 14, 2010, which shall remain in full force until terminated by either party upon provision of written notice under the agreement. MCSI will provide to the aircraft operated by PAL ordered food, services, bonded items and other catering supplies as well as storage facilities for PAL‟s catering supplies, equipment and inflight sales items. In March and September 2011, the parties executed the addendums to the service agreement increasing the scope of services. The agreement was terminated in March 2012. Related catering expenses amounted to P=111.96 million in 2013, P=98.31 million in 2012 and P=0.45 million in 2011. Outstanding liability to MCSI amounted to P=1.51 million and P=68.78 million as of March 31, 2013 and 2012, respectively.

PAL has a ground handling agreement with Macroasia Airport Services Corp. (MASC), an entity under significant shareholder group. On October 1, 2011, the parties executed a supplement to the agreement specifying the locations, agreed services and charges. The supplement is effective for a period of five years. Related ground handling expenses amounted to P=89.11 million and P=56.79 million in 2013 and 2012, respectively. Outstanding payable to MASC amounted to P=19.44 million and P=9.88 million as of March 31, 2013 and 2012, included under “Accounts payable” in the consolidated statements of financial position, respectively.

k. “Due to related parties” as of March 31, 2013 eliminated during consolidation amounted to P=91.09 million. These are advances made by the subsidiary to the Parent Company in 2013 as payment for filing fees and documentary stamp tax on the issuance of shares to Trustmark, with no fixed maturity date. There were no related party balances eliminated as of March 31, 2012.

l. The compensation of key management personnel of the Group, consisted of short-term employee benefits amounting to P=27.40 million, P=29.49 million and P=31.54 million in 2013, 2012 and 2011, respectively, and retirement benefits of P=6.79 million, P=5.95 million and P=5.84 million in 2013, 2012 and 2011, respectively.

19. Other Comprehensive Income

Comprehensive income consists of net income or loss for the year, together with other gains and losses that are not recognized in profit or loss for the year as required or permitted by PFRS (collectively described as “Other comprehensive income”).

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Other comprehensive income includes the following:

Unrealized mark-to-market gains (losses) on AFS investments of (P=22.01 million) in 2013, (P=35.11 million) in 2012 and P=39.93 million in 2011. These amounts are net of the related deferred income tax of P=0.03 million in 2013, P=0.04 million in 2012 and P=0.09 million in 2011.

Net changes in fair values of cash flow hedges comprise the amount transferred from equity to profit and loss amounting to (P=277.08 million) in 2011 (nil in 2013 and 2012) which pertains to preterminated cash flow hedges (see Note 28). The related deferred income tax on this net change in fair value of cash flow hedges amounted to P=66.73 million in 2011.

Increase in revaluation increment in property arising from the results of an updated appraisal amounted to P=267.05 million and P=453.09 million, net of the related deferred income tax of P=113.75 million and P=194.18 million in 2013 and 2011, respectively. The latest appraisal reports are as at March 31, 2013 (see Note 10).

Effect of foreign exchange losses arising from the translation to Philippine peso of the assets and liabilities of PAL amounting to P=740.90 million, P=55.38 million, P=110.74 million in 2013, 2012 and 2011, respectively.

Included under “Cumulative translation adjustment - net of deferred income tax” in the consolidated statement of changes in equity as of March 31, 2010 are unrealized after-tax gains on hedging contracts aggregating to P=277.08 million, which were realized in 2011. As discussed in Note 28, certain derivative instruments (i.e., fuel derivatives and interest rate swaps) that were designated as effective hedging instruments were expected to protect PAL against the impact of rising fuel prices and increasing interest rates. The related hedging gains or losses were recognized in profit or loss at the same time as the corresponding hedged items were recognized in profit or loss.

20. Revenue and Expenses

Details of other revenue are as follows:

2013 2012 2011 (In Thousands) Transport-related revenue P=3,469,775 P=3,336,518 P=3,971,738 Lease income (Note 18) 2,478,281 1,792,550 1,188,346 Non-transport revenue 296,768 297,461 438,682 Others (Notes 5, 6, 12 and 18) 223,523 155,772 400,263 P=6,468,347 P=5,582,301 P=5,999,029

The significant components of expenses by nature are as follows:

2013 2012 2011 (In Thousands) Fuel and oil (Notes 18 and 28) P=31,521,017 P=33,332,322 P=27,468,265 Repairs and maintenance (Note 18) 9,588,612 8,900,202 8,394,158 Crew and staff costs (Note 21) 6,015,364 4,499,269 6,985,966

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2013 2012 2011 (In Thousands) Depreciation, amortization and obsolescence (Notes 8, 10 and 11) P=5,821,727 P=6,723,180 P=6,852,387 Aircraft lease rentals (Note 25) 5,046,250 2,074,602 3,570,382 Ground handling charges 4,525,960 4,220,651 3,762,738 Landing and take-off fees 2,638,120 3,007,453 2,621,841 Passenger food 1,966,243 1,575,880 1,672,154 Financing charges (Notes 13, 15 and 18) 1,348,685 1,365,785 1,661,570 Reservation and selling costs 1,126,198 1,195,936 1,128,973 Utilities 1,032,337 892,252 768,471 Professional fees 872,254 431,537 193,253 Flight amenities 576,078 566,582 578,299 Outside services 517,258 656,404 615,692

21. Employee Benefits

As of March 31, the Group‟s accrued employee benefits consisted of the following:

2013 2012 (In Thousands) Regular retirement benefits P=3,559,327 P=3,217,365 Other long-term benefits 1,832,151 1,674,578 P=5,391,478 P=4,891,943

PAL has funded noncontributory defined benefit retirement plans covering all its permanent and regular employees with benefits based on years of service and latest compensation.

The following tables summarize the components of the retirement benefits cost recognized in the consolidated profit or loss and the amounts recognized in the consolidated statements of financial position.

The details of net retirement benefits cost under the defined benefit plans are as follows:

2013 2012 2011 (In Thousands) Current service cost P=369,822 P=240,948 P=315,255 Interest cost on benefit obligation 292,750 280,439 435,048 Expected return on plan assets (20,867) (19,832) (40,513) Net actuarial loss (gain) recognized during the year (64,608) 255,457 (268,339) Curtailment loss – 106,859 – P=577,097 P=863,871 P=441,451 Actual return (loss) on plan assets (P=14,143) (P=50,483) P=34,350

Due to the significant reduction in the number of employees resulting from the outsourcing, the Group recognized a curtailment loss in 2012.

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The details of net retirement benefits liability are as follows:

2013 2012 (In Thousands) Defined benefit obligation P=7,491,167 P=4,845,301 Fair value of plan assets (550,078) (564,221) 6,941,089 4,281,080 Unrecognized net actuarial loss (3,381,762) (1,063,715) Net retirement benefits liability P=3,559,327 P=3,217,365

Changes in present value of defined benefit obligation are as follows:

2013 2012 (In Thousands) Defined benefit obligation, beginning of year P=4,845,301 P=3,880,302 Current service cost 369,822 240,948 Interest cost 292,750 280,439 Benefits paid (235,135) (263,946) Effect of curtailment – (933,178) Actuarial loss on obligation 2,218,429 1,640,736 Defined benefit obligation, end of year P=7,491,167 P=4,845,301

Changes in fair value of plan assets are as follows:

2013 2012 (In Thousands) Fair value of plan assets, beginning of year P=564,221 P=844,608 Expected return on plan assets 20,867 19,832 Actual contributions to the plan 235,135 1,486,941 Benefits paid (235,135) (1,716,845) Actuarial loss on plan assets (35,010) (70,315) Fair value of plan assets, end of year P=550,078 P=564,221

The retirement plans‟ assets and investments which are being maintained by a trustee bank (see Note 18), consist of the following:

Cash and cash equivalents, which include regular savings and time deposits, earning interest at their respective bank deposit rates; and Investments in corporate debt instruments, consisting of both short and long-term corporate notes of foreign commercial banks, which bear interest ranging from 6.63% to 9.75% and have maturities from December 2013 to March 2029.

The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2013 2012 Cash and cash equivalents 77% 66% Investments in corporate debt instruments 21% 32% Receivables 2% 2% 100% 100%

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The overall expected return on the plan assets is determined based on the market prices prevailing on the date applicable to the period over which the obligation is to be settled.

The principal assumptions used at the beginning of the fiscal year in determining retirement benefits cost for PAL‟s plans are as follows:

2013 2012 Discount rate per annum 5.50% to 6.66% 7.20% to 8.73% Expected annual rate of return on plan assets 2.79% to 3.96% 2.00% to 2.40% Future annual increase in salary 10% 10% to 11%

As of March 31, 2013, following are the information with respect to the above assumptions: discount rate per annum of 3.10% to 4.00%; expected annual rate of return on plan assets of 1.50% to 4.00%; and future annual increase in salary of 10.00%.

