PHI Annual Report March2009 Tcm61 24138

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 COVER SHEET P W - 9 4 S.E.C. Registration Number P A L H O L D I N G S , I N C . (Company’s Full Name) 7 T H 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 . M A K A T I C I T Y (Business Address: No. Street City / Town / Province) SUSAN TCHENG LEE 736-8466 Contact Persons Company Telephone Number 0 3 3 1 1 7 - A Month Day Fiscal Year Month Day Annual Meeting Secondary License Type, If Applicable Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings Total No. of Stockholders Domestic Foreign ------------------------------------------------------------------------------------------------------------------------------ To be accomplished by SEC Personnel concerned File Number LCU Document I.D. Cashier S T A M P S Remarks = pls. use black ink for scanning purposes

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COVER SHEET

P W - 9 4

S.E.C. Registration Number

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

(Company’s Full Name)

7 T H 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 . M A K A T I C I T Y

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

SUSAN TCHENG LEE 736-8466

Contact Persons Company Telephone Number

0 3 3 1 1 7 - A

Month DayFiscal Year

Month Day

Annual Meeting

Secondary License Type, If Applicable

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

------------------------------------------------------------------------------------------------------------------------------

To be accomplished by SEC Personnel concerned

File Number LCU

Document I.D. Cashier

S T A M P S

Remarks = pls. 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 141OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended March 31, 2009

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

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

5. Philippines 6.(SEC Use Only)

(Province, country or other jurisdiction of incorporation or organization)

Industry Classification Code:

7.7/F Allied Bank Center, 6754 Ayala Avenue, Makati City 1200

Address of principal office PostalCode

8. (632) 816-3421 local 3453 / 736-8466

Registrant’s telephone number, including area code

9. Not Applicable

Former name, former address, former fiscal year, if changed since last report

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

Title of Each ClassNumber of Shares of Common Stock Outstanding

and Amount of Debt Outstanding

Common Stock 5,421,512,096 shares

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

Yes [ X ] No [ ]

12. Check whether the registrant:

(a) has filed all reports to be filed by Section 17 of the SRC and SRC Rule 17 thereunder orSection 11 of the Revised Securities Act (RSA) and RSA Rule 11 (a)-1 thereunder andSection 26 and 141 of the Corporation Code of the Philippines during the preceding 12months (or for such shorter period that the registrant was required to file such reports);

Yes [ X ] No [ ]

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

Yes [ X ] No [ ]

13. Aggregate market value of the voting stock held by non-affiliates of the registrant isPHP 372,671,595 as of March 31, 2009.

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 in 1930 as “Baguio Gold Mining Company”. In1996, the Securities and Exchange Commission approved the change in the Company’s name to “BaguioGold Holdings Corporation” and the change in its primary purpose to that of a holding company.

On May 30, 1997, the stockholders approved the increase in the Company’s authorized capital stock from 200 million common shares to 4 billion common shares both at P1 par value per share. On April13, 1998, the stockholders amended the increase in the Company’s authorized capital stock from 4billion common shares to 2.8 billion common shares and 1.2 billion preferred shares both at P1 parvalue per share. On August 30, 1999, the stockholders further amended the authorized capital stock 

from 2.8 billion common shares and 1.2 billion preferred shares to 400 million common shares at P1 parvalue per share this was approved by the SEC on October 2, 2000.

On July 26, 2006 and September 19, 2006, the Board of Directors (BOD) approved the increase inauthorized capital stock of the Company from P400 million divided into 400 million common shareswith a par value of P1 per share to P 20 billion divided into 20 billion common shares.

On August 17, 2006, the Board of Directors (BOD) approved the acquisition of the following holdingcompanies which collectively control 84.67% of Philippine Airlines (PAL); Pol Holdings, Inc., CubeFactor Holdings, Inc., Ascot Holdings, Incorporated, Sierra Holdings & Equities, Inc., Network Holdings & Equities, Inc., and Maxell Holdings Corporation.

On January 19, 2007 the Securities and Exchange Commission (SEC) approved the increase inauthorized capital stock and change in corporate name of Baguio Gold Holdings Corporation to PALHoldings, Inc.

On August 13, 2007, the Company acquired directly from the Six Holding Companies 8,823,640,223shares in PAL, which is equivalent to 81.6% of the issued and outstanding common shares in theAirline. At the same time, it acquired from the Five Holding Companies 50,591,155 shares in PRHoldings, Inc., equivalent to 82.3% of the outstanding shares in PR Holdings, Inc. Both acquisitionswere made by way of a dacion en pago, whereby the total acquisition price of PHP 12,550 million forthe shares in the Airline and PR Holdings, Inc. was satisfied by an equivalent reduction of the liabilityowning to the Company from the Six Companies.

On August 14, 2007, the Company transferred its shares in each of the Six Holding Companies to

Trustmark Holdings Corporation.

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

On October 17, 2007, the Securities and Exchange Commission approved the equity restructuring of theCompany. This allowed the Company to wipe out the deficit as of March 31, 2007 amounting toP253.73 million using the Additional Paid-In Capital amounting to P4,029.3 billion subject to thecondition that the remaining additional paid-in capital will not be used to wipe out losses that may be

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incurred in the future without prior approval of the SEC.

b) Description of Subsidiaries

Philippine Airlines, Inc.

Philippine Airlines, Inc. (PAL), a corporation organized and existing under the laws of the Republic of the Philippines, was incorporated on February 25, 1941. It is the national flag carrier of the Philippinesand its principal activity is to provide air transportation for passengers and cargo within and outside thePhilippines.

PAL continues to fly to the most popular domestic jet routes and the international and regional pointsthat are either most visited by Filipinos or provide a good source of visitors to the Philippines. As of 31March 2009, PAL’s route network covered 29 points in the Philippines and 31 internationaldestinations.

PR Holdings, Inc.

PR Holdings, Inc. (PR) was organized by a consortium of investors for the purpose of bidding for and

acquiring the shares of stock of PAL in accordance with the single-buyer requirement of the biddingguidelines set by the seller, the National Government of the Republic of the Philippines. PR acquiredon 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 capitalstock and retirement of some of its shares in exchange of PAL shares to retiring stockholders as returnof capital.

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

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

revenues of each product or service:

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

PAL's operations for FY2008-09 are described as follows:

During the year, the Airline carried an average of 24,508 passengers (14,699 domestic and 9,809 international)and 297 tons of cargo (166 tons domestic and 131 tons international) per day.

Operations Summary: System wide

FY 2008-2009 (In Thousand PHP)

Domestic  International  SystemTotal Transport Revenues 16,417,412 57,659,878 74,077,290% to Total System wide Revenues 22.2 % 77.8 % 100.0 %

Aside from the core business, the Airline also generated revenues from ancillary businesses including groundhandling, inflight sales, and flight & ground training. These non-transport operations generated PHP 611.1million in net revenues, contributing 0.8% to the Airline's total net revenues.

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Net Revenues by Route

Based on FY2008-2009 results, the revenue contribution by route is shown below:

Transpacific & Canada 32.6%Asia & Australia 45.2%Total International 77.8%

Total Domestic 22.2%Total System 100.0%

International Passenger Services

As of March 31, 2009, PAL’s international route network covered 31 cities (including 7 under jointservice/codeshare arrangements with other international carriers) in 16 countries.24 on-line points : Guam, Honolulu, Las Vegas, Los Angeles, San Francisco, Vancouver,

  Melbourne, Sydney, Fukuoka, Nagoya, Osaka, Tokyo, Pusan, Seoul,  Hongkong, Macau, Beijing, Shanghai, Xiamen, Taipei, Bangkok, Saigon,

Singapore, Jakarta

7 points under joint Abu Dhabi, Bahrain, Bandar Seri Begawan, Doha, Dubai, Kota Kinabalu,

service/codeshare Kuala Lumpur arrangements :

Transpacific

During the year, PAL flew an average of 25 flights a week to North America utilizing B747-400s and A340-300s: 10 times weekly non-stop flights to Los Angeles; 8 times weekly non-stop services to San Francisco; and 7times a week to Vancouver, five of which fly onward to Las Vegas and back. Technical stops either in Guam orHonolulu are required on the return flights of Transpacific services at certain times of the year to compensate foradverse wind conditions.

PAL also operated regular thrice-weekly direct service to Honolulu. Guam was served 5 times a week.

The Airline is entitled to fly to 33 other US cities for unlimited frequencies under certain terms and conditions of the Philippines-US bilateral agreement.

 Asia and Australia

PAL operated 181 departures per week out of Manila and Cebu to 9 countries in Asia and Australia. The Airlineflew 35 times a week to Hongkong; 28 times a week to Singapore; 16 times a week to Seoul; 14 times a week toBangkok; 12 times a week to Tokyo; 9 times a week to Taipei; 7 times a week each to Nagoya, Osaka, Saigon,Shanghai, and Xiamen; 5 times a week each to Beijing and Fukuoka; and 4 times a week each to Macau andPusan. Jakarta is served 4 times a week via Singapore and three flights direct. PAL also operated 4 timesweekly service on the Manila-Melbourne-Sydney-Manila route and 3 times weekly service on the Manila-Sydney-Melbourne-Manila route. 

Domestic Passenger Services

PAL's domestic network covered 29 cities and towns in the Philippines. In FY2008-2009, it flew about 3.9billion ASKs on its domestic routes, which represented 16.6% of the Airline's total capacity. PAL operated allits jet aircraft (B747-400, A340-300, A330-300, A320-200, and A319-100) on its domestic routes. It serves thefollowing domestic destinations: Bacolod, Butuan, Cagayan de Oro, Cebu, Cotabato, Davao, Dipolog,Dumaguete, General Santos, Iloilo, Kalibo, Laoag, Legazpi, Manila, Puerto Princesa, Roxas, Tacloban,Tagbilaran, and Zamboanga. Aside from these, PAL Express serves an additional 10 domestic points includingBusuanga, Calbayog, Catarman, Caticlan, Ormoc, Ozamiz, San Jose, Surigao, Tuguegarao, and Virac, usingturbo prop aircraft (Bombardier Q300 and Q400). PAL Express flew approximately 0.3 billion ASKs (1.3% of the Airline's total capacity) during the year.

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Joint Services and Code Share Agreements

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

PAL maintains codeshare agreements with Malaysia Airlines (in place since February 1999) covering a total of 11 weekly flights between Kuala Lumpur and Manila, Kota Kinabalu and Manila, Kota Kinabalu and Cebu, andKuala Lumpur and Cebu; with Emirates Airlines (in place since September 1999) on 10 times weekly non-stopflights between Dubai and Manila; with Cathay Pacific (in place since November 2001) on daily servicesbetween Hongkong and Cebu; with Qatar Airways (in place since August 2002) on 11 times weekly servicebetween Doha and Manila; with Royal Brunei Airlines (in place since March 2004) on 6 times weekly flightsbetween Bandar Seri Begawan and Manila; with Gulf Air (in place since March 2006) on 10 times weeklyservice between Bahrain and Manila; and with Etihad Airways (in place since October 2007) on daily servicesbetween Abu Dhabi and Manila.

PAL's daily services between Manila and Saigon are operated under a codeshare agreement with VietnamAirlines (in place since July 2001). PAL also has a similar agreement with Garuda Indonesia (since March 2001)on PAL operated flights between Manila and Jakarta. PAL codeshares with Air Philippines (in place since May

2002) on regular domestic services, which the latter operates.

Frequent Flyer Programs

The PAL Mabuhay Miles provides opportunities for travel rewards through accumulation of mileage creditsearned 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, touroperators, cruise services, insurance, car rentals, and other merchandise companies. PAL Mabuhay Miles has awebsite "www.mabuhaymiles.com", which provides access to account information, and details on promotionsand offers.

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

(ii) Distribution methods of products or services

PAL maintains a total of twelve (12) sales and ticket offices in Manila, twenty four (24) in other cities in thePhilippines, and twenty nine (29) located in foreign stations. There are thirty three (33) general sales agents inselected international points and twelve (12) domestic sales agents who handle the promotions and sales of PAL'sproducts and services.

The Airline's website, "philippineairlines.com", has a booking facility which provides interactive booking of flights and ticket purchase. It also contains additional web pages that feature detailed descriptions of PALdestinations and a calendar of destination festivities. Functionalities include fares and tour modules, onlinetraining registration, route maps, flight schedules, dropdown lists, and online cargo booking. Real time flightinformation of all PAL flights may also be accessed by logging on to the PAL website.

Flight information via SMS/text messaging continue to be available to passengers. Cellphone subscribers candownload the exact flight departure and arrival information through text messaging.

(iii) Status of any publicly-announced new product or service

PAL completed the reconfiguration and refurbishment of two of its B747-400s. Aside from the new interiors,state-of-the-art seats and the latest in inflight entertainment were installed in the aircraft. The rest of the Airline'sB747-400s will also have the same features and improvement.PAL Mabuhay Lounges are available in selected international and domestic stations for Mabuhay class

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passengers and Mabuhay Miles Elite and Premier Elite members. Passengers can unwind, dine, and freshen upin these facilities before boarding their flights.

The PAL Swingaround and PALakbayan are the Airline's tour programs, which continue to offer holidaypackages in PAL's international and domestic destinations.PAL's RHUSH (Rapid Handling of Urgent Shipments) is the airport-to-airport cargo service, which provides thefastest way to ship cargo domestically or overseas. It offers high priority in cargo, guaranteed space, and quick 

acceptance and release time.

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

methods of competition

PAL continues to maintain a strong market share in its international routes despite competition with flag carriersof the host countries where PAL flies and with the 'fifth freedom' carriers, which fly to the Philippines en route totheir final destinations.

The following table shows main competitors and PAL's total market and capacity share per route.

PAL's Market and Capacity Share

  Route Market 

Share

Capacity

Share

 Airline Competitors

Transpacific 36.6% 34.5% Northwest Airlines, Air Canada, Korean Airlines, Asiana Airlines,

  Japan Airlines, Cathay Pacific, Eva Airways, China Airlines,

Continental Airlines

 Asia and 

 Australia

31.6% 32.2% Japan Airlines, Cathay Pacific, Singapore Airlines, Thai Airways,

Korean Airlines, Asiana Airlines, China Airline, Eva Airways,

Qantas Airways, Air Niugini, China Southern Airlines, Dragon Air,

China Eastern Airlines, Air Macau, Royal Brunie, Kuwait Airways,

 Northwest Airlines, Malaysia Airlines, Cebu Pacific, Jetstar Asia

PAL competes with the biggest carriers in the airline industry. Northwest Airlines and Continental Airlines areamong the worlds largest in fleet size. Singapore Airlines and Cathay Pacific are among the worlds biggest interms of passengers carried. China Airlines, Korean Airlines, Thai Airways, and Qantas Airways are in the list of leading carriers in the Asia and Pacific region. Most of these international airlines belong to the largest alliancesin the industry (including the Star Alliance, Sky Team and One World).

PAL held a 45.2% share in the domestic market in the fiscal year ending March 2009. Competitors include CebuPacific, Air Philippines, Zest Air, and Seair.

The continuous enhancement of products and services, competitive fares, and an excellent safety record, enablesPAL to hold its market leadership. Over the Transpacific, PAL has the advantage of providing the only nonstop

service to mainland USA and Canada. The distinct Filipino flavor in the PAL inflight service, which appealsstrongly to the Filipino ethnic passengers, is another advantage over the non-Filipino carriers.

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

PAL’s jet fuel suppliers are: Air BP Limited, Petron Corporation, Pilipinas Shell Petroleum Corporation,Chevron Products Company, PT Pertamina, World Fuel Services (Singapore) Pte. Ltd., Win Both InternationalCorporation, PTT Public Company Limited, China National Aviation Fuel Supply Co., Ltd., Japan EnergyCorporation, Shanghai Pudong International Airport Aviation Fuel Supply Co., Ltd., Pacific Fuel TradingCorporation, Hyundai Oilbank Company Limited, S-Oil Corporation, Singapore Petroleum Company Ltd.,

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Sinopec (HK) Petroleum Company Limited, Lubwell Corporation, Safeair Corporation, SK networks Co., Ltd.Subic Bay Energy Company Limited.

PAL’s inflight catering requirements are provided by its own inflight kitchen in Manila for all outgoing flights.For incoming flights, the major suppliers include Flying Foods and Hacor in the United States, SingaporeAirport Terminal Services Ltd. (SATS) in Singapore and Tokyo Flight Kitchen in Narita.

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

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

(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 toConsolidated Financial Statements.

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

Maintenance

PAL has a ten year Technical Services Agreement (TSA) with Lufthansa Technik Philipines (LTP), whichstarted in September 2000 for the maintenance and overhaul requirements of its fleet. PAL's AircraftEngineering Department undertakes planning, monitoring and control of all maintenance activities and technicalcompliance of aircraft, engines and accessories with airworthiness standards and industry accepted standards forsafety, reliability, and customer acceptability.

Man-hour rates for maintenance requirements are negotiated with LTP in accordance with the terms of the PAL-LTP Technical Service Agreement (TSA). Maintenance materials and parts are sourced from the original

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

Development Plans

The airline industry is experiencing slow business as a result of the global recession and the upswing in fuelprices, PAL was not spared from these circumstances. With these challenges still prevailing, PAL plans to initiateprograms geared toward revenue generation, asset and cost management, and business efficiency.

The Airline will evaluate its route network and venture into other route possibilities. New service programs tofurther enhance the customer experience will also be implemented. PAL also plans to maintain or furtherimprove its on-time performance.

New management systems will be adopted for operational efficiency. PAL will also control costs withoutcompromising safety and customer satisfaction.

Franchise

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

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

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b. franchise tax of two percent (2%) of the gross revenue derived from non transport , domestictransport and outgoing international transport operations, whichever is lower, in lieu of all othertaxes, 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 lossincurred in any year up to five years following the year of such loss (see Note 23). In addition, the payment of 

principal, interest, fees, and other charges on foreign loans obtained by PAL, and all rentals, interests, fees andother 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 forthe 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 orthe E-VAT Act of 2005. The E-VAT law took effect on November 1, 2005 following the approval on October19, 2005 of Revenue Regulation (RR) No. 16-2005 which provides for the implementation of the rules of the E-VAT law. Among the relevant provisions of RA No. 9337 are the following:

a. The franchise tax of PAL is abolished;

b. PAL shall be subject to the corporate income tax;

c. PAL shall remain exempt from any taxes, duties, royalties, registration license, and other feesand charges, as may be provided by the Company’s franchise;

d. Change in corporate income tax rate from 32% to 35% for the next three years effective on November 1,2005, and 30% starting on January 1, 2009 and thereafter;

e. Change in unallowable deduction for interest expense from 38% to 42% of interest income subject to finaltax for three years effective on November 1, 2005, and 33% starting on January 1, 2009; and

f. Increase in the VAT rate imposed on goods and services from 10% to 12% effective on February 1, 2006.

On November 21, 2006, the President signed into law RA No. 9361, which amends

Section 110(B) of the Tax Code. This law, which became effective on December 13, 2006, provides that if theinput tax, inclusive of the input tax carried over from the previous quarter exceeds the output tax, the excessinput tax shall be carried over to the succeeding quarter or quarters . The Department of Finance through theBureau of Internal Revenue issued RR No. 2-2007 to implement the provisions of the said law. Based on theregulation, the amendment shall apply to the quarterly VAT returns to be filed after the effectivity of RA No.9361, except VAT returns covering taxable quarters ending earlier than December 2006.

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

Airline operations are regulated by the Philippine Government through the Civil Aeronautics Board (CAB) withregard to new routes, tariffs, and schedules; through the Civil Aviation Authority of the Philippines (CAAP)formerly Air Transport Office (RP-ATO) for aircraft and operating standards; and through airport authorities for

airport slots. PAL also conforms to the standards and requirements set by different foreign civil aviationauthorities of countries where the airline operates.

In coordination with the different government air transport agencies - the CAAP and the Department of Transportation and Communications (DOTC) - PAL initiates improvement programs for the facilities in thecountry's domestic and international airport.

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

The Company strictly complies with and adheres to existing and probable government regulations.

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 xi) Estimate of the amount spent during each of the last three fiscal years on research and

development activities, and if applicable the extent to which the cost of such activities are borne

directly by customers;

NOT APPLICABLE

xii) Cost and effects of compliance with environmental laws

PAL has fully complied with the following major environmental laws:

1. Republic Act (RA) 8749 “Clean Air Act” - No cost to PAL for FY2008-2009 due monthlyair sampling done by fuel supplier (Petron).

2. DENR Administrative Order (AO) No.34 “Revised Water Usage and Classification”.No cost to PAL for period covering FY2008-2009

3. DENR Administrative Order No. 35 “Revised Effluent Regulations of 1990”Cost: P56,000 annually for water quality analysis; approx P1,200,000/annum for electricityconsumption of sewage treatment plant operation P720,000/annum for enzyme used to dissolve greasein the catering/kitchen area, control odor and enhance STP biological reaction.

4. Presidential Decree No. 1152 “Philippine Environmental Code”- No cost to PAL for periodcovering FY2008-2009

5. Presidential Decree No. 1586 “Establishing an Environmental Impact Assessment System”DENR Administrative Order No. 96-37. Cost not determined yet due completion of checklist for ECC(Environmental Compliance Certificate) application for fuel farm at MBC (Maintenance BaseComplex).

6. Republic Act No. 6969 “Toxic and Hazardous Waste Management”. DENR Administrative Order No.90-29. Cost: approximately P432,000 for disposal of hazardous wastes; approx P45,000 for disposal of busted fluorescent lamps.

7. Presidential Decree No. 1067 “The Water Code of the Philippines”. Cost: P5,005.50 for renewal of annual Water Permit.

8. Republic Act 9003 “The Ecological Waste Management Act of 2000”. No cost to PAL due solidwastes with recyclable materials are purchased by lot..

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

1. Regulatory compliance2. Resource utilization3. Waste generation reduction4. Environmental cost reduction5. Improved public image and community relations6. Improved positive perception of regulators and NGOs7. Enhancing PAL’s commitment to continually improve its environmental

performance in all aspects of its operations8. Appreciation and recognition from the DENR for PAL’s participation in Earth Day , Environment

Month and International Coastal Cleanup celebrations.9. Cost cutting through energy and resource conservation.

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

The Company’s employees are only the 10 directors who are employed by the company. Thereare no regular employees. The Company does not have any plan of hiring employees within theensuing twelve months.

PAL Employees :

As of March 31, 2009 PAL has a total workforce of 8,052 as follows:

Classification Number of Employees

Ground Employees

Philippine 5,757

Foreign 230

Flight Crew

Pilots 472

Cabin Crew 1,593

PAL recognizes two local labor unions, one for the rank & file ground employees and another for the cabin crew.

In addition, it also recognizes foreign labor unions in the United States, Singapore and Japan.

Of the total ground employees and flight crew, 4084 and 1509 respectively are covered by a collectivebargaining agreement (CBA). The CBA for the local rank & file ground employees is under moratorium whilenegotiations are ongoing for Singapore (expired in December 2008) and Japan (expired in May 2009). The CBAnegotiations for the cabin crew which expired in July 2007 is likewise ongoing.

There has been no strike or threatened industrial action for the last 10 years.

In FY 2008-2009, PAL gave its employees all benefit entitlements in accordance with the stipulations in therespective collective bargaining agreements.

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

being undertaken to identify, assess and manage such risks.

Investment risk – the Company has available-for-sale investment which has unpredictablemarket 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 fuelis harmful to the business.

Regulatory risk – PAL is subject to extensive regulations which may restrict growth oroperations 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 affectedthe overall air travel of passengers.

Financial market risk- fluctuations of interest and currency rates.

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

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Procedures undertaken to manage risks

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

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

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

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

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

Item 2. Properties

The Company does not own any property. It has an annual lease contract for its office space with amonthly rental of P19,200. The lease contract was renewed for another two years which expires in May2010. The Company has no plans of acquiring any property in the next twelve months.

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

The Company’s operating fleet as of March 31, 2009 consists of :

Owned:Bombardier DHC-8-300 3Bombardier DHC-8-400 5

Capital leases:Boeing 747-400 4Airbus 340-300 4Airbus 330-300 8Airbus 320-200 10

Operating leases:Boeing 747-400 1

Airbus 320-200 8Airbus 319-100 4

Total 47

Aircraft covered by capital lease agreements that transfer substantially all the risks and give rights equivalent toownership 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 termobligations in the Consolidated Statements of Financial Position. The capital leases provide for quarterly orsemi-annual installments, generally ranging over 6 to 15 years including balloon payments for certain capitalleases at the end of the lease term, at fixed rates and/or floating interest rates based on certain margins overthree-month or six-month London Interbank Offered Rate (LIBOR), as applicable.

Aircraft covered by operating lease agreements contain terms ranging from 5 to 11 years. Total operating

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lease payments amounted to PHP1,992.7 million for 2009 and PHP 1,890.9 million in 2008..

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

A. Domestic Properties

1. Bacoor, Cavite 126 sq.m. (house and lot)

2. Maasin, Iloilo City 3,310 sq.m & 9,504 sq.m . (parcel of land)3. Somerset Millenium Makati City 39 sq.m. (condominium unit)4. Makati City 853 sq.m. & 879 sq.m. (parcel of land)5. Malate 266.40 sq.m. (lot)6. Ozamiz City 10,000 sq.m. (parcel of land)7. Quezon City 627 sq.m. (parcel of land)8. Bacolod City 200,042 sq.m. (parcel of land)9. Mandurriao, Iloilo City 1,300 sq.m. & 1,700 sq.m. (parcel of land)10. 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 & 3,701 sq.ft. (condominium units)3. San Mateo, Daly City, California 1,760 sq.ft. & 1,193 sq.ft. (condominium units)4. Singapore 85 sq.m.; 126 sq.m. & 68 sq.m. (office units)5, Singapore 65 sq.m. (shop unit)6. Sydney, Australia 177 sq.m. & 229 sq.m. (office units)

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

1. Zamboanga 300 sq.m.2. Cebu 1,215 sq.m.3. Puerto Princesa 192 sq.m.4. Iloilo 1,000 sq.m.5. Butuan 192 sq.m.

6. Kalibo 192 sq.m.7. Legaspi 192 sq.m.

The land where these buildings are situated are leased from the Civil Aviation Authority of the Philippines(CAAP).

PAL’s existing ground facilities service the Airline’s own requirements and some of the requirements of theforeign airlines that fly to the Philippines. These major ground facilities as of April 2009 are as follows:

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

The facility serves as the home for the Airline’s Training and Development Department, with the Airline’s seventraining units, namely: Corporate & Commercial Training Sub-department, Flight Deck Crew Training Sub-department, Inflight Services Training Division, Human Factor Division, PAL Personality DevelopmentDivision, External Training & Development Services, and Training Administration & Logistics Division.

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

The PLC boasts of new and modern training equipment and facilities, such as 13 classrooms, two (2) computer-

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based training (CBT) rooms; one (1) cockpit mock-up trainer (CMT) room as follows: one (1) flightmanagement system (FMS-747) and three (3) flight management guidance system trainer (FMGS-Airbus);Frasca 172R simulator room; inflight service simulators for B747, A340, B737 and cabin safety simulator; agrooming room, a speech laboratory for personality development; and five (5) computer training rooms. Supportfacilities include an auditorium/ projection room, museum, gym, canteen and a medical clinic. The PLC buildingwith a total floor area of 6,787.56 sq. m. is leased from the Tan Yan Kee Foundation. A 4,328.80 sq.m. lot spaceis used for parking and driveway, with a 1,539.00 sq.m. annex parking.

The PAL Inflight Center (IFC) along Baltao St., Pasay houses PAL’s inflight kitchen which is capable of producing more than 3.7 million meals annually to service PAL’s catering requirements. PAL held 48% marketshare in terms of meal tray production while 52% was the combined share of MacroAsia and Miascor.

PAL IFC has a total land area of 22,093.00 sq.m. of which 68% is allocated to Catering Services and theremaining 32% for Cabin Services, warehouse and other offices. The land where the building stands is leasedfrom the ManiIa International Airport Authority (MIAA).

The modern NAIA Centennial Terminal 2 in Pasay is where the Airline’s entire flight operation is housed inone terminal for the first time since it was founded 68 years ago. This gives PAL a genuine hub for its operationswhere passengers from domestic flights connect seamlessly onto international flights and vice versa.

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

It is also the home of the Airport Services Group and other support offices, i.e., Operations Control Center, LineMaintenance International Division, Aircraft Interior Maintenance Division, Flight Dispatch, Ticket Office,Treasury, Safety and Medical office. 

Various airport support offices servicing PAL’s foreign airline customers were retained at the NAIA 1, togetherwith the Sampaguita Lounge. The areas occupied by PAL are leased from MIAA. 

