PHI 17Q-Sep 2015

7/23/2019 PHI 17Q-Sep 2015

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SEC Registration Number

P W – 9 4

Company Name

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

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

Principal Office (No./Street/Barangay/City/Town/Province)

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

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

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

Form Type Department requiring the report Secondary License Type, IfApplicable

1 7 - Q

COMPANY INFORMATION

Company‟s Email Address Company‟s Telephone Number/s Mobile Number

[email protected] (02) 817-8710 N/A

No. of StockholdersAnnual Meeting

Month/DayFiscal YearMonth/Day

6,555

As of September 30, 2015

Last Working Day of

September

12/31

CONTACT PERSON INFORMATIONThe designated contact person MUST be an Officer of the Corporation

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

Susan T. Lee [email protected] (02) 817-8710 N/A

Contact Person‟s Address

7/F Allied Bank Center, 6754 Ayala Avenue, Makati City

Note: In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to theCommission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated.

COVER SHEET

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SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-Q

QUARTERLY REPORT PURSUANT TO

SECTION 17 OF THE SECURITIES REGULATION CODE

1. For the quarterly period ended September 30, 2015

2. SEC Identification Number PW- 94

3. BIR Tax Identification No. 000-707-922

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

5. Metro Manila, Philippines

(Province, country or other jurisdiction ofincorporation or organization)

6. Industry Classification Code: (SEC Use Only)

7. 7/F Allied Bank Center, 6754 Ayala Avenue, Makati City 1200

Address of principal office including postal code Postal Code

8. (632) 817-8710

Registrant‟s telephone number, including area code

9. N/A

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 Class Number of Shares of Common Stock Outstanding

and Amount of Debt Outstanding

Common Stock 24,836,512,096

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

Yes [ / ] No [ ]

Philippine Stock Exchange/Common Stock - 22,421,567,685 shares

12. Check whether the registrant:

(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17 thereunder orSections 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of theCorporation Code of the Philippines, during the preceding twelve (12) months (or for suchshorter period the registrant was required to file such reports)

Yes [ / ] No [ ]

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

Yes [ / ] No [ ]

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Annex “A”

PAL HOLDINGS, INC.

AND SUBSIDIARIES

Consolidated Financial Statements

As of September 30, 2015 and December 31, 2014

And for the Nine Months Ended September 30, 2015 and 2014

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PAL HOLDINGS, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Amounts in Thousands)

30-Sep-15 31-Dec-14

(Unaudited) (Audited)

ASSETS

Current Assets

Cash and cash equivalents (Note 2) P 8,498,206 P 10,794,152

Short-term investments 28,380 -

Receivables - net (Note 3) 13,391,882 12,055,998

Expendable parts, fuel, materials and supplies (Note 4) 1,800,043 2,086,405

Other current assets (Note 5) 7,164,266 6,573,844

30,882,777 31,510,399

Assets held for sale (Note 8) 140,493 1,397,275

Total Current Assets 31,023,270 32,907,674

Noncurrent Assets

Property and equipment - net (Note 6) 58,726,215 55,864,288

Investment properties (Note 7) 1,357,771 1,297,147

Investment in an associate (Note 9) 6,368,126 5,708,198

Available-for-sale investments (Note 9) 227,510 504,307

Deferred income tax assets 2,406,083 2,298,652

Other noncurrent assets (Note 10) 14,122,122 10,641,767

Total Noncurrent Assets 83,207,827 76,314,359

TOTAL ASSETS P 114,231,097 P 109,222,033

LIABILITIES AND EQUITY

Current Liabilities

Notes payable (Note 11) P 3,044,015 P 15,589,877

Accounts payable (Note 12) 7,493,270 7,842,556

Current portion of long-term obligations (Note 14) 7,905,682 9,114,925 Unearned transportation revenue 12,886,627 13,060,993

Accrued expenses and other current liabilities (Note 13) 18,615,272 26,231,596

Total Current Liabilities 49,944,866 71,839,947

Noncurrent Liabilities

Long-term obligations - net of current portion (Note 14) 41,471,801 22,189,340

Accrued employee benefits 7,092,414 6,449,271

Reserves and other noncurrent liabilities (Note 15) 5,490,935 5,058,931

Total Noncurrent Liabilities 54,055,150 33,697,542

TOTAL LIABILITIES 104,000,016 105,537,489

Equity

Attributable to the equity holders of the parent:

Capital stock - P1.00 par value (net of subscription receivable amounting to P1,811.25 million) 23,025,318 23,025,318

Additional paid-in capital 17,886,018 17,886,018

Other components of equity (4,206,276) (4,535,330)

Deficit (26,663,124) (32,766,378)

Treasury stock - at cost (56) (56)