There are 4,610 and 4,568 employees covered in the plans as of March 31, 2013 and 2012, respectively.

Relevant amounts for the current and prior periods are as follows:

2013 2012 2011 2010 2009 (In Thousands) Defined benefit obligations P=7,491,167 P=4,845,301 P=3,880,302 P=4,686,011 P=4,318,578 Fair value of plan assets (550,078) (564,221) (844,609) (810,259) (1,327,979) Deficit 6,941,089 4,281,080 3,035,693 3,875,752 2,990,599 Experience adjustment on plan liabilities • loss (gain) 420,665 413,649 (595,766) 506,156 (140,569) Experience adjustment on plan assets • gain (loss) (35,010) (70,315) (6,163) 44,562 114,133

The Group‟s expected contribution to the retirement fund in fiscal year ending March 31, 2014 is P=807.46 million.

22. PAL’s Franchise

PAL operates under a franchise, which extends up to the year 2034, granted by the Philippine Government under Presidential Decree No. 1590. As provided for under the franchise, PAL is subject to:

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

b. franchise tax of 2% of the gross revenue derived from nontransport, domestic transport and outgoing international transport operations, whichever is lower, in lieu of all other taxes, duties, fees, and licenses of any kind, nature, or description, imposed by any municipal, city, provincial or national authority or government agency, except real property tax.

As further provided for under its franchise, PAL can carry forward as a deduction from taxable income, net loss incurred in any year up to five years following the year of such loss (see Note 23). In addition, the payment of the principal, interest, fees, and other charges on foreign loans obtained by PAL, and all rentals, interest, fees and other charges paid by PAL to lessors for the lease of aircraft, engines, spares, other flight or ground equipment, and other

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personal property are exempt from all taxes, including withholding tax, provided that the liability for the payment of said taxes is assumed by PAL.

Under Republic Act (RA) No. 9337 or the E-VAT Act of 2005, which took effect on November 1, 2005, the franchise tax of PAL was abolished and PAL became subject to the corporate income tax. PAL remains exempt from any taxes, duties, royalties, registration license, and other fees and charges, as may be provided by PAL‟s franchise.

23. Income Taxes

a. The income tax expense (benefit) consists of the following:

2013 2012 2011 (In Thousands) Current income tax P=64,085 P=42,342 P=216,099 Deferred income tax (163,639) (1,087,923) (169,484) (P=99,554) (P=1,045,581) P=46,615

b. The Group‟s recognized net deferred income tax assets, all relating to PAL, are as follows:

2013 2012 (In Thousands) Deferred income tax assets on: NOLCO P=1,716,808 P=2,618,654 Accrued retirement benefits cost and unamortized past service cost contribution 1,434,176 1,558,118 Changes in exchange rates related to nonmonetary assets and liabilities - net 185,972 – Allowance for inventory losses 37,931 51,521 Reserves and others 25,246 39,757 3,400,133 4,268,050 Deferred income tax liabilities on: Prepaid commission and others (894,918) (915,696) Unrealized foreign exchange adjustments - net (271,134) (221,564) Revaluation increment in property (251,809) (172,938) Investment properties carried at deemed cost (83,677) (87,800) Net present value adjustments on financial liabilities (27,988) (38,125) Cumulative translation and fair value adjustments • net (6,260) (80,158) Changes in exchange rates related to nonmonetary assets and liabilities • net – (853,270) (1,535,786) (2,369,551) Net deferred income tax assets P=1,864,347 P=1,898,499

c. As of March 31, 2013 and 2012, the Parent Company did not recognize deferred income tax asset on provision for probable loss amounting to P=3.24 million and P=2.88 million, and carryforward benefits of NOLCO amounting to P=27.59 million and P=26.75 million, respectively, as management believes that the Parent Company may not have sufficient future taxable profits to allow all or part of the deferred income tax assets to be utilized in the future.

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As of March 31, 2013, the Parent Company‟s NOLCO that are available for deduction against future taxable income are as follows:

Available until Incurred during fiscal year Balance as of fiscal year ended March 31 Amount Expired March 31, 2013 ending March 31 (In Thousands) 2010 P=8,678 (P=8,678) P=– 2013 2011 8,951 – 8,951 2014 2012 9,121 – 9,121 2015 2013 9,514 – 9,514 2016 P=36,264 (P=8,678) P=27,586

The Parent Company‟s MCIT incurred in 2010 amounting to P=101.23 million expired in 2013.

As of March 31, the deferred income tax assets on the following deductible temporary differences were not recognized by PAL because management believes that PAL may not have sufficient future taxable income against which these deductible temporary differences, NOLCO and MCIT may be utilized.

2013 2012 (In Thousands) Allowance for doubtful accounts (Note 7) P=4,706,635 P=4,707,713 NOLCO 4,436,943 – Accrued retirement benefits 2,070,655 1,398,446 Provisions (Note 16) 1,957,804 1,598,261 MCIT 323,559 359,393

PAL‟s outstanding NOLCO as of March 31, 2013 is available for application against future taxable income as follows:

Incurred During Fiscal Year Available Until Fiscal Ended March 31 Amount Year Ending March 31 2013 P=1,430,807 2018 2012 2,921,453 2017 2010 1,370,433 2015 2009 4,436,963 2014 P=10,159,656

PAL‟s outstanding MCIT as of March 31, 2013 is available for application against future taxable income as follows:

Incurred During Fiscal Year Available Until Fiscal Ended March 31 Amount Year Ending March 31 2013 P=65,400 2016 2012 42,172 2015 2011 215,987 2014 P=323,559

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d. The reconciliation between the statutory tax rate and the Group‟s effective tax rate follows:

2013 2012 2011 Statutory income tax rate (30.00%) (30.00%) 30.00% Adjustments resulting from: Movement in deductible temporary differences for which no deferred income tax assets were recognized 7.95% (8.36%) 7.17% Interest income subjected to final tax or exempted from tax (0.28%) (0.18%) (0.27%) Nondeductible portion of interest expense 0.09% 0.06% 0.09% Deductible temporary differences used/recognized in current year but for which no deferred income tax assets were recognized in prior years 18.33% – 16.43% Nondeductible expenses and others - net 1.24% 18.88% (51.89%) Effective income tax rate (2.67%) (19.60%) 1.53%

e. RR No. 10-2002 defines expenses to be classified as entertainment, amusement and recreation (EAR) expenses and sets a limit for the amount that is deductible for tax purposes, i.e., 1% of net revenue for sales of services and 0.50% of net sales for sales of goods. EAR expenses amounted to P=16.11 million in 2013, P=11.67 million in 2012 and P=10.96 million in 2011.

24. Note to Consolidated Statements of Cash Flows

Noncash investing activities consist of purchases of property and equipment on account amounting to P=992.83 million in 2013, P=321.40 million in 2012 and P=300.82 million in 2011. The increase in property and equipment also includes aircraft acquired through finance lease with related obligations amounting to P=11.17 billion in 2013 and reclassification from deposit on aircraft leases amounting to P=1.40 billion in 2012 (see Note 18).

25. Aircraft Lease Commitments and Purchases

Aircraft Purchases and Finance Leases Airbus aircraft On December 6, 2005, PAL finalized a Purchase Agreement with Airbus wherein PAL placed a firm order for nine Airbus 320-200 aircraft and options for five aircraft for delivery in fiscal years 2010 to 2013. All nine aircraft on firm order were delivered to and accepted by PAL during fiscal years 2008 to 2009. One of these aircraft was financed through a Japanese Operating Lease (JOL) structure.

On July 28, 2008, PAL exercised its right to purchase two of the five option aircraft for delivery in fiscal year 2011 by virtue of an amendment agreement to the Purchase Agreement with Airbus. PAL did not exercise its right, which lapsed in July 2009, to purchase the remaining three of the

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five option aircraft. The two option aircraft were acquired through sale and leaseback transaction with a buyer/lessor under operating lease agreements.

As presented in Note 10, PAL has existing finance lease agreements for two Airbus 340-300 aircraft, seven Airbus 330-300 aircraft and eight Airbus 320-200 aircraft as of March 31, 2013. Carrying values of these passenger aircraft under finance lease amounted to P=20.89 billion and P=28.47 billion as of March 31, 2013 and 2012, respectively.