The PAL Cargo Terminal (PCT) near NAIA 1 in Pasay which houses PAL’s domestic and internationalcargo operations and sales offices at the NAIA measures 5,727.55 sq.m.(warehouse) and 1,050.88 sq.m. (officespace). 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 extensivecomputer systems in the Philippines. It houses two (2) Mainframe Computers, one hundred twenty (120) Unixsystems, and PC servers. These equipment run the sophisticated systems like Reservations and DepartureControl which are used in the daily operation of the airline. The DCB is also the center of applicationsdevelopment and maintenance, housing close to one hundred twenty (120) analysts and programmers. It is the

hub of PAL’s domestic network, connecting the various PAL ticket offices and airports. The DCB, comprising3,588.35 sq.m., is leased from the MIAA. 

Other major ground facilities include a Maintenance Base Complex (MBC) in Nichols, Pasay City is composedof the North and South sectors which refer to the areas north and south of Andrews Avenue, respectively. Itcovers an area of 104,531.87 sq.m. (open) and 1,768.01 sq.m. (covered) land space leased from the MIAA. Italso covers a Local Area Network (LAN) and Wide Area Network (WAN) that links together all of PAL’s

domestic on-line and office stations as well as the other major offices in Metro Manila.

MBC houses the Operations Group. Other facilities located in the MBC include Flight Operations and the B737Flight Simulator Building, Aircraft Engineering, Airworthiness Management, Communications Operations, FuelManagement, Employee Benefits, Medical, Sports Complex, Corporate Logistics & Services, OperationsAccounting, Ground Property, Material Sales Management, Comat Handling, Safety, Security, GroundEquipment Management, Communications Maintenance, Network Management & Telecom System,Construction and Facilities Management, Reservations Control Center/Telesales, General Materials Warehouse,

Central Finance Records Warehouse, Aircraft Records Warehouse and other support offices. MBC also housesthe K-9 Kennel Facility.

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The Airlines’ head office is located at the PNB Financial Center along President Macapagal Avenue, Pasay City.It houses the Executive Offices, Commercial Group, Finance Group, Legal, Corporate Secretary’s Office,Human Resources, Corporate Audit, Corporate Communications, Government Relations, and the Domestic andInternational Ticket Offices. It is being proposed that the Data Center be transferred to the same location. Totalarea being leased from the PNB is 15,080.08 sq.m.PAL’s properties and equipment include its aircraft fleet,various parcels of land, and buildings.

Item 3. Legal Proceedings

PAL is currently being investigated by the U.S. Department of Justice based in Washington D.C. forpossible violation of U.S. Anti-trust laws for both passenger and cargo services covering the periodJanuary 1, 1999 to July 11, 2007, which carries for each violation a fine not exceeding PHP 4,842.2million or imprisonment not exceeding 10 years or both.

Except for the foregoing, the Company and its subsidiaries or affiliates is not involved in, nor any of itsproperties the subject of any legal proceeding and has no knowledge of any contemplated proceeding byany government authorities involving an amount exceeding PHP 2,085.4 million (10% of its current

assets) for fiscal year ended March 31, 2009. 

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

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal yearended March 31, 2009.

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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 andlow sales prices for each quarter for the past three years are as follows:

2009 HIGH LOW

Second QuarterPhp3.10

Php2.55

First Quarter 3.00 2.902008

Fourth Quarter 3.50 2.10Third Quarter 3.80 3.25Second Quarter 4.80 3.60

First Quarter 6.30 4.202007

Fourth Quarter 8.50 5.10Third Quarter 8.20 4.10Second Quarter 4.75 3.30First Quarter 4.20 3.10

As of July 10, 2009, the latest practicable trading date, PAL Holdings’ was traded at P 2.85.

2. Holders

The number of shareholders of record as of June 30, 2009, was 6,865 and commonshares outstanding as of the same date were 5,421,512,096.

The top 20 stockholders as of June 30, 2009 are as follows :

Stockholders’ Name No. of Shares Held % to Total1 Trustmark Holdings Corp. 5,297,280,230 97.7075%2 Pan Asia Securities Corp. 40,699,176 0.7507%3 Wonderoad Corporation 10,251,679 0.1891%4 Anthony M. Te 5,144,000 0.0949%5 Emmanuel P. Te 5,000,000 0.0922%6 Cynthia Manalang 4,139,000 0.0763%7 Citiseconline.com, Inc. 2,699,375 0.0498%

8 Tower Securities, Inc. 1,955,157 0.0361%9 Mandarin Securities Corp. 1,393,907 0.0257%10 R. Coyiuto Securities, Inc. 1,389,692 0.0256%11 Ansaldo, Godinez & Co., Inc 1,358,902 0.0251%12 BPI Securities Corp. 1,341,774 0.0247%13 Triton Securities Corp. 1,223,561 0.0226%14 R. S. Lim & Company, Inc. 1,154,000 0.0213%15 Abacus Securities Corp. 1,028,779 0.0190%16 Quality Investment & Securities Corp 1,005,378 0.0185%17 Luys Securities Company, Inc. 866,276 0.0160%

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18 Intra-Invest Securities, Inc. 776,212 0.0143%19 Investors Securities, Inc. 768,121 0.0142%20 Irene Imee Lo Ting 686,000 0.0127%

* The Company has no preferred shares.

3. Dividends

a.) The Company did not declare any cash dividends during the past three years in the periodended March 31, 2009. The Board of Directors may declare dividends only from the surplusprofits arising from the business of the Company and in accordance with the preferencesconstituted in favor of preferred stock when and if such preferred stock be issued andoutstanding.

b.) There are no other restrictions that limit the ability to pay dividends on common equity orthat are likely to do so in the future.

4. Recent Sales of Unregistered or Exempt Securities, Including Recent Issuance of SecuritiesConstituting an Exempt Transaction (for the past three years)

On 22 January 2007, the Company issued 5,021,567,685 new shares to Trustmark HoldingsCorporation (Trustmark) as subscription to the increase in capital pursuant to a debt-to equitytransaction.

On 01 March 2007 the Securities and Exchange Commission confirmed that the issuance of these new shares to Trustmark is exempt from the registration requirements of Section 8 of SRC.

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

Restatement to Philippine Peso

In line with the adoption of PAS 21, The Effects of Changes in Foreign Currency Rates , PAL determinedthat its functional currency is the US dollar. On May 20, 2005, the Philippine Securities and ExchangeCommission 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 financialposition 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 Philippinepeso.

Consolidation

The consolidated financial statements referred to consist of the financial statements of the Company and itssubsidiaries. The financial statements of the subsidiaries are prepared as of March 31 of each year usingconsistent accounting policies as those of the Company. Companies included in the consolidation are PALand PR Holdings, Inc. As a result of the restructuring in fiscal year 2008 (see note 2 of the notes toconsolidated financial statements), the Company still owns 84.67% of PAL, through a direct ownership in81.57% of PAL’s shares and an indirect ownership in 3.10% of PAL’s shares through an 82.33% directownership in PR.

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Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to beconsolidated from the date on which control is transferred out of the Group. All intercompany accounts andtransactions with subsidiaries are eliminated in full.

Results of Operations

a.) FY 2009 vs. FY 2008

The Company’s consolidated comprehensive loss amounted to PHP12,260.1 million for the fiscal yearended March 31,2009 a significant decline from the previous years’ comprehensive loss of PHP 528.5million.

Total revenues for the current fiscal year amounted to PHP 75,311.0 million or 14% increase from last year’ssame period figure of PHP 66,317.8 million. The increase in revenues by PHP 8,993.2 million was broughtabout mainly by the increase in passenger revenues which increased by 16% due to higher net yield per RevenuePassenger Kilometers (RPK) and by the number of passengers carried. Revenues also include cargo, recoveriesarising from surcharges; interest income; and other income earned during the period. In FY 08-09 “OtherIncome” included among others the foreign exchange gain recognized as a result of the depreciation of thePhilippine peso versus the US dollar from PHP 44.2068 per US$1.00 in 2008 to PHP 46.1994 per US$1.00 in

2009.

Total consolidated expenses increased by 30% or PHP 20,118.5 million from the previous year’s total of PHP 67,678.0 million. The growth in expenses was primarily due to higher expenses related to flying operations,maintenance, and aircraft & traffic servicing offset by the decrease in other expenses..

The increase in flying operations by 64% was attributable mainly to higher fuel costs. The rise in fuel cost by88.2% over last year’s figure of PHP 20,637.6 million was a result of the increase in average fuel price per barrelfrom US$ 89.52 in 2008 to US$ 123.80 in 2009 and higher fuel consumption as a result of the increase in flights.Fuel cost also includes the recognition of losses as a result of the early termination of several hedging contractsbefore maturity date.

Higher aircraft, engine and component repair costs had the effect of increasing maintenance expenses by 11% orPHP 957.8 million from a total of PHP 8,999.6 million of the previous fiscal year.

As a result of more flights operated in 2009 aircraft & traffic servicing expenses increased by 9.7 % orPHP 777.2 million above last year’s figure of PHP 8,009.3 million.

In FY 08-09, PAL recognized a net foreign exchange translation gain of PHP 731.1 million and this has beenincluded as part of “Other Income” under “ Revenues”. However, in fiscal year 2008 PAL incurred a net foreignexchange translation loss of PHP 1,001.7 million and this was recognized as part of “Other Expenses”. Thisbasically explains the reduction in Other Expenses from 2008 to 2009 by 31% and at the same time increased“Other Revenues” in 2009 by 30%. These foreign exchange gains and losses arise as a result of the movement of the Philippine peso and other currencies vis a vis the US dollar. Changes in the fair valuation of outstandingderivative instruments that did not qualify as cash flow hedges also contributed to the decrease in “Other

Expenses” by PHP 108.6 million.

The reassessment done by PAL on deferred tax assets and liabilities on all deductible temporary differences inaccordance with PAS 12 , Income Taxes, resulted in the  recognition of a deferred income tax of PHP 473.3million for the period.

In compliance with the amended provisions of PAS 1, Presentation of Financial Statements, the Companyrecognized a total other comprehensive income of PHP 698.7 million. This primarily reflects themovements of all non-owner changes in equity, which showed a significant decline in value of derivativeassets by 183% resulting from the fair valuation of outstanding fuel hedges recognized in equity and in the

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net changes in fair value of available-for-sale investments which declined by 297%. The increase inrevaluation increment due to appraisal also decreased by 30%. The Company recognized a foreignexchange translation gain amounting to PHP 1,902.4 billion in 2009. This is due to the significant increasein exchange rates from Php 41.756 as of March 31, 2008 to PHP 48.422 as of March 31, 2009

b.) FY 2008 vs. FY 2007

The Company’s consolidated comprehensive income for the fiscal year 2008 amounted to (PHP 528.5)million or a decline of 72% from the previous fiscal year’s of PHP 5,807.6 million. As a result of the earlyadoption of Amendments to PAS 1, Presentation of Financial statements, the Company recognized a foreignexchange translation loss amounting to PHP 2.4 billion in 2008 and PHP 755.7 million in 2007. This is dueto the reduction in exchange rates from Php 48.217 as of March 31, 2007 to PHP 41.756 as of March 31,2008.

Consolidated revenues for the current fiscal year amounted to PHP 66,317.8 million or 4.9% lower thanlast year’s same period figure of PHP 69,716.7 million. The decrease in revenues was mainly due to theeffect of the appreciation of the Philippine peso vis a vis the US dollar from PHP 50.4825 per US$ 1.00 in2007 to PHP 44.2068 per US$ 1.00 in 2008. Had there been no change in the exchange rate , there wouldhave been an increase in revenues of PHP 6,016.4 million brought about mainly by the increase in

passenger revenues. The increase in passenger revenues was due to higher net yield per Revenue PassengerKilometers (RPK) and by the number of passengers carried, offset by the decrease in other income. Thedecrease in other income by 46% was a result of the PHP 3,139.6 million credit memorandum receivedfrom Boeing with respect to the Settlement Agreement and Release entered into with Boeing on October30, 2006; and the recognition as other revenue in November 2006 the amount of PHP 855.6 millionrepresenting the difference between the face amount of the claims by Manila International AirportAuthority (MIAA) and fair value of the amount of the liability under the compromise agreement enteredinto with MIAA. Revenues also include cargo, recoveries arising from surcharges; interest income; andother income earned during the period.

Consolidated expenses grew by 4.0% from the previous year’s total of PHP 65,156.7 million to PHP67,678.0 million in the current fiscal year. The increase was mainly due to higher expenses related topassenger service, reservation & sales, general & administrative and other expenses offset by the decreasein flying operations, maintenance and aircraft & traffic servicing costs.

Passenger service expenses increased by 11 % .The increase was brought about by the growth in volume of passengers carried as well as improvements implemented by PAL in cabin crew benefits.

Higher selling expenses recognized related to the above transportation service provided as well as in thecost incurred under the frequent flyer program resulted to the upward movement in reservation and salesexpenses by 4%.

Improvements in employee benefits implemented by PAL resulted in higher general and administrativeexpenses by 23% in 2008.

The effect of the changes in the fair value of outstanding derivative instruments as well as the continuedappreciation of the Philippine peso versus the US dollar had the effect of increasing “Other Expenses” byPHP 3,138.3 million or 407% higher compared with the previous fiscal year’s figure of PHP 771.2 million.

The substantial appreciation of the Philippine peso vis a vis the US dollar ,on the other hand , had the effectof reducing the following expenses :

There was a slight decline in flying operations by 0.2% or PHP 50.9 million over last year's total of PHP30,277.6 million. Had there been no change in the exchange rate, higher fuel, cockpit crew cost and aircraftlease charges would have been recognized. The rise in fuel cost was a result of higher fuel consumption and

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the escalation in average fuel price per barrel from US$ 79.81 in 2007 to US$ 89.52 in 2008. Improvementsin pilot’s pay implemented by PAL contributed to the increase in cockpit crew costs. The phase in of four(4) A319 and two (2) A320 aircraft likewise resulted in higher lease rentals.

Maintenance expense decreased by 10% or PHP 1,019.3 million as compared with the previous year'sfigure of PHP 10,018.9 million mainly on account of the appreciation of the Philippine peso vis a vis the USdollar. Again, had the exchange rate remained at 2007 levels, aircraft, engine and component repair costswould have increased by 2.6% or PHP 258.5 million.

There was a 2.6 % reduction in aircraft & traffic servicing cost over last year's total of PHP 8,219.5 millioninspite of the increase in number of flights operated in 2008. Had the exchange rate remained the same,there would have been an increase in aircraft & traffic servicing cost by 11.3%.

As a result of the reassessment done on deferred tax assets and liabilities on all deductible temporarydifferences in accordance with PAS 12, Income Taxes the Group recognized a deferred benefit from incometax of PHP 1,697.9 million for the period.

Financial Condition

FY 2009 vs FY 2008

The Company’s consolidated total assets as of March 31, 2009, amounted to PHP 95,713.5 million or anincrease of 12% from the previous years’ balance of PHP 85,185.3 million. The increase was mainly due to theeffect of the depreciation of the Philippine peso vis a vis the US dollar from PHP 41.756 per US$1.00 in 2008 toPHP 48.422 per US$1.00 in 2009. Had there been no change in the exchange rate, the total assets balance wouldhave decreased by 3% or PHP 2,479.0 million. The difference was primarily brought about by the downwardmovement in total current assets by PHP 6,662.3 million or 24% as compared with the March 31, 2008 balanceof PHP 27,516.1 million. This was attributable to the decline in cash and cash equivalent balance by 61% due toservicing of debts, payments made for security deposits used as collateral for certain derivative instruments,purchase of turbo-prop aircraft and advance payments made for the purchase of B777-300ER and A320 optionaircraft. The receivable balance also dropped by 11% from the March 31, 2008 figure of PHP 5,756.9 million as

a result of lower passenger and cargo ticket sales coupled with the effect of the provision for doubtful accountrecognized during the fiscal year. A lower fuel inventory balance as of March 31, 2009 contributed significantlyto the decline as well of the “expendable parts, fuel, materials & supplies” account by 37%. The aforementioneddecreases on the other hand were offset by the increase in other current assets by 58% mainly as a result of theadditional security deposits made to collateralize certain derivative instruments.

Total noncurrent assets rose by PHP 17,190.6 million as a result of the net increase in property and equipmentbalance by PHP 16,804.0 million resulting from the acquisition of four (4) A320 aircraft delivered in April ,July, October and December 2008 as part of PAL’s refleeting program; and eight (8) turbo-prop aircraft (threeQ300s and five Q400s) delivered in May, June, July and August 2008 used in PAL’s “PAL Express” flights. Theincrease was also due to the pre delivery payments made for the B777-300ER scheduled for delivery in fiscalyears 2010 to 2011 and A320 option aircraft for delivery on the 3

rdand 4

thquarter of 2010.The conversion from

a US dollar based amount of the Property and Equipment account to Philippine Peso, also had the effect of increasing the 2009 balance by PHP 7,917.6 million. The above increases were offset in part by the drop in othernon current assets by 11% from the March 31, 2008 balance of PHP 3,841.0 million principally due to the effectof the remeasurement to fair value of certain financial assets and derivative instruments.

Total liabilities increased by 32% or by PHP 22,788.4 million over the March 31, 2008 balance of PHP 70,577.2million. Of this increase, PHP 10,002.1 million was brought about by the effect of the depreciation of thePhilippine peso vis a vis the US dollar in converting the US dollar based figures to Philippine peso. The rest wasattributable to the availment of additional uncollateralized short term notes payable from several local banks aswell as additional long term obligations in support of the acquisition of the turboprops and the Airbus A320

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aircraft under capital lease. This increased long-term liabilities-net of current portion by 38%. Theremeasurement to fair value of certain derivative instruments also had the effect of increasing the accruedliabilities balance grouped under current liabilities and in the other liabilities balance grouped under reserves andother liabilities.

As of March 31, 2009 the Company’s stockholders’ equity balance amounted to PHP 2,348.0 million, down byPHP 12,260.1 million or 84% from the March 31, 2008 balance of PHP 14,608.1 million. The significant decline

was brought about mainly by the net loss recognized during the fiscal year 2008-2009.

FY 2008 vs FY 2007

As of March 31, 2008, the Company’s consolidated assets amounted to PHP 85,185.3 million or 8% lowerthan the March 31, 2007 balance of PHP 92,837.9 million. The decline was brought about mainly by the netdecrease in current and non current assets by 12% and 7% respectively.

The decrease in consolidated current assets by 12% over the March 31, 2007 balance of PHP 31,095.9million was mainly due to the effect of the appreciation of the Philippine peso vis a vis the US dollar fromPHP 48.217 per US$ 1.00 in 2007 to PHP 41.756 per US$ 1.00 in 2008. Had there been no change in theexchange rate, current assets balance would have increased by 2% or PHP 699.1 million.

The increase was mainly a result of the upward movement in other current assets due to the recognition of current derivative assets resulting from the remeasurement to fair value of certain financial assets as well asderivative instruments and prepayments made to repair entity on aircraft reconfiguration and engine repairs.These increases, however, were partly reduced by the decrease in cash & cash equivalents by 28% due toservicing of debts and the downward movement of available for sale investments by 86% resulting from theremeasurement to fair value of certain financial assets.

The decrease in consolidated noncurrent assets by 7% was mainly due to the effect of the appreciation of the Philippine peso vis a vis the US dollar. Again, had the exchange rate remained at 2007 levels,noncurrent assets would have increased by 6% brought about by the net increase in property and equipmentbalance by PHP 928.1 million resulting from the acquisition of four A320 aircraft, which PAL took deliveryin April, July and November 2007 as part of its refleeting program. This increase was in part offset by the

early retirement of one (1) A320-200 aircraft from PAL’s operating fleet as a result of the total damageincurred by the aircraft while landing at a domestic point. The depreciation expense recognized during theperiod also had the effect of reducing the carrying values of these assets. Following the transfer of PAL’sprincipal offices to its current business address and the transfer of a domestic airport to a new location, thevacated property as well as the owned land where the old airport was located that was vacated by PAL werereclassified from property and equipment to investment properties in the amount of PHP 1,472.3 million,thus the increase in investment properties by 2015%. Likewise, the effect of the remeasurement to fair valueof certain financial assets and derivative instruments increased other non current assets by 34 % ascompared with the March 31, 2007 figure of PHP 2,869.2 million.

Consolidated liabilities decreased by 23% from PHP 91,442.9 million in 2007 to PHP 70,577.2 million asof March 31, 2008.This is mainly due to the decrease in advances by 97% and long-term obligations-net of current portion by 20%. The decrease in advances was the result of the Group’s reorganization in 2007.

On August 2, 2007, the Parent Company assumed an additional PHP 3.08 billion out of the PHP 23.12billion liabilities of the Holding companies to Trustmark. This totaled to PHP 12.12 billion, which was usedto acquire the PAL and PR Holdings’ shares from the 6 Holding Companies via dacion en pago. Thisresulted in a liability to Maxell Holdings Corp., one of the Holding Companies amounting to PHP 431.6million as of March 31,2008. Trustmark agreed to convert its receivable of PHP 3.08 billion intoadditional paid-in capital of the Parent Company. Since the 6 Holding Companies no longer form part of theconsolidation, the remaining advances of PHP 11 billion remained in the books of the holding companies.

PAL’s increase in current liabilities was in part due to the availment of additional uncollateralized shortterm notes payable from several local banks. This increased Notes payable by 177%. The remeasurement to

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fair value of certain derivative instruments also had the effect of increasing the accrued liabilities groupedunder current liabilities by 19%. During the year, PAL consistently paid its outstanding debts, whichdecreased the current portion of long-term obligations by 33%.

At the end of the fiscal year, long-term obligations recognized under Noncurrent Liabilities, dropped by 20%. This downward movement is net of additional obligations incurred during the same period as a result of the acquisition of four (4) A320 aircraft under capital leases. Further, the Company’s reassessment of its

deferred tax position resulted in a reduction of deferred tax liabilities by 100% as of March 31, 2008.

As of March 31, 2008, the Company’s stockholders’ equity amounted to PHP 14,608.1 million. Thesignificant increase of 947% is mainly attributable to the increase in Additional paid-in capital by 335%.This was due to the disposal of the Parent Company of its shares in the 6 Holding companies to Trustmark.The release of the investments in the Holding Companies to Trustmark was accounted for as a disposal of “legal rights” to those Holding Companies as said investee companies did not have assets that werederecognized in the process other than the investment in shares of stock of PAL that has no carrying valueat consolidated level. The disposal relieved the Group with the liabilities that were settled as theywereassumed by Trustmark, the ultimate parent company. Accordingly, this transaction was accounted for as anequity transaction where the reduction in consolidated liabilities was treated as an additional equityinvestment (or additional paid-in capital of the Parent Company) by Trustmark.

TOP FIVE KEY PERFORMANCE INDICATORS OF PAL

Mission Statement Key Performance Indicator Measurement Methodology

To maintain aircraft with thehighest degree of airworthiness, reliability andpresentability in the most cost-effective manner

Aircraft Maintenance Check Completion

Number of checks performedless number of maintenancedelays over number of checksperformed

To conduct & maintain safe,reliable, cost & effective flightoperations

Number of aircraft relatedaccidents/incidents

By occurrence and monitoringby Flight Operations SafetyOffice

To achieve On-TimePerformance on all flightsoperated

Percentage Deviation fromIndustry Standards (OTPParticipation)

Number of flights operated lessnumber of flights delayed overtotal flights operated

To provide safe, on time,quality and cost effectiveinflight service for totalpassenger satisfaction

Number of safety violationsincurred by cabin crew

Number of incidents of safetyviolation incurred by cabin crewper month

To maximize revenue

generation in passenger andcargo sales through increasedyields by diversifying marketsegments and efficientmanagement of seat inventoryand cargo space

Net Revenues generated from

passengers and cargoes carried

Percentage Deviation from

Budget/Forecasted Revenues

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

03/31/09 03/31/08

Profitability Factors:

1. Return on Total Assets

Net loss/Average Total Assets -14.37% 0.01%

2. Percentage of Operating Income

Operating Income/Total Revenues -11.82% 5.99%

Asset Management:

3. Receivable Turnover

Net Sales/Average Trade Receivables10.37 10.21

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

# of Days in a year/Receivable turnover35.18 35.85

Financial Leverage:

5. Interest Coverage RatioEarnings before interest & taxes/Interest Charges -2.33 0.64

In April 2009, PAL’s Board of Directors authorized management to finalize the terms of the sale of one of itsparcel of land with a carrying value of PHP 346.4 million. This property is included under the caption “OtherCurrent Assets” in the Statement of Financial Position as of March 31, 2009.

i. In May 2009, Trustmark purchased certain unsecured claims against PAL from various debt holdersamounting to PHP 5,264.9 million in face value. These claims are carried in the books at amortized costamounting to PHP 4,825.1 million. In June 2009, PAL purchased these unsecured claims from Trustmark at thesame price that they were bought by Trustmark.. Trustmark Holdings Corporation is the parent company of PALHoldings,Inc. which owns 84.67% of PAL.

ii. There are no known material off-balance sheet transactions, arrangements, obligations (includingcontingent obligations), and other relationships of the Company with unconsolidated entities or otherpersons created during the reporting period.

iii. Commitments for capital expenditures

As part of its refleeting program PAL signed in December 2006 operating lease agreements for the lease of two(2) brand new Boeing 777-300ER aircraft scheduled to be delivered in November 2009 and January 2010.

Also, on October 30, 2006 a purchase agreement with Boeing was finalized wherein PAL placed a firm order forfour (4) new Boeing 777-300ER aircraft scheduled to be delivered in fiscal years 2010 to 2012. Subsequent tofiscal year 2009, the Parent Company and Boeing agreed to reschedule the deliveries of these aircraft from theiraforementioned original delivery schedules to fiscal years 2013 and 2014.

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PAL on July 28, 2008 exercised its right to purchase two (2) of the five (5) option Airbus 320-200 aircraftscheduled for delivery in fiscal year 2011.

PAL also embarked on a comprehensive renovation of its long-range wide body fleet, highlighted by thereconfiguration of the passenger cabin from a tri-class to bi-class layout, along with a major upgrade of theinteriors and amenities. As of March 31, 2009 the passenger cabin of the two (2) B747-400 aircraft have alreadybeen reconfigured.

iv. There are no known trends, events or uncertainties that have had or that are reasonably expected to havematerial favorable or unfavorable impact on net sales or revenues or income from continuing operations.

v .There are no significant element of income that did not arise from continuing operations.

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

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

1. Cash and cash equivalents- H- (61%) V- (11%)

2. Available-for-sale- investment- current- H- (100%)3. Short-term investments- H- 100%4. Receivables-net- H- (11%)5. Expendable parts, fuel, materials & supplies- H- (37%)6. Other current assets- H- 58%7. Property, plant and equipment- cost- H- 35% V- 11%8. Property, plant and equipment- at appraised values- H- 47%9. Deposits on aircraft leases- H- 24%10. Deferred tax assets- H- 82%11. Available-for-sale- investment- non-current- H– (11%)12. Investment properties- H- (5%)13. Other non-current assets- H- (11%)14. Notes payable- H- 100%

15. Current portion of long term liabilities- H- 92%16. Accounts payable- H- (36%)17. Accrued expenses- H- 31%18. Income tax payable- H- (100%)19. Unearned transportation revenue- H- (15%)20. Long-term liabilities- net of current portion- H- 38% V- 8%21. Accrued employee benefits payable- H- 30%22. Reserves and other non-current liabilities- H- 34%23. Other components of equity- H-98% V- (9%)24. Minority interest- H- (82%)25. Revenue –H-14%26. Expenses – H-30% V- 15%

27. Income (loss) before income tax- H- (818%) V- (15%)28. Provision for income tax- H- 135%29. Total Other Comprehensive income- H- 233%30. Total Comprehensive loss- H- 2220% V- (15%)

All of these material changes were explained in the management’s discussion and analysis of financial condition and results of operations stated above.

vii. PAL experiences a peak in holiday travel during the months of January, April, May, June andDecember.

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B. Information on Independent Accountant and other Related Matters

(1) External Audit Fees and Services

a.) Audit and Audit-Related Fees

1. The audit of the Company’s annual financial statements or services that are normallyprovided by the external auditor in connection with statutory and regulatory filings or engagements for 2009and 2008..

Yr. 2009 - Estimated at P 450,000 exclusive of out-of-pocket expenses for the audit of 2009financial statements.

Yr.2008 - P 439,514 audit fee and out-of-pocket expenses for the audit of 2008 financialstatements.

b.) Tax Fees – None

Yr. 2008 - none

c.) All Other Fees – None

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

Upon recommendation and approval of the audit committee, the appointment of the external auditoris being confirmed in the annual stockholders’ meeting. On the other hand, financial statementsshould be approved by the Board of Directors before its release.

Item 7. Financial Statements

See accompanying Index to Financial Statements and Supplementary Schedules

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

There are no changes in, and disagreements with the registrant’s accountants on any accounting andfinancial disclosure during the three most recent fiscal years in the period ended March 31, 2009 or inany subsequent interim period.

PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers of the Registrant

1. Directors, Executive Officers, Promoters and Control Persons

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

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Name Age Citizen-ship

Position /Term of Office/Period Served

Business Experience/Other Directorshipwithin the last 5 years

Lucio C. Tan 74 Filipino Chairman/ 1 year/ 1 year Chairman of Philippine Airlines, Inc.,Asia Brewery Inc., Himmel IndustriesInc., Fortune Tobacco Corp., Tanduay

Holdings, Inc., Tanduay Distillers, Inc.,Eton Properties Philippines, Inc.,Grandspan Development Corp., LuckyTravel Corp.; Director of Phil. NationalBank, majority stockholder of AlliedBanking Corp., Century Park Hotel andThe Charter House, Inc.

Jaime J. Bautista 52 Filipino President and Director/ 1year/ 1 year

President and Chief Operating Officer of Philippine Airlines, Inc.; President of Basic Capital Investments Corp. and CubeFactor Holdings, Inc; President and Boardof Trustees Member of University of theEast; Director of MacroAsia Corp.,

Macroasia-Eurest Catering Services andMacroasia Menzies Airport ServicesCorp.; Board of Trustees Member of UERM Medical Center Foundation

Mariano C.Tanenglian

69 Filipino Treasurer & Director/ 1 year/ 1 year

Vice Chairman of Philippine Airlines,Inc., Director and Treasurer of AsiaBrewery Inc., Basic Holdings Corp.,Charter House Inc., Himmel IndustriesInc., Fortune Tobacco Corp., TanduayDistillers, Inc., Tanduay BrandsInternational, Inc., and GrandspanDevelopment Corp.; Former Director

Treasurer of Allied Banking Corp., EtonProperties Philippines, Inc., and TanduayHoldings, Inc.

Harry C. Tan 63 Filipino Director/ 1 year/ 1 year Chairman of Tobacco Board; ViceChairman of Eton Properties Philippines,Inc., Tanduay Holdings, Inc., and LuckyTravel Corp.; Managing Director of Charter House; Director of Allied BankingCorp., Basic Holdings Corp., PhilippineAirlines Inc., Fortune Tobacco Corp.,Asia Brewery Inc., Tanduay Distillers,Inc., and Foremost Farms, Inc., Presidentof Century Park Hotel and Landcom

Realty Corp.,Macario U. Te 79 Filipino Director/ 1 year/ 1 year Chairman of MT Holdings Corp.;

previously director of PalawanConsolidated Mining Corp., TradersRoyal Bank and Traders Hotel, GotescoLand, Alcorn Petroleum & MineralsCorp., Associated Devt Corp. Pacific RimOil Resources Corp., Link WorldConstruction Development Corp., SuriconResources Corp.; Former Director of 

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Philippine National Bank, PNBRemittance Center Inc., PNB GeneralInsurers Inc., PNB Holding Corproration,PNB Investment, Ltd, PNB Capital &Investment Corp., PNB IFL and PNBEurope PLC., Oriental Petroleum &

Minerals Corp., Waterfront Phils,Beneficial PNB Life Corp., BulawanMining Corp., Nissan North Edsa.

Wilson T. Young 52 Filipino Director/ 1 Year/ 1 Year Director and President of TanduayHoldings, Inc, Tanduay BrandsInternational Inc., Director of EtonProperties Philippines, Inc., Flor De CanaShipping, Inc, Air Philippines Corp., andVictorias Milling Co., Inc.; ,Vice-Chairman, Board of Trustees of UERMMedical Center, Board of TrusteesMember of University of the East, Chief Operating Officer of Tanduay Distillers,

Inc., Asian Alcohol Corp., AbsolutChemicals, Inc. and Total Bulk Corp.

Lucio K. Tan Jr. 43 Filipino Director/ 1 year/ 1 year Director/EVP of Fortune Tobacco Corp.;Director of Allied Bankers InsuranceCorp., Philippine Airlines, Inc., PhilippineNational Bank, Tanduay Holdings, Inc.,Tanduay Brands International, Inc., AirPhilippines Corp., MacroAsiaCorporation, Lucky Travel Corp. and EtonProperties Philippines, Inc.; EVP of Foremost Farms, Inc.

Michael G. Tan 43 Filipino Director/1 year/ 1 year Director/Chief Operating Officer of Asia

Brewery, Inc., Director of Allied BankingCorporation, Allied Bankers InsuranceCorp., Philippine Airlines, Inc., PhilippineAirlines Foundation, Inc., TanduayHoldings, Inc; Air Philippines Corp.,Lucky Travel Corp., and Eton PropertiesPhilippines, Inc.

Juanita Tan Lee 66 Filipino Director/1 year/ 1 year Director of Eton Properties Philippines,Inc.; Corporate Secretary of AsiaBrewery, Inc., Asian Alcohol Corp.,Charter House, Inc., Dominium Realty &Construction Corp., Far East MolassesCorp., Foremost Farms, Inc., Fortune

Tobacco Corp., Fortune Tobacco Int’lCorp., Grandspan Development Corp.,Himmel Industries, Inc., Landcom RealtyCorp., Lucky Travel Corp., ManufacturingServices & Trade Corp., MarcuencoRealty & Development Corp., TanduayDistillers, Inc., Tanduay BrandsInternational Inc., Tobacco RecyclersCorp., Total Bulk Corp., Zebra Holdings,Inc.; Assistant Corp. Secretary of Basic

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Holdings Corp., and Tanduay Holdings,Inc.

Antonino L.Alindogan, Jr.

70 Filipino Independent Director/ 1 year/ 1 year

Chairman of An-Cor Holdings, Inc.;Independent Director of Phil. Airlines,Inc., Rizal Commercial Banking Corp.,Eton Properties Philippines, Inc., House of 

Investments, Inc.; President of C55, Inc.;Former Chairman of Development Bank of the Philippines (DBP); FormerConsultant for Microfinance of DBP;Former Member of the Monetary Board of Bangko Sentral ng Pilipinas.

Enrique O. Cheng 75 Filipino Independent Director/ 1 year/ 1 year

Chairman of Landmark Corporation;Chairman/President of Philippine TradeCenter; Director/Vice-Chairman of Hideco Sugar Milling, Co., Inc.;Independent Director of PhilippineAirlines

Ma. Cecilia L.

Pesayco

56 Filipino Corporate Secretary/ 1 year/ 

1 year

Corporate Secretary of Allied Banking

Corp., Allied Savings Bank, EtonProperties Philippines, Inc., TanduayHoldings Inc., Air Philippines, Corp., EastSilverlane Realty and Dev’t Corp..

Susan T. Lee 38 Filipino Chief Finance Officer/ 1year/ 1 year

AVP and Asst. CFO of TanduayHoldings, Inc.

2. Significant Employees

There are no other significant employees who are expected by the registrant to make a significantcontribution to the business.

3. Family Relationship

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

4. Pending Legal Proceedings (last 5 years)

The Directors and Executive officers of the Corporation are not involved in any bankruptcy petitionby or against any business of which such person was a general partner or executive officer either atthe 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 trafficviolations and other minor offenses; being subject to any order, judgment or decree, notsubsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or

foreign, permanently or temporarily enjoining, barring suspending or otherwise limiting hisinvolvement in any type of business, securities, commodities or banking activities; and being foundby a domestic or foreign court of competent jurisdiction ( in a civil action), the Commission orcomparable foreign body, or a domestic or foreign Exchange or other organized trading market orself regulatory organization, to have violated a securities or commodities law or regulation, and the judgment has not been reversed, suspended, or vacated.

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Item 10. Executive Compensation

The Company’s president and chief executive officer as well as the other officers receive a fixed basicmonthly salary. Pursuant to Section 13, Article II of the Company’s By-laws, the directors of theCorporation are entitled to a per diem. Approved per diem amounted to twenty five thousand Pesos(P 25,000.00) for the directors’ attendance in the Annual Stockholders’ Meeting. The directors andexecutive officers received no bonus or any other remuneration in cash or in kind. The directors andexecutive officers hold no outstanding warrant or option.

a.) Standard Arrangements – Other than the stated salaries & wages and per diem of the directors,there are no other standard arrangements to which the directors of the Company arecompensated, or are to be compensated, directly or indirectly, for any services provided as adirector, including any additional amounts payable for committee participation or specialassignments, for the last completed fiscal year and the ensuing year.

b.) Other Arrangements – None

c.) Employment contract or compensatory plan or arrangement - None

Warrants and Options Outstanding: Repricing

a.) There are no outstanding warrants or options held by the Company’s CEO, the namedexecutive officers, and all officers and directors as a group.

b.) This is not applicable since there are no outstanding warrants or options held by theCompany’s CEO, executive officers and all officers and directors as a group.

Item 11. Security Ownership of Certain Beneficial Owners and Management as of June 30, 2009

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

Title of 

class

Name, address of record owner

and relationship with Issuer

Name of 

BeneficialOwner andRelationship 

with RecordOwner

Citizenship

No. of 

Shares Held

Percent

Common Trustmark Holdings

Corporation*

SMI Compound, C. RaymundoAve., Maybunga, PasigCity/(Shareholder)

*

Filipino 5,297,280,230 97.708%

* Trustmark Holdings Corp.(TMHC) is owned and controlled by the Lucio Tan Group of 

Companies. Mr. Lucio Tan shall have the voting power over the shareholdings of TMHC.

(2) Security Ownership of Management as of June 30, 2009

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Title of className of beneficial

owner

Amount andnature of 

record/beneficialownership *

CitizenshipPercent of 

Class

Common Lucio C. Tan 1,000 “r” Filipino Nil

Common Mariano C.Tanenglian 1,000 “r” Filipino NilCommon Harry C. Tan 1,000 “r” Filipino NilCommon Jaime J. Bautista 500 “r” Filipino NilCommon Wilson T. Young 500 “r” Filipino NilCommon Lucio Tan, Jr. 1,000” r” Filipino NilCommon Michael Tan 1,000 “r” Filipino NilCommon Macario U. Te 1 “r” Filipino NilCommon Juanita Tan Lee 500 “r” Filipino NilCommon Antonino

Alindogan, Jr.500 “r” Filipino Nil

Common Enrique O. Cheng 1,000 “r” Filipino Nil

* All shares held by management are of record.

Security ownership of all directors and officers as a group is 8,001 representing 0.00% of theCompany’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 commonstock under a voting trust agreement.

4. Changes in Control

There are no arrangements which may result in a change in control of the registrant.

Item 12. Certain Relationships and Related Transactions

In addition to Note 18 of the Notes to the Consolidated Financial Statements on pages 89  to 92, thefollowing are additional relevant related party disclosures:

The Company’s cash and cash equivalents are deposited/placed with Allied Banking Corporation, anaffiliate, at competitive interest rates. The Company also has a lease and stock transfer agency agreementwith the said bank at prevailing rates. There are no preferential treatment in any of its transactions withthe Bank. There are no special risk or contingencies involved since the transactions are done under normalbusiness practice.

a.) Business purpose of the arrangements:

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

b.) Identification of the related parties transaction business and nature of relationship:

1. Allied Banking Corporation – deposits, rental and stock transfer services

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2. MacroAsia Corporation – investments

c.) Transaction prices are based on prevailing market rates.

d.) Transactions have been fairly evaluated since the Company adhere to industry standards andpractices.

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

2.) Not applicable – there are no parties that fall outside the definition of “ related parties”with whom the Company or its related parties have a relationship that enables the parties tonegotiate terms of material transactions that may not be available from other, more clearlyindependent parties on an arm’s length basis.

3.) Not applicable – the Company has no transactions with promoters.

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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 theCompany 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 partof the exhibits.

LIST OF ITEMS REPORTED UNDER SEC FORM 17-C (DURING THE LAST 6MONTHS) – OCTOBER 2008 TO MAY 2009

Date of Report Subject Matter Disclosed

November 19, 2008 Press Release of Philippine Airlines, Inc. (PAL)November 20, 2008 – PAL reports $114-M loss

May 13, 2009 Trustmark Holdings Corporation (“Trustmark”), the controllingstockholder of PAL Holdings, Inc., invited holders of theUS$200 million Zero Coupon Notes due 2011 (formerly,Floating Rate Notes due 2000) issued by Philippine Airlines,Inc. (the “PAL”) (hereafter, the “Notes”) and creditors in respectof certain other unsecured indebtedness of PAL (hereafter, the“Other Indebtedness”) to offer to tender such Notes and OtherIndebtedness for purchase by Trustmark.

The Tenders:

Dutch Auction tenders for unsecured indebtedness of PAL

comprised of the Notes (Reg S ISIN:XS0071784762) and theOther Indebtedness. The Notes and the Other Indebtedness havea current aggregate principal amount outstanding of approximately US$220 million. Trustmark proposes to buy acombination of the Notes and the Other Indebtedness up to anaggregate principal amount of US$143 million, at its solediscretion.

Key dates for tendering the Notes:

Early tender date :  Tuesday 19 May 2009 4pmLondon Time(Holders of the Notes must offer totender by this time to receive theirpurchase price AND the early tenderpremium. Holders of the Notes whooffer to tender after will receive theirpurchase price without the earlytender premium.)

Final expiration date : Friday 22 May 2009 4pm GMT

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Settlement date :  Friday May 29 [expected]

The Purchaser:

Trustmark, the primary shareholder in PAL Holdings Inc., inturn the holder of 84% of the issued share capital of PAL. As

part of this transaction, Trustmark will become the beneficialowner of the purchased Notes & Other Indebtedness, but intendsto advance all payments made by PAL in respect of the Notesand Other Indebtedness for future equity subscriptions.

J.P. Morgan Securities Ltd. is sole dealer manager in respect tothis transaction.

May 20, 2009 Further to the earlier announcement regarding the invitation byTrustmark Holdings Corporation (“Trustmark”), the controllingstockholder of PAL Holdings, Inc., to the holders of US$200million Zero Coupon Notes due 2011 (formerly, Floating RateNotes due 2000) (the “Notes”) issued by Philippine Airlines,

Inc. (“PAL”) and creditors in respect of certain other unsecuredindebtedness of PAL (the “Other Indebtedness”) to offer totender for purchase such Notes and Other Indebtedness, pleasebe informed that Trustmark has extended the Early TenderPeriod to Friday, 22 May 2009, 4pm London Time.

PART V - CORPORATE GOVERNANCE

Item 14. Evaluation System

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

Item 15. Measures undertaken to Fully Comply

Measures are slowly being undertaken by the Company to fully comply with the adopted leading practiceson good corporate governance and one of them is attending seminars by our Corporate Directors.

Item 16. Deviations

The Company is taking steps towards full compliance of its Corporate Governance Manual.

Item 17. Plan to improve

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

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PAL HOLDINGS, INC.

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES

SEC FORM 17-A

Page No.

FINANCIAL STATEMENTS

Statement of Management’s Responsibility for Financial Statements 37-38Report of Independent Auditors 40-41

Statements of Financial Position - March 31, 2009 and 2008 42-43Statements of Comprehensive Income for the Period Ended March 31, 2009, 2008 and

2007 44-45Statements of Changes in Equity for the Years Ended March 31, 2009, 2008 and 2007 46-47

Statements of Cash Flows for the Years Ended March 31, 2009, 2008 and 2007 48-49

Notes to Financial Statements 50-114

SUPPLEMENTARY SCHEDULES

Report of Independent Auditors on Supplementary Schedules 115

A. Marketable Equity Securities and Other Short-Term Cash Investments *

B. Amounts Receivable from Directors, Officers, Employees, Related Parties,and Principal Stockholders (Other than Related Parties) *

C. Non-Current Marketable Equity Securities, Other Long-Term Investmentsin Stock, and Other Investments *

D. Indebtedness of Unconsolidated Subsidiaries and Related Parties *E. Intangible Assets and Other Assets *F. Long- Term Debt 116-119G. Indebtedness to Related Parties *H. Guarantees of Securities of Other Issuers *I. Capital Stock 120J. Reconciliation of Retained Earnings 121K. 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 theCompany’s financial statements.

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PAL Holdings, Inc.

and Subsidiaries

Consolidated Financial StatementsMarch 31, 2009 and 2008and Years Ended March 31, 2009, 2008and 2007

and

Independent Auditors’ Report

SyCip Gorres Velayo & Co.

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PAL HOLDINGS, INC. AND SUBSIDIARIES_________________________________

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION(Amounts in Thousands)

March 31

2009 2008 

ASSETS

Current Assets

Cash and cash equivalents (Notes 5, 18, 27 and 28) P=5,836,988 P=14,783,695Short-term investments (Notes 27 and 28) 374,205 –Available-for-sale investments (Notes 6, 18, 27 and 28) – 92,364Receivables (Notes 7, 18, 27 and 28) 5,150,551 5,756,942Expendable parts, fuel, materials and supplies (Note 8) 938,806 1,486,013Other current assets (Notes 8, 9 and 28) 8,553,245 5,397,117

Total Current Assets 20,853,795 27,516,131

Noncurrent Assets

Property and equipment (Notes 11, 13, 15, 18, 24 and 25)At cost 65,065,900 48,261,877At appraised values 384,955 261,100

Deposits on aircraft leases (Notes 18, 25, 27 and 28) 3,154,548 2,534,673Available-for-sale investments (Notes 6, 18, 27 and 28) 819,510 916,797Investment properties (Notes 10 and 11) 1,450,045 1,533,364Deferred income tax assets - net (Note 23) 581,936 320,352Other noncurrent assets (Notes 5, 12, 16, 18, 25, 27 and 28) 3,402,856 3,840,967

Total Noncurrent Assets 74,859,750 57,669,130

TOTAL ASSETS P=95,713,545 P=85,185,261

LIABILITIES AND EQUITYCurrent Liabilities

Notes payable (Notes 13, 18, 27 and 28) P=6,888,223 P=3,440,235Accounts payable (Notes 18, 27 and 28) 3,577,514 5,583,487Accrued expenses (Notes 14, 16, 18, 27 and 28) 14,574,625 11,136,180Due to related parties (Notes 2, 18, 24, 27 and 28) 481,090 481,090Income tax payable (Note 23) – 187,109Unearned transportation revenue 5,188,611 6,127,234Current portion of long-term obligations (Notes 15, 18, 25,

27 and 28) 10,296,454 5,368,235

Total Current Liabilities 41,006,517 32,323,570

Noncurrent Liabilities 

Long-term obligations - net of current portion(Notes 15, 18, 25, 27 and 28)  42,112,420 30,511,652

Accrued employee benefits (Note 21) 4,200,028 3,237,802Reserves and other noncurrent liabilities (Note 16) 6,046,552 4,504,136

Total Noncurrent Liabilities 52,359,000 38,253,590

Total Liabilities 93,365,517 70,577,160

(Forward)

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March 31

2009 2008 

Equity

Attributable to the equity holders of the parent:Capital stock (Notes 2 and 17) P=5,421,568 P=5,421,568Additional paid-in capital (Notes 2 and 17) 17,517,283 17,517,283Other components of equity (Note 17) (21,006,975) (10,614,212)Treasury stock - 55,589 shares, at cost (Note 17) (56) (56)

1,931,820 12,324,583Minority interests 416,208 2,283,518

Total Equity 2,348,028 14,608,101

TOTAL LIABILITIES AND EQUITY P=95,713,545 P=85,185,261

 See accompanying Notes to Consolidated Financial StatementsSee accompanying Notes to Consolidated Financial Statements.

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44

PAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Amounts in Thousands, Except Earnings Per Share and Number of Shares)

Years Ended March 31

2009 2008 2007

REVENUE

Passenger 64,699,241 55,938,984 54,593,744Cargo 4597819 5,266,635 6,016,554Interest income (Note 18) 461,819 839,662 1,264,069Others (Notes 16 and 18) 5,552,112 4,272,532 7,842,320

75,310,991 66,317,813 69,716,687

EXPENSES (Note 20)Flying operations (Note 28) 49,506,426 30,226,745 30,277,639Maintenance (Note 18) 9,957,436 8,999,604 10,018,924Aircraft and traffic servicing 8,786,530 8,009,326 8,219,496

Passenger service 5,099,346 4,872,743 4,389,934Reservation and sales 4,245,095 4,053,702 3,913,230General and administrative (Notes 7 and 16) 3,761,948 3,743,995 3,046,797Financing charges (Notes 13, 15 and 18) 3,746,429 3,862,407 4,519,446Others - net (Notes 16 and 28) 2,693,308 3,909,509 771,182

87,796,518 67,678,031 65,156,648

INCOME (LOSS) BEFORE INCOMETAX (12,485,527) (1,360,218) 4,560,039

PROVISION FOR (BENEFIT FROM)

INCOME TAX (Note 23) 473,274

 (1,355,667)

 (2,466,398)

NET INCOME (LOSS) (12,958,801) (4,551) 7,026,437

OTHER COMPREHENSIVEINCOME (LOSS) (Note 19)

Net changes in fair values of available-for-saleinvestments, net of deferred income tax

(Note 6) (157,824) 80,111 178,682Net changes in fair values of derivative assets,net of deferred income tax (Notes 19 and 28) (1,231,650) 1,492,058 (981,793)Increase in revaluation increment due toappraisal, net of deferred income tax (Note 11) 185,779 263,726 340,040Effect of foreign exchange translation* 1,902,423 (2,359,886)* (755,732)

TOTAL OTHER COMPREHENSIVE

INCOME (LOSS) 698,728 (523,991) (1,218,803)

TOTAL COMPREHENSIVE

INCOME (LOSS) (12,260,073) (528,542) 5,807,634

Net income (loss) attributable to:

Equity holders of the parent (10,972,902) (6,100) 5,939,284Minority interests (1,985,899) 1,549 1,087,153

(12,958,801) (4,551) 7,026,437

(Forward)

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Years Ended March 31

2009 2008 2007

Total comprehensive income attributable to:

Equity holders of the parent (10,392,763) (445,035) 4,926,225Minority interests (1,867,310) (83,507) 881,409

(12,260,073) (528,542) 5,807,634

Basic/Diluted Earnings (Loss) Per Share** Computed based on Net Income (Loss) (2.0240) (0.0011) 1.3574

Computed based on Total ComprehensiveIncome (Loss) (1.9169) (0.0821) 1.1259

* Represent the effect of translating the US Dollar consolidated financial statements of Philippine Airlines, Inc., a subsidiary, using the applicable year-end exchange rates to US$1 of 48.422, 41.756, and 48.217 asof March 31, 2009, 2008 and 2007, respectively, and the monthly average exchange rates for the yearsthen ended. As of July 8, 2009, the applicable exchange rate to US$1 is 48.300.

**Computed using the weighted average number of issued and outstanding shares of stock of 5,421,512,096 

in 2009 and 2008 and 4,375,351,766 in 2007.

See accompanying Notes to Consolidated Financial Statements.

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PAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYFOR THE YEARS ENDED MARCH 31, 2009, 2008 AND 2007

(Amounts in Thousands)

Attributable to Equity Holders of the Parent

Net Changes

in FairValues

of Available-

for-sale

Investments -

Additional Deposit Net of Capital Paid-in for Future Cumulative Deferred Revaluation

Stock Capital Stock Translation Income Tax Increment Deficit T

(Notes 2 (Notes 2 Subscription Adjustment (Notes 6 in Property (Notes 17

and 17) and 17) (Note 17) (Note 19) and 26) (Note 11) and 21) (N

BALANCES AT APRIL 1, 2006 400,000 12,033 4,814,850 (1,860,443) 27,511 1,020,824 (14,537,023)

Total comprehensive income for the year

(Notes 3 and 19) – – – (1,471,143) 170,176 287,908 5,939,284

Net effect of transfer of portion of revaluationincrement in property realized through

depreciation - net of deferred income tax,

foreign exchange adjustment and

other changes – – – – – (38,339) 38,339

Total income and expense for the year – – – (1,471,143) 170,176 249,569 5,977,623

Conversion of deposits for future stock 

subscription to advances from related parties – – (4,814,850) – – – –

Conversion of advances fromparent company to equity 5,021,568 4,017,254 – – – – –

BALANCES AT MARCH 31, 2007 5,421,568 4,029,287 – (3,331,586) 197,687 1,270,393 (8,559,400)

Conversion of advances from parent company

to equity – 3,079,567 – – – – –

Conversion of advances from parent company

to equity – 10,662,158 – – – – –

Additional paid-in capital applied against deficit – (253,729) – – – – 253,729

Total comprehensive income for the year

(Notes 3 and 19) – – – (734,781) 72,552 223,294 (6,100)

(Forward)

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Attributable to Equity Holders of the Parent

Net Changes

in Fair

Values

of Available-

for-sale

Investments -Additional Deposit Net of 

Capital Paid-in For Future Cumulative Deferred RevaluationStock Capital Stock Translation Income Tax Increment Deficit T

(Notes 2 (Notes 2 Subscription Adjustment (Notes 6 in Property (Notes 17

and 17) and 17) (Note 17) (Note 19) and 26) (Note 11) and 21) (N

Net effect of transfer of portion of revaluation

increment in property realized through

depreciation - net of deferred income tax,foreign exchange adjustment and

other changes – – – – – (69,420) 69,420

Total income and expense for the year – 13,487,996 – (734,781) 72,552 153,874 317,049

BALANCE AT MARCH 31, 2008 5,421,568 17,517,283 – (4,066,367) 270,239 1,424,267 (8,242,351)

Total comprehensive income for the year

(Notes 3 and 19) – – – 567,938 (145,096) 157,297 (10,972,902)

Net effect of transfer of portion of revaluation

increment in property realized through

depreciation - net of deferred income tax,foreign exchange adjustment and

other changes – – – – – (84,262) 84,262

Total income and expense for the year – – – 567,938 (145,096) 73,035 (10,888,640)

BALANCE AT MARCH 31, 2009 5,421,568 17,517,283 – (3,498,429) 125,143 1,497,302 (19,130,991)

See accompanying Notes to Consolidated Financial Statements.

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PAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in Thousands)

Years Ended March 31

2009 2008 2007CASH FLOWS FROM OPERATING ACTIVITIES

Income (loss) before income tax (12,485,527) (1,360,218) 4,560,039Adjustments for:

Depreciation and amortization (Notes 10, 11, 18and 20) 6,218,287 5,619,022 6,259,453

Financing charges (Note 20) 3,746,429 3,862,407 4,519,446Realization of hedge and non-hedge derivatives 4,532,003 1,836,642 (1,435,167)Foreign exchange loss (gain) - net (1,092,910) 836,036 378,567Interest income (461,819) (839,662) (1,264,069)Dividend income (163,776) (206,075) (329,391)Gain on disposal of property and equipment,

and others (32,298) (225,369) (527,627)

Operating income before working capital changes 260,389 9,522,783 12,161,251Decrease (increase) in:

Receivables 128,277 (312,872) (1,188,745)Expendable parts, fuel, materials and supplies 546,645 (200,162) 158,030Other current assets (3,692,734) (1,098,863) 554,906

Increase (decrease) in:Accounts payable (2,051,993) (295,556) 454,178Accrued expenses 2,676,609 (681,884) 1,081,058Due to related parties – (9,687) –Unearned transportation revenue (938,623) (470,829) 729,155

Net cash settlement on derivative transactions (2,140,423) 497,309 1,629,373Net increase (decrease) in accrued employee benefits 1,497,270 (621,547) 144,438

Increase (decrease) in other noncurrent liabilities 467,643 (530,046) 275,088

Net cash generated from (used in) operations (3,246,940) 5,798,646 15,998,732Financing charges paid (2,347,820) (2,610,492) (3,349,721)

Interest received 243,295 698,846 1,028,149

Income taxes paid (including final and withholding taxes) (278,847) (270,872) (135,106)

Net cash flows from (used in) operating activities (5,630,312) 3,616,128 13,542,054

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to property and equipment (Notes 11 and 24) (9,685,763) (4,049,834) (2,991,493)Investments in:

Short-term investments (374,205) – –Available-for-sale investments (121) (226,596) –

Proceeds from disposal of:Available-for-sale investments 97,774 764,887 953,295

Property and equipment 61,386 516,333 124,154Dividend received 163,776 206,075 329,391Return of various deposits – 98,427 110,888Proceeds from cancellation of predelivery

payments (Note 11) 940,082 – –Additional various deposits made (22,482) (55,271) (9,715)Decrease (increase) in other noncurrent assets (1,477,713) 780,627 (372,527)

Net cash flows used in investing activities (10,297,266) (1,965,352) (1,856,007)

(Forward)

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Years Ended March 31

2009 2008 2007

CASH FLOWS FROM FINANCING ACTIVITIESAvailments of:

Notes payable (Note 13) 13,461,218 3,004,790 1,665,000

Long-term obligations (Notes 15 and 24) 8,605,201 – –

Payments of:

Notes payable (Note 13) (8,049,410) (780,000) (1,615,000)

Long-term obligations (Notes 15 and 24) (6,827,281) (9,937,614) (8,839,181)

Advances from related parties – – 52,125

Net cash flows from (used in) financing activities 7,189,728 (7,712,824) (8,737,056)

EFFECT OF EXCHANGE RATE CHANGES

ON CASH AND CASH EQUIVALENTS (208,857) 272,683 (1,252,449)

NET INCREASE (DECREASE) IN CASH AND

CASH EQUIVALENTS (8,946,707) (5,789,365) 1,696,542

CASH AND CASH EQUIVALENTS

AT BEGINNING OF YEAR  14,783,695 20,573,060 18,876,518

CASH AND CASH EQUIVALENTS

AT END OF YEAR (Note 5) 5,836,988 14,783,695 20,573,060

See accompanying Notes to Consolidated Financial Statements.