10,041,880 3,609,572

Non-controlling interests 189,201 74,972

Total Equity 10,231,081 3,684,544

TOTAL LIABILITIES AND EQUITY P 114,231,097 P 109,222,033

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PAL HOLDINGS, INC. AND SUBSIDIARIES Note:

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


REVENUES (Note 16)

Passenger P 68,370,773 P 60,779,369 P 21,201,123 P 19,768,182

Cargo 5,463,736 5,699,196 1,685,201 2,219,959

Others 8,145,220 7,502,397 3,147,984 3,041,366

81,979,729 73,980,962 26,034,308 25,029,507

EXPENSES (Note 16)

Flying Operations P 45,382,584 P 46,231,515 P 15,340,926 P 15,966,553

Maintenance 8,263,724 6,048,480 2,711,421 2,288,228

Aircraft and traffic s ervicing 8,577,104 8,345,586 2,925,770 2,787,604

Passenger service 6,283,723 5,647,287 2,003,472 1,853,280

Reservation and sales 4,808,918 4,495,784 1,628,395 1,542,455

General and administrative 2,701,295 2,194,982 1,044,798 664,481

Others 372,771 165,323 135,040 52,843

76,390,118 73,128,957 25,789,821 25,155,444

INCOME (LOSS) FROM OPERATIONS 5,589,611 852,004 244,487 (125,938) Financing charges (1,490,919) (1,278,696) (532,435) (467,892)

Share in net income of an as soc iate (Note 9) 378,212 439,418 127,342 198,695

Other income (charges)-net 1,631,342 225,375 408,503 72,978

NET INCOME (LOSS) 6,108,246 238,101 247,897 (322,157)

OTHER COMPREHENSIVE INCOME (LOSS)

Net changes in fair values of ava ilable-for-sa le

investments , net of DIT (30,840) (115,577) 7,902 52,863

Effect of foreign exchang e trans lation 469,131 46,557 355,360 76,949

438,291 (69,020) 363,262 129,812

TOTAL COMPREHENSIVE INCOME (LOS S) P 6,546,537 P 169,081 P 611,159 P (192,345)

Net income (loss) attributable to:

Equity Holders of the Parent P 6,002,132 P 233,877 P 243,549 P (316,619)

Non-controlling Interests P 106,114 P 4,224 P 4,348 P (5,538)

6,108,246 238,101 247,897 (322,157)

Total comprehensive income (loss) attributable to:

Equity Holders of the Parent P 6,432,308 P 164,041 P 600,664 P (188,140)

Non-controlling Interests P 114,229 P 5,040 P 10,495 P (4,205)

6,546,537 169,081 611,159 (192,345)

EARNINGS (LOSS) PER SHARE

Computed based on net income (loss) P 0.24 P 0.01 P 0.01 P (0.01) Computed based on total comprehen sive

income (loss) P 0.26 P 0.01 P 0.02 P (0.01)

Computed based on net income (loss)

09.30.15 nine months = P 6,002,132 / 24,836,512

09.30.14 nine months = P 233,877 / 24,836,512

09.30.15 three months = P 243,549 / 24,836,512

09.30.14 three months = (P 316,619) / 24,836,512

Computed based on total comprehensive income (loss)

09.30.15 nine months = P 6,432,308 / 24,836,512

09.30.14 nine months = P 164,041 / 24,836,512

09.30.15 three months = P 600,664 / 24,836,512

09.30.14 three months = (P 188,140) / 24,836,512

Earnings (loss) per share is determined by dividing net income (loss) / total comprehensive income (loss) by the number of shares outstanding

(Unaudited)

For the Quarter Ended

30-Sep-15 30-Sep-14 30-Sep-15 30-Sep-14

Nine Mon ths EndedNine Months Ended

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INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(UNAUDITED)

(Amounts in Thousands PHP)

Net Changes Total Equity

in Fair Values Effect of Remeasurement Attributable

Additional Cumulative of Available- Change in Losses on to Equity Non-

Capital Paid-in Translation for-sale Revaluation Ownership Defined Benefit Treasury Holders of controlling

Stock Capital Adjustment Investments Increment Interest Plan Sub-total (Deficit) Stock the Parent Interest Total

23,025,318 17,886,018 (5,368,419) 41,243 392,699 520,769 (121,622) (4,535,330) (32,766,378) (56) 3,609,572 74,972 3,684,544

Net income for the period - - - - 6,002,132 - 6,002,132 106,114 6,108,246

Other comprehensive income (loss) 461,015 (30,839) 430,176 - - 430,176 8,115 438,291

Total comprehensive income for the period - - 461,015 (30,839) - - - 430,176 6,002,132 - 6,432,308 114,229 6,546,537

Net effect of transfer of portion of

revaluation increment in property

realized through depreciation. net of

deferred income tax and foreign

exchange adjustment (101,122) (101,122) 101,122 -

23,025,318 17,886,018 (4,907,404) 10,404 291,577 520,769 (121,622) (4,206,276) (26,663,124) (56) 10,041,880 189,201 10,231,081