In August 2012, PAL entered into two separate Purchase Agreements with Airbus. The first Purchase Agreement is for a firm order of 44 Airbus “A320 family” aircraft and options for 20 Airbus “A320 family” aircraft for delivery in fiscal years 2014 to 2020. The other Purchase Agreement is for a firm order of 10 Airbus 330-300 aircraft and options for ten aircraft for delivery in fiscal years 2014 to 2016. In September 2012, PAL exercised its right to purchase all of the 10 Airbus 330-300 option aircraft for delivery in fiscal years 2014 to 2016 by virtue of an amendment agreement to the Purchase Agreement with Airbus. As of March 31, 2013, total predelivery payments relating to the acquisition of these Airbus aircraft amounted to P=20.40 billion (see Note 10).

Boeing aircraft As presented in Note 10, PAL accepted delivery of two of the four Boeing 777-300ER aircraft in fiscal year 2013 under finance lease. The remaining two aircraft are scheduled for delivery in fiscal year 2014. As of March 31, 2013 and 2012, predelivery payments relating to the acquisition of Boeing 777-300ER aircraft amounted to P=4.91 billion and P=8.89 billion, respectively (see Note 10).

PAL also has four Boeing 747-400 aircraft as of March 31, 2013 and 2012 under finance lease (see Note 10). Carrying values of these passenger aircraft under finance lease amounted to P=15.64 billion and P=3.45 billion as of March 31, 2013 and 2012, respectively.

Operating Leases Airbus aircraft In March 2010, PAL signed operating lease agreements for the lease of two brand new Airbus 320-200 aircraft which were delivered in October and November 2010. Additional Airbus 320-200 aircraft were also delivered in September and November 2010, representing the two option aircraft covered by Purchase Agreement with Airbus.

On various dates in fiscal year 2011, PAL also signed operating lease agreements for the lease of seven Airbus 320-200 aircraft. PAL accepted the delivery of five aircraft in fiscal year 2012 and the remaining two aircrafts in April and September 2012, respectively. These seven aircrafts were subleased to APC upon delivery.

On May 28, 2011, PAL agreed to acquire two Airbus 320-200 from GE Commercial Aviation Services under operating lease arrangements. PAL accepted the delivery of these aircrafts in March and May 2012 for use in its operations.

In November 2011, PAL entered into operating lease agreements with a lessor covering two Airbus 320-200, which are due for delivery in October and November 2012, for a period of six years and were used in its operations.

In April 2013, PAL entered into a sublease tolling agreement with APC and the aircraft owner wherein PAL will take possession of the two Airbus 320-200 aircraft being subleased to APC for a period of six months beginning April 1, 2013 for use in its operations.

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On May 20, 2013, PAL and APC executed an aircraft sublease termination agreement covering two Airbus 320-200 aircraft effective upon redelivery of the aircraft to PAL. The same aircraft shall be subleased to a third party under an operating lease agreement executed in the same month. The start of the lease term is dependent upon the effectivity of the termination agreement with APC.

As discussed in Note 18, the Parent Company has existing operating lease agreements with APC. The future minimum lease income receivables from these agreements are as follows:

2013 2012 Due within one year P=2,295,950 P=2,379,316 Due after one year but within five years 6,244,210 7,463,045 More than five years 1,033,711 1,461,946 P=9,573,871 P=11,304,307

Boeing aircraft In December 2006, PAL signed operating lease agreements for the lease of two brand new Boeing 777-300ER aircraft, also as part of its refleeting program initiated in the October 2006 purchase agreement. The two aircraft were delivered in November 2009 and January 2010 (see Note 10).

The future minimum lease payments related to the operating lease agreements are shown in the following table:

Year Ending March 31 2013 2012 (In Thousands) 2013 P=− P=5,172,130 2014 4,894,284 5,041,439 2015 4,253,508 4,474,453 2016 3,939,380 4,144,848 2017 and thereafter 13,363,205 13,992,062 P=26,450,377 P=32,824,932

Aircraft engine In December 2011, PAL sold and leased back an aircraft engine for a period of 96 months. In fiscal years 2013 and 2012, PAL also has short-term lease agreements on various aircraft engines with terms ranging from three months to 13 months.

Ground property PAL has an operating lease agreement with an entity under common control for the lease of a portion of the PNB Financial Center Building. The lease is for a period of 10 years commencing on November 1, 2007 and may be renewed upon mutual agreement of the parties.

Minimum rental commitments under this lease contract are as follows:

2013 2012 Due within one year P=31,057 P=29,582 Due after one year but within five years 124,391 133,911 More than five years − 21,596 P=155,448 P=185,089

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Others The Company‟s capital expenditure commitments relate principally to the acquisition of aircraft fleet aggregating to P=414.06 billion, P=50.92 billion and P=51.48 billion as of March 31, 2013, 2012 and 2011, respectively.

On April 25, 2013, PAL‟s BOD approved, confirmed and ratified the authority of Management to pursue the joint venture agreement with Inter Logistics (Cambodia) Co. Ltd., involving Cambodia Airlines Co. Ltd. (Cambodia Air) signed on April 2, 2013. The amount of the investment of the PAL in Cambodia Air is P=409.18 million ($10,000) for a 49% interest therein.

26. Capital Management

The primary objective of the Group‟s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value.

The Group considers its equity of P=13.78 billion and P=1.01 billion as of March 31, 2013 and 2012, respectively, presented in the consolidated statements of financial position as its capital. The Group manages its capital structure and makes adjustment to it, in light of changes in economic conditions. To maintain or adjust capital structure, the Group may issue new shares or return capital to shareholders. The Group manages its capital by monitoring its cash flows and debt levels. No changes were made in the objectives, policies or processes from April 1, 2011 to March 31, 2013.

27. Financial Risk Management Objectives and Policies

Risk Management Structure

BOD The BOD is mainly responsible for the overall risk management approach and for the approval of risk strategies and policies of the Group.

Treasury Risk Committee The Treasury Risk Committee has the overall responsibility for the development of financial risk strategies, principles, frameworks, policies and limits. It establishes a forum of discussion of the Group‟s approach to financial risk issues (fuel price and foreign exchange risk, in particular) in order to make relevant decisions.

Treasury Risk Office The Treasury Risk Office is responsible for the comprehensive monitoring, evaluation and analysis of the Group‟s financial risks in line with the policies and limits set by the Treasury Risk Committee. The Treasury Risk Office conducts marking-to-market of derivative positions and daily calculation and reporting of Value-at-Risk (VaR) amounts.

Financial Risk Management

The Group‟s principal financial instruments, other than derivatives, consist of loans, cash and cash equivalents, investments in equities, and deposits. The main purpose of these financial instruments is to raise financing for the Group‟s operations. The Group has various other financial

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assets and financial liabilities such as receivables, accounts payable, and accrued expenses, which arise directly from its operations.

The main risks arising from the use of financial instruments are market risks (consisting of foreign exchange risk, cash flow interest rate risk, fuel price risk and equity price risk), liquidity risk, counterparty risk and credit risk.

PAL uses derivative instruments to manage its exposures to currency, interest and fuel price risks arising from PAL‟s operations and its sources of financing. The details of PAL‟s derivative transactions, including the risk management objectives and the accounting results, are discussed in this note.

Market risks The Group‟s operating, investing, and financing activities are directly affected by changes in foreign exchange rates, interest rates, and fuel prices. Increasing market fluctuations in these variables may result in significant equity, cash flow and profit volatility risks for the Group. For this reason, the Group seeks to manage and control these risks primarily through its regular operating and financing activities, and through the execution of a documented hedging strategy.

Management of financial market risk is a key priority for the Group. The Group generally applies sensitivity analysis in assessing and monitoring its market risks. Sensitivity analysis enables management to identify the risk position of the Group as well as provide an approximate quantification of the risk exposures. Estimates provided for foreign exchange risk, cash flow interest rate risk, price interest rate risk, fuel price risk and equity price risk are based on the historical volatility for each market factor, with adjustments being made to arrive at what the Group considers to be reasonably possible.

Foreign exchange risk The Group is exposed to foreign exchange rate fluctuations arising from its revenue, expenses and borrowings in currencies other than its functional currency. The Group manages this exposure by matching its receipts and payments for each individual currency. Any surplus is sold as soon as practicable. PAL also uses foreign currency forward contracts and options to hedge a portion of its exposure. PAL‟s significant foreign currency-denominated monetary assets and liabilities (in Philippine peso equivalents) as of March 31 are as follows:

2013 2012 (In Thousands) Financial Assets and Financial Liabilities Financial assets: Cash P=1,600,589 P=1,900,817 Receivables 6,617,464 7,214,243 Others* 1,924,496 1,623,034 10,142,549 10,738,094 Financial liabilities: Accounts payable (2,577,057) (1,529,309) Accrued expenses (4,249,171) (4,456,377) Others** (263,635) (617,477) (7,089,863) (6,603,163)

(Forward)

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2013 2012 (In Thousands) Net foreign currency-denominated financial assets P=3,052,686 P=4,134,931 Nonfinancial Liabilities Accrued employee benefits (5,391,478) (4,891,943) Provisions (1,957,804) (1,598,261) (7,349,282) (6,490,204) Net foreign Currency-denominated Monetary Liabilities (P=4,296,596) (P=2,355,273) * Includes miscellaneous deposits and security deposits. ** Substantially pertaining to notes payable to a local bank.