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50

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, 1930under the name “Baguio Gold Mining Company” originally to engage in mining and othermineral exploration activities. On September 23, 1996, the Parent Company changed its primarypurpose to that of engaging in the business of a holding company and changed its corporate nameto 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 andDecember 13, 2000, respectively. The change of the Parent Company’s name was approved bythe Philippine Securities and Exchange Commission (SEC) on January 19, 2007.

The Parent Company is a subsidiary of Trustmark Holdings Corporation (Trustmark) and is partof the Lucio Tan Group of Companies (LT Group).

The Parent Company’s registered office address is 7th Floor, Allied Bank Center, 6754 AyalaAvenue, Makati City.

The Parent Company and its subsidiaries (collectively referred to herein as “the Group”),through Philippine Airlines, Inc. (PAL), the Philippine national flag carrier and the majorsubsidiary of the Parent Company, is primarily engaged in air transport of passengers and cargowithin the Philippines and between the Philippines and several international destinations. Thesebusiness activities are further described in Note 29.

The consolidated financial statements as of March 31, 2009 and 2008 and for each of the threeyears in the period ended March 31, 2009 were authorized for issue by the Board of Directors

(BOD) on July 8, 2009.

2. Status of Operations and Reorganizations 

a.  Increase in capital stock of the Parent Company

On July 26 and September 19, 2006, at separate meetings, the Parent Company’s BOD, by avote 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 pershare. Out of the increase in the authorized capital stock, 5.02 billion shares with a total parvalue of P=5.02 billion have been subscribed and in payment thereof, the Parent Companyagreed to convert to equity a part of its debt to Trustmark, in the amount of P=9.04 billion, at arate of P=1.80 per share. Accordingly, as a result of the conversion, Trustmark’s ownershipover the Parent Company increased from 69.16% to 97.73%. The increase in authorized capital stock was approved by the Philippine SEC onJanuary 19, 2007.

As a result of the above transactions, the Parent Company had a P=4.03 billion additional paidin capital as of March 31, 2007. On October 17, 2007, the Philippine SEC approved theParent Company’s request to undergo equity restructuring to wipe out the deficit of theParent Company as of March 31, 2007 amounting to P=253.73 million against the additionalpaid-in capital (see Note 17).

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Transactions in Fiscal Year 2007  

In fiscal year 2007, the Parent Company undertook the following business restructuring

activities that were accounted for under the pooling of interests method:  

On August 17, 2006, the BOD of the Parent Company approved the acquisition of 100% of the total voting shares of then its subsidiaries, Cube Factor Holdings, Inc., Ascot Holdings,Incorporated, POL Holdings, Inc., Sierra Holdings & Equities, Inc., Network Holdings &Equities, Inc. and Maxell Holdings Corp. (collectively, the Holding Companies) forP=136.00 million from the individual stockholders representing interests of Lucio Tan Groupof Companies (Nominees of the LT Group). The Holding Companies collectively owned81.57% 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 aggregatingto about P=9.04 billion. The BOD of Trustmark accepted the said assumption by the ParentCompany on August 18, 2006.

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

Transactions in Fiscal Year 2008 

On June 27, 2007, the BOD of the Parent Company approved the assumption by the ParentCompany 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 theParent Company (after the assumption) into additional paid-in capital of the ParentCompany.

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% inPAL 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 ParentCompany (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 Companyfrom the Holding Companies after the dacion en pago, amounting to P=11.00 billion, will beconverted into additional paid-in capital in the Holding Companies. The additional paid-incapital resulting from the conversion into equity of the Parent Company’s obligation toTrustmark 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, 2007resolution 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 onJune 27, 2007. The remaining liabilities of the Holding Companies amounting toP=11.00 billion are thus retained with the Holding Companies as a result of the amendment.

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Pursuant to the approval of the BOD on July 19, 2007 to acquire direct ownership in PAL andPR, 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 Companiesassigned to the Parent Company their respective investments in PAL and PR aggregating toP=12.44 billion and P=108.66 million, respectively, in exchange for the full payment of theHolding Companies’ liabilities to the Parent Company totaling to P=12.12 billion, including theP=9.04 billion receivables of the Parent Company from the Holding Companies, as of March 31, 2007. This resulted in the recognition of a liability to Maxell Holding Corp.(Maxell), one of the Holding Companies, amounting to P=431.60 million as of March 31, 2008.

On August 2, 2007, the BOD approved, upon concurrence of Trustmark, that the ParentCompany shall sell/assign its shares in the Holding Companies to Trustmark. In paymentthereof, Trustmark agreed to assume the obligations of the Parent Company to the previousstockholders 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 andassumption of liabilities by Trustmark.

As a result of the restructuring in fiscal year 2008, the Parent Company still owns 84.67% of PAL, through a direct ownership in 81.57% of PAL’s shares and an indirect ownership in3.10% of PAL’s shares through an 82.33% direct ownership in PR.

The release of the investments in the Holding Companies to Trustmark was accounted for asa 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 theGroup with the liabilities that were settled as they were assumed by Trustmark, the ultimateparent company. Accordingly, the transaction was accounted for as an equity transactionwhere the reduction in consolidated liabilities was treated as an additional equity investment(or additional paid-in capital of the Parent Company) by Trustmark.

c. Status of PAL’s rehabilitation 

On June 7, 1999, the Philippine SEC confirmed its approval of PAL’s Amended andRestated Rehabilitation Plan (Rehabilitation Plan) dated March 15, 1999. The PhilippineSEC also appointed a Permanent Rehabilitation Receiver (PRR) to, among other things,

monitor and supervise the strict and faithful implementation of the Rehabilitation Plan. Withthe approval of the Rehabilitation Plan, the exercise of creditors’ and third parties’ rightsunder various agreements became subject to Philippine SEC jurisdiction. As part of theRehabilitation Plan, various liabilities were restructured (reflected as part of “Long-termobligations” in the consolidated statements of financial position, see Note 15).

On May 28, 2007, the BOD of PAL authorized management to initiate action, obtainrequired approvals and file necessary applications and other documents for the proposed exitfrom rehabilitation and quasi-reorganization of PAL.

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Future Changes in Accounting PoliciesFollowing are the new and amended accounting standards and interpretations that will becomeeffective subsequent to March 31, 2009 and have not been early adopted by the Group.

 Effective in fiscal year 2010

• Revised PFRS 2, Share-based Payment - Vesting Condition and Cancellations, clarifies thedefinition of a vesting condition and prescribes the treatment for an award that is effectivelycancelled.

• PFRS 8, Operating Segments, adopts a full management approach to reportingsegment information. PFRS 8 will replace PAS 14, Segment Reporting, and is required to beadopted only by entities whose debt or equity instruments are publicly traded, or are in theprocess of filing its financial statements with a securities commission or similar party.

• Revised PAS 23,  Borrowing Costs,  requires capitalization of borrowing costs when suchcosts are directly attributed to the acquisition, construction or production of a qualifyingasset.

• Amendments to PAS 27, Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate, has changes in respect of the holding companies’ separate consolidated financial statements including (a) the deletionof ‘cost method’, making the distinction between pre-acquisition and post-acquisition profitsno longer required, and (b) in cases of reorganizations where a new parent is inserted abovean existing parent of the group (subject to meeting specific requirements), the cost of thesubsidiary is the previous carrying amount of its share of equity items in the subsidiary rather

than its fair value. All dividends will be recognized in profit or loss. However, the paymentof such dividends requires the entity to consider whether there is an indicator of impairment.

• Amendments to PAS 32, Financial Instruments: Presentation and PAS 1, Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation, specify, among others, that puttable financial instruments will be classified asequity if they have all of the following specified features: (a) the instrument entitles theholder to require the entity to repurchase or redeem the instrument (either on an ongoingbasis or on liquidation) for a pro-rata share of the entity’s net assets, (b) the instrument is inthe most subordinate class of instruments, with no priority over other claims to the assets of the entity on liquidation, (c) all instruments in the subordinate class have identical features,(d) the instrument does not include any contractual obligation to pay cash or financial assets

other than the holder’s right to a pro-rata share of the entity’s net assets, and (e) the totalexpected cash flows attributable to the instrument over its life are based substantially on theprofit or loss, a change in recognized net assets, or a change in the fair value of therecognized and unrecognized net assets of the entity over the life of the instrument.

• Philippine Interpretation IFRIC 13, Customer Loyalty Programmes, requires customerloyalty award credits to be accounted for as a separate component of the sales transaction inwhich they are granted and therefore part of the fair value of the consideration received isallocated to the award credits and deferred over the period that the award credits arefulfilled. Management has yet to complete its assessment of the impact of adopting IFRIC13 in fiscal year 2010.

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• Philippine Interpretation IFRIC 16,   Hedges of a Net Investment in a Foreign Operation,provides guidance on identifying foreign currency risks that qualify for hedge accounting inthe hedge of net investment; where within the group the hedging instrument can be held inthe hedge of a net investment; and how an entity should determine the amount of foreigncurrency gains or losses, relating to both the net investment and the hedging instrument, tobe recycled on disposal of the net investment.

 Improvements to PFRS

In May 2008, the International Accounting Standards Board issued its first omnibus of amendments to certain standards, primarily with a view to remove inconsistencies and clarifywordings. There are separate transitional provisions for each standard.

• PFRS 5,  Noncurrent Assets Held for Sale and Discontinued Operations, specifies that

when a subsidiary is held for sale, all of its assets and liabilities will be classified as held forsale under PFRS 5, even when the entity retains a noncontrolling interest in the subsidiaryafter the sale.

• PAS 1, Presentation of Financial Statements, clarifies that assets and liabilities classified asheld for trading are not automatically classified as current in the balance sheet.

• Amendment to PAS 16, Property, Plant and Equipment , replaces the term ‘net selling price’with ‘fair value less costs to sell’, to be consistent with PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations and PAS 36,  Impairment of Assets. It also clarifies thatitems of property, plant and equipment held for rental that are routinely sold in the ordinarycourse of business after rental, are transferred to inventory when rental ceases and they are

held for sale. Proceeds of such sales are subsequently shown as revenue. PAS 7, Statement of Cash Flows, is also revised to require cash payments on initial recognition of such items,the cash receipts from rents and subsequent sales to be shown as cash flows from operatingactivities.

• PAS 19,   Employee Benefits, revises the definition of ‘past service costs’ to includereductions in benefits related to past services (‘negative past service costs’) and to excludereductions in benefits related to future services that arise from plan amendments.Amendments to plans that result in a reduction in benefits related to future services areaccounted for as a curtailment.

It also revises the definition of ‘return on plan assets’ to exclude plan administration costs if 

they have already been included in the actuarial assumptions used to measure the definedbenefit obligation. It further revises the definition of ‘short-term’ and ‘other long-term’employee benefits to focus on the point in time at which the liability is due to be settled. Italso deletes the reference to the recognition of contingent liabilities to ensure consistencywith PAS 37, Provisions, Contingent Liabilities and Contingent Assets.

• PAS 23, Borrowing Costs, revises the definition of borrowing costs to consolidate the typesof items that are considered components of ‘borrowing costs’, i.e., components of the interestexpense calculated using the effective interest rate method.

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- 7 -• PAS 28, Investment in Associates, clarifies that if an associate is accounted for at fair value

in accordance with PAS 39, only the requirement of PAS 28 to disclose the nature and extentof any significant restrictions on the ability of the associate to transfer funds to the entity inthe form of cash or repayment of loans applies. It also defines an investment in an associateas a single asset for the purpose of conducting the impairment test. Therefore, any

impairment test is not separately allocated to the goodwill included in the investmentbalance. 

• PAS 31,   Interest in Joint Ventures, clarifies that if a joint venture is accounted for at fairvalue, in accordance with PAS 39, only the requirements of PAS 31 to disclose thecommitments of the venturer and the joint venture, as well as summary financial informationabout the assets, liabilities, income and expense will apply. 

• PAS 36,   Impairment of Assets, provides that when discounted cash flows are used toestimate ‘fair value less cost to sell’, additional disclosure is required about the discount rate,consistent with disclosures required when the discounted cash flows are used to estimate‘value in use’. 

• PAS 38,   Intangible Assets, provides that expenditure on advertising and promotionalactivities is recognized as an expense when the Group either has the right to access the goodsor has received the services. Advertising and promotional activities now specifically includemail order catalogues. It also deletes references to there being rarely, if ever, persuasiveevidence to support an amortization method for finite life intangible assets that results in alower amount of accumulated amortization than under the straight-line method, therebyeffectively allowing the use of the unit of production method. 

• PAS 39, Financial Instruments: Recognition and Measurement , provides that changes incircumstances relating to derivatives, specifically derivatives designated or re-designated ashedging instruments after initial recognition, are not reclassifications. It further removes thereference to a ‘segment’ when determining whether an instrument qualifies as a hedge. It

also requires use of the revised effective interest rate (rather than the original effectiveinterest rate) when remeasuring a debt instrument on the cessation of fair value hedgeaccounting. 

• PAS 40, Investment Properties, revises the scope (and the scope of PAS 16, Property, Plant and Equipment ) to include property that is being constructed or developed for future use asan investment property. Where an entity is unable to determine the fair value of aninvestment property under construction but expects to be able to determine its fair value oncompletion, the investment under construction will be measured at cost until such time asfair value can be determined or construction is complete. 

• PAS 41, Agriculture, removes the reference to the use of a pretax discount rate to

determine fair value, thereby allowing use of either a pretax or post-tax discount ratedepending on the valuation methodology used and removes the prohibition to take intoaccount cash flows resulting from any additional transformations when estimating fair value.Instead, cash flows that are expected to be generated in the ‘most relevant market’ are takeninto account. 

 Effective in fiscal year 2011 

• Revised PFRS 3, Business Combinations and PAS 27, Consolidated and Separate FinancialStatements. The revised PFRS 3 introduces a number of changes in the accounting forbusiness combinations that will impact the amount of goodwill recognized, the reported

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- 8 -results in the period that an acquisition occurs, and future reported results. The revisedPAS 27 requires, among others, that a change in ownership interests of a subsidiary (thatdoes not result in loss of control) will be accounted for as an equity transaction and will haveno impact on goodwill nor will it give rise to a gain or loss. The amendment also changes theaccounting for losses incurred by the subsidiary and loss of control of a subsidiary.

• Amendment to PAS 39, Financial Instruments: Recognition and Measurement - Eligible Hedged Items, addresses only the designation of a one-sided risk in a hedged item and thedesignation of inflation as a hedged risk or portion in particular situations. The amendmentclarifies that an entity is permitted to designate a portion of the fair value changes or cashflow variability of a financial instrument as a hedged item.

• Philippine Interpretation IFRIC 17,   Distributions of Noncash Assets to Owners, providesguidance on when to recognize a dividend payable, how to measure it, and the accountingtreatment for the difference between the carrying amount of the assets distributed and thecarrying amount of dividends payable when an entity settles the dividend payable. Theinterpretation applies to all non-reciprocal distribution of noncash assets (e.g., items of 

property, plant and equipment, businesses as defined in PFRS 3, ownership interests inanother entity or disposal groups as defined in PFRS 5), including those giving the owners achoice of receiving either noncash or cash alternative, provided that all owners of the sameclass of equity instruments are treated equally and the noncash assets distributed are notultimately controlled by the same party or parties both before and after the distribution. Thisexclusion applies to the separate, individual and consolidated financial statements of anentity that makes the distribution. 

 Effective in fiscal year 2013 

• Philippine Interpretation IFRIC 15,   Agreement for Construction of Real Estate, coversaccounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This interpretation requires that revenue on

construction of real estate be recognized only upon completion, except when such contractqualifies as construction contract to be accounted for under PAS 11, Construction Contracts,or involves rendering of services in which case revenue is recognized based on stage of completion. 

The Group is currently assessing the impact of these standards, amendments and interpretations.The effects and required disclosures of the adoption of the relevant standards, amendments andinterpretations, if any, will be included in the consolidated financial statements when these areadopted subsequent to fiscal year 2009. 

ConsolidationThe consolidated financial statements consist of the financial statements of the Parent Companyand its subsidiaries. The financial statements of the subsidiaries are prepared using consistentaccounting policies as those of the Parent Company. The subsidiaries and the relatedpercentages of ownership (see Note 2) of the Parent Company as of March 31, 2009 and 2008are as follows:

Percentages of Ownership

Direct Indirect

PAL 81.57% –Abacus Distribution Systems Philippines,

Inc. (ADSPI) – 70.23%Synergy Services Corporation (SSC) – 54.19%

(Forward)

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Percentages of Ownership

Direct Indirect

Pacific Aircraft Ltd. – 84.67%

Pearl Aircraft Ltd. – 84.67%Peerless Aircraft Ltd – 84.67%

PR 82.33% –PAL – 3.10%

Subsidiaries are consolidated from the date on which control is transferred to the Group andcease to be consolidated from the date on which control is transferred out of the Group. Allintercompany accounts and transactions with subsidiaries are eliminated in full.

The equity and net income attributable to minority interests of the consolidated subsidiaries arerecognized and, where material, are shown separately in the consolidated statement of financialposition and consolidated statement of comprehensive income, respectively.

Minority interest represents the interest in a subsidiary, which is not owned, directly or indirectlythrough subsidiaries, by the Parent Company. If losses applicable to the minority interest in asubsidiary exceed the minority interest’s equity in the subsidiary, the excess, and any furtherlosses applicable to the minority interest, are charged against the majority interest except to theextent that the minority has a binding obligation to, and is able to, make good the losses. If thesubsidiary subsequently reports profits, the majority interest is allocated all such profits until theminority interest’s share of losses previously absorbed by the majority interest has beenrecovered. Minority interest represents the interests in PAL and PR not held by the Group.

Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid

investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisition and that are subject to an insignificant risk of change in value.

Financial and Derivative InstrumentsFinancial assets and financial liabilities carried in the Group’s consolidated statement of financial position include cash and cash equivalents, short-term investments, receivables,available-for-sale investments, deposits on aircraft leases, short-term and long-term loans, andderivative instruments such as fuel, interest rate and currency derivative instruments.

The Group recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to the contractual provisions of the instrument. All

regular way purchases and sales of financial assets are recognized on the trade date, i.e., the datethe Group commits to purchase the assets. Regular way purchases or sales are purchases or salesof financial assets that require the delivery of assets within the period generally established byregulation or convention in the market place.

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

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

impairment.

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

Financial assets are classified as either financial assets at fair value through profit or loss, loansand receivables, held-to-maturity investments or available-for-sale investments, as appropriate.Financial liabilities are classified as either financial liabilities at fair value through profit or lossor other financial liabilities.

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

“Day 1” differenceWhere the transaction price in a non-active market is different to the fair value from otherobservable current market transactions in the same instrument or based on a valuation techniquewhose variables include only data from observable market, the Group recognizes the differencebetween the transaction price and the fair value (a “Day 1” difference) in the consolidated

statements of comprehensive income. In cases where use is made of data which is notobservable, the difference between the transaction price and model value is only recognized inthe consolidated net income or loss when the inputs become observable or when the instrumentis derecognized. For each transaction, the Group determines the appropriate method of recognizing the “Day 1” difference amount.

Financial assets and financial liabilities at fair value through profit or lossFinancial assets and financial liabilities at fair value through profit or loss include financialinstruments held for trading and financial instruments designated upon initial recognition as atfair value through profit or loss.

Financial assets are classified as held for trading if they are acquired for the purpose of selling in

the near term. Derivatives, including separated embedded derivatives, are also classified as heldfor trading unless they are designated as effective hedging instruments or a financial guaranteecontract. Gains or losses on investments held for trading are recognized in the consolidatedstatements of comprehensive income. Interest earned or incurred and dividend income isrecorded when the right of payments has been established.

Where a contract contains one or more embedded derivatives, the hybrid contract may bedesignated as financial asset at fair value through profit or loss, except where the embeddedderivative does not significantly modify the cash flows or it is clear that separation of theembedded derivative is prohibited.

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- 11 -Financial instruments may be designated as at fair value through profit or loss by management oninitial recognition when the following criteria are met:

• The designation eliminates or significantly reduces the inconsistent treatment that wouldotherwise arise from measuring the assets and liabilities or recognizing gains or losses onthem on a different basis, or

• The assets or liabilities are part of a group of financial assets or financial liabilities, or bothfinancial assets and financial liabilities, which are managed and their performance isevaluated on a fair value basis, in accordance with a documented risk management orinvestment strategy, or

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

Assets and liabilities classified under this category are carried at fair value in the consolidatedstatement of financial position, with any gains or losses being recognized in the consolidated net

income or loss in the consolidated statement of comprehensive income.

The Group accounts for its derivative transactions (including embedded derivatives) under thiscategory with fair value changes being reported directly to profit or loss, except when thederivative is treated as an effective accounting hedge, in which case the fair value change iseither 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 TranslationAdjustment” account.

 Loans and receivablesLoans and receivables are nonderivative financial assets with fixed or determinable paymentsthat are not quoted in an active market. This category includes short-term investments, trade

receivables arising from operations, deposits for aircraft leases and security and refundabledeposits. Such assets are carried at amortized cost using the effective interest rate method.Gains and losses are recognized in income when the loans and receivables are derecognized orimpaired, and through the amortization process. Loans and receivables are included in currentassets if maturity is within 12 months from the statement of financial position date. Otherwise,these are classified as noncurrent assets.

Information regarding the Group’s outstanding receivables is included under Note 7.

 Held-to-maturity investmentsQuoted nonderivative financial assets with fixed or determinable payments and fixed maturitiesare 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 inthis classification. Where the Group sells other than an insignificant amount of held-to-maturityinvestments, the entire category would be tainted and reclassified as available-for-saleinvestments. Other long-term investments that are intended to be held-to-maturity, such asbonds, are subsequently measured at amortized cost. This cost is computed as the amountinitially recognized minus principal repayments, plus or minus the cumulative amortization usingthe effective interest rate method of any difference between the initially recognized amount andthe maturity amount. This calculation includes fees paid or received between parties to thecontract that are an integral part of the effective interest rate, issuance costs and all otherpremiums and

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- 12 -discounts. For investments carried at amortized cost, gains and losses are recognized in incomewhen the investments are derecognized or impaired, and through the amortization process. Assetsunder this category are classified as current assets if maturity is within 12 months from thestatement of financial position date. Otherwise, these are classified as noncurrent assets.

The Group has no held-to-maturity investments as of March 31, 2009 and 2008.

 Available-for-sale investmentsAvailable-for-sale 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,available-for-sale investments are measured at fair value with gains or losses being recognized aspart of other comprehensive income until the investment is derecognized or until the investmentis determined to be impaired at which time the cumulative gain or loss previously reported inequity is included in the consolidated net income or loss in the consolidated statement of comprehensive income. The effective yield and (where applicable) results of foreign exchangerestatement for available-for-sale investments are reported immediately in the consolidated netincome or loss. These financial assets are classified as noncurrent assets unless the intention isto dispose such assets within 12 months from the statement of financial position date.

Available-for-sale investments represent the Group’s investment in United States (US) Treasurybonds, shares of stock of MacroAsia Corporation (MAC) and other equity instruments as shownin Note 6.

Other financial liabilitiesOther financial liabilities pertain to financial liabilities that are not held for trading nordesignated as at fair value through profit or loss upon the inception of the liability. Theseinclude 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 amortizedcost, taking into account the impact of applying the effective interest rate method of amortization(or accretion) for any related premium, discount and any directly attributable transaction costs.

Included under this category are the Group’s accounts payable, accrued expenses, notes payable,obligations under finance leases, other long-term liabilities and due to related parties.

 Derivatives and Hedge AccountingFreestanding derivativesFor the purpose of hedge accounting, hedges are classified primarily either as: a) a hedge of thefair 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 forecastedtransaction (cash flow hedge); or c) hedge of a net investment in a foreign operation. The Groupdid not designate any of its derivatives as fair value hedges. The Group designated its pay-fixed,receive-floating interest rate swaps and certain fuel derivatives as cash flow hedges.

At the inception of a hedge relationship, the Group formally designates and documents the hedgerelationship to which the Group wishes to apply hedge accounting and the risk managementobjective 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

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- 13 -how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure tochanges in the hedged item’s fair value or cash flows attributable to the hedged risk. Suchhedges are assessed on an ongoing basis to determine that they actually have been highlyeffective 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 highlyeffective cash flow hedge are included in the consolidated statement of changes in equity under“Cumulative translation adjustment” account, net of related deferred income tax. The ineffectiveportion is immediately recognized in the consolidated statement of comprehensive income.

For cash flow hedges with critical terms that match those of the hedged items and where thereare no basis risks (such as the pay-fixed, receive-floating interest rate swaps), the Group expectsthe 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 hedgeeffectiveness is performed on a quarterly basis by the Group by comparing the critical terms of the hedges and the hedged items to ensure that they continue to match and by evaluating thecontinued 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 hedgesfor forecasted jet fuel purchases), the Group assesses the effectiveness of its hedges (both on aprospective 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 thepercentage change in prices of jet fuel over a specified period that is consistent with the hedgetime 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 lossesinitially recognized in equity are transferred from equity to income or loss in the same period orperiods during which the hedged forecasted transaction or recognized asset or liability affect theconsolidated statement of comprehensive income.

When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively.In this case, the cumulative gain or loss on the hedging instrument that has been reported directlyin equity is retained in equity until the forecasted transaction occurs. When the forecastedtransaction is no longer expected to occur, any net cumulative gain or loss previously reported inequity is charged against the consolidated statement of comprehensive income. 

For derivatives that are not designated as effective accounting hedges, any gains or losses arisingfrom changes in fair value of derivatives are recognized directly in the consolidated statement of comprehensive income.

 Embedded derivatives

Embedded derivatives are accounted for at fair value through profit or loss when the entirehybrid contracts (composed of the host contract and the embedded derivative) are not accountedfor at fair value through profit or loss, the economic risks of the embedded derivatives are notclosely related to those of their respective host contracts, and a separate instrument with the sameterms as the embedded derivative would meet the definition of a derivative.

Embedded derivatives that are bifurcated from the host contracts are accounted for as financialassets at fair value through profit or loss. Changes in fair values are included in the consolidatedstatement of comprehensive income. Derivatives are carried as assets when the fair value ispositive and as liabilities when the fair value is negative.

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- 14 -The Group assesses whether an embedded derivative is required to be separated from the hostcontract 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 thatsignificantly modifies the cash flows that otherwise would be required under the contract, inwhich 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 associatedwith the embedded derivative, the host contract or both have changed and whether the change issignificant relative to the previously expected cash flows on the contract.

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

• the rights to receive cash flows from the asset have expired;

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

• the Group has transferred its rights to receive cash flows from the asset and either (a) hastransferred substantially all the risks and rewards of the asset, or (b) has neither transferrednor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset and has neithertransferred nor retained substantially all the risks and rewards of the asset nor transferred controlof the asset, the asset is recognized to the extent of the Group’s continuing involvement in theasset.

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 substantiallydifferent terms, or the terms of an existing liability are substantially modified, such modificationis treated as a derecognition of the carrying value of the original liability and the recognition of anew liability at fair value, and any resulting difference is recognized in profit or loss.

Impairment of financial assetsThe Group assesses at each statement of financial position date whether there is objectiveevidence that a financial asset may be impaired.

Financial assets carried at amortized cost For financial assets carried at amortized cost, whenever it is probable that the Group will notcollect all amounts due according to the contractual terms of receivables, an impairment loss hasbeen incurred. The amount of the loss is measured as the difference between the asset’s carryingamount and the present value of estimated future cash flows discounted at the financial asset’soriginal effective interest rate. The carrying amount of the asset is reduced either directly orthrough the use of an allowance account. Any loss determined is recognized in income.

The Group initially assesses whether objective evidence of impairment exists individually forfinancial assets that are individually significant, and individually or collectively for financialassets 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, theasset

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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 forimpairment and for which an impairment loss is or continues to be recognized are not included in

a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can berelated objectively to an event occurring after the impairment was recognized, the previouslyrecognized impairment loss is reversed. Any subsequent reversal of an impairment loss isrecognized in the consolidated statement of comprehensive income, to the extent that thecarrying value of the asset does not exceed its amortized cost at the reversal date.

In relation to trade receivables, a provision for impairment is made when there is objectiveevidence (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 theinvoice. The carrying amount of the receivable is reduced through the use of an allowanceaccount. Impaired receivables are derecognized when they are assessed as uncollectible.

Receivables, together with the associated allowance accounts, are written off when there is norealistic prospect of future recovery and all collateral has been realized. If, in a subsequentperiod, the amount of the estimated impairment loss decreases because of an event occurringafter the impairment was recognized, the previously recognized impairment loss is reversed.Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent thatthe carrying value of the asset does not exceed its amortized cost at the reversal date.