23,025,318 17,886,018 (5,353,836) 172,813 489,147 520,769 (911,226) (5,082,333) (32,995,856) (56) 2,833,091 58,815 2,891,906

Net income for the period - - - - 233,877 - 233,877 4,224 238,101

Other comprehensive income (loss) 45,751 (115,587) (69,836) - - (69,836) 816 (69,020)

Total comprehensive income for the period - - 45,751 (115,587) - - - (69,836) 233,877 - 164,041 5,040 169,081

Net effect of transfer of portion of

revaluation increment in propertyrealized through depreciation. net of

deferred income tax and foreign

exchange adjustment (101,122) (101,122) 101,122 -

23,025,318 17,886,018 (5,308,085) 57,226 388,025 520,769 (911,226) (5,253,291) (32,660,857) (56) 2,997,132 63,855 3,060,987

Other Components of Equity

BALANCES AT SEPTEMBER 30, 2014

BALANCES AT SEPTEMBER 30, 2015

BALANCES AT DECEMBER 31, 2013

(AUDITED)

BALANCES AT DECEMBER 31, 2014

(AUDITED)

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INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P 6,108,246 P 238,101

Adjustments for:

Depreciation 3,311,475 3,127,369

Income on manufacturers' and suppliers' credits (383,274) (1,059,912)

Net increase in accrued employee benefits payable and

other noncurrent liabilities 807,320 801,727

Effect of remeasurement of derivative financial instruments 527,815 545,496

Share in net income of an as sociate (378,212) (439,413)

Dividend income (237,436) (17,949)

Net gain on dispos al of property and equipment and others (1,380,905) -

Others (20,781) 33,632

Operating income before working capital changes 8,354,248 3,229,051

Decrease (increase) in:

Receivables (753,745) (6,707,031)

Expendable parts, fuel, materials and supplies 383,874 504,878

Other current assets 938,776 (314,502)

Increase (decrease) in:

Accounts payable, accrued expenses and other current liabilities (8,261,156) (1,027,517)

Unearned transportation revenue (784,794) 1,042,070

Net cash used in operating activities (122,797) (3,273,051)

CASH FLOWS FROM INVESTING ACTIVITIES

Predelivery payments for aircraft - (2,107,524)

Net additions to property and equipment (1,220,791) (3,796,703)

Refund of aircraft predelivery payments 1,561,908 8,957,460

Proceeds from sale of property and equipment and others 4,263,120 1,458,126

Investments in an associate - (1,027,708)

Net payments for security depos its (5,337,142) (914,785)

Dividend received 237,436 17,949

Net changes in other assets (224,789) (190,120)

Net cash from (used in) investing activities (720,258) 2,396,695

CASH FLOWS FROM FINANCING ACTIVITIES

Net availments (payments) of notes payable (13,014,085) 3,401,023

Net availments (payments) of long-term obligations 11,205,925 (10,163,933) Net cash used in financing activities (1,808,160) (6,762,910)

EFFECT OF EXCHANGE RATE CHANGES

ON CASH AND CASH EQUIVALENTS 355,269 49,832

NET DECREASE IN CASH AND CASH EQUIVALENTS (2,295,946) (7,589,434)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,794,152 12,782,420

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD P 8,498,206 P 5,192,986

2015 2014

Nine Months Ended September 30

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SELECTED EXPLANATORY NOTES

As of September 30, 2015 and December 31, 2014

And for the Nine Months Ended September 30, 2015 and 2014(As required under Par. 7 (d) Selected Explanatory Notes Required Under SRC Rule 68, asAmended 2011)

a. The Company‟s interim consolidated financial reports are in compliance with generallyaccepted accounting principles in the Philippines as set forth in the Philippine FinancialReporting Standards (PFRS). The financial statements of Philippine Airlines, Inc wereoriginally presented in United States dollars, which is their functional currency wererestated to Philippine peso for purposes of combination of financial statements inaccordance with PFRS 10, Consolidated Financial Statements.

b. Explanatory comments on the seasonality or cyclicality of interim operations.

PAL experiences a peak in holiday travel during the months of January, April, May, Juneand December.

c. The nature and amount of items affecting assets, liabilities, equity, net income, or cashflows which are unusual because of their nature, size, or incidents.

Not Applicable. There were no items affecting assets, liabilities, equity, net income, or cashflows that are unusual because of their nature, size, or incidents.

d. The nature and amount of changes in estimates of amounts reported in prior interim periods

of the current financial year or changes in estimates of amounts reported in prior financialyears, if those changes have a material effect in the current interim period.

Not Applicable. There were no changes in estimates of amounts reported in prior interim periods of the current financial year or changes in estimates of amounts reported in priorfinancial years.

e. Issuances, repurchases, and repayments of debt and equity securities.