The Group recognized P=507.03 million foreign exchange loss in 2013, P=34.93 million foreign exchange gain in 2012 and P=209.23 million foreign exchange loss in 2011, respectively, included under “Others - net” in the consolidated statement of comprehensive income, arising from the translation and settlement of these foreign currency-denominated financial instruments.

PAL‟s foreign currency-denominated exposures comprise primarily of PHP and JPY. Other foreign currency exposures include Canadian Dollar (CAD), Euro (EUR), Australian Dollar (AUD), Singaporean Dollar (SGD), Chinese Yuan (CNY), Thai Baht (THB), and Hong Kong Dollar (HKD).

Shown below is the impact on the Group‟s income before income tax of reasonably possible changes in the exchange rates of foreign currencies against the USD, PAL‟s functional currency, with all other variables held constant.

2013 Net Loss (Gain) Effect on Income Before Tax Movement in Foreign Increase in Foreign Decrease in Foreign Currency Exchange Rates Exchange Rates Exchange Rates (In Thousands) PHP 4.97% P=373,254 (P=373,254) JPY 9.31% (36,294) 36,294 Others* 0.1% to 15.33% (108,678) 108,678 Net P=228,282 (P=228,282) *Includes various currencies (i.e. CAD, AUD, EUR, HKD, SGD and others).

2012 Net Loss (Gain) Effect on Income Before Tax Movement in Foreign Increase in Foreign Decrease in Foreign Currency Exchange Rates Exchange Rates Exchange Rates (In Thousands) PHP 6.85% P=454,499 (P=454,499) JPY 8.08% (43,621) 43,621 Others* 0.03% to 14.86% (202,477) 202,477 Net P=208,401 (P=208,401) *Includes various currencies (i.e. CAD, AUD, EUR, HKD, SGD and others).

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The Group‟s major currency derivatives consist of options and forwards to buy USD and sell JPY. Before taking into account the effect of income taxes, income for the years ended March 31, 2013 and 2012 would have either increased by P=76.03 million and P=46.71 million or decreased by P=59.58 million and P=20.52 million, respectively, had the percentage change in JPY/USD been at 9.31% and 8.08%, respectively.

Other currency derivatives consist of options and forward contracts in AUD, CAD and SGD. Before taking into account the effect of income taxes, income for the years ended March 31, 2013 and 2012 would either increase by P=6.0 million and P=4.47 million and decrease by P=6.45 million and P=5.62 million, respectively, had the various foreign exchange rates changed with the range of 0.10 % to 15.33% in 2013 and 0.03% to 14.86% in 2012. There is no other impact on the Group‟s equity other than those affecting profit or loss.

Cash flow interest rate risk The Group‟s exposure to cash flow interest rate risk arises from the regular repricing of interest on its floating-rate loans and interest rate swaps. The Group‟s policy on interest rate risk is designed to limit the Group‟s exposure to fluctuating interest rates. The ratio of floating rate to the total borrowings is 0.45:1 and 0.71:1 as of March 31, 2013 and 2012, respectively. There were no outstanding swap agreements entered into as of March 31, 2013 and 2012.

Income before income tax as of March 31, 2013 and 2012 would either decrease or increase by P=46.43 million and P=74.53 million, respectively, if the USD interest rate for the periods had been higher or lower by 25 basis points and 38 basis points, respectively. There is no other impact on the Group‟s equity other than those already affecting profit or loss. The Group assumes concurrent movements in interest rates and parallel shifts in the yield curves.

Fuel price risk PAL is exposed to price risk on jet fuel purchases. This risk is managed by a combination of strategies with the objective of managing price levels within an acceptable band through various types of derivative and hedging instruments. In managing this significant risk, PAL has a portfolio of swaps, collars, vanilla options, swaptions, as well as options with knock-out features. PAL implements such strategies to manage and minimize the risks within acceptable risk parameters.

PAL‟s fuel derivatives are viewed as economic hedges and are not held for speculative purposes. Short-term exposures are hedged primarily with fuel derivatives indexed to jet fuel. On long-term exposures, PAL also uses fuel derivatives indexed to crude oil as proxy hedges due to liquidity constraints in the refined oil products market (i.e., jet fuel). PAL uses a VaR computation to estimate the potential three-day loss in the fair value of its fuel derivatives. The VaR computation is a risk analysis tool designed to statistically estimate the maximum potential loss at a given confidence interval from adverse movement in fuel prices.

Assumptions and limitations of VaR The VaR methodology employed by PAL uses a three-day period due to the assumption that not all positions could be undone in a single day given the size of the positions. The VaR computation makes use of Monte Carlo simulation with multi-factor models. Multi-factor models ensure that the simulation process takes into account mean reversion tendency and seasonality of fuel prices. It captures the complex dynamics of the term structure of commodity markets, such as contango and backwardation. The VaR estimates are made assuming normal market conditions using a 95% confidence interval and are determined by observing market data movements over a 90-day period.

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The estimated potential three-day losses on its fuel derivative transactions, as calculated in the VaR model amounted to P=78.86 million, P=48.77 million and P=66.28 million as of March 31, 2013, 2012 and 2011, respectively.

The high, average and low VaR amounts are as follows:

High Average Low (In Thousands) April 1, 2012 to March 31, 2013 P=96,433 P=36,808 P=5,538 April 1, 2011 to March 31, 2012 182,960 92,450 41,396 April 1, 2010 to March 31, 2011 102,722 54,568 23,030

Equity price risk Equity price risk is the risk that the fair values of equity securities decrease as the result of changes in the levels of equity indices and the value of individual stocks. The prices of these investments are monitored based on their current fair values.

Sensitivity analysis Before taking into account the effect of taxes, equity as of March 31, 2013 and 2012 would either decrease or increase by P=0.85 million and P=1.45 million, respectively, had the indices in MAC shares changed by 0.38% in 2013 and 0.59% in 2012. The impact on the Group‟s equity already excludes the impact of transactions affecting profit or loss.

Liquidity risk Liquidity risk arises from the possibility that the Group may encounter difficulties in raising funds to meet commitments from financial instruments (e.g., long-term obligations) or that a market for derivatives may not exist in some circumstances.

The Group‟s objectives to manage its liquidity profile are: (a) to ensure that adequate funding is available at all times; (b) to meet commitments as they arise without incurring unnecessary costs; (c) to be able to access funding when needed at the least possible cost; and (d) to maintain an adequate time spread of refinancing maturities.

The tables below summarize the maturity analysis of the Group‟s financial liabilities based on contractual undiscounted payments (principal and interest):

As of March 31, 2013

>1-<2 >2-<3 >3-<4 >4-<5 >5 <1 Year Years Years Years Years Years Total (In Thousands) Accounts payable and accrued expenses P=18,864,794 P=− P=− P=− P=− P=− P=18,864,794 Notes payable 11,207,931 − − − − − 11,207,931 30,072,725 − − − − − 30,072,725 Obligation under finance lease 8,137,608 2,766,016 2,090,910 2,089,232 2,087,555 9,519,655 26,690,976 Other long-term liabilities 3,817,199 6,989,858 2,944,909 − − − 13,751,966 Other liability (under “Accrued expense” and “Other noncurrent liabilities”) (Note 16) 414,007 34,494 − − − − 448,501 Derivative instruments: Contractual receivable (1,286,298) − − − − − (1,286,298) Contractual payable 1,129,255 − − − − − 1,129,255 Fuel derivatives 139,449 (158,926) − − − − (19,477) 12,351,220 9,631,442 5,035,819 2,089,232 2,087,555 9,519,655 40,714,923 P=42,423,945 P=9,631,442 P=5,035,819 P=2,089,232 P=2,087,555 P=9,519,655 P=70,787,648

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As of March 31, 2012

>1-<2 >2-<3 >3-<4 >4-<5 >5 <1 Year Years Years Years Years Years Total (In Thousands) Accounts payable and accrued expenses P=17,345,250 P=− P=− P=− P=− P=− P=17,345,250 Notes payable 6,004,578 − − − − − 6,004,578 23,349,828 − − − − − 23,349,828 Obligation under finance lease 2,856,528 7,478,072 1,817,010 1,107,826 1,105,894 4,022,916 18,388,246 Other long-term liabilities 3,778,578 3,460,781 2,577,414 3,090,733 − − 12,907,506 Other liability (under “Accrued expense” and “Other noncurrent liabilities”) (Note 16) 414,012 414,013 34,518 − − − 862,543 Derivative instruments: Contractual receivable (792,175) − − − − − (792,175) Contractual payable 649,935 − − − − − 649,935 Fuel derivatives (248,717) − − − − − (248,717) 6,658,161 11,352,866 4,428,942 4,198,559 1,105,894 4,022,916 31,767,338 P=30,007,989 P=11,352,866 P=4,428,942 P=4,198,559 P=1,105,894 P=4,022,916 P=55,117,166

The Group‟s total financial liabilities due to be settled currently amounting to P=42.42 billion and P=30.01 billion as of March 31, 2013 and 2012, respectively, include liabilities aggregating to P=30.07 billion and P=23.35 billion, respectively, that management considers as working capital. Accounts payable and accrued expenses of P=18.86 billion and P=17.35 billion, as of March 31,2013 and 2012, respectively, and due to related parties of P=10.00 million as of March 31, 2011, include liabilities that are payable on demand but are expected to be renegotiated in the future. For the other liabilities amounting to P=12.35 billion and P=6.66 billion, as of March 31, 2013 and 2012, respectively, management expects to settle these from the Group‟s cash to be generated from operations.