 Assets carried at cost If there is objective evidence that an impairment loss on financial assets carried at cost such as an

unquoted equity instrument that is not carried at fair value because its fair value cannot bemeasured 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 thedifference between the asset’s carrying amount and the present value of estimated future cashflows discounted at the current market rate of return for a similar financial asset.

 Available-for-sale investmentsIn case of equity investments classified as available-for-sale financial assets, impairment wouldinclude a significant or prolonged decline in the fair value of the investments below its cost.Where there is evidence of impairment loss, the cumulative loss - measured as the differencebetween the acquisition cost and the current fair value, less any impairment loss on that financialasset previously recognized in income - is removed from equity and recognized in income.

Impairment losses on equity investments are not reversed through income. Increases in fair valueafter impairment are recognized directly in the consolidated statement of changes in equity.

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

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- 16 -Offsetting of Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount reported in theconsolidated statement of financial position if, and only if, there is a currently enforceable legalright to offset the recognized amounts and there is an intention to settle on a net basis, or torealize 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 consolidatedstatement of financial position. 

Expendable Parts, Fuel, Materials and SuppliesExpendable parts, fuel, materials and supplies are stated at the lower of cost and net realizablevalue. Cost is determined using the weighted average method. Net realizable value representsthe current replacement cost.

Asset Held for SaleNoncurrent assets and disposal groups are classified as held for sale if their carrying amount willbe recovered principally through a sale transaction rather than through continuing use. Thiscondition is considered met only when the sale is highly probable and the asset (or disposal

group) is available for immediate sale at its present condition. Management must be committedto the sale, which should be expected to qualify for recognition as a completed sale within oneyear from the date of classification.

Property and EquipmentProperty and equipment (except land and buildings and improvements) are stated at cost lessaccumulated depreciation and any impairment in value. Land is stated at revalued amount, lessany impairment in value. Buildings and improvements are stated at revalued amounts lessaccumulated depreciation and any impairment in value. Revalued amounts were determinedbased on valuations undertaken by professionally qualified appraisers. Revaluations are madewith sufficient regularity. The latest appraisal report obtained by PAL is as of March 31, 2009.

For subsequent revaluations, the accumulated depreciation at the date of the revaluation iseliminated against the gross carrying amount of the asset and the net amount restated to therevalued amount of the asset. Any resulting increase in the asset’s carrying amount as a result of the revaluation is recognized as other comprehensive income credited directly to equity as“Revaluation increment in property”, net of the related deferred income tax liability. Anyresulting decrease is directly charged against the related revaluation increment to the extent thatthe decrease does not exceed the amount of the revaluation increment in respect of the sameasset.

The initial cost of property and equipment comprises its purchase price, any related capitalizableborrowing costs attributed to progress payments incurred on account of aircraft acquisition andother 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 thatreduce the price of the aircraft, received from aircraft and engine manufacturers are recordedupon delivery of the related aircraft and engines. Such credits are applied as a reduction fromthe cost of the property and equipment (including those under finance lease).

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

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

Number of YearsBuildings and improvements 8 to 40Passenger aircraft (owned and under finance lease) 12 to 20Other aircraft 5 to 10Spare engines 12 to 20Rotable and reparable parts 3 to 18Other ground property and equipment 3 to 8

Expenditures for heavy maintenance on passenger aircraft are capitalized at cost and depreciatedover the estimated number of years until the next major overhaul or inspection. Generally, heavymaintenance visits are required every five to six years for airframe and 10 years for landing gear.Other maintenance and repair costs are expensed as incurred.

The estimated useful lives, depreciation method and residual values are reviewed periodically toensure that the periods and method of depreciation and residual values are consistent with theexpected pattern of economic benefits from items of property and equipment. Any changes inestimate arising from the review are accounted for prospectively.

When assets are sold or retired, their costs, accumulated depreciation and any impairment  invalue and related revaluation increment are eliminated from the accounts. Any gain or lossresulting from their disposal is recognized as income and included in the consolidated statementof comprehensive income.

The portion of “Revaluation increment in property, net of related deferred income tax”, realized

through depreciation or upon the disposal or retirement of the property is transferred to retainedearnings.

Construction in progress represents the cost of aircraft and engine modifications in progress andbuildings and improvements and other ground property under construction. Construction inprogress is not depreciated until such time when the relevant assets are completed and availablefor use.

Asset Retirement ObligationPAL is required under various aircraft lease agreements to restore the leased aircraft to theiroriginal condition and to bear the cost of dismantling and restoration at the end of the lease term.PAL provides for these costs over the terms of the leases, based on aircraft hours flown until the

next scheduled checks.

Investment PropertiesInvestment properties include parcels of land and building and building improvements not usedin operations.

Investment properties are measured initially at cost, including any transaction costs. Thecarrying amount includes the cost of replacing part of an existing investment property at the timethat cost is incurred if the recognition criteria are met; and excludes the costs of day-to-dayservicing of an investment property.

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- 18 -Investment properties are subsequently measured at cost less accumulated depreciation (exceptland) and any impairment in value. Land is subsequently carried at cost less any impairment invalue.

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 anotherparty or completion of construction or development. Transfers are made from investmentproperties 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 toinvestment properties, the carrying value at the date of reclassification is retained as new cost of the investment property. The corresponding revaluation increment, net of the related deferredincome tax liability, of the asset is retained in equity and released to retained earnings when the

asset is derecognized.

Investment properties are derecognized when they are either disposed of or permanentlywithdrawn from use and no future economic benefit is expected from its disposal. Any gains orlosses on the retirement or disposal of an investment property are recognized as income in theconsolidated statement of comprehensive income in the year of retirement or disposal.

Impairment of Property and Equipment and Investment PropertiesThe carrying values of property and equipment and investment properties are reviewed forimpairment when events or changes in circumstances indicate that the carrying values may not berecoverable. If any such indication exists and where the carrying values exceed the estimatedrecoverable amounts, the assets or cash generating units are written down to their recoverable

amounts. The recoverable amount is the greater of net selling price and value-in-use. Inassessing value-in-use, the estimated future cash flows are discounted to their present value usinga pretax discount rate that reflects current market assessments of the time value of money and therisks specific to the asset. For an asset that does not generate largely independent cash inflows,the recoverable amount is determined for the cash generating unit to which the asset belongs.Impairment losses, if any, are recognized as expense in the consolidated statement of comprehensive income.

LeasesThe 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 theuse of a specific asset or assets or the arrangement conveys a right to use the asset. Areassessment is made after the inception of the lease, if any, of the following applies: (a) there isa change in contractual terms, other than a renewal or extension of the arrangement; (b) arenewal option is exercised or extension granted, unless the term of the renewal or extension wasinitially included in the lease term; (c) there is a change in the determination of whetherfulfillment 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 whenthe change in circumstances gave rise to the reassessment for scenarios (a), (c), or (d) above, andat the date of renewal or extension period for scenario (b).

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- 20 -changes in revaluation increment in property, gains and losses on re-measuring available-for-salefinancial assets, and any effective portion of gains and losses on hedging instruments in cashflow hedges.

Interest and Dividend Income

Interest on cash, cash equivalents and other short-term cash investments and investments inbonds is recognized as the interest accrues using the effective interest rate method. Dividendincome from available-for-sale equity investments is recognized when the Group’s right toreceive payment is established.

Liability Under Frequent Flyer ProgramPAL operates a frequent flyer program called “Mabuhay Miles.” The incremental cost of providing awards in exchange for redemption of miles earned by members is accrued in theaccounts as an operating cost and a liability after allowing for miles which are not expected to beredeemed. The liability is adjusted periodically based on awards earned, awards redeemed, andchanges in the frequent flyer program.

Retirement Benefits CostRetirement benefits cost under the defined benefit plan is actuarially determined using theprojected unit credit method. This method reflects services rendered by employees up to the dateof valuation and incorporates assumptions concerning employees’ projected salaries. Actuarialvaluations are conducted with sufficient regularity with option to accelerate when significantchanges to underlying assumptions occur. Actuarial gains and losses are recognized as income orexpense when the net cumulative unrecognized actuarial gains and losses for the plan at the endof the previous reporting year exceeded 10% of the higher of the present value of defined benefitobligation and the fair value of plan assets at that date. These gains or losses are recognized overthe 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 theintroduction of, or changes to, the retirement plan, past service cost is recognized immediately.

Retirement benefits cost includes current service cost, interest cost, amortization of unrecognizedpast service costs, actuarial gains and losses, experience adjustments, effect of any curtailment orsettlement and changes in actuarial assumptions over the expected average remaining workinglives 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 pastservice cost not yet recognized, and the fair value of plan assets out of which the obligations areto be settled directly. If such aggregate is negative, the asset is measured at the lower of suchaggregate or the aggregate of cumulative unrecognized net actuarial losses and past service costand the present value of any economic benefits available in the form of refunds from the plans or

reductions in the future contributions to the plan.

Retirement benefits cost under the defined contribution plan is based on the established amountof contribution and is recognized as expense in the same year as the related employee servicesare rendered.Borrowing CostsBorrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they aredirectly 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 andexpenditures and borrowing costs are being incurred. Borrowing costs are capitalized until theassets are substantially ready for their intended use.

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Income TaxesCurrent income taxCurrent 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 taxlaws used to compute the amounts are those that have been enacted or substantively enacted as of the statement of financial position date.

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

Deferred income tax liabilities are recognized for all taxable temporary differences, includingasset revaluations. Deferred income tax assets are recognized for all deductible temporarydifferences, carryforward benefits of unused tax credits and unused net operating loss carryover

(NOLCO), to the extent that it is probable that sufficient taxable profit will be available againstwhich the deductible temporary differences and carryforward benefits of unused tax credits andunused NOLCO can be utilized. Deferred income tax, however, is not recognized when it arisesfrom the initial recognition of an asset or liability in a transaction that is not a businesscombination and, at the time of the transaction, affects neither the accounting profit nor taxableprofit or loss.

Deferred income tax liabilities are not provided on non-taxable temporary differences associatedwith investments in domestic subsidiaries and associates. With respect to investments with othersubsidiaries and associates, deferred income tax liabilities are recognized except where thetiming of reversal of the temporary differences can be controlled and it is probable that thetemporary difference will not reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at each statement of financialposition date and reduced to the extent that it is no longer probable that sufficient taxable profitwill 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 positiondate and are recognized to the extent that it has become probable that future taxable profit willallow the deferred income tax asset to be recovered.

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

position date.

Income tax relating to items recognized directly in equity is recognized in equity and notincluded in the calculation of comprehensive income for the period.

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

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- 22 -Functional Currency and Foreign Currency Translation 

Each entity in the Group determines its own functional currency and the items included in theseparate financial statements of each entity are measured using the functional currency.Transactions in foreign currencies are initially recorded using the functional currency rate at thedate of the transaction. Outstanding monetary assets and liabilities denominated in foreign

currencies are translated using the functional currency rate of exchange at statement of financialposition date. All differences are taken to other comprehensive income. Non-monetary itemsthat are measured in terms of historical cost in a foreign currency are translated using theexchange rates at the dates of the transactions. Non-monetary items measured at fair value in aforeign currency are translated using the exchange rates at the date when the fair value wasdetermined.

The results of operations and financial position of all Group entities (none of which has thefunctional currency of a hyperinflationary economy) that have functional currencies differentfrom 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 theclosing rate at statement of financial position date;

b. comprehensive income items for each consolidated statement of comprehensive incomepresented are translated at the monthly average exchange rates (unless this average is not areasonable approximation of the cumulative effect of the rates prevailing on the transactiondates, 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 directlyrecognized in equity (i.e., revaluation increment in property) are translated using the ratesprevailing on the transaction dates; and

d. all resulting exchange differences are recognized as a separate component of equity, in theaccount “Cumulative translation adjustment”.

On consolidation, exchange differences arising from the translation of the net investment in

foreign operations are taken to equity. When a foreign operation is sold or disposed of, exchange

differences that were recorded in equity are recognized in the consolidated statement of 

comprehensive income.

Earnings (Loss) Per ShareBasic earnings (loss) per share (EPS) is calculated based on net income (loss) before othercomprehensive income and total comprehensive income for the year. EPS is calculated by

dividing net income (loss) before other comprehensive income or total comprehensive incomefor the year, as applicable, by the weighted average number of issued and outstanding shares of stock during the year, after giving retroactive effect to any stock dividends declared or stock rights exercised. The Group has no dilutive potential common shares.

Events After the Statement of Financial Position DatePost year-end events that provide additional information about the Group’s position at thestatement of financial position date (adjusting events), if any, are reflected in the consolidatedfinancial statements. Post year-end events that are not adjusting events are disclosed in the notesto consolidated financial statements when material.

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4. Summary of Significant Accounting Judgments, Estimates and Assumptions 

The preparation of the consolidated financial statements in accordance with PFRS requires theGroup’s management to make judgments, estimates and assumptions that affect the amountsreported in the consolidated financial statements and accompanying notes. These judgments,

estimates and assumptions are based on management’s evaluation of relevant facts andcircumstances as of the date of the comparative consolidated financial statements. Future eventsmay occur which will cause the assumptions used in arriving at the estimates to change. Theeffects of any change in estimates are reflected in the consolidated financial statements as theybecome reasonably determinable. Revisions to accounting estimates are recognized in the periodin which the estimate is revised if the revision affects only that period or in the period of therevision and future periods if the revision affects both current and future periods.

Judgments Determination of functional currencyJudgment is exercised in assessing various factors in determining the functional currency of eachentity within the Group, including prices of goods and services, competition, cost and expensesand other factors including the currency in which financing is primarily undertaken by the entity.Additional factors are considered in determining the functional currency of a foreign operation,including whether its activities are carried as an extension of that of the Parent Company ratherthan 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 primaryeconomic environment in which it operates. The functional currency of PAL, its majorsubsidiary, has been determined to be the US dollar (USD).

Classification of financial instrumentsThe 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 inaccordance with the substance of the contractual arrangement and the definitions of a financialasset, a financial liability or an equity instrument. The substance of a financial instrument, ratherthan 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 Note28.

 Application of hedge accountingThe Group applies hedge accounting treatment for certain qualifying derivatives after complyingwith hedge accounting requirements, specifically on hedge documentation designation andeffectiveness testing. Judgment is involved in these areas, which include managementdetermining the appropriate data points for evaluating hedge effectiveness, establishing that the

hedged forecasted transaction in cash flow hedges are probable of occurring, and assessing thecredit standing of hedging counterparties.

 Impairment of available-for-sale equity investmentsThe Group treats available-for-sale equity investments as impaired when there has been asignificant or prolonged decline in the fair value below its cost or where other objective evidenceof impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires  judgment. The Group considers the decline in value as ‘significant’ when the value generallydecreased by 20% or more and ‘prolonged’ if the decline persisted for a period greater than 12months for quoted equity securities. In addition, the Group evaluates other factors, includingnormal volatility in share price for quoted equity shares.

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Classification of leasesManagement exercises judgment in determining whether substantially all the significant risksand 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 theleased items are capitalized. Otherwise, they are considered as operating leases.

PAL has lease agreements (as lessee) covering some of its aircraft where the leaseterms approximate the estimated useful lives of the aircraft or the risks and rewards related to theasset are transferred to PAL. These leases are classified by the Group as finance leases.The net carrying value of these aircraft amounted to P=47.17 billion and P=37.86 billion as of March 31, 2009 and 2008, respectively (see Note 11).

The Group also has lease agreements (as lessee) where it has determined that the risks andrewards related to the properties are retained with the lessors (e.g., no bargain purchase optionand transfer of ownership at the end of the lease term). The leases are, therefore, accounted foras operating leases (see Notes 18 and 25).

ContingenciesThe Group is involved in various labor disputes, litigations, claims, and tax assessments that arenormal to its business. Based on the opinion of the Group’s legal counsels on the progress andlegal grounds of these cases, the Group believes that it may have a present obligation arisingfrom a past event but that their likely outcome and estimated potential cash outflow cannot bedetermined reasonably as of this time. As such, no provision was made for these othercontingencies.

Estimates Estimation of allowance for doubtful accounts

The allowance for doubtful accounts relating to receivables is estimated as the differencebetween the carrying amount of the receivables (at amortized cost) and the present value of estimated future cash flows (using the original effective interest rate). The amount and timing of recorded expenses for any period could therefore differ based on the judgments or estimatesmade. An increase in the Group’s allowance for doubtful accounts would increase its recordedgeneral and administrative expenses and decrease its current assets.

The carrying value of receivables, net of allowance for doubtful accounts, as of March 31, 2009and 2008 amounted to P=5.15 billion and P=5.76 billion, respectively. The allowance for doubtfulaccounts as of March 31, 2009 and March 31, 2008 amounted to P=4.45 billion and P=3.12 billion,respectively (see Note 7).

 Application of effective interest rate method of amortization and impact of revisions in cash flowestimatesThe Group carries certain financial assets and financial liabilities at amortized cost, which isdetermined 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 paymentsand projection of changes in its financial assets or financial liabilities, the Group adjusts thecarrying amounts to reflect actual and revised estimated cash flows. The Group recalculates thecarrying amount by discounting the estimated future cash flows using the financial asset orfinancial liability’s original effective interest rate, with the resulting adjustment being recognizedin income or loss. 

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 Determination of fair value of financial instruments (including derivatives)The Group initially records all financial instruments at fair value and subsequently carries certainfinancial assets and financial liabilities at fair value, which requires extensive use of accounting

estimates and judgment. Valuation techniques are used particularly for financial assets andfinancial liabilities (including derivatives) that are not quoted in an active market. Wherevaluation techniques are used to determine fair values (discounted cash flow, option models),they are periodically reviewed by qualified personnel who are independent of the tradingfunction. All models are calibrated to ensure that outputs reflect actual data and comparativemarket prices. To the extent practicable, models use only observable data as valuation inputs.However, other inputs such as credit risk (whether that of the Group or the counterparties),forward prices, volatilities and correlations, require management to develop estimates or makeadjustments to observable data of comparable instruments. The amount of changes in fair valueswould differ if the Group uses different valuation assumptions or other acceptablemethodologies. Any change in fair value of these financial instruments (including derivatives)would affect either the consolidated statement of comprehensive income or consolidatedstatement of changes in equity.

The fair values of financial assets and financial liabilities are presented in Note 28. 

 Determination of net realizable value of expendable parts, fuel, materials and suppliesThe Group’s estimates of the net realizable values of expendable parts, fuel, materials andsupplies are based on the most reliable evidence (e.g., age and physical condition of theinventory) available at the time the estimates are made, of the amount that the expendable parts,fuel, materials and supplies are expected to be realized. A new assessment is made of the netrealizable value in each subsequent period. When the circumstances that previously causedexpendable 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 ineconomic circumstances, the amount of the write-down is reversed so that the new carryingamount is the lower of the cost and the revised net realizable value. The expendable parts, fuel,materials and supplies as of March 31, 2009 and 2008 amounting to P=938.81 million andP=1.49 billion, respectively, are stated at the lower of cost and net realizable value (see Note 8).

Valuation of property and equipment under revaluation basisThe Group’s land and buildings and improvements are carried at revalued amounts, whichapproximate their fair values at the date of the revaluation, less any subsequent accumulateddepreciation and any accumulated impairment losses. The valuations of property and equipmentare performed by professionally qualified appraisers using generally acceptable valuationtechniques and methods. Revaluations are made regularly to ensure that the carrying amounts do

not differ materially from those which would be determined using fair values at statement of financial position date.

The resulting revaluation increment, net of related deferred income tax, in the valuation of theseassets based on appraisal reports amounted to P=1.50 billion (net of minority interests’ shareamounting to P=271.12 million) and P=1.42 billion (net of minority interests’ share amounting toP=257.89 million) as of March 31, 2009 and 2008, respectively. These are presented as“Revaluation increment, net of the related deferred income tax”, and the portion transferred todeficit resulting from their realization, in the equity section of the consolidated statement of financial position and in the consolidated statement of changes in equity. Increase in the valuesof property resulting from revaluation is treated as other comprehensive income.

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  Estimation of useful lives and residual values of property and equipment and investment  propertiesThe 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 livesand residual values are reviewed periodically and updated if expectations differ from previousestimates due to physical wear and tear, technical and commercial obsolescence and other limitson the use of the assets. The carrying amount of property and equipment, net of accumulateddepreciation, as of March 31, 2009 and 2008 amounted to P=65.45 billion and P=48.52 billion,respectively (see Note 11). The carrying amount of investment properties, net of accumulateddepreciation, as of March 31, 2009 and 2008 amounted to P=1.45 billion and P=1.53 billion,respectively (see Note 10).

 Impairment of property and equipment and investment properties The Group determines whether its property and equipment and investment properties areimpaired, 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 estimatedrecoverable amounts, the non-financial assets are written down to their recoverable amounts.The recoverable amount is the greater of net selling price and value in use. Determination of impairment requires an estimation of the value in use of the cash-generating units to which theassets belong. Estimating the value in use requires the Group to make an estimate of theexpected future cash flows from the cash-generating unit and also to choose a suitable discountrate in order to calculate the present value of those cash flows. In discounting, the Group uses anapplicable discount rate specific to its non-financial assets. Other assumptions include fuel costsand fuel surcharge rate. As of March 31, 2009 and 2008, the aggregate net carrying value of the Group’s nonfinancial assets amounted to P=66.90 billion and P=50.05 billion, respectively(see Notes 10 and 11). No impairment loss was recognized in 2009, 2008 and 2007.

 Estimation of retirement and other benefits cost  The Group’s retirement and other benefits cost relating to its defined benefit plan is actuariallycomputed. This entails using certain assumptions like salary increases, return on plan assets anddiscount rates. Accrued employee benefits as of March 31, 2009 and 2008 amounted toP=4.20 billion and P=3.24 billion, respectively. Unrecognized net actuarial gain (loss) amounted toP=257.78 million and (P=1.58 billion) as of March 31, 2009 and 2008, respectively, which resultedfrom changes in actuarial assumptions (see Note 21).

 Estimation of liability for tickets sold but not yet serviced  The Group assesses at each statement of financial position date its liability for tickets sold butnot yet serviced based on historical trends, the timing and amount of tickets used for travel onother airlines and the amount of tickets sold that will not be used. Unearned transportationrevenue, net of the related prepaid commission, amounted to P=5.19 billion and P=6.13 billion as of March 31, 2009 and 2008, respectively.

 Estimation of liability under the Frequent Flyer Program The incremental cost of providing awards in exchange for redemption of miles earned bymembers is accrued in the accounts as an operating cost and a liability after considering the mileswhich are not expected to be redeemed. The accrued cost is based on various estimates withrespect to the incremental food, insurance and other costs incurred in providing such schemes.Additional assumptions are made, based on general customer behavior, regarding the likelihood

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- 27 -of a customer redeeming the miles from PAL. Changes in cost estimates or accrual methods,among other factors, could have a significant effect on PAL’s financial results. Liability underthe frequent flyer program amounted to P=491.77 million and P=236.80 million as of March 31,2009 and 2008, respectively (see Note 16).

Provisions The Group provides for present obligations (legal or constructive) where it is probable that therewill be an outflow of resources embodying economic benefits that will be required to settle thesaid obligations. Management exercises judgment in assessing the probability of the Groupbecoming liable. An estimate of the provision is based on known information at statement of financial position date. The amount of provision is being reassessed at least on an annual basisto consider new and relevant information. Accrued provisions amounted to P=1.58 billion andP=1.40 billion as of March 31, 2009 and 2008, respectively (see Note 16).

 Recognition of deferred income tax assetsThe Group assesses at each statement of financial position date and recognizes deferred incometax assets to the extent of probable taxable profit and reversing taxable temporary differences

that will allow the deferred income tax assets to be utilized. Management uses judgment andestimates in assessing the probability of future taxable profit, including the timing of reversal of deferred income tax liability, aided by forecasting and budgeting techniques. Deferred incometax assets recognized amounted to P=6.83 billion and P=5.16 billion as of March 31, 2009 and2008, respectively (see Note 23).

5. Cash and Cash Equivalents

2009 2008

(In Thousands)Cash (Note 18) P=1,069,407 P=1,822,048

Cash equivalents (Note 18) 4,767,581 12,961,647P=5,836,988 P=14,783,695

Cash equivalents amounting to P=506.69 million and P=130.20 million as of March 31, 2009 and2008, respectively, were used to collateralize standby letters of credit. These are shown as partof “Other noncurrent assets” in the consolidated statements of financial position.

6. Available-for-sale Investments

The Group’s available-for-sale investments include investments in MAC (amounting toP=255.20 million and P=330.00 million as of March 31, 2009 and 2008, respectively), certainquoted equity investments (amounting to P=261.09 million and P=322.48 million as of March 31,

2009 and 2008, respectively), unquoted equity investments (amounting to P=303.22 million andP=264.32 million as of March 31, 2009 and 2008, respectively) and investments in US Treasurybonds (amounting to P=92.36 million as of March 31, 2008).

The carrying value of these investments includes accumulated unrealized gain of P=125.14 millionand P=270.24 million (net of related deferred income tax) as of March 31, 2009 and 2008,

respectively, that is reflected in “Net changes in fair values of available-for-sale investments, net

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- 28 -of deferred income tax” of the consolidated statements of changes in equity and the consolidatedstatements of comprehensive income. The movements in “Net changes in fair values of available-for-sale investments, net of deferred income tax” are as follows:

2009 2008

(In Thousands)

Balance at beginning of year P=291,286 P=211,175

Movements during the year recognized as othercomprehensive income:Mark-to-market gain (loss) (151,075) 64,662Amount in equity transferred to consolidated

statements of comprehensive income (6,745) 15,428Foreign exchange difference (4) 21

(157,824)  80,111

133,462 291,286Less share of minority interests 8,319 21,047

Balance at end of year P=125,143 P=270,239

The fair values of available-for-sale investments were determined based on published prices inthe active market. Available-for-sale investments with no market prices are measured at cost, netof impairment losses, if any.

7. Receivables

2009 2008

(In Thousands)General traffic:

Passenger P=3,619,835 P=3,560,117Cargo 330,383 560,741International Air Transport Association (IATA) 324,234 347,744

Others 62,222 25,429Non-trade* (Note 18) 5,261,680 4,382,083

  9,598,354 8,876,114Less allowance for doubtful accounts (Note 27) 4,447,803 3,119,172

  P=5,150,551 P=5,756,942

*  Non-trade receivables include accounts under litigation, accounts of defaulted agents, dividend and receivables from lessors.

Movements in allowance for doubtful accounts presented by class, are as follows (amounts inThousands):

2009

General Traffic

Passenger Cargo Others Non-trade TotalBalance at beginning of year P=116,123 P=119,339 P=9,061 P=2,874,649 P=3,119,172

Charges for the year – – 47,308 801,098 848,406

Recoveries (12,197) (43,658) – – (55,855)

Foreign exchange difference 17,952 16,950 3,723 497,455 536,080

Balance at end of year P=121,878 P=92,631 P=60,092 P=4,173,202 P=4,447,803

Collective impairment P=23,339 P=73,553 P=60,092 P=730,156 P=887,140

Individual impairment 98,539 19,078 – 3,443,046 3,560,663

Balance at end of year P=121,878 P=92,631 P=60,092 P=4,173,202 P=4,447,803

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General Traffic

Passenger Cargo Others Non-trade Total

Balance at beginning of year P=90,600 P=91,419 P=45,276 P=3,129,428 P=3,356,723

Charges for the year 39,875 42,527 – 532,382 614,784

Recoveries – – (31,917) – (31,917)Accounts written off  – – – (358,163) (358,163)

Foreign exchange difference (14,352) (14,607) (4,298) (428,998) (462,255)

Balance at end of year P=116,123 P=119,339 P=9,061 P=2,874,649 P=3,119,172

Collective impairment P=24,260 P=– P=9,061 P=281,728 P=315,049

Individual impairment 91,863 119,339 – 2,592,921 2,804,123

Balance at end of year P=116,123 P=119,339 P=9,061 P=2,874,649 P=3,119,172

 Impairment assessment The main considerations for impairment assessment include whether any payments are overdueor 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 assessedallowances.

The Group determines allowance for each significant receivable on an individual basis. Amongthe items that the Group considers in assessing impairment is the inability to collect from thecounterparty based on the contractual terms of the receivables. Receivables included in thespecific assessment are the accounts that have been endorsed to the legal department, non-moving account receivables, accounts of defaulted agents and accounts from closed stations.

For collective assessment, allowances are assessed for receivables that are not individuallysignificant and individually significant receivables where there is no objective evidence of individual impairment yet. Impairment losses are estimated by taking into consideration the age

of the receivables, past collection experience and other factors that may affect collectibility.

The total impairment losses on the receivables (net of recoveries of previously written off accounts) recognized in the consolidated statement of comprehensive income amounted toP=792.55 million, P=550.55 million and P=824.75 million for the years ended March 31, 2009, 2008and 2007, respectively.