Not applicable. There were no issuances, repurchases, and repayments of debt and equitysecurities

f.

Dividends paid (aggregate or per share) separately for ordinary shares and other shares.

Not applicable. There were no dividends paid during the period.

g. Segment revenue and segment result for business segments or geographical segments,whichever is the issuer‟s primary basis of segment reporting.

Segment Information of Philippine Airlines, Inc.:

PAL has one reportable operating segment, which is the airline business (system-wide).This is consistent with how the Group‟s management internally monitors and analyzes the

financial information for reporting to the chief operating decision-maker, who is

responsible for allocating resources, assessing performance and making operatingdecisions.

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The revenue of the operating segment are mainly derived from rendering transportationservices and all sales are made to external customers.

Segment information for each reportable segment is shown in the following table:

Quarter Ended Quarter EndedSeptember 2015 September 2014

(In Thousands)Revenue P=23,815,068 P=22,770,449Interest income (27,313) 33,408Financing charges (505,122) (483,971)Depreciation, amortization and

obsolescence (1,147,042) (1,113,295) Net income (loss) 296,539 (1,100,159)Reportable segment assets 113,591,962 108,321,450

Reportable segment liabilities 103,998,117 105,972,910

The reconciliation of total revenue reported by reportable operating segment to revenue inthe consolidated statements of comprehensive income is presented in the following table:

Quarter Ended

September 2015

Quarter EndedSeptember 2014

(In Thousands)Total segment revenue of reportable

operating segments P=23,815,068 P=22,770,449 Nontransport revenue and other income 2,219,240 2,259,058

Total Revenue P=26,034,308 P=25,029,507

The reconciliation of total income reported by reportable operating segment to totalcomprehensive loss in the consolidated statements of comprehensive income is presentedin the following table:

Quarter Ended Quarter EndedSeptember 2015 September 2014

(In Thousands)Total segment income (loss) of

reportable segments P=296,539 (P=1,100,159)Add (deduct) unallocated items:

Nontransport revenue andother income 2,219,240 2,259,058 Nontransport expenses and

other charges (2,264,504) (1,479,043)

Net income (loss) 251,275 (320,144)Other comprehensive income (loss) (18) 63

Total comprehensive income (loss) P=251,257 (P=320,081)

The Company‟s major revenue-producing asset is the fleet owned by PAL, which isemployed across its route network.

h. Material events subsequent to the end of the interim period that have not been reflected in

the financial statements for the interim period.

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Not applicable. The Company has no material event subsequent to the end of the interim period that has not been reflected in the financial statements for the interim period.

i. The effect of changes in the composition of the issuer during the interim period, including business combinations, acquisition or disposal of subsidiaries and long-term investments,restructurings, and discontinuing operations.

There were no changes in the composition of the Company during the interim period. PALhowever filed for the dissolution of its three foreign subsidiaries which was deemedeffective on April 7, 2015.

j. Changes in contingent liabilities or contingent assets since the last annual balance sheetdate.

Not applicable. The Company has no contingent liabilities or assets.

k. Existence of material contingencies and any other events or transactions that are material to

an understanding of the current interim period.

Not applicable. There were no contingencies and any other events or transactions that arematerial to an understanding of the current interim period.

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Annex “B”

PAL HOLDINGS, INC.AND SUBSIDIARIES

Management Discussion and Analysis of

Financial Condition and Results of Operations

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PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

The financial statements form part of this 17Q.

1. Summary of Significant Accounting and Financial Reporting Policies

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

Statement of ComplianceThe consolidated financial statements have been prepared in accordance with Philippine Financial

Reporting Standards (PFRS).

Changes in Accounting PoliciesThe accounting policies adopted are consistent with those of the previous financial years except forthe adoption of the following amendments to existing standards and a new Philippine interpretationeffective beginning January 1, 2014.

Amendments to PFRS 10, Consolidated Financial Statements, PFRS 11, Joint Arrangements and Philippine Accounting Standards (PAS) 27, Separate Financial Statements: Investment

Entities These amendments provide an exception to the consolidation requirement for entities that meetthe definition of an investment entity under PFRS 10. The exception to consolidation requires

investment entities to account for subsidiaries at fair value through profit or loss. Theamendments must be applied retrospectively, subject to certain transition relief. Theseamendments are not relevant to the Group since the Parent Company‟s subsidiaries do notqualify as investment entities under PFRS 10.

Amendments to PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial LiabilitiesThese amendments clarify the meaning of “currently has a legally enforceable right to set -off”and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify foroffsetting and are applied retrospectively. The application of these amendments has no materialimpact on the disclosures in the Group‟s consolidated financial statements since the Group‟s

offsetting arrangements are unconditional.

Amendments to PAS 39, Financial Instruments: Recognition and Measurement - Novation of Derivatives and Continuation of Hedge