The following tables summarize the Group‟s financial assets used to manage liquidity risk:

As of March 31, 2013

>1-<2 >2-<3 >3-<4 <1 Year Years Years Years >4-<5 Years >5 Years Total (In Thousands) Cash P=2,466,464 P=– P=– P=– P=– P=– P=2,466,464 Loans and receivables: Cash equivalents 1,020,331 – – – – – 1,020,331 Receivables - net 7,355,870 – – – – – 7,355,870 P=10,842,665 P=– P=– P=– P=– P=– P=10,842,665

As of March 31, 2012

>1-<2 >2-<3 >3-<4 <1 Year Years Years Years >4-<5 Years >5 Years Total (In Thousands) Cash P=2,630,045 P=– P=– P=– P=– P=– P=2,630,045 Loans and receivables: Cash equivalents 350,900 – – – – – 350,900 Receivables - net 6,672,588 – – – – – 6,672,588 P=9,653,533 P=– P=– P=– P=– P=– P=9,653,533

Counterparty risk The Group‟s counterparty risk encompasses issuer risk on investment securities, credit risk on cash in banks, time deposits and security deposits, and settlement risk on derivatives. The Group manages its counterparty risk by transacting with counterparties of good financial condition and selecting investment grade securities. Settlement risk on derivatives is managed by limiting aggregate exposure on all outstanding derivatives to any individual counterparty, taking into

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account its credit rating. PAL also enters into master netting arrangements and implements counterparty and transaction limits to avoid concentration of counterparty risk.

The table below shows the maximum counterparty exposure after taking into account any collateral and other credit enhancements of the Group as of March 31:

2013 Financial Effect of Gross Fair Net Collateral Maximum Value of Exposure to or Credit Exposure Collateral Credit Risk Enhancements Cash in banks and cash equivalents P=3,148,149 P=– P=3,148,149 P=– Receivables - net 7,355,870 1,116,652 6,255,708 1,100,162 Derivative instruments 305,411 – 305,411 – Margin deposits, lease deposits and others 4,812,734 – 4,812,734 – P=15,622,164 P=1,116,652 P=14,522,002 P=1,100,162

2012 Financial Effect of Gross Fair Net Collateral Maximum Value of Exposure to or Credit Exposure Collateral Credit Risk Enhancements Cash in banks and cash equivalents P=2,731,375 P=– P=2,731,375 P=– Receivables - net 6,672,673 1,157,114 5,540,418 1,132,255 Derivative instruments 380,523 – 380,523 – Margin deposits, lease deposits and others 4,255,833 – 4,255,833 – P=14,040,404 P=1,157,114 P=12,908,149 P=1,132,255

Credit risk The Group‟s exposure to credit risk arises from the possibility that agents, financial institutions and other counterparties may fail to fulfill their agreed obligations and that the collaterals held may not be sufficient to cover the Group‟s claims. To manage such risk, the Group, through its Credit and Collection Department, employs a credit evaluation process prior to the accreditation or re-accreditation of its travel and cargo agents. The Group considers, among other factors, the size, paying habits and the financial condition of the agents. To further mitigate the risk, the Group requires from its agents financial guarantees in the form of cash bonds, letters of credit and assignment of time deposits. The carrying value of these collaterals held as of March 31, 2013 and 2012 amounted to P=1.12 billion and P=1.16 billion, respectively.

The Group, to the best of its knowledge, has no significant concentration of credit risk with any counterparty.

Credit quality per class of financial assets The credit quality of receivables is managed by the Group using internal credit quality ratings. High grade accounts consist of passenger and cargo receivables from agents with good financial condition and which management believes to be reasonably assured to be recoverable. Standard grade accounts consist of passenger and cargo receivables from agents with relatively low defaults. Substandard grade accounts, on the other hand, are receivables from agents with history of defaulted payments. Accounts from these agents are consistently monitored in order to identify any potential adverse changes in the credit quality. Receivables from IATA which consist of receivables from other airlines through the IATA clearing house are deemed high grade accounts as the expectation of default is minimal.

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The Group considers its other financial assets as high grade as they consist of accounts with good financial standing and with relatively low defaults.

Past due accounts include those accounts that are past due by a few days. An analysis of past due accounts, by age, is discussed in the succeeding section.

The tables below show the credit quality of receivables and an aging analysis of past due accounts:

2013 Past Due but not Impaired Impaired High Standard Substandard Over 30 Over 60 Over 90 Financial Grade Grade Grade Days Days Days Assets Others Total (In Thousands) General traffic: Passenger P=3,475,043 P=324,889 P=39,609 P=100,986 P=3,683 P=64,282 P=253,651 P=235,441 P=4,497,584 Cargo 469,452 27,497 50,902 19,231 17,267 37,031 136,380 − 757,760 IATA 255,042 − − − − − − − 255,042 Others − − 13,953 982 205 41 26,719 − 41,900 Receivable from related parties − − 124,791 320,470 440,360 331,518 378,778 − 1,595,917 Non-trade* − − 564,998 2,537 1,964 3,028 1,073,729 339,578 1,985,834 Total P=4,199,537 P=352,386 P=794,253 P=444,206 P=463,479 P=435,900 P=1,869,257 P=575,019 P=9,134,037 *Excludes receivables arising from statutory requirements amounting to P3,598,738.

2012 Past Due but not Impaired Impaired High Standard Substandard Over 30 Over 60 Over 90 Financial Grade Grade Grade Days Days Days Assets Others Total (In Thousands) General traffic: Passenger P=1,735,907 P=2,197,534 P=16,014 P=57,102 P=47,743 P=49,846 P=429,168 P=148,939 P=4,682,253 Cargo 593,133 40,487 12,580 7,642 11,249 10,948 171,650 − 847,689 IATA 330,077 − − − − − − − 330,077 Others − − 1,288 1,331 1,030 859 32,930 − 37,438 Receivable from related parties − − 254,641 148,638 65,947 459,823 12,451 − 941,500 Non-trade* − − 291,779 22,369 10,648 1,245 1,088,162 324,238 1,738,441 Total P=2,659,117 P=2,238,021 P=576,302 P=237,082 P=136,617 P=522,721 P=1,734,361 P=473,177 P= 8,577,398 *Excludes receivables arising from statutory requirements amounting to P3,345,202.

28. Financial Instruments

Fair Values of Financial Instruments The table below presents a comparison by category of the carrying amounts and fair values of the Group‟s financial instruments:

2013 2012 Carrying Value Fair Value Carrying Value Fair Value (In Thousands) Financial Assets Cash P=2,466,464 P=2,466,464 P=2,630,045 P=2,630,045 Loans and receivables: Cash equivalents 1,020,331 1,020,331 350,900 350,900 Receivables - net General traffic 4,975,014 4,975,014 5,146,756 5,146,756 Receivables from related parties 1,319,065 1,319,065 884,140 884,140 Non-trade* 970,700 970,700 611,724 611,724 Margin deposits, lease deposits and others 4,812,734 4,807,619 4,255,833 4,262,015 13,097,844 13,092,729 11,249,353 11,255,535

(Forward)

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2013 2012 Carrying Value Fair Value Carrying Value Fair Value (In Thousands) Available-for-sale investments Equity investments: Quoted P=231,029 P=231,029 P=253,355 P=253,355 Unquoted 256,637 256,637 269,368 269,368 487,666 487,666 522,723 522,723 Derivative assets - fair value through profit or loss 305,412 305,412 380,524 380,524 P=16,357,386 P=16,352,271 P=14,782,645 P=14,788,827

Financial Liabilities Financial liabilities carried at amortized cost: Accounts payable and accrued expenses P=18,864,794 P=18,864,794 P=17,345,250 P=17,345,250 Notes payable 11,166,277 11,166,277 5,979,805 5,979,805 Obligations under finance leases 23,912,356 23,912,643 16,399,800 17,392,220 Other long-term debts 13,015,689 13,079,971 11,355,914 10,046,771 Other liability (under “Accrued expenses” and “Other noncurrent liabilities”) 437,823 445,924 802,265 833,048 67,396,939 67,469,609 51,883,034 51,597,094 Derivative liabilities - fair value through profit or loss 237,938 237,938 117,553 117,553 P=67,634,877 P=67,707,547 P=52,000,587 P=51,714,647 *Excludes receivables arising from statutory requirements (net of allowance) amounting to=P761,361 and =P542,213 as of March 31, 2013 and 2012, respectively.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents and receivables The carrying amounts of cash and cash equivalents approximate fair value. The carrying amounts of receivables approximate fair value due to their short-term settlement period.