8. Expendable Parts, Fuel, Materials and Supplies 

2009 2008

(In Thousands)At cost:

Fuel P=440,834 P=1,179,148Materials and supplies 294,067 220,847Expendable parts 171,123 57,749

  906,024 1,457,744At net realizable value - expendable parts 32,782 28,269

  P=938,806 P=1,486,013

The expendable parts have an aggregate cost of P=266.90 million and P=140.34 million as of March 31, 2009 and 2008, respectively.

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- 30 -In line with the various purchase agreements and fuel hedging transactions (see Note 28), PALhas short-term standby letters of credit amounting to P=3.09 billion and P=77.62 million as of March 31, 2009 and 2008, respectively, which serve as security or margin deposits to the variousfuel suppliers and hedging counterparties. These margin deposits are included under “Deposits”in “Other current assets” in the consolidated statements of financial position (see Note 9).

9. Other Current Assets

2009 2008

(In Thousands)Derivative assets (Note 28) P=3,087,048 P=3,074,453Deposits (Note 8) 3,168,799 140,652Prepayments and others - net of allowance

for probable losses of P=527 in 2009 (Note 18) 2,297,398 2,182,012

P=8,553,245 P=5,397,117

10. Investment Properties 

2009(In Thousands)

Reclassifications ForeignApril 1,

2008 Additionsand Others

(Note 18)Exchange

DifferenceMarch 31,

2009

CostLand (Note 13) P=1,525,263 P=– (P=346,400) P=266,388 P=1,445,251Buildings and

improvements (Note 13) 33,197 – – 5,299 38,496

1,558,460 – (346,400) 271,687 1,483,747

Accumulated DepreciationBuildings and improvements (25,096) (4,387) – (4,219) (33,702)

Net Book Value P=1,533,364 (P=4,387) (P=346,400) P=267,468 P=1,450,045

2008(In Thousands)

Reclassifications ForeignApril 1,

2007 Additionsand Others

(Note 18)Exchange

DifferenceMarch 31,

2008CostLand (Note 13) P=58,294 P=2,677 P=1,450,587 P=13,705 P=1,525,263Buildings and

improvements (Note 13) 38,333 – – (5,136) 33,19796,627 2,677 1,450,587 8,569 1,558,460

Accumulated Depreciation

Buildings and improvements (24,109) (4,485) – 3,498 (25,096)Net Book Value P=72,518 (P=1,808) P=1,450,587 P=12,067 P=1,533,364

Investment properties pertain to properties not used in operations with a total net book valueamounting to P=1.45 billion and P=1.53 billion as of March 31, 2009 and 2008, respectively. Thefair values of investment properties amounted to P=1.57 billion as of March 31, 2009 andP=1.53 billion as of March 31, 2008. These have been determined based on valuations performedby various qualified and independent appraisers. In the valuation process, the appraiserscompared the fair market value of similar assets and considered the best use of the investmentproperties at hand.

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11. Property and Equipment

2009

(In Thousands)

April 1, Disposals/ ReclassificationsForeign

Exchange March 31,

2008 Additions Retirements and Others Difference 2009

At Cost

Cost

Passenger aircraft(Notes 15 and 25) P=70,461,246 P=9,824,902 (P=180,380) P=2,133,328 P=11,565,213 P=93,804,309

Other aircraft 286,571 – (1,188) – 45,581 330,964

Spare engines (Note 15) 3,804,306 1,839,864 (128) – 685,101 6,329,143

Rotable and reparable parts(Notes 13 and 15) 6,427,042 1,196,168 (1,041,288) – 1,053,985 7,635,907

Other ground property and

equipment (Note 13) 8,923,340 544,852 (330,326) 2,462 1,434,940 10,575,268

89,902,505 13,405,786 (1,553,310) 2,135,790 14,784,820 118,675,591

Accumulated Depreciation 

Passenger aircraft (30,255,479) (5,247,756) 161,099 – (5,053,385) (40,395,521)

Other aircraft (253,876) (5,589) 1,188 – (40,631) (298,908)Spare engines (2,100,870) (290,465) 128 – (361,875) (2,753,082)

Rotable and reparable parts (4,251,053) (213,538) 800,359 – (650,216) (4,314,448)

Other ground property andequipment (8,176,827) (305,233) 326,437 78 (1,304,177) (9,459,722)

  (45,038,105) (6,062,581) 1,289,211 78 (7,410,284) (57,221,681)

Net Book Value 44,864,400 7,343,205 (264,099) 2,135,868 7,374,536 61,453,910

Construction in progress 33,196 562,303 – (5,265) 61,429 651,663

Predelivery payments(Notes 13 and 25) 3,364,281 2,331,868 – (3,248,253) 512,431 2,960,327

P=48,261,877 P=10,237,376 (P=264,099)  (P=1,117,650)  P=7,948,396 P=65,065,900

At Appraised Value - Buildings 

and improvementsAppraised value (Note 13) P=351,711 P=164 P=– P=699 P=56,157 P=408,731

Accumulated depreciation (90,611) (151,319) – 240,630 (22,476) (23,776)Net Book Value P=261,100 (P=151,155) P=–  P=241,329 P=33,681 P=384,955

2008(In Thousands)

April 1, Disposals/ Reclassifications

Foreign

Exchange March 31,

2007 Additions Retirements and Others Difference 2008

At Cost

Cost

Passenger aircraft

(Notes 15 and 25) P=77,589,205 P=5,904,092 (P=1,669,144) (P=434,669) (P=10,928,238)  P=70,461,246

Other aircraft 346,439 – (13,992) – (45,876) 286,571Spare engines (Note 15) 4,393,678 – (694) – (588,678) 3,804,306Rotable and reparable parts

(Notes 13 and 15) 7,520,261 623,716 (714,236) –

 

(1,002,699) 6,427,042Other ground property and

equipment (Note 13) 9,891,910 561,331 (185,670) 2,287 (1,346,518) 8,923,340

99,741,493 7,089,139 (2,583,736) (432,382) (13,912,009) 89,902,505

Accumulated Depreciation Passenger aircraft (33,833,484) (4,476,851) 797,686 2,481,018 4,776,152 (30,255,479)Other aircraft (300,054) (7,902) 13,992 – 40,088 (253,876)Spare engines (2,180,517) (225,686) 694 – 304,639 (2,100,870)Rotable and reparable parts (4,806,222) (573,958) 479,855 – 649,272 (4,251,053)Other ground property and

equipment (9,419,818) (193,540) 173,719 (512) 1,263,324 (8,176,827)

(50,540,095) (5,477,937) 1,465,946 2,480,506 7,033,475 (45,038,105)

Net Book Value 49,201,398 1,611,202 (1,117,790) 2,048,124 (6,878,534) 44,864,400(Forward)

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2008(In Thousands)

April 1, Disposals/ Reclassifications

Foreign

Exchange March 31,

2007 Additions Retirements and Others Difference 2008

Construction in progress P=297,451 P=47,993 P=– (P=285,565) (P=26,683) P=33,196Predelivery payments

(Notes 13 and 25) 3,514,296 2,119,641 – (1,819,024) (450,632) 3,364,281

P=53,013,145 P=3,778,836 (P=1,117,790) (P=56,465) (P=7,355,849) P=48,261,877

At Appraised Values:

Appraised Value (Note 13) Land P=1,700,228 P=– P=– (P=1,450,587) (P=249,641)  P=–Buildings and improvements 530,724 24,648 (130,901) – (72,760)  351,711

2,230,952 24,648 (130,901) (1,450,587) (322,401)  351,711Accumulated Depreciation

Buildings and improvements (141,131) (136,600) 130,901 27,883 28,336  (90,611)

Net Book Value P=2,089,821 (P=111,952) P=– (P=1,422,704) (P=294,065)  P=261,100

If buildings and improvements were carried at cost less accumulated depreciation, the amountsas of March 31, 2009 and 2008 would be as follows:

2009 2008

(In Thousands)Cost P=5,472 P=7,224Accumulated depreciation (4,213) (251)

P=1,259 P=6,973

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

Operating FleetPAL’s operating fleet consists of:

2009 2008

OwnedBoeing 747-400 – 1Bombardier DHC 8-400 5 –Bombardier DHC 8-300 3 –

Under finance leasesBoeing 747-400 4 3Airbus 340-300 4 4

Airbus 330-300 8 8Airbus 320-200 10 6

Under operating leasesBoeing 747-400 1 1Boeing 737-300 – 1Airbus 320-200 8 7Airbus 319-100 4 4

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 Boeing 747-400In March 2008, PAL took ownership of one Boeing 747-400 aircraft following the full paymentof the related finance lease obligation. In January to March 2009, PAL paid the remaining

finance lease obligation for the three remaining Boeing 747-400 aircraft and took ownership of the said aircraft. Subsequently, PAL entered into finance lease agreements involving the fourBoeing 747-400 aircraft (see Note 15).

 Boeing 737-300In January 2008, PAL leased out to Air Philippines Corporation (APC), a related party, its ownedBoeing 737-300 aircraft under an operating lease arrangement for 36 months (see Note 18). Thisaircraft is excluded from the operating fleet of PAL as of March 31, 2009 and 2008.

In addition, PAL also redelivered one Boeing 737-300 aircraft on operating lease in 2009.

 Bombardier aircraft 

PAL took delivery of two Bombardier DHC 8-400 aircraft from Scandinavian Airlines SystemDenmark-Norway-Sweden in May and August 2008. PAL also took delivery of anotherthree Bombardier DHC 8-400 from Wideroe’s Flyveselskap AS in June and July 2008.In September 2008, PAL received the predelivery payment made in 2008 amounting toP=535.87 million for the fourth DHC 8-400 which was cancelled.

In April 2008, Major Win Enterprises Limited assigned to PAL its right to purchase oneBombardier DHC 8-300 Series aircraft under a purchase agreement with Bombardier, Inc. In thesame month, PAL also signed a purchase agreement with Major Win Enterprises Limited inrespect of two Bombardier DHC 8-300 Series aircraft. PAL accepted delivery of the threeBombardier DHC 8-300 aircraft, in April and May 2008 (see Note 25).

 Airbus 320-200As part of its purchase agreement with Airbus, PAL took delivery of five Airbus 320-200 aircraftin 2009. The related predelivery payments for these aircraft have been paid in 2008. Four of these aircraft were acquired under finance leases (see Note 25). Carrying values of passengeraircraft under finance leases amounted to P=47.17 billion and P=37.86 billion as of March 31, 2009and 2008, respectively. The acquisition of the fifth aircraft was financed through a JapaneseOperating Lease (JOL) structure and the related predelivery payment was cancelled. Totalpredelivery payments returned to PAL amounted P=404.22 million.

Land and Building and ImprovementsIn October 2007, PAL transferred its principal offices to its current business address, andaccordingly reclassified the vacated property, with a carrying value (based on revalued amounts)

of P=288.39 million, to investment properties. Also, following the transfer of a domestic airportto a new location in 2008, the owned land where the old airport was located that was vacated byPAL was reclassified from property and equipment to investment properties. This property had acarrying value, based on revalued amounts, of P=1.16 billion at date of reclassification. Followingthe Group’s policy in accounting for investment properties which is the cost model, PAL treatedthe revalued amounts at reclassification dates as the deemed cost of these investment properties.As of March 31, 2008, the aggregate carrying value of these investment properties amounting toP=1.47 billion includes an appraisal increase of P=1.46 billion. The portion of revaluationincrement in property relating to these investment properties, net of related deferred tax,amounted to P=1.26 billion.

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12. Other Noncurrent Assets

2009 2008

(In Thousands)

Derivative assets (Note 28) P=179,065 P=1,756,007Long-term security deposits (Note 5) 2,533,149 1,337,069Others - net (Note 16) 690,642 747,891

P=3,402,856 P=3,840,967

As of March 31, 2009 and 2008, long-term security deposits include certain cash and cashequivalents amounting to P=172.43 million and P=130.24 million that were used to collateralizevarious surety bonds issued (as required under the legal proceedings) in connection with certainlitigations.

13. Notes Payable

The Group enjoys an omnibus credit facility with Allied Banking Corporation (ABC), a relatedparty (see Note 18), which is covered by a real estate mortgage on certain real properties andchattel mortgage on certain land and rotable and reparable parts, having an aggregate netcarrying value of P=1.48 billion and P=1.30 billion as of March 31, 2009 and 2008, respectively.

In 2009 and 2008, PAL availed of uncollateralized short-term loans from various local banksamounting to P=8.20 billion and P=2.98 billion, respectively.

Fixed interest rates on these notes payable range from 4.22% to 8.00% in 2009 and 4.37% to7.33% in 2008. The related interest expense pertaining to all notes payable amounted to

P=571.53 million in 2009, P=71.26 million in 2008 and P=19.89 million in 2007. Interest payablerelating to short-term notes payable amounted to P=46.58 million and P=18.16 million as of March 31, 2009 and 2008, respectively.

Notes payable as of March 31, 2008 include portion of predelivery payments amounting toP=705.76 million (see Note 11), due in fiscal year 2009. This is in relation to PAL’s acquisitionof Airbus 320-200 aircraft (see Note 25). These notes payable carry fixed rates ranging from5.90% to 6.40% per annum in 2009 and 2008. Cumulative interest relating to these notespayable amounting to P=53.31 million and P=40.80 million as of March 31, 2009 and 2008,respectively, was capitalized as part of property and equipment (see Note 11).

14. Accrued Expenses

2009 2008

(in Thousands)Landing and take-off fees and

Ground handling charges (Note 16) P=5,526,839 P=4,525,557Derivative liabilities 3,999,464 2,207,807Maintenance (Note 18) 2,588,931 2,104,210Others (Notes 18 and 27) 2,459,391 2,298,606

P=14,574,625 P=11,136,180

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15. Long-term Obligations

2009 2008

(In Thousands)Obligations under aircraft finance leases (Note 25) P=36,971,165 P=28,417,172

Long-term debts:Secured loans 6,052,750 – 

Other secured claims (Note 18) –  250,745Terminated operating lease claims 837,894 642,082Unsecured claims (Note 18) 8,547,065 6,569,888

15,437,709 7,462,715

52,408,874 35,879,887Less current portion 10,296,454 5,368,235

P=42,112,420 P=30,511,652

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

Obligations Under Aircraft Finance Leases

Relating to Boeing 747-400 AircraftIn March 2008, PAL fully paid its obligation pertaining to the finance lease of a Boeing 747-400aircraft under a Japanese Leveraged Lease (JLL) structure. As a result, the ownership of theaircraft was transferred to PAL (see Note 11). In 2009, PAL also prepaid its outstandingobligation pertaining to the remaining three Boeing 747-400 aircraft under finance leases. As aresult, the ownership of the aircraft was transferred to PAL (see Note 11).

In January to March 2009, PAL sold all of its four owned Boeing 747-400 aircraft andimmediately leased them back under finance lease agreements. PAL recognized a total amountof P=4.69 billion as liability arising from the finance leases. Interests on the finance leases are tobe paid based on three-month LIBOR plus margin.

Relating to Airbus 320-200 AircraftObligations under finance leases as of March 31, 2009 and 2008 include obligations coveringeight Airbus 320-200 aircraft acquired in accordance with the Purchase Agreement signed withAirbus as discussed in Note 25. These aircraft were delivered in 2009 and 2008 (see Note 11).As of March 31, 2009 and 2008, the aggregate future minimum lease payments for these leasesamounted to P=12.84 billion (with current portion of P=1.01 billion) and P=6.61 billion (with currentportion of P=552.06 million), respectively. These finance leases require rental payments over thelease term of 12 years.

The finance lease arrangements covering the Airbus 320-200 aircraft provide for aircraftpurchase or remarketing options. In either case, PAL guarantees to the lessor a certain aircraftvalue at the end of the lease term. It also provides for quarterly or semi-annual installments, withmaturities generally ranging from 12 to 15 years including balloon payments for certain financeleases at the end of the lease term, at fixed rates ranging from 2.30% to 6.58% and/or floatinginterest rates based on certain margins over three-month or six-month LIBOR, as applicable.

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Relating to Airbus 340-300 and Airbus 330-300 AircraftFinance lease agreements pertaining to Airbus 340-300 and Airbus 330-300 aircraft provide forsemi-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 amountof principal and interest under the original agreements and the principal, including capitalizedinterest 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)-denominateddeposits with the initial deposit amount aggregating to JPY6.39 billion or P=3.25 billion andJPY6.39 billion or P=2.48 billion as of March 31, 2009 and 2008, respectively, and all interestaccruing thereon maintained by PAL to secure the payment of the obligations for JLLs on twoAirbus 340-300, and one Airbus 330-300 aircraft. Under the Rehabilitation Plan, the integrity of the JLLs is not to be affected by the financial restructuring of the underlying loans and the JLLsare therefore treated as unimpaired claims.

The original lease agreements contain, among other things, provisions regarding merger andconsolidation, disposal of all or substantially all of PAL’s assets and ownership and control bythe present managing stockholder company.

PAL’s minimum lease commitments for obligations under finance leases are as follows:

Year Ending March 31 2009 2008

(In Thousands)2009 P=– P=6,973,4192010 7,869,301 6,592,1032011 7,484,637 5,738,4022012 6,538,132 4,559,2962013 and thereafter 21,123,662 11,608,627

Net minimum lease payments 43,015,732 35,471,847Interest and others (6,044,567) (7,054,675)

Present value of net minimum lease payments  P=36,971,165 P=28,417,172

Long-term Debts

2009 2008

(In Thousands)Secured loans P=6,052,750 P=–Other secured claims (Note 18) –  250,745Terminated operating lease claims 837,894 642,082Unsecured claims (Note 18) 8,547,065 6,569,888

15,437,709 7,462,715Less current portion 3,805,727 250,745

P=11,631,982 P=7,211,970

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- 37 -Secured LoansLong-term debts totaling P=6.05 billion pertain to loans obtained from a local bank and asyndicate of local banks. The loan from a local bank amounting to P=3.22 billion consists of twotranches(P=3.06 billion for tranche one and P=157.37 million for tranche two) and is secured by aircraft and

aircraft engines with a total appraised value of P=4.39 billion. The loan agreement requiresquarterly payments of principal and interest based on three-month LIBOR rate plus margin. Thefirst and second tranche will mature in 2015 and 2013, respectively, inclusive of a two-year graceperiod.

The loan with the syndicate of local banks (including affiliate banks, see Note 18) amounting toP=2.83 billion also requires quarterly payments of principal and interest based on three-monthLIBOR plus margin and will mature in September 2015. Aircraft and various aircraft engineswith appraised value totaling to P=4.07 billion were used as collateral for this syndicated loan.Other Secured Claims

The details of the other secured claims as of March 31, 2008 are as follows (in thousands):Outstanding Loan Securities

Balances Description Carrying Value

$60,000 syndicated Collateral Trust Indenture overloan facility (Note 18) P=205,189 certain engines, rotables

Others 45,556 and reparables P=560,157

P=250,745 P=560,157

The other secured claims provide for monthly, quarterly or semi-annual installments, generallyranging over five to eight years until fiscal year 2009 at a fixed interest rate of 8.3% per annumor floating interest rates based on three-month LIBOR plus margin, as applicable.

In 2009, P=250.75 million worth of other secured claims under the restructuring terms, gross of effect of PAS 39 amounting to P=2.66 million, matured and was fully paid.

Terminated Operating Lease ClaimsIn accordance with the Rehabilitation Plan, PAL terminated 26 operating leases relating toBoeing 747-200, Airbus 340-200, Airbus 300-B4, Fokker 50, and Shorts 360 aircraft. Anyclaims, net of security deposits and maintenance reserves held by the lessors, resulting from thetermination of operating leases (Terminated Operating Lease Claims) are treated as unsecuredclaims.

Unsecured Claims 

The restructured unsecured claims are noninterest-bearing and constitute 100% of the principaland 100% of accrued but unpaid interest as of June 23, 1998.

For purposes of valuation of the unsecured claims (including Terminated Operating LeaseClaims) for statement of financial position carrying value, PAL used a discount rate of 12% perannum (PAL’s estimated borrowing cost for instruments of similar type and tenor at the time of deemed issuances of the restructured unsecured claims) to restate the unsecured claims(including Terminated Operating Lease Claims) to present value. Adjustments in present valueresulting from the passage of time and the interest portion of prepayments made amounted toP=998.51 million in 2009, P=989.57 million in 2008 and P=1.03 billion in 2007 and were recognizedas part of “Financing charges” in the consolidated statements of comprehensive income.

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- 38 -The amounts payable on the unsecured claims (including Terminated Operating Lease Claims)under the restructured terms are as follows (in thousands):

Maturity Dates 

Percentages of Face Value 2009 2008

June 7, 2009 31 P=3,805,727 P=3,291,166June 7, 2010 32 3,928,477 3,397,310June 7, 2011 32 2,906,579 2,513,502

Face value 10,640,783 9,201,978Less imputed interest 1,255,824 1,990,008

  9,384,959 7,211,970Less current portion 3,805,727 –

  P=5,579,232 P=7,211,970

 In May 2009, Trustmark purchased certain unsecured claims against PAL from various debtholders amounting to P=5.26 billion in face value. These claims are carried in the books at

amortized cost amounting to P=4.83 billion. In June 2009, PAL purchased these unsecured claimsfrom Trustmark at the same price as they were bought by Trustmark.

Excess Cash Flow Recapture Mechanism of the Rehabilitation Plan

Under the Excess Cash Flow Recapture mechanism of the Rehabilitation Plan, at the end of anysix-month period starting September 30, 1999, any Excess Cash Flow (the remaining cashbalance, excluding certain funds, in excess of the greater of $50,000 and the average of thepreceding six months’ revenue of PAL) will be used to prepay Eligible Creditors on a pro ratabasis. Such prepayments in respect of indebtedness will be applied in inverse order of maturityof claims.

PAL made prepayments under the Excess Cash Flow Recapture mechanism totaling P=5.18 billionin 2001, 2003, 2006 and 2007. Subsequent payments relating to the Excess Cash FlowRecapture mechanism amounted to P=2.34 billion in 2008.

PAL’s obligations under the Excess Cash Flow Recapture mechanism shall terminate on the lastto 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 thepreceding three fiscal years. With respect to each participating creditor class, rights to receiveprepayments under the Excess Cash Flow Recapture mechanism would also terminate on thedate on which creditors of that creditor class have been returned to their original pre-restructuring repayment profiles.

16. Reserves and Other Noncurrent Liabilities

2009 2008

(In Thousands)Derivative liabilities (Note 27) P=2,907,596 P=1,605,769Provisions 1,583,593 1,404,964Liability under the Frequent Flyer Program 491,774 236,798Other noncurrent liabilities 1,063,589 1,256,605

  P=6,046,552 P=4,504,136

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ProvisionsProvisions consist substantially of probable claims under labor-related disputes and otherlitigations 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 currentlyongoing with the parties involved.

In 2009, additional provision amounted to P=48.00 million (P=112.79 million in 2008), reversal of provisions recognized in prior years amounted to P=19.33 million (P=90.92 million in 2008) andsettlement of closed cases amounted to P=11.80 million.

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

Claims by Manila International Airport Authority (MIAA)

PAL and MIAA entered into a Compromise Agreement on November 14, 2006, which wasapproved by the Court of Appeals on March 26, 2007. Under the Compromise Agreement, PALagreed 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 willserve as full and final settlement of MIAA’s claim against PAL for landing and take-off fees, parking fees, lighting charges and tacking fees for the period December 1, 1995 toMarch 31, 2006. The liability was recognized at fair value at inception and the resultingdifference between the face amount and the fair value amounting to P=855.57 million wasrecognized as income for the year ended March 31, 2007.

As of March 31, 2009 and 2008, accrued expenses to MIAA, excluding the related VAT,amounted to P=1.69 billion and P=1.93 billion, respectively. Of the amount, P=813.39 million andP=745.55 million was included as part of “Accrued landing and take-off fees” (see Note 14)classified under “Current liabilities”, and P=876.97 million and P=1.18 billion was included as partof “Other noncurrent liabilities” in the consolidated statements of financial position as of March 31, 2009 and 2008, respectively.

17. Equity Items

a. Capital stock 

The following summarizes the capital stock account as of March 31, 2009 and 2008

(amounts in thousands, except number of shares):

Number of Shares Amount

Authorized (Note 1) 20,000,000,000 P=20,000,000

Issued 5,421,567,685 P=5,421,568Treasury stock - 55,589 shares, at cost (55,589) (56)

Issued and outstanding 5,421,512,096 P=5,421,512

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- 40 -The issued and outstanding shares are held by 6,934 and 6,769 equity holders as of March31, 2009 and 2008, respectively.

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

shares.

On October 17, 2007, the Philippine SEC approved the wipe out of the Parent Company’sdeficit as of March 31, 2007 amounting to P=253.73 million against the additional paid-incapital arising from the conversion of liability to Trustmark into equity in fiscal year 2007(see Note 2).

On June 21, 2007, the BOD of PAL approved the reduction in par value of PAL’s shares of stock from P=1.0 per share to P=0.8 per share for the purpose of wiping out PAL’s deficit. OnSeptember 7, 2007, the Philippine SEC approved PAL’s application to reduce the par valueof PAL’s shares of stock from P=1.0 per share to P=0.8 per share. PAL’s resulting reductionsurplus amounting to P=2.16 billion was applied against the deficit as of March 31, 2007amounting to P=1.54 billion. However, the approval of the request to undergo equityrestructuring was subjected to the condition that the balance of the reduction surplusamounting to P=626.72 million shall not be used to wipe out losses that may be incurred inthe future without prior approval of the Philippine SEC.

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

2009 2008

(In Thousands)Cumulative translation adjustment - net of related

deferred income tax (Note 19) (P=3,498,429) (P=4,066,367)

Net changes in fair values of available-for-saleinvestments - net of related deferred income tax(Notes 6 and 28) 125,143 270,239

Revaluation increment - net of related deferredincome tax (Note 11) 1,497,302 1,424,267

Deficit (19,130,991) (8,242,351)

(P=21,006,975) (P=10,614,212)

18. Related Party Transactions

The Group, in the normal course of business, has transactions with its stockholders, associated

companies and related parties pertaining to leases of aircraft and ground property, availment of loans, temporary investments of funds, and purchases of goods and services, among others. Thesignificant related party transactions are as follows:

a. On August 2, 2007, the Parent Company’s BOD resolved to amend its June 27, 2007resolution 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. Thisresulted to a total of P=12.12 billion receivables of the Parent Company from the HoldingCompanies, which were used in exchange for the Parent Company’s acquisition of the

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- 41 -Holding Companies’ investment in PAL and PR amounting to P=12.44 billion andP=108.66 million, respectively. This gave rise to a liability to Maxell amounting to P=431.60million as of March 31, 2009 and 2008. The P=3.08 million assumed liability was convertedto additional paid-in capital, as approved by the BOD on the same date (see Note 2).

b. The Parent Company has advances from Trustmark amounting to P=49.49 million as of 

March 31, 2009 and 2008 which were used to pay filing fees and other expenses related tothe acquisition of the Holding Companies and the Parent Company’s change in corporatename and increase in the authorized capital stock.

c. As of March 31, 2007, the Parent Company has an outstanding liability to related partiestotaling P=136.00 million arising from its acquisition of the Holding Companies (see Notes 2and 24). These related parties are the previous stockholders of the Holding Companies. OnAugust 14, 2007, the Parent Company assigned to Trustmark its investments in the shares of stock of the Holding Companies. In payment thereof, Trustmark assumed the P=136.00million liability to the previous stockholders of the Holding Companies (see Note 2).

d. Management, accounting, statutory reporting and compliance, and administrative services

are provided by a related party at no cost to the Parent Company.

e. As of March 31, 2009 and 2008, the Parent Company owns 88 million common shares(7.04% equity interest) of MAC. Controlling owners of the Parent Company are also closefamily members of certain members of the key management of MAC. Likewise, certainmembers of the Parent Company’s BOD are also officers and members of the BOD of MAC.Dividends received from this investment amounted to P=4.40 million in 2009 and 2008.

f. PAL has finance lease agreements with certain related parties pertaining to threeAirbus 330-300 aircraft. Deposits on leases of said aircraft amounted to P=3.13 billionand P=2.53 billion as of March 31, 2009 and 2008, respectively. Outstanding obligationsunder finance lease of the said aircraft amounted to P=5.50 billion and P=5.58 billion as of March 31, 2009 and 2008, respectively. Financing charges attributable to these financelease obligations amounted to P=331.11 million in 2009, P=606.74 million in 2008 and P=621.49million in 2007. Related accrued interest amounted to P=73.65 million and P=64.43 million asof March 31, 2009 and 2008, respectively.

g. PAL has a Technical Services Agreement (TSA) with Lufthansa Technik Philippines (LTP),a related party, which took effect on September 1, 2000. The TSA provides that during theentire duration of the agreement, LTP will serve as the sole and exclusive provider to PAL of aircraft-related technical services and management of all required maintenance work necessary to achieve the sound operation and optimal utilization of PAL’s fleet.