Other current financial instruments Similarly, the historical cost carrying amounts of miscellaneous deposits, accounts payable and accrued expenses and due to related parties approximate their fair values due to the short-term nature of these accounts.

Equity investments (available-for-sale investments) The fair values of quoted equity investments are based on market prices. Unquoted equity investments are carried at cost (subject to impairment).

Margin deposits, lease deposits and others The fair value of margin deposits, lease deposits and others is determined using discounted cash flow techniques based on prevailing market rates. Discount rates used are 3.47% and 1.36% to 1.99% for March 31, 2013 and 2012, respectively.

Long-term obligations and short-term, fixed rate notes payable The fair value of long-term obligations (whether fixed or floating) is generally based on the present value of expected cash flows with discount rates that are based on risk-adjusted benchmark rates (in the case of floating rate liabilities with quarterly repricing, the carrying value approximates the fair value in view of the recent and regular repricing based on current market rates). The discount rates used for USD-denominated loans ranged from 1.23% to 4.92% and

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1.26% to 4.42% in 2013 and 2012, respectively. The discount rates used for PHP-denominated loans amounted to 5.03% in 2011 (nil in 2012 and 2013). The discount rates used for JPY- denominated loans amounted to 1.35% in 2012 (nil in 2013).

The carrying value of the short-term, fixed rate notes payable approximates its fair value due to the short-term settlement period of the notes (i.e., effect of discounting is minimal).

Derivatives The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

The fair values of fuel derivatives that are actively traded in an organized and liquid market are based on published prices. In the absence of an active and liquid market, and depending on the type of instrument and the underlying commodity, the fair value of fuel derivatives is determined by the use of either present value methods or standard option valuation models. The valuation inputs on these fuel derivatives are based on assumptions developed from observable information, including (but not limited to) the forward curve derived from published or futures prices adjusted for factors such as seasonality considerations and the volatilities that take into account the impact of spot prices and the long-term price outlook of the underlying commodity.

Derivative Financial Instruments The derivative financial instruments set out in this section have been entered into to achieve PAL‟s risk management objectives, as discussed in Note 27. PAL‟s derivative financial instruments are accounted for at fair value through profit or loss.

The following table provides information about PAL‟s derivative financial instruments outstanding as of March 31, 2013 and 2012 and the related fair values:

2013 2012 Asset Liability Asset Liability (In Thousands) Fuel derivatives P=257,374 P=237,897 P=366,270 P=117,553 Currency forwards − − 558 − Structured currency derivatives 48,038 41 13,696 − P=305,412 P=237,938 P=380,524 P=117,553

As of March 31, 2013 and 2012, the positive and negative fair values of derivative positions that will be settled in 12 months or less are classified under “Other current assets” (P=305.41 million in 2013 and P=380.52 million in 2012) and “Accrued expenses” (P=237.94 million in 2013 and P=117.55 million in 2012), respectively. The negative fair values of derivative positions that will settle in more than 12 months are classified under “Other noncurrent assets” (P=160.15 million in 2013 and nil in 2012) and “Other noncurrent liabilities” (P=1.23 million in 2013 and nil in 2012). The derivative asset (liability) balances include amounts arising from derivative settlements that are currently due to PAL which amounted to P=8.23 million and P=40.44 million as of March 31, 2013 and 2012, respectively.

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Fuel derivatives PAL is dependent on jet fuel to run its operations, and jet fuel costs have become a larger portion of PAL‟s expenses due to the increase in all energy prices over the years. Approximately 41.08%, 42.75% and 39.58% of its operating expenses represent jet fuel consumption for 2013, 2012 and 2011, respectively. In order to hedge against adverse market condition and to be able to acquire jet fuel at the lowest possible cost, PAL enters into fuel derivatives. PAL does not purchase or hold any derivative financial instruments for trading purposes.

There are no outstanding fuel derivatives accounted for as cash flow hedges as of March 31, 2013 and 2012.

PAL‟s fuel derivatives not accounted for as cash flow hedges still provide economic hedges against jet fuel price risk. These derivatives include spreads, written calls, swaps, collars, vanilla options, swaptions and other structures with extendible, cancelable or knock-out features. These fuel derivatives are carried at fair values in the consolidated statement of financial position, with fair value changes reported immediately in the consolidated statements of comprehensive income. As of March 31, 2013 and 2012, the outstanding notional amounts of fuel derivative assets and liabilities not accounted for as cash flow hedges totaled 1,740,000 and 480,000 barrels and 480,000 and 290,000 barrels, respectively.

Currency forwards PAL‟s currency forwards are carried at fair value in the consolidated statements of financial position, with the fair value changes being reported immediately in statement of comprehensive income. PAL‟s outstanding currency forwards consist of short term buy USD and sell various currencies (i.e., JPY, SGD, CAD). The aggregate notional amount in USD is equal to nil and $1.02 million as of March 31, 2013 and 2012, respectively. The net positive fair value of these forwards amounts to nil and P=0.56 million as of March 31, 2013 and 2012, respectively.

Structured currency derivatives PAL enters into structured currency derivatives consisting of option structures with combination of long calls and short put. These contracts are carried at fair value in the consolidated statements of financial position and the fair value changes from these derivatives are recognized directly in profit or loss. Outstanding structured currency derivatives as of March 31, 2013 and 2012 are composed of options to buy USD and sell various currencies (i.e., AUD, JPY, CAD and SGD). As of March 31, 2013 and 2012, the contracts have bought and sold options with translated notional amounts of $31.44 million and $27.60 million, and $14.12 million and $17.43 million, respectively. The net fair value of these option structures as of March 31, 2013 and 2012 amounts to P=48.04 million and P=13.70 million, respectively. There are no outstanding structured currency derivatives as of March 31, 2011.

Cash flow hedges For the year ended March 31, 2010, the effective portion of the positive fair value changes on PAL‟s cash flow hedges that were deferred in equity amounted to P=277.08 million (net of tax), which is the effective fair value changes on fuel derivatives previously designated as cash flow hedges and which were preterminated in fiscal year 2009. These amounts were recognized in profit or loss at the same time as the corresponding hedged items are recognized in profit or loss.

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Below is a rollforward of PAL‟s “Cumulative translation adjustments” on cash flow hedges for the year ended March 31, 2011 (in thousands):

Beginning of year P=277,077 Items recognized as other comprehensive income: Transferred to profit or loss* (222,415) Tax effects of items taken directly to or transferred from equity 66,729 Foreign exchange difference (121,391) (277,077) End of year P=− * The amount from fuel derivatives transferred to profit or loss is included in flying operations expense as mark-to-market gain or loss and the amount from interest rate swaps is included as part of financing charges as swap income or cost.

Fair value changes on derivatives The net changes in the fair values of all derivative instruments for the years ended March 31 are as follows:

2013 2012 (In Thousands) Beginning of year P=222,527 P=93,154 Net changes in fair values of derivatives not designated as accounting hedges 146,389 307,189 Fair value of settled instruments** (301,895) (176,233) Foreign exchange difference (7,772) (1,583) End of year* P=59,249 P=222,527 * Excludes balances that are currently due to the Group amounting to =P8.23 million and =P40.44 million as of March 31, 2013 and 2012, respectively. ** Includes fuel derivatives, interest rate swaps, currency forwards and structured currency derivatives.

Fair Value Hierarchy As of March 31, 2013 and 2012, the Group‟s quoted available-for-sale financial investments measured at fair value under the Level 1 hierarchy amounted to P=231.03 million and P=253.36 million, respectively. The Group‟s financial assets measured at Level 2, which consist of derivative assets, amounted to P=305.41 million and P=380.52 million as of March 31, 2013 and 2012, respectively, and financial liabilities measured at Level 2, which consist of derivative liability of P=236.71 million and P=117.55 million as of March 31, 2013 and 2012, respectively. There were no transfers between the levels of fair value hierarchies in 2013 and 2012.

29. Segment Information

The Group has one reportable operating segment, which is the airline business (system-wide). This is consistent with how the Group‟s management internally monitors and analyzes the financial information for reporting to the chief operating decision-maker, who is responsible for allocating resources, assessing performance and making operating decisions.

The revenue of the operating segment are mainly derived from rendering transportation services and all sales are made to external customers.

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Segment information for the reportable segment is shown in the following tables:

For the fiscal year ended March 31, 2013

Adjustments Consolidated Airline and Financial Business eliminations Statement (In Thousands) Revenue P=69,876,559 P=4,094,397 P=73,970,956 Interest income 51,675 32 51,707 Interest expense (1,348,685) 2,697,370 1,348,685 Depreciation, amortization and obsolescence (5,821,727) − (5,821,727) Net loss (1,533,151) (2,104,023) (3,637,174) Reportable segment assets 99,729,687 137,960 99,867,647 Reportable segment liabilities 86,084,148 2,309 86,086,457

For the fiscal year ended March 31, 2012

Adjustments Consolidated Airline and Financial Business eliminations Statement (In Thousands) Revenue P=71,018,762 P=2,986,626 P=74,005,388 Interest income 47,653 68 47,721 Interest expense (1,365,785) − (1,365,785) Depreciation, amortization and obsolescence (6,723,180) − (6,723,180) Net loss (3,914,856) (373,966) (4,288,822) Reportable segment assets 71,528,302 255,568 71,783,870 Reportable segment liabilities 70,775,540 2,284 70,777,824

For the fiscal year ended March 31, 2011

Adjustments Consolidated Airline and Financial Business eliminations Statement (In Thousands) Revenue P=71,442,322 P=2,924,835 P=74,367,157 Interest income 240,091 72 240,163 Interest expense (1,661,570) − (1,661,570) Depreciation and amortization (6,814,978) (37,409) (6,852,387) Net income 2,860,668 132,250 2,992,918 Reportable segment assets 72,270,500 294,890 72,565,390 Reportable segment liabilities 67,176,224 12,138 67,188,362

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The reconciliation of total revenue reported by reportable operating segment to revenue in the consolidated statements of comprehensive income is presented in the following table:

2013 2012 2011 (In Thousands) Total segment revenue of reportable operating segments P=69,928,234 P=71,066,415 P=71,682,413 Nontransport and other revenue 4,094,429 2,986,694 2,924,907 Total revenue P=74,022,663 P=74,053,109 P=74,607,320

The reconciliation of total income (loss) reported by reportable operating segment to total comprehensive income (loss) in the consolidated statements of comprehensive income is presented in the following table:

2013 2012 2011 (In Thousands) Total segment income (loss) of reportable segments (P=1,533,151) (P=3,914,856) P=2,860,668 Add (deduct) unallocated items: Nontransport revenue and other income 4,088,677 2,986,694 2,924,907 Nontransport expenses and other charges (6,292,254) (4,406,241) (2,746,042) Income tax benefit (expense) 99,554 1,045,581 (46,615) Net income (loss) (3,637,174) (4,288,822) 2,992,918 Other comprehensive income (loss) (495,865) (90,489) 105,201 Total comprehensive income (loss) (P=4,133,039) (P=4,379,311) P=3,098,119

The Group‟s major revenue-producing asset is the fleet owned by the Group, which is employed across its route network (see Note 10).

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PAL HOLDINGS, INC. and SUBSIDIARIES Schedule A Financial Assets March 31, 2013 (Amounts in Thousands)

Number of shares Amount shown Income Name of Issuing entity and or principal amount of in the received association of each issue bonds and notes balance sheet and accrued

MacroAsia Corporation 88,000 Php 224,400 Php 5,720 Abacus International Holdings, Ltd. 1,109,495 226,686 - Golf La Moraleja 2 3,846 166,097 Medical Doctors, Inc. 10,164 8,143 - Societe Internationale de Telecommunications (SITA) 30 13,830 - Tanah Merah Country Club (L corp) 1 4,992 - Others 61,852 5,769 - 487,666 171,817

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PAL HOLDINGS, INC. and SUBSIDIARIES Schedule B Amounts Receivable from Directors, Officers and Employees, Related Parties and Principal Stockholders March 31, 2013 (Amounts in Thousands)

Balance at Additions Amounts Amounts Forex Current Non- Balance at Name and Designation of debtor Beg. of Period Collected Written-off Adjustments current End of Period

Various Pilot Trainees - Employees 27,735 8,043 (11,653) - (132) 23,993 - 23,993 Receivable from various employees 2,147 1,553 (365) - 10 1,402 1,943 3,345

29,882 9,596 (12,018) - (122) 25,395 1,943 27,338

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PAL HOLDINGS, INC. and SUBSIDIARIES Schedule C. Amounts Receivable from Related Parties Which are Eliminated during the Consolidation of Financial Statements March 31, 2013

Name and Designation of Balance at beginning Balance at end Additions Amounts collected Amounts written off Current Not Current debtor of period of period

NOT APPLICABLE

Please refer to Note 18 of the Consolidated Financial Statements

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PAL HOLDINGS, INC. and SUBSIDIARIES Schedule D Intangible Assets - Other Assets March 31, 2013

Other changes Charged to cost and Charged to other Description Beginning balance Additions of cost additions Ending Balance expenses accounts (deductions)

NOT APPLICABLE

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PAL HOLDINGS, INC. and SUBSIDIARIES Schedule E Long-term Obligations March 31, 2013 (Amounts in Thousands)

Amount Amount Type of Obligation Shown as Shown as Current Long-term Total Interest Rates Maturity Dates

Obligations under aircraft finance leases 7,597,245 16,315,111 23,912,356 1.89% to 7.96% per anum and Various dates through 2024 3 or 6-month LIBOR plus margin Long-term debts: Secured 2,949,247 5,156,282 8,105,529 7.25% per anum and Various dates through 2016 3-month LIBOR plus margin Unsecured 409,180 4,500,980 4,910,160 2% per anum and Various dates through 2014 3-month LIBOR plus margin 10,955,672 25,972,373 36,928,045

See Note 15 of the Consolidated Financial Statements.

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PAL HOLDINGS, INC. and SUBSIDIARIES Schedule F Indebtedness to Related Parties (Notes Payable and Long-term Obligations) March 31, 2013 (Amounts in Thousands)

Balance at Balance at Name of Related Party Beginning of Period End of Period Remarks

Entities under common control Philippine National Bank Portion of $125 Million Syndicated Loan 1,395,355 1,125,245 Portion of $120 Million Syndicated Loan 1,502,690 954,740 Fortune Tobacco Corporation 1,288,020 818,360 Allied Banking Corporation Portion of $125 Million Syndicated Loan 470,900 379,760 Pili Aircraft Leasing Limited 608,547 557,753 Plaridel Aircraft Leasing Limited 607,430 556,771 Poro Aircraft Leasing Limited 597,384 548,669 6,470,326 4,941,299 Entity under significant shareholder group Bank of Commerce - 4,091,800 to finance pre-delivery payments for various Airbus aircraft

6,470,326 9,033,099

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PAL HOLDINGS, INC. and SUBSIDIARIES Schedule G Guarantees of Securities of Other Issuers March 31, 2013

Name of issuing entity of securities guaranteed by the Title of issue of each class of Total amount guaranteed Amount owned by person Nature of guarantee company for which this securities guaranteed and outstanding for which statement is filed statement is filed

NOT APPLICABLE

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PAL HOLDINGS, INC. AND SUBSIDIARIES Schedule H CAPITAL STOCK MARCH 31, 2013

No. of shares reserved Number of shares held by No. of shares No. of shares issued for options, warrants, Title of Issue authorized * and outstanding conversion and other Related Directors, Officers Others rights Parties and Employees

Common Stock 23,000,000,000 22,421,512,096 - 22,297,280,230 9,000 124,222,866

* The Company‟s BOD and stockholders approved the increase in the authorized capital stock from 20.00 billion divided into 20.0 billion shares at 1 par value per share to 23.00 billion divided into 23.0 billion shares at 1 par value per share in separate meetings held on June 26, 2012 and September 28, 2012, respectively. The increase in authorized capital stock and the amended Articles of Incorporation were approved by the SEC on December 12, 2012. On June 26, 2012, the BOD approved the subscription of Trustmark to 17 billion shares at 1.00 par value per share amounting to 17.00 billion.