The TSA will remain effective for a period of 10 years until September 1, 2010. Within theframework of the TSA, PAL entered into a Heavy Maintenance Service Agreement forD1-Checks (4C/5Y) of Airbus 340-300, Airbus 330-300 and Airbus 320-200 aircraft for theperiod June 1, 2002 to March 17, 2004. On April 20, 2005, PAL and LTP signed anamendment to the Heavy Maintenance Service Agreement effective from January 1, 2004until the expiry of the TSA, unless otherwise amended.

On February 20, 2009, PAL and LTP signed an additional attachment to the TSA to coverthe provision of Engine Maintenance Services for CFM56-5B engines. The attachment iseffective for a period of 12 years and LTP has the option to extend the agreement for anothertwo years by giving six months prior written notice.

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- 42 -Total LTP-related maintenance and repair costs charged to operations amounted toP=8.03 billion, P=7.71 billion and P=9.03 billion in 2009, 2008 and 2007, respectively. Inaddition, related expendable parts sold to LTP amounted to P=26.15 million in 2009,P=75.73 million in 2008 and P=19.79 million in 2007.

In connection with the sale of Maintenance and Engineering facilities to LTP, PAL and LTPentered into several transition services agreements whereby PAL will render to LTP variousservices such as information technology support, training and medical services, amongothers. Revenue earned from the said transition services agreements (included under“Others” in the revenue section of the consolidated statements of comprehensive income)amounted to P=95.49 million in 2009, P=99.33 million in 2008 and P=73.05 million in 2007.

As of March 31, 2009 and 2008, PAL has outstanding amounts payable to and estimatedunbilled charges from LTP totaling P=1.99 billion and P=1.90 billion, respectively, net of unapplied credits from and advance payments to LTP amounting to P=326.90 million andP=292.00 million as of March 31, 2009 and 2008, respectively. Receivables from LTPamounted to P=112.78 million and P=102.05 million as of March 31, 2009 and 2008,respectively.

h. The transactions with APC, a related party, include joint services and code share agreements,and endorsements of passengers during flight interruptions. As of March 31, 2009 and 2008,PAL has a net receivable from APC (shown as part of “Non-trade receivables”) amounting toP=461.07 million and P=320.10 million, respectively.

In fiscal year 2008, PAL entered into an operating lease agreement with APC covering theowned Boeing 737-300 aircraft at a fixed monthly rate, for a period of 36 months. In relationto this, certain spare parts and tools of the said aircraft were included in the lease.

On April 30, 2008, PAL and APC entered into a TSA effective May 1, 2008 and willremain in force for a period of five years. This agreement covers all aircraft-relatedtechnical services and management of all required maintenance related to the Bombardieraircraft. Total APC-related maintenance and repair cost amounted to P=123.40 million in2009.

i. As of March 31, 2009, the P=2.83 billion syndicated loan, presented under “Secured loans”,include loans obtained from affiliate banks, Philippine National Bank (PNB) and ABC,amounting to P=1.94 billion and P=653.70 million, respectively. The related financing chargeson these loans obtained from related parties represent about 2% of total financing chargeswhile interest on these loans accrued as at the end of the fiscal year 2009 amounted toP=3.97 million.

  j. Other secured claims include loans obtained from stockholders and related parties whichamounted to P=102.59 million as of March 31, 2008. Moreover, unsecured claims includeloans from stockholders amounting to P=341.96 million and P=286.99 million as of March 31,2009 and 2008, respectively. The related financing charges on these loans represent about1% of total financing charges in 2009, about 3% in 2008 and 4% in 2007. Related accruedinterest on these loans amounted to P=0.79 million as of March 31, 2008.

k. As discussed in Note 13, PAL has outstanding short-term notes payable to ABC amountingto P=2.29 billion and P=1.06 billion as of March 31, 2009 and 2008, respectively. Also, theretirement fund of PAL is being managed by ABC.

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l. In 2009, PAL obtained additional working capital from PNB amounting to P=2.99 billion.Outstanding balance as of March 31, 2009 amounted to P=343.46 million.

m. As of March 31, 2009 and 2008, cash and cash equivalents and short-term investments(included under “Cash and cash equivalents”, “Short-term investments” and “Othernoncurrent assets” in the consolidated statements of financial position) with ABC amountedto P=5.84 billion and P=5.10 billion, respectively. The related interest income on theseinvestments amounted to P=40.39 million in 2009, P=124.22 million in 2008 and P=258.77million in 2007.

n. In October 2008, PAL obtained a short-term, noninterest-bearing loan from Trustmark in theamount of P=5.33 billion, which was fully paid during the year.

o. In April 2009, PAL’s BOD authorized management to finalize terms of the sale of one of itsparcels of land with a carrying value of P=346.40 million to an affiliate. This property is

included under “Other current assets”.

p. As of March 31, 2009 and 2008, PAL has cash and standby letters of credit with OceanicBank, a related party, amounting to P=213.30 million and P=198.63 million, respectively.

q. In connection with the transfer of its principal office to a new location, PAL entered intoan operating lease agreement with PNB, a related party, for the lease of a portion of thePNB Financial Center Building. The lease is for a period of 10 years commencing onNovember 1, 2007 and may be renewed upon mutual agreement of the parties. Thereis no outstanding rental liability relating to the said lease contract as of March 31, 2009(P=11.98 million as of March 31, 2008).

Minimum rental commitments under this lease contract are as follows (amounts inthousands):

2009 2008

Due within one year P=29,053 P=28,979Due after one year but within five years 116,745 115,915After more than five years 118,731 148,067

P=264,529 P=292,961

PAL also maintains checking accounts and money placements with PNB. As of March 31,2009 and 2008, total cash and cash equivalents maintained with PNB amounted to

P=140.23 million and P=61.80 million, respectively.

In 2009, PAL availed of a bridge financing loan from PNB in the amount of P=1.87 billion to support current working capital requirements. The amounts was fully paidduring the year.

r. The compensation of key management personnel of the Group, consisting mainly of short-term employee benefits, amounted to P=46.06 million, P=50.11 million and P=42.74 million in2009, 2008 and 2007, respectively, and retirement benefits of P=7.62 million, P=8.09 millionand P=1.57 million in 2009, 2008 and 2007, respectively.

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19. Comprehensive Income

Comprehensive income consists of net income or loss for the year, together with certain othereconomic gains and losses, which are collectively described as “Other comprehensive income”and excluded from the calculation of net income or loss for the year. 

Other comprehensive income includes the following:• Unrealized mark-to-market gains (losses) on available-for-sale investments of 

(P=157.82 million) in 2009, P=80.11 million in 2008 and P=178.68 million in 2007. Theseamounts are net of the related deferred income tax of P=37.72 million in 2009, P=21.67 millionin 2008 and P=25.03 million in 2007.

• Net changes in the fair values on derivative assets and derivative liabilities designated bymanagement as cash flow hedging instruments amounting to (P=1.23 billion) in 2009,P=1.49 billion in 2008 and (P=981.79 million) in 2007. These amounts are net of the relateddeferred income tax of P=676.79 million, P=640.87 million and P=504.78 million, respectively.

• Increase in revaluation increment in property arising from recognition of the results of an

updated appraisal or effect of exchange rate changes in the aggregate amount of P=185.78 million in 2009, P=263.73 million in 2008 and P=340.04 million in 2007. Theseamounts are net of the related deferred income tax of P=69.49 million, P=15.32 million andP=183.32 million, respectively.

• Effect of foreign exchange gains (losses) arising from the translation to Philippine peso of the assets and liabilities of PAL, amounting to P=1.90 billion, (P=2.36 billion) and(P=755.73 million) in 2009, 2008, and 2007, respectively.

Included under “Cumulative translation adjustment” in the consolidated statement of changes inequity as of March 31, 2009 and 2008 are unrealized after-tax gains on hedging contractsaggregating to P=1.07 billion and P=2.04 billion, respectively. As discussed in Note 27, certain

derivative instruments (i.e., fuel derivatives and interest rate swaps) that were designated aseffective hedging instruments over the next two years are expected to protect PAL against theimpact of rising fuel prices and increasing interest rates. The related hedging gains or losses areexpected to be recognized in net income or loss at the same time as the corresponding hedgeditems are recognized in profit or loss.

20. Expenses

The significant components of expenses by nature are as follows:

2009 2008 2007

(In Thousands)

Fuel and oil (Note 28) P=38,838,517

P=

20,637,573

P=

20,304,486Maintenance (Note 18) 9,480,925 8,533,665 10,018,924Crew and staff costs (Note 21) 7,955,141 6,980,017 6,268,964Depreciation (Notes 10 and 11) 6,218,287 5,619,022 6,259,453Financing charges (Notes 13, 15and 18) 3,746,429 3,862,407 4,519,446Groundhandling charges 3,295,370 2,941,541 3,021,806Landing and take-off fees (Note14) 2,300,914 2,130,622 2,479,063Aircraft lease rentals (Note 25) 1,992,666 1,890,923 1,730,925Passenger food 1,719,498 1,604,503 1,134,349

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21. Employee Benefits

2009 2008

(In Thousands)Regular retirement benefits P=3,248,381 P=2,445,632Other benefits 951,647 792,170

P=4,200,028 P=3,237,802

PAL has a noncontributory defined benefit retirement plan covering all its permanent and regularemployees with benefits based on years of service and latest compensation.

The following tables summarize the components of the retirement benefits cost recognized in theconsolidated statements of comprehensive income and the amounts recognized in theconsolidated statements of financial position.

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

2009 2008 2007

(In Thousands)Current service cost P=517,398 P=424,661 P=417,767Interest cost on benefit obligation 371,823 319,169 273,667Expected return on plan assets (89,708) (35,032) (2,108)Net actuarial loss recognized during

the year 259,805 28,797 33,259

P=1,059,318 P=737,595 P=722,585

Actual return (loss) on plan assets P=206,624 (P=50,876) P=17,130

The details of net defined retirement benefits liability are as follows:

2009 2008

(In Thousands)Defined benefit obligation P=4,318,578 P=5,149,365Fair value of plan assets (1,327,979) (1,121,355)

2,990,599 4,028,010Unrecognized net actuarial gain (loss) 257,782 (1,582,378)

Net defined benefit liability P=3,248,381 P=2,445,632

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

2009 2008

(In Thousands)Defined benefit obligation, April 1 P=5,149,365 P=4,480,529Current service cost 517,398 424,661Interest cost 371,823 319,169Benefits paid (256,569) (221,892)Actuarial loss (gain) on obligation (1,463,439) 146,898

Defined benefit obligation, March 31 P=4,318,578 P=5,149,365

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- 46 -Changes in fair value of plan assets are as follows:

2009 2008

(In Thousands)Fair value of plan assets, April 1 P=1,121,355 P=583,863Expected return on plan assets 89,708 35,032Actual contributions to the plan 256,569 810,260Benefits paid (256,569) (221,892)Actuarial gain (loss) on plan assets 116,916 (85,908)

Fair value of plan assets, March 31 P=1,327,979 P=1,121,355

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

2009 2008

Investments in government securities 71% 83%Cash 27% 11%

Receivables 2% 6%100% 100%

The overall expected return on the plan assets is determined based on the market pricesprevailing 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 retirementbenefits cost for PAL’s plans are as follows:

2009 2008

Number of employees (including those covered bydefined contribution plans) 7,377 7,367

Discount rate per annum 7.17% to 10.21% 7.17% to 10.41%Expected annual rate of return on plan assets 8% 6%Future annual increase in salary 10% to 12% 7% to 12%

As of March 31, 2009, following are the information with respect to the above assumptions:discount rate per annum of 9.86% to 14.45%, expected annual rate of return on plan assets of 5%and future annual increase in salary of 10%.

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

2009 2008 2007 2006

(In Thousands)Defined benefit obligations P=4,318,578 P=5,149,365 P=4,480,529 P=4,131,138

Fair value of plan assets (1,327,979) (1,121,355) (583,863) (23,409)Deficit 2,990,599 4,028,010 3,896,666 4,107,729Experience adjustment on plan

liabilities - loss (gain) (134,695) (318,793) 227,546 –Experience adjustment on plan assets - gain 116,916 (85,908) 15,023 –

Retirement benefits cost under the defined contribution plan amounted to P=235.91 million in2009, P=209.06 million in 2008 and P=313.14 million in 2007.

The Group expects to contribute about P=1.03 billion to the retirement fund in fiscal year endingMarch 31, 2010.

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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 issubject 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 andoutgoing 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 taxableincome, net loss incurred in any year up to five years following the year of such loss (seeNote 23). In addition, the payment of the principal, interest, fees, and other charges on foreignloans obtained by PAL, and all rentals, interest, fees and other charges paid by PAL to lessors forthe lease of aircraft, engines, spares, other flight or ground equipment, and other personalproperty are exempt from all taxes, including withholding tax, provided that the liability for thepayment 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, 2005following the approval on October 19, 2005 of Revenue Regulation (RR) No. 16-2005 whichprovides for the implementation of the rules of the E-VAT law. Among the relevant provisionsof RA No. 9337 are the following:

a. The franchise tax of PAL is abolished;

b. PAL shall be subject to the corporate income tax;

c. PAL shall remain exempt from any taxes, duties, royalties, registration license, and otherfees and charges, as may be provided by PAL’s franchise;

d. Change in corporate income tax rate from 32% to 35% for three years effective onNovember 1, 2005, and 30% starting on January 1, 2009 and thereafter;

e. Change in unallowable deduction for interest expense from 38% to 42% of interest incomesubject to final tax for three years effective on November 1, 2005, and 33% starting onJanuary 1, 2009; and

f. Increase in the VAT rate imposed on goods and services from 10% to 12% effective onFebruary 1, 2006.

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- 49 -d. As of March 31, 2009 and 2008, the Parent Company did not recognize deferred income tax

asset on the carryforward benefits of NOLCO amounting to P=96.06 million andP=90.28 million, respectively, as management believes that the Parent Company may not havesufficient future taxable profit to allow all or part of the deferred income tax assets to beutilized in the future.

As of March 31, 2009, the Parent Company’s NOLCO that are available for deductionagainst future taxable income are as follows (amounts in thousands):

Incurred during fiscal year ended Amount ExpiredBalance as of 

March 31, 2009

Available untilfiscal year

endingMarch 31

March 31, 2006 P=3,063 P=3,063 P=– 2009March 31, 2007 69,829 – 69,829 2010March 31, 2008 17,383 – 17,383 2011March 31, 2009 8,848 – 8,848 2012

P=99,123 P=3,063 P=96,060

In 2009, the deferred income tax assets on the following deductible temporary differences

were not recognized because management believes that the Group may not have sufficienttaxable income against which these deductible temporary differences may be utilized(amounts in thousands).

Unrealized foreign exchange adjustments onlong-term obligations P=5,699,608

Allowance for doubtful accounts (Note 7) 4,447,803Fair value adjustments on noncurrent derivative liabilities 1,519,918

e. A reconciliation of the Group’s provision for (benefit from) income tax computed based onincome (loss) before income tax at the statutory tax rates to the benefit from income taxshown in the consolidated statements of comprehensive income is as follows:

2009 2008 2007

(In Thousands)Provision for (benefit from) income tax

at statutory tax rates  (P=4,213,866) (P=476,076) P=1,596,014Adjustments resulting from:

Movement in deductible temporarydifferences for which nodeferred income tax assets wererecognized 3,759,991 6,084 (924)

Interest income subjected to final taxand exempted from tax (69,128) (193,609) (372,969)

Nondeductible portion of interestexpense 27,489 81,296 138,024

Deductible temporary differencesused/recognized in current yearbut for which no deferred

income tax assets were recognized inprior years – – (3,894,846)

Nondeductible expenses and others 968,788 (773,362) 68,303

Provision for (benefit from) income tax P=473,274 (P=1,355,667) (P=2,466,398)

 

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- 50 -f. RR No. 10-2002 defines expenses to be classified as entertainment, amusement and

recreation (EAR) expenses and sets a limit for the amount that is deductible for tax purposes,i.e., 1% of net revenue for sales of services and 0.50% of net sales for sales of goods. EARexpenses amounted to P=15.52 million in 2009, P=14.28 million in 2008 and P=14.84 million in2007.

24. Note to Consolidated Statements of Cash Flows

Noncash activities consist of:2009 2008 2007

(In Thousands) Investing activities

Liabilities for purchases of property andequipment (Note 11) P=13,234,369 P=6,625,406 P=1,393,809

Claims from insurance set-off against long-termobligation (Notes 11 and 15)  –   814,113  –  

Liability to a related party incurred in relation to theacquisition of investments in PAL and PR shares

(Note 2)  –   431,600  –  Liability of the Group assumed by Trustmark as

consideration for the disposal of the investmentsin the Holding

Companies (Note 2)   –   (136,000)  – 

Financing activities (Note 2) Liability of the Parent Company to Trustmark 

converted to additional paid-in capital  –   3,079,567 9,038,822Liability of the Group to Trustmark released upon

the disposal of the investments in the HoldingCompanies  –   10,998,766  –  

25. Aircraft Lease Commitments and Purchases

Operating LeasesIn December 2006, PAL signed operating lease agreements for the lease of two brand-newBoeing 777-300ER aircraft, also as part of its refleeting program. The two aircraft are scheduledto be delivered in November 2009 and January 2010.

Also, PAL entered into operating lease agreements for the lease of Airbus 319-100,Airbus 320-200 and Boeing 747-400 aircraft. The future minimum lease payments related tothese lease agreements are shown in the following table:

Year Ending March 31  2009 2008

(In Thousands)2009 P=– P=1,730,4102010 2,729,839 2,131,0592011 3,607,633 2,780,6572012 3,334,000 2,544,7362013 3,334,000 2,544,7362014 and thereafter 17,149,668 13,338,954

P=30,155,140 P=25,070,552

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Aircraft Purchases and Finance Leases Airbus aircraft On December 6, 2005, PAL finalized a Purchase Agreement with Airbus wherein PAL placed a

firm order for nine Airbus 320-200 aircraft and options for five aircraft for delivery in 2010 to2013. As of March 31, 2009, all nine aircraft on firm order were delivered to and accepted byPAL.

On July 28, 2008, PAL exercised its right to purchase two of the five option aircraft for deliveryin fiscal year 2011 by virtue of an amendment agreement to the Purchase Agreement withAirbus.

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

In May 2007, PAL finalized a supplemental agreement with Boeing relating to its exercise of purchase rights for two Boeing 777-300ER aircraft for delivery in fiscal year 2012.

Subsequent to fiscal year 2009, PAL and Boeing agreed to reschedule the deliveries of fourBoeing 777-300ER aircraft from their original delivery schedules of fiscal year 2010, 2011 and2012 to fiscal years 2013 and 2014.

Capital Expenditure CommitmentsPAL's capital expenditure commitments relate principally to the acquisition of aircraft fleet,aggregating to P=64.50 billion and P=58.45 billion as of March 31, 2009 and 2008, respectively.

26. Capital Management

The primary objective of the Group’s capital management is to ensure that it maintains a strongcredit and healthy capital ratios in order to support its business and maximize shareholder value.The Group considers its equity as its capital.

The Group manages its capital structure and makes adjustment to it, in light of changes ineconomic conditions. To maintain or adjust capital structure, the Group may adjust the dividendpayment to shareholders, return capital to shareholders or issue new shares. No changes weremade in the objectives, policies or processes from April 1, 2006 to March 31, 2009. As

mentioned in Note 2, the Philippine SEC has approved PAL’s request to undergo an equityrestructuring and to exit from rehabilitation on September 7, 2007 and September 28, 2007,respectively.

The Group monitors its use of capital using leverage ratios, specifically, debt ratio and debt toequity ratio. Included as debt are notes payable and long-term obligations. The table belowshows the leverage ratios of the Group as of March 31, 2009 and 2008.

2009 2008

Debt ratio 0.62:1 0.46:1Debt to equity ratio 25.25:1 2.69:1

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27. Financial Risk Management Objectives and Policies

Risk Management Structure

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

Financial Risk CommitteeThe Financial Risk Committee has the overall responsibility for the development of financialrisk strategies, principles, frameworks, policies and limits. It establishes a forum of discussionof the Group approach to financial risk issues in order to make relevant decisions.

Finance Risk Office

The Finance Risk Office is responsible for the comprehensive monitoring, evaluating andanalyzing of the Group financial risks in line with the policies and limits set by the Finance Risk Committee.

Financial Risk Management

The Group’s principal financial instruments, other than derivatives, consist of loans, cash andcash equivalents, short-term investments, investments in bonds and equities, and deposits. Themain purpose of these financial instruments is to raise financing for the Group’s operations.The Group has various other financial assets and financial liabilities such as trade receivables,trade payables, and accrued expenses, which arise directly from its operations.

The main risks arising from the use of financial instruments are market risk (consisting of foreign exchange risk, cash flow interest rate risk, price interest rate risk, equity price risk andfuel price risk), liquidity risk, counterparty risk and credit risk.

PAL uses derivative financial instruments to manage its exposures to currency, interest and fuelprice risks arising from PAL’s operations and its sources of financing. The details of PAL’sderivative transactions, including the risk management objectives and the accounting results, arediscussed in this note.

 Market risksIncreasing market fluctuations may result in significant equity, cash flow and profit volatilityrisks for the Group. Its operating activities as well as its investing and financing activities are

affected by changes in foreign exchange rates, interest rates and fuel prices. The Group seeks tomanage and control these risks primarily through its regular operating and financing activities,and through execution of a documented hedging strategy.

Management of financial market risk is a key priority for the Group. The Group generallyapplies sensitivity analysis in analyzing and managing its market risks. Sensitivity analysisenables management to identify the risk position of the Group as well as provide an approximatequantification of the risk exposures. Estimates provided for foreign exchange risk, cash flowinterest rate risk, price interest rate risk and fuel price risk are based on the historical volatilityfor each market factor, with adjustments being made to arrive at what the Group considers to bereasonably possible.

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Foreign exchange risk The Group is exposed to foreign exchange rate fluctuations arising from its revenue, expensesand 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 issold as soon as practicable. PAL also uses foreign currency forward contracts and options tohedge a portion of its exposure. PAL’s significant foreign currency-denominated monetaryassets and liabilities as of March 31 are as follows:

2009 2008

(In Thousands)

Financial assets and financial liabilities:

Financial Assets:Cash P=738,290 P=1,181,068Receivables 3,888,819 4,401,834Others*

1,698,9341,509,813

6,326,043 7,092,715

Financial Liabilities:Accounts payable 1,141,064 759,625Accrued expenses 4,001,400 4,021,854Others** 1,440,022 1,069,413

6,582,486 5,850,892

Net foreign currency-denominatedfinancial assets (liabilities) (256,443) 1,241,823

Nonfinancial liabilities:

Accrued employee benefits payable (4,200,028) (3,237,802)Unremitted tax collections (145,508) (1,166,162)

Provisions (1,583,593) –(5,929,129) (4,403,964)

Net foreign currency-denominated monetary

liabilities P=6,185,572 P=3,162,141* Includes miscellaneous deposits, security deposits and currency forwards.** Substantially pertaining to notes payable to a local bank.

The Group recognized P=752.73 million foreign exchange gain in 2009, P=1.01 billion andP=193.25 million foreign exchange loss in 2008 and 2007, respectively, arising from thetranslation of these foreign currency-denominated financial instruments.

The Group’s foreign currency-denominated exposures comprise primarily of USD and Japaneseyen (JPY). Other foreign currency exposures include Canadian Dollar (CAD), Euro (EUR),Australian Dollar (AUD), Singaporean Dollar (SGD), and Hong Kong Dollar (HKD).

Sensitivity analysisThe following tables show the impact on the Group’s income before income tax of reasonablypossible changes in the exchange rates of foreign currencies against the USD, PAL’s functionalcurrency (amounts in thousands).

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2009

Net loss (gain) effect on income before tax

Currency

Movement in foreign

exchange rates

Increase in foreign

exchange rates

Decrease in foreign

exchange rates

PHP 15.25% P=458,847 (P=458,847)

JPY 13.60% (9,345) 9,345

Others* 0.00% to 26.73% (149,188) 149,188

Net P=300,314 (P=300,314)

* Includes various currencies (i.e. CAD, AUD, EUR, HKD, SGD and others) 

2008

Net loss (gain) effect on income before tax

CurrencyMovement in foreign

exchange ratesIncrease in foreign

exchange ratesDecrease in foreign

exchange rates

PHP 8.02% P=84,932 (P=84,932)

JPY 10.72% (31,568) 31,568

Others* 0.00%-22.65% (165,604) 165,604

Net (P=112,240) P=112,240

* Includes various currencies (i.e. CAD, AUD, EUR, HKD, SGD and others) 

PAL’s major currency derivatives consist of options and forwards to buy USD and sellJPY. Before taking into account the effect of income taxes, income for the period endedMarch 31, 2009 and 2008 would have either increased by P=81.35 million and P=32.49 million ordecreased by P=140.81 million and P=45.64 million, respectively.

Other currency derivatives consist of options and forward contracts in different currencies.Before taking into account the effect of income taxes, income for the period ending March 31,2009 and 2008 would either increase by P=36.12 million and P=6.56 million and decrease byP=50.99 million and P=6.64 million, respectively, had the various foreign exchange rates changedwith the range of 9.30% to 15.28% in 2009 and 0.80% to 10.70% in 2008. There is no otherimpact on the Group’s equity other than those affecting profit and loss.

Cash flow interest rate risk The Group’s policy on interest rate risk is designed to limit the Group’s exposure to fluctuatinginterest rates. Before taking into account the effects of interest hedging, the ratio of floating rateto the total borrowings is 0.67:1 and 0.54:1 as of March 31, 2009 and 2008, respectively.

PAL has interest rate swap agreements (either as freestanding instruments or embedded incertain long-term obligations) to manage its interest rate exposure relative to the financing of three Airbus 330-300 and two Airbus 340-300. The interest rate swap agreements relative to thefinancing of two Airbus 330-300 aircraft require the exchange, at semi-annual intervals, thedifference between the Group’s fixed interest rates and the counterparties’ floating interest rates.The effect of these swap agreements (aggregate notional amounts of $36.08 million and$52.41 million as of March 31, 2009 and 2008, respectively) is to effectively fix the Group’sinterest rate exposure under these financing agreements to rates ranging from 6.50% to 6.61%.With respect to the junior loan financing of one Airbus 330-300 and two Airbus 340-300, theGroup agreed with the counterparties to exchange, at semi-annual intervals, the differencebetween the Group’s floating interest rates and the counterparties’ fixed interest rates. These

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swap agreements (aggregate notional amounts of $5.42 million and $6.58 million as of March 31,2009 and 2008, respectively) effectively convert the Group’s fixed interest rate exposure relative

to these junior loan financing agreements of 7.95% into floating rate exposure based on six-month LIBOR plus margin.

Sensitivity analysisThe Group’s exposure to cash flow interest rate risk arises from the regular repricing of intereston the floating rate loans. A sensitivity analysis to a reasonably possible change in the interestrates, holding all other variables constant, would show the potential decrease or increase in theGroup’s profit and loss.

Income before income tax as of March 31, 2009 and 2008 would either decrease or increase byP=54.86 million and P=102.97 million, respectively, if the USD interest rate for the periods hadbeen higher or lower by 25 basis points and 50 basis points, respectively. There is no otherimpact on the Group’s equity other than those already affecting profit and loss. The Groupassumes concurrent movements in interest rates and parallel shifts in the yield curves.

Price interest rate risk PAL’s interest rate swaps, designated as cash flow hedges and investments in US Treasurybonds, classified as available for sale, are subject to price interest rate risk. The prices of theseinvestments are monitored based on their current fair values, which are affected by the changesin market factors such as interest rates.

As of March 31, 2009, the Group has no outstanding quoted debt investments.

Sensitivity analysisA sensitivity analysis to a reasonably possible change in the interest rates, holding all othervariables constant, would show the potential decrease or increase in the Group’s equity.

Before taking into account the effect of income taxes, equity as of March 31, 2009 and 2008would increase by P=1.99 million and P=23.55 million, respectively, and decrease by P=1.99 millionand P=23.42 million, respectively, if the USD interest rate for the periods had been 25 basis pointshigher or lower in 2009 and 50 basis points higher or lower in 2008. The Group assumesconcurrent movements in interest rates and parallel shifts in the yield curves. The impact on theGroup’s equity already excludes the impact of transactions affecting profit or loss.

 Equity price risk 

Equity price risk is the risk that the fair values of equity securities decrease as the result of changes in the levels of equity indices and the value of individual stocks. The prices of theseinvestments are monitored based on their current fair values.

Sensitivity analysisBefore taking into account the effect of taxes, equity as of March 31, 2009 and 2008 wouldeither decrease or increase by P=69.78 million and P=55.13 million, respectively, had the indiceschanged by 31.55% to 37.46% in 2009 and by 19.82% to 25.50% in 2008. The impact on theGroup’s equity already excludes the impact of transactions affecting profit or loss.