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PAL HOLDINGS, INC. Schedule I RECONCILIATION OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION MARCH 31, 2013 (Amounts in Thousands)

Deficit as of March 31, 2012 P 33,872 Add: Net loss during the year closed to retained earnings 4,514 Deficit as of March 31, 2013 P 38,386

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PAL HOLDINGS, INC. & SUBSIDIARIES Schedule J Relationships between & among the Group and its parent March 31, 2013

SMEII is a wholly-owned subsidiary of San Miguel Corporation (SMC). Refer to SMC‟s 17-A as of December 31, 2012 for the entities included in the SMC Group.

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PAL HOLDINGS, INC. & SUBSIDIARIES Schedule K LIST OF PHILIPPINE FINANCIAL REPORTING STANDARDS EFFECTIVE AS AT MARCH 31, 2013

Adopted Not Not Adopted Applicable Framework for the Preparation and Presentation of Financial  Statements Conceptual Framework Phase A: Objectives and qualitative characteristics PFRSs Practice Statement Management Commentary  Philippine Financial Reporting Standards PFRS 1 First-time Adoption of Philippine Financial Reporting  (Revised) Standards Amendments to PFRS 1 and PAS 27: Cost of an Investment  in a Subsidiary, Jointly Controlled Entity or Associate Amendments to PFRS 1: Additional Exemptions for First-  time Adopters Amendment to PFRS 1: Limited Exemption from  Comparative PFRS 7 Disclosures for First-time Adopters Amendments to PFRS 1: Severe Hyperinflation and Removal  of Fixed Date for First-time Adopters Amendments to PFRS 1: Government Loans  PFRS 2 Share-based Payment  Amendments to PFRS 2: Vesting Conditions and  Cancellations Amendments to PFRS 2: Group Cash-settled Share-based  Payment Transactions PFRS 3 Business Combinations  (Revised) PFRS 4 Insurance Contracts  Amendments to PAS 39 and PFRS 4: Financial Guarantee  Contracts PFRS 5 Non-current Assets Held for Sale and Discontinued  Operations PFRS 6 Exploration for and Evaluation of Mineral Resources  PFRS 7 Financial Instruments: Disclosures  Amendments to PAS 39 and PFRS 7: Reclassification of  Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of  Financial Assets - Effective Date and Transition Amendments to PFRS 7: Improving Disclosures about  Financial Instruments Amendments to PFRS 7: Disclosures - Transfers of Financial  Assets Amendments to PFRS 7: Disclosures – Offsetting Financial Not early adopted

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Adopted Not Not Adopted Applicable Assets and Financial Liabilities Amendments to PFRS 7: Mandatory Effective Date of PFRS Not early adopted 9 and Transition Disclosures PFRS 8 Operating Segments  PFRS 9* Financial Instruments Not early adopted Amendments to PFRS 9: Mandatory Effective Date of PFRS Not early adopted 9 and Transition Disclosures PFRS 10* Consolidated Financial Statements Not early adopted PFRS 11* Joint Arrangements Not early adopted PFRS 12* Disclosure of Interests in Other Entities Not early adopted PFRS 13* Fair Value Measurement Not early adopted Philippine Accounting Standards PAS 1 Presentation of Financial Statements  (Revised) Amendment to PAS 1: Capital Disclosures  Amendments to PAS 32 and PAS 1: Puttable Financial  Instruments and Obligations Arising on Liquidation Amendments to PAS 1: Presentation of Items of Other Not early adopted Comprehensive Income PAS 2 Inventories  PAS 7 Statement of Cash Flows  PAS 8 Accounting Policies, Changes in Accounting Estimates and  Errors PAS 10 Events after the Reporting Period  PAS 11 Construction Contracts  PAS 12 Income Taxes  Amendment to PAS 12 - Deferred Tax: Recovery of  Underlying Assets PAS 16 Property, Plant and Equipment  PAS 17 Leases  PAS 18 Revenue  PAS 19 Employee Benefits  Amendments to PAS 19: Actuarial Gains and Losses, Group  Plans and Disclosures PAS 19 Employee Benefits Not early adopted (Amended)* PAS 20 Accounting for Government Grants and Disclosure of  Government Assistance PAS 21 The Effects of Changes in Foreign Exchange Rates  Amendment: Net Investment in a Foreign Operation 

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Adopted Not Not Adopted Applicable PAS 23 Borrowing Costs  (Revised) PAS 24 Related Party Disclosures  (Revised) PAS 26 Accounting and Reporting by Retirement Benefit Plans  PAS 27 Consolidated and Separate Financial Statements  PAS 27 Separate Financial Statements Not early adopted (Amended)* PAS 28 Investments in Associates  PAS 28 Investments in Associates and Joint Ventures Not early adopted (Amended)* PAS 29 Financial Reporting in Hyperinflationary Economies  PAS 31 Interests in Joint Ventures  PAS 32 Financial Instruments: Disclosure and Presentation  Amendments to PAS 32 and PAS 1: Puttable Financial  Instruments and Obligations Arising on Liquidation Amendment to PAS 32: Classification of Rights Issues  Amendments to PAS 32: Offsetting Financial Assets and Not early adopted Financial Liabilities PAS 33 Earnings per Share  PAS 34 Interim Financial Reporting  PAS 36 Impairment of Assets  PAS 37 Provisions, Contingent Liabilities and Contingent Assets  PAS 38 Intangible Assets  PAS 39 Financial Instruments: Recognition and Measurement  Amendments to PAS 39: Transition and Initial Recognition of  Financial Assets and Financial Liabilities Amendments to PAS 39: Cash Flow Hedge Accounting of  Forecast Intragroup Transactions Amendments to PAS 39: The Fair Value Option  Amendments to PAS 39 and PFRS 4: Financial Guarantee  Contracts Amendments to PAS 39 and PFRS 7: Reclassification of  Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of  Financial Assets – Effective Date and Transition Amendments to Philippine Interpretation IFRIC 9 and PAS  39: Embedded Derivatives Amendment to PAS 39: Eligible Hedged Items  PAS 40 Investment Property 

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Adopted Not Not Adopted Applicable PAS 41 Agriculture  Philippine Interpretations IFRIC 1 Changes in Existing Decommissioning, Restoration and  Similar Liabilities IFRIC 2 Members' Share in Co-operative Entities and Similar  Instruments IFRIC 4 Determining Whether an Arrangement Contains a Lease  IFRIC 5 Rights to Interests arising from Decommissioning,  Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities arising from Participating in a Specific Market -  Waste Electrical and Electronic Equipment IFRIC 7 Applying the Restatement Approach under PAS 29 Financial  Reporting in Hyperinflationary Economies IFRIC 8 Scope of PFRS 2  IFRIC 9 Reassessment of Embedded Derivatives  Amendments to Philippine Interpretation IFRIC–9 and PAS  39: Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment  IFRIC 11 PFRS 2- Group and Treasury Share Transactions  IFRIC 12 Service Concession Arrangements  IFRIC 13 Customer Loyalty Programmes  IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding  Requirements and their Interaction Amendments to Philippine Interpretations IFRIC- 14,  Prepayments of a Minimum Funding Requirement IFRIC 16 Hedges of a Net Investment in a Foreign Operation  IFRIC 17 Distributions of Non-cash Assets to Owners  IFRIC 18 Transfers of Assets from Customers  IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments  IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine  SIC-7 Introduction of the Euro  SIC-10 Government Assistance - No Specific Relation to Operating  Activities SIC-12 Consolidation - Special Purpose Entities  Amendment to SIC - 12: Scope of SIC 12 Not early adopted SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by  Venturers SIC-15 Operating Leases - Incentives  SIC-25 Income Taxes - Changes in the Tax Status of an Entity or its  Shareholders

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Adopted Not Not Adopted Applicable SIC-27 Evaluating the Substance of Transactions Involving the Legal  Form of a Lease SIC-29 Service Concession Arrangements: Disclosures.  SIC-31 Revenue - Barter Transactions Involving Advertising Services  SIC-32 Intangible Assets - Web Site Costs 

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PAL HOLDINGS, INC. & SUBSIDIARIES Schedule L Financial Soundness Indicators

31-Mar-13 31-Mar-12

CURRENT RATIO 0.29 0.33

LIQUIDITY RATIO 0.22 0.25

DEBT-TO-EQUITY RATIO 3.49 35.19

ASSET-TO-EQUITY RATIO 7.25 71.35

RECEIVABLE TURNOVER 12.12 13.71

NUMBER OF DAYS SALES IN 30.10 26.69 RECEIVABLES

INTEREST RATE COVERAGE RATIO (1.77) (2.91)

SOLVENCY RATIO 0.05 0.07

PROFITABILITY RATIOS:

PROFIT MARGIN (0.05) (0.06)

RETURN ON ASSETS (0.04) (0.05)

RETURN ON EQUITY (0.26) (3.61)

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