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Fuel price risk The Group is exposed to price risk on jet fuel purchases. This risk is managed by a combinationof strategies with the objective of managing price levels within an acceptable band through

various types of derivative and hedging instruments. In managing this significant risk, the Grouphas a portfolio of swaps, collars, and compound structures with sold options or optioncombinations with extendible or cancellable features. The Group implements such strategies tomanage 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 toliquidity constraints in the refined oil products market (i.e., jet fuel).

The Group uses a Value-at-Risk (VaR) computation to estimate the potential three-day loss inthe fair value of its fuel derivatives. The VaR computation is a risk analysis tool designed toestimate statistically the maximum potential loss from adverse movement in fuel prices.

 Assumptions and Limitations of VaRThe VaR methodology employed by the Group uses a three-day period due to the assumptionthat not all positions could be undone in a single day given the size of the positions. The VaRcomputation makes use of Monte Carlo simulation with multi-factor models. Multi-factormodels ensure that the simulation process takes into account mean reversion and seasonality. Itcaptures the complex dynamics of the term structure of commodity markets, such as contangoand backwardation. The VaR estimates are made assuming normal market conditions using a95% confidence interval and are determined by observing market data movements over a 90-dayperiod.

The estimated potential three-day losses on its fuel derivative transactions, as calculated in theVaR model amounted to P=83.30 million and P=191.50 million as of March 31, 2009 and 2008,respectively.

The high, average and low VaR amounts are as follows:

High Average Low(In Thousands)

April 1, 2008 to March 31, 2009 P=1,135,119 P=390,662 P=75,536April 1, 2007 to March 31, 2008 322,621 156,359 92,878

 Liquidity risk Liquidity risk arises from the possibility that the Group may encounter difficulties in raisingfunds to meet commitments from financial instruments (e.g., long-term obligations) or that amarket for derivatives may not exist in some circumstances.

The Group’s objectives to manage its liquidity profile are: a) to ensure that adequate funding isavailable at all times, b) to meet commitments as they arise without incurring unnecessary costs,c) to be able to access funding when needed at the least possible cost and d) to maintain anadequate time spread of refinancing maturities.

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The tables below summarize the maturity analysis of the Group’s financial liabilities based oncontractual undiscounted payments (principal and interest): 

 March 31, 2009 (amounts in thousands)

<1 year

 

>1-<2 years >2-<3 years

 

>3-<4 years

 

>4-<5 years

 

>5 years

 

TotalAccounts payable and accrued

expenses P=12,087,477 P= –  P= –  P= –  P= –  P= –  P=12,087,477

Notes payable (noncurrent portionis included under “Othernoncurrent liabilities”) 6,918,535  –    –    –    –    –  6,918,535

Obligation under finance lease 7,869,350 7,484,637 6,538,084 3,437,187 8,579,991 9,106,483 43,015,732

Other long-term liabilities 4,110,205 4,537,384 3,989,973 1,064,509 1,000,108 3,597,512 18,299,691

Other liability(under “Accrued expense” and“Other noncurrent liabilities”)(Note 16) 414,008 414,008 414,008 414,008 414,008 34,525 2,104,565

Due to related parties 481,090  –    –    –    –    –   481,090

Derivative instruments:Contractual receivable (1,483,021)  –    –    –    –    –   (1,483,021)

Contractual payable 1,509,701  –    –    –    –    –   1,509,701

Fuel derivatives 906,896 2,690,811  –    –    –    –   3,597,707

P=32,814,241 P=15,126,840 P=10,942,065 P=4,915,704 P=9,994,107 P=12,738,520 P=86,531,477

 March 31, 2008 (amounts in thousands)

<1 year 

>1-<2 years >2-<3 years 

>3-<4 years 

>4-<5 years 

>5 years 

TotalAccounts payable and accrued

expenses P=11,731,286 P=– P=– P= –  P= –  P= –  P=11,731,286Notes payable (noncurrent portion

is included under “Othernoncurrent liabilities”) 3,464,871 – –  –    –    –   3,464,871

Obligation under finance lease 6,973,419 6,592,103 5,738,402 4,559,296 1,804,569 9,804,058 35,471,847Other long-term liabilities 250,745 3,291,166 3,397,310 2,513,502  –    –  9,452,723Other liability

(under “Accrued expense” and“Other noncurrent liabilities”)

(Note 16) 414,011 414,011 414,011 414,011 414,011 448,501 2,518,556Due to related parties 481,090 – –  –    –    –  481,090

Derivative instruments:Contractual receivable (1,758,178) (20,794) –  –    –    –  (1,778,972)Contractual payable 2,040,992 50,065 –   – – – 2,091,057Fuel derivatives 789,355 234,794 23,383   – – – 1,047,532

P=24,387,591 P=10,561,345 P=9,573,106 P=7,486,809 P=2,218,580 P=10,252,559 P=64,479,990

  Note: Coupon cash flows on floating rate liabilities are determined using projected rates. In the case of derivatives, where the settlement mechanism is gross, the contractual cash inflows and outflows are presented by time bucket. Where the settlement mechanism is net, the futureundiscounted cash flows are used, where the estimated forward or swap curve is compared against contractually agreed rates or prices.

Counterparty risk The Group’s counterparty risk encompasses issuer risk on investment securities; credit risk oncash in bank, time deposits, and security deposits; and settlement risk on derivatives. The Groupmanages its counterparty risk by transacting with counterparties of good financial condition and

selecting investment grade securities. Settlement risk on derivatives is managed by limitingaggregate exposure on all outstanding derivatives to any individual counterparty, taking intoaccount its credit rating. Credit limits are set in line with the long-term rating of the counterpartyas determined by Standard & Poor’s and Moody’s. These limits are regularly monitored,reviewed and adjusted as deemed necessary. PAL also enters into master netting arrangementsand implements counterparty and transaction limits to avoid concentration of counterparty risk.

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- 58 -The table below shows the maximum counterparty exposure before taking into account anycollateral and other credit enhancements of the Group as of March 31:

2009 2008

(amounts in thousands)Cash in bank and cash equivalents P=5,759,600 P=14,724,057

Short-term investments 374,205 –Receivables 4,588,469 5,323,305Investment in US Treasury bonds – 92,364Investment in MAC 255,200 330,000Derivative instruments 3,266,113 4,830,460Margin deposits, lease deposits and others 8,856,496 4,012,394

P=23,100,083 P=29,312,580

Credit risksThe Group’s exposure to credit risk arises from the possibility that agents and othercounterparties may fail to fulfill their agreed obligations and that the collaterals held may not besufficient to cover the Group’s claims. To manage such risk, the Group, through its Credit 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 Grouprequires from its agents financial guarantees in the form of cash bonds, letters of credit andassignment of time deposits. The carrying value of these collaterals held as of March 31, 2009and 2008 amounted to P=1.16 billion and P=0.78 billion, respectively.

The Group, to the best of its knowledge, has no significant concentration of credit risk with anycounterparty.

Credit quality per class of financial assetsThe credit quality of receivables is managed by the Group using internal credit quality ratings.

High grade accounts consist of passenger and cargo receivables from agents with good financialcondition and which management believes to be reasonably assured to be recoverable. Standardgrade accounts consist of passenger and cargo receivables from agents with relatively lowdefaults. Substandard grade accounts, on the other hand, are receivables from agents withhistory of defaulted payments. Accounts from these agents are consistently monitored in order toidentify any potential adverse changes in the credit quality. Receivables from IATA whichconsist of receivables from other airlines through the IATA clearing house are deemed highgrade accounts as the expectation of default is minimal.

Past due accounts include those accounts that are past due by only a few days. An analysis of pastdue accounts, by age, is discussed in the succeeding section.

The table below shows the credit quality of receivables and an aging analysis of past dueaccounts (amounts in thousands):

2009

Past Due but not Impaired

High Grade

Standard

Grade

Substandard

Grade

Over 30

Days

Over 60

Days

Over 90

Days

Impaired

Financial

Assets Others Total

General traffic

Passenger

receivables P=2,630,622 P=515,549 P=121,539 P=160,713 P=5,423 P=20,531 P=121,878 P=43,580 P=3,619,835

Cargo

receivables 101,202 69,050 23,243 13,800 12,880 17,577 92,631 – 330,383

(Forward)

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Past Due but not Impaired

High Grade

Standard

Grade

Substandard

Grade

Over 30

Days

Over 60

Days

Over 90

Days

Impaired

Financial

Assets Others Total

IATA

receivables P=324,234 P=– P=– P=– P=– P=– P=– P=– P=324,234

Others – – – 2,130 – – 60,092 – 62,222

Non-tradereceivables* – – – 14,914 5,036 137,567 1,850,108 368,879 2,376,504

P=3,056,058 P=584,599 P=144,782 P=191,557 P=23,339 P=175,675 P=2,124,709 P=412,459 P=6,713,178

*Non-trade receivables exclude receivables arising from statutory requirements amounting to P2,885,176.

2008

Past Due but not Impaired

High GradeStandard

GradeSubstandard

GradeOver 30

DaysOver 60

DaysOver 90

Days

ImpairedFinancial

Assets Others Total

General trafficPassenger

receivables P=2,472,080 P=6,723 P=148,568 P=591,140 P=– P=22,799 P=116,123 P=202,684 P=3,560,117Cargo receivables 398,394 752 42 – – – 119,339 42,214 560,741IATA receivables 347,744 – – – – – – – 347,744Others – – – 543 1,503 1,963 9,061 12,359 25,429

Non-tradereceivables* – – – 108,733 47,560 77,165 1,077,681 840,340 2,151,479

P=3,218,218 P=7,475 P=148,610 P=700,416 P=49,063 P=101,927 P=1,322,204 P=1,097,597 P=6,645,510

*Non-trade receivables exclude receivables arising from statutory requirements amounting to P2,230,604.

28. Financial Instruments

Fair Values of Financial InstrumentsThe table below presents a comparison by category of the carrying amounts and fair values of theGroup’s financial instruments (amounts in thousands):

2009 2008Carrying Value Fair Value Carrying Value Fair Value

Financial Assets

Cash P=1,069,407 P=1,069,407 P=1,822,048 P=1,822,048

Loans and ReceivablesCash equivalents 4,767,581 4,767,581 12,961,647 12,961,647Short-term investments 374,205 374,205 – –Accounts receivable - net:

General traffic:Passenger 3,497,957 3,497,957 3,443,994 3,443,994Cargo 237,752 237,752 441,402 441,402IATA 324,234 324,234 347,744 347,744Others 2,130 2,130 16,368 16,368

Non-trade* 526,395 526,395 1,073,798 1,073,798Margin deposits, lease deposits

and others 8,856,496 8,613,562 4,012,394 3,192,181

18,586,750 18,343,816 22,297,347 21,477,134

Available-for-sale investments:Debt investments - quoted – – 92,364 92,364Equity investments:

Quoted 516,291 516,291 652,482 652,482Unquoted 303,219 303,219 264,315 264,315

819,510 819,510 1,009,161 1,009,161

Derivative Assets:Fair value through profit or loss 3,266,113 3,266,113 1,536,287 1,536,287Accounted for as cash flow 

hedges – – 3,294,173 3,294,173

3,266,113 3,266,113 4,830,460 4,830,460

P=23,741,780 P=23,498,846 P=29,959,016 P=29,138,803

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2009 2008Carrying Value Fair Value Carrying Value Fair Value

Financial LiabilitiesFinancial liabilities carried atamortized cost:Accounts payable and accrued

expenses P=12,087,477 P=12,087,477 P=11,731,286 P=11,731,286Notes payable 6,888,223 6,888,223 3,440,235 3,440,235Obligations under finance

lease 36,971,165 37,408,513 28,417,172 29,968,908Other long-term liabilities 15,437,709 16,503,573 7,462,715 8,913,486Due to related parties 481,090 481,090 481,090 481,090Other liability

(under “Accrued expense” and“Other noncurrent liabilities”) 1,690,364 1,705,229 1,929,169 1,956,519

73,556,028 75,074,105 53,461,667 56,491,524Derivative Liabilities:

Fair value through profit or loss 6,869,339 6,869,339 3,549,177 3,549,177Accounted for as cash flow 

hedges 37,721 37,721 264,399 264,399

6,907,060 6,907,060 3,813,576 3,813,576

P=80,463,088 P=81,981,165 P=57,275,243 P=60,305,100

* Excludes receivables arising from statutory requirements (net of allowance amounting to P 562,083 and P433,636 as of March 31,

2009 and 2008, respectively).

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, short-term investments and receivablesThe carrying amounts of cash and cash equivalents and short-term investments approximate fairvalue. The carrying amounts of receivables approximate fair value due to their short-termsettlement period.

Current financial instrumentsSimilarly, the historical cost carrying amounts of receivables, miscellaneous deposits, accountspayable, accrued expenses and due to related parties approximate their fair values due to theshort-term nature of these accounts.

 Debt investments (available-for-sale investments)

The fair values of debt investments are generally based upon quoted market prices. If marketprices are not readily available, fair values are estimated by obtaining quotes from counterpartiesor from independent entities that offer pricing services, by adjusting the quoted market prices of comparable investments.

 Equity investments (available-for-sale investments) The fair values of equity investments are generally based upon quoted market prices. Unquotedequity investments are carried at cost (subject to impairment) if the fair value cannot bedetermined reliably or where the variability in the range of fair value estimates is significant.

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- 61 -Security depositsThe fair value of refundable deposits is determined using discounted cash flow techniques basedon prevailing market rates. Discount rates used are 1.65% to 1.67% and 6.66% forMarch 31, 2009 and 2008, respectively.

 Long-term obligations and short-term, fixed rate notes payableThe fair value of long-term obligations (whether fixed or floating) is generally based on thepresent value of expected cash flows with discount rates that are based on risk-adjustedbenchmark rates (in the case of floating rate liabilities with quarterly repricing, the carryingvalue approximates the fair value in view of the recent and regular repricing based on currentmarket rates). The discount rates used range from 0.92% to 4.17% and 2.04% to 5.09% forUSD-denominated loans in 2009 and 2008, respectively. The discount rates used amounted to2.25% and 2.10% for JPY-denominated loans in 2009 and 2008, respectively.

The carrying value of the short-term, fixed rate notes payable approximates its fair value due tothe short-term settlement period of the notes (i.e., effect of discounting is minimal).

 DerivativesThe fair value of forward exchange contracts is calculated by reference to current forwardexchange rates for contracts with similar maturity profiles.

The fair value of interest rate swap transactions is the net present value of estimated future cashflows.

The fair values of fuel derivatives that are actively traded on an organized and liquid market arebased on published prices. In the absence of an active and liquid market, and depending on thetype of instrument and the underlying commodity, the fair value of fuel derivatives is determinedby the use of either present value methods or standard option valuation models. The valuationinputs on these fuel derivatives are based on assumptions developed from observable

information, including (but not limited to) the forward curve derived from published or futuresprices adjusted for factors such as seasonality considerations and the volatilities that take intoaccount the impact of spot prices and the long-term price outlook of the underlying commodity.The fair values of fuel derivatives with extendible or cancelable features are based on quotesprovided by counterparties.

Derivative Financial InstrumentsThe derivative financial instruments set out in this section have been entered into to achieve theGroup’s risk management objectives, as discussed in Note 27. PAL’s derivative financialinstruments are accounted for at fair value through profit or loss, except for interest rate swapsand certain fuel derivatives (which are accounted for as cash flow hedges).

The following table provides information about PAL’s derivative financial instruments

outstanding as of March 31 and the related fair values:

2009 2008

(In Thousands)

Asset Liability Asset Liability

Fuel derivatives P=3,231,733 P=6,829,390 P=4,823,570 P=3,467,627Interest rate swaps – 37,721 – 107,938Currency forwards – – 6,890 39,585Structured currency derivatives 34,380 39,949 – 198,426

P=3,266,113 P=6,907,060 P=4,830,460 P=3,813,576

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As of March 31, 2009 and 2008, the positive and negative fair values of derivative positions thatwill settle in 12 months or less are classified under “Other current assets” (P=3.09 billion in 2009and P=3.07 billion in 2008) and “Accrued expenses” (P=4.00 billion in 2009 and P=2.21 billion in

2008), respectively. The positive and negative fair values of derivative positions that will settlein more than 12 months are classified under “Other noncurrent assets" (P=179.07 million in 2009and P=1.76 billion in 2008) and “Other noncurrent liabilities” (P=2.91 billion in 2009 and P=1.61billion in 2008), respectively. The derivative asset (liability) balances include amounts arisingfrom derivative settlements that are currently due to (due from) the Group. The amounts totaled(P=249.28 million) and P=308.45 million as of March 31, 2009 and 2008, respectively.

Fuel derivativesPAL is dependent on jet fuel to run its operation. Approximately 47.32% and 32.03% of itsoperating expenses represent jet fuel consumption for March 31, 2009 and 2008, respectively.

The dramatic increase in all energy prices over the years is another reason why jet fuel and oil

have become a large portion of its expenses. In order to hedge against adverse market conditionand to be able to acquire jet fuel at the lowest possible cost, PAL enters into fuel derivatives.PAL does not purchase or hold any derivative financial instruments for trading purposes.

PAL accounted for certain fuel derivatives as cash flow hedges as such instruments are utilizedto reduce the variability of the cash flows of forecasted jet fuel purchases. These hedges,consisting of fuel caps and floors (collar structures), and fixed swaps are linked to specified fuelindices and have various monthly maturities up to June 30, 2010.

As of March 31, 2009, there are no outstanding fuel derivatives accounted for as cash flowhedges. As of March 31, 2008, the outstanding notional amounts of bought and sold optionsaccounted for as cash flow hedges totaled 3,855,000 barrels and 3,585,000 barrels, respectively.

The net positive fair value of these fuel derivatives as of March 31, 2008 amounted toP=3.14 billion. The unrealized positive fair value after tax included under “Cumulativetranslation adjustment, net of deferred income tax” in the equity section of the consolidatedstatements of financial position amounted to P=1.00 billion and P=2.54 billion for the years endedMarch 31, 2009 and 2008, respectively.

PAL’s other fuel derivatives, which provide economic hedges against jet fuel price risk, are notaccounted for as accounting hedges. These derivatives include leveraged collars, written calls,swaps and other structures with extendible or cancelable features and are carried at fair values inthe consolidated statement of financial position, with fair value changes being reportedimmediately in the consolidated statement of comprehensive income. As of March 31, 2009, theoutstanding notional amounts of bought and sold options not accounted for as cash flow hedges

totaled 9,435,000 barrels and 9,705,000 barrels, respectively. As of March 31, 2008, theoutstanding notional amounts of bought and sold options not accounted for as cash flow hedgestotaled 3,180,000 and 8,790,000 barrels, respectively. The net negative fair value of these fuelderivatives as of March 31, 2009 and 2008 amounted to P=3.35 billion and P=2.09 billion,respectively.

In 2009, PAL incurred P=5.30 billion loss resulting from the early termination of several fuelhedging contracts before maturity date and P=2.85 billion loss from restructuring deals.

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 Interest rate swapsThe interest rate swap agreements relative to the financing of two Airbus 330-300 aircraft haveaggregate notional amounts of $36.08 million and $52.41 million as of March 31, 2009 and 2008,

respectively, and have expiry dates from August 27, 2009 to September 24, 2009. Under theagreements, PAL agreed with the counterparties to exchange, at semi-annual intervals, thedifference between PAL’s fixed interest rates and the counterparties’ floating interest rates. Theeffect of these swap agreements is to effectively fix PAL’s interest rate exposures under thesefinancing agreements to rates ranging from 6.50% to 6.61%. As discussed under “Aircraftsecured claims”, the unpaid swap costs amounting to P=51.94 million as of March 31, 1999 wereconverted into long-term liabilities in 1999 and included as part of the outstanding principalbalances of the related “Aircraft secured claims” (see Note 15).

As of March 31, 2009 and 2008, the estimated negative fair values for these interest rate swapagreements amounted to P=37.72 million and P=107.94 million, respectively. Financing charges inthe consolidated statements of comprehensive income include swap costs on the interest rate swapagreements of P=77.99 million and P=39.39 million for the years ended March 31, 2009 and 2008,respectively.

The unrealized negative fair value after tax included under “Cumulative translation adjustment,net of deferred income tax” in the equity section of the consolidated statements of financialposition amounted to P=26.24 million and P=74.20 million as of March 31, 2009 and 2008,respectively.

Currency forwardsThe Group’s currency forwards are carried at fair value in the consolidated statements of financialposition, with the fair value changes being reported immediately in the consolidated statements of 

comprehensive income. The Group’s outstanding currency forwards consist of short term buyUSD and sell various currencies (i.e., JPY, HKD, CAD, AUD, PHP). The aggregate notionalamount in USD is equal to $10.52 million as of March 31, 2008. The net negative fair values of these forwards amount to P=37.71 million as of March 31, 2008. During 2008, PAL also enteredinto currency forward contract to buy EUR and sell CAD, with an aggregate notional amount inEUR 600. The net positive fair value of these currency forwards amounts to P=5.01 million as of March 31, 2008.

As of March 31, 2009, PAL has no outstanding currency forwards.

Structured currency derivativesThe Group entered into structured currency derivatives consisting of compound option structures

with combination of long calls with knockout and short put with leverage features. Thesecontracts are carried at fair value in the consolidated statement of financial position. The fairvalue changes of the derivative instruments are recognized directly in the consolidated statementof comprehensive income. The outstanding structured currency derivatives are composed of option to buy EUR in USD and buy USD in various currencies (i.e., JPY, CAD and SGD). As of March 31, 2009 and 2008, the contracts have aggregate notional amounts of $30.40 million and$29.27 million, respectively, while negative net fair value of these structures amounts to P=5.57million and P=198.42 million, respectively.

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 Hedge effectiveness of cash flow hedgesBelow is a rollforward of PAL’s “Cumulative translation adjustments” on cash flow hedges forthe years ended March 31:

2009 2008

(In Thousands)Beginning of year P=2,273,118 P=781,061

Items recognized as other comprehensive income:Changes in fair value of cash flow hedges 1,848,022 3,908,235Transferred to consolidated statements of 

comprehensive income* (3,367,120) (1,895,314)Tax effects of items taken directly to or

transferred from equity 645,729 (678,486)Foreign exchange difference (358,281) 157,622

(1,231,650) 1,492,057End of year P=1,041,468 P=2,273,118

* The amount transferred to the consolidated statements of comprehensive income is included in flyingoperations expense as hedging gain or loss and the amount from interest rate swaps is included as part of financing charges as swap income or cost.

For the years ended March 31, 2009 and 2008, the effective portion of the positive fair valuechanges on the Group’s cash flows hedges that were deferred in equity amounted to P=1.04 billion(net of tax) and P=2.27 billion (net of tax), respectively. The total mark-to-market gain (loss)relating to the ineffective portion of cash flow hedges for the years ended March 31, 2009 and2008, which were recognized immediately in profit and loss amounted to (P=6.93) million andP=658.86 million, respectively.

Fair value changes on derivativesThe net changes in the fair values of all derivative instruments for the years ended March 31 areas follows:

2009 2008

(In Thousands)Beginning of year P=708,432 P=1,268,734

Net changes in fair values of derivatives:Designated as accounting hedges 1,841,138 4,567,093Not designated as accounting hedges (12,134,596) (2,845,282)

(10,293,458) 1,721,811

Fair value of settled instruments** 6,273,647 (2,135,012)Foreign exchange difference (80,292) (147,101)

End of year* (P=3,391,671) P=708,432

* Includes balances that are currently due to (from) the Group amounting to (P=249,276) and P=308.45 million as of 

 March 31, 2009 and 2008, respectively.

** Includes fuel derivatives, interest rate swaps, currency forwards and structured currency derivatives.

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29. Segment Information

PAL’s domestic and international destinations constitute its reportable geographical segments,which is consistent with how PAL’s management internally disaggregates financial informationfor the purpose of evaluating performance and making operating decisions.

Segment information for each reportable geographical segment is shown in the following table:

2009 2008 2007(In Thousands)

International:Revenue P=57,659,878 P=52,428,497 P=52,348,327Net income (loss) (4,608,683) 3,911,198 4,079,029

Domestic:Revenue 16,417,412 12,370,909 12,837,608

Net loss (3,109,682) (456,140) (269,470)Total:

Revenue 74,077,290 64,799,406 65,185,935Net income (loss) (7,718,365) 3,455,058 3,809,559

 

The reconciliation of total income reported by reportable geographical segment to net income(loss) in the consolidated statements of comprehensive income is presented in the followingtable:

2009 2008 2007

(In Thousands)Total segment income (loss) of 

reportable segments (P=7,718,365) P=3,455,058 P=3,809,559Add (deduct) unallocated items:Non-transport revenue and

other income 1,233,701 1,518,408 4,225,586Non-transport expenses and

other charges (6,000,863) (6,333,684) (3,475,106)Benefit from (provision for)

income tax (473,274) 1,355,667 2,466,398

Net income (loss) (P=12,958,801) (P=4,551) P=7,026,437

 The details of revenue earned from each business segment (passenger, cargo, and others) areshown in the consolidated statements of comprehensive income.

PAL’s major revenue-producing asset is the fleet owned by PAL, which is employed across itsroute network (see Note 11). Geographical and business segment assets, liabilities, and otherinformation on cash flows and capital expenditures are not disclosed since there is noreasonable basis for allocating such assets and related liabilities and cash flows to geographicaland business segments.

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PAL HOLDINGS, INC. & SUBSIDIARIES

Schedule F Long-term Obligations

March 31, 2009(Amounts in Thousand Pesos )

Amount Amount Amoun t

Type of Obligation Authorized by Shown as Shown as

Indenture Current Long-term To

Obligations under finance leases relating to:

Boeing 747-400 aircraft P - P 781,095 P 3,905,428 P 4,6

Airbus 320-200 aircraft 1,011,778 11,829,058 12,8

Airbus 340-300 aircraft 1,657,824 4,486,250 6,1Airbus 330-300 aircraft - 3,040,030 10,259,702 13,2

- 6,490,727 30,480,438 36,9

Long-term debt:

Secured loans - - 6,052,750 6,0

Trade Creditor Claims - - -

Estimated terminated operating lease claims* - 342,247 495,647 8

Unsecured claims* - 3,463,480 5,083,584 8,5

- 3,805,727 11,631,981 15,4

P - P 10,296,454 P 42,112,419 P 52,4

* Net of im puted interest 

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PAL HOLDINGS, INC. & SUBSIDIARIES

Schedule F Long-term Obligations - ANNEX A

March 31, 2009(Amounts in Thousand Pesos )

Type of Obligation Amount Shown Amount Shown as Floating Payment Issue

as Current Long-term Interest Rate Term Date

Secured Loans:From a local bank P - P 3,220,063 3 mont h LIBOR plus quarterly 2008

margin of 3%

From a syndicate of local banks - 2,832,687 3 mont h LIBOR plus quarterly 2008

margin of 3%

P - P 6,052,750

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PAL HOLDINGS, INC. & SUBSIDIARIES

Schedule F Long-term Obligations - ANNEX B

March 31, 2009(Amounts in Thousand Pes os)

Amount Amount Shown ed O Lease Expiry Early

Aircraft Type Shown as Current as Long-term e Cl Date

Net Present Value Net Present Value

Estimated Terminated Operating Lease Claims

B747-200 P 171,947 P 252,424 1997, 1999, 2000

F50 164,635 234,895 1998-2001

SD-360 5,665 8,328 1999

P 342,247 P 495,647

Restructured Payment terms:

June 7, 2000 - 5%

June 7, 2009 - 31%

June 7, 2010 - 32%

June 7, 2011 - 32%

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PAL HOLDINGS, INC. & SUBSIDIARIES

Schedule F Long-term Obligations - ANNEX C

March 31, 2009(Amounts in Thousand Pesos )

Original Original Floating

Amount Shown Amount Shown Fixed Interest Rate

Type of Obligation as Current as Long-term Interest Rate

Net Present Value Net Present Value

Unsecured ClaimsForeign-currency denominated loans:

US$178.5 floating rate note - P 2,769,109 P 4,065,947 -

6 month LIBOR

Others Loans 596,075 873,533 10.75%

1 month LIBOR

3,365,184 4,939,480

Peso denominated loans 98,296 144,104 19.50% weighted average yield ra

364 -day treasury bill

P 3,463,480 P 5,083,584

Restructured payment terms:

June 7, 2000 - 5%

June 7, 2009 - 31%

June 7, 2010 - 32%

2% per annum over

1.5-4.5% per annum ov

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PAL HOLDINGS, INC. AND SUBSIDIARIESSCHEDULE I: CAPITAL STOCK

MARCH 31, 2009

Title of Issue No. Of shares reserve

No. of shares No. of shares issued for options, warrants,

authorized and outstanding conversion and other Affiliates Dire

rights an 

Common Stock 20,000,000,000 5,421,512,096 - 5,297,280,230

Number

 

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PAL HOLDINGS, INC.

SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS

AVAILABLE FOR DIVIDEND DECLARATION

MARCH 31, 2009

(Amounts in Thousands)

Deficit as of March 31, 2008 P (14,662) 

Less net loss during the year closed to retained earnings 5,402 

Deficit as of March 31, 2009 P (20,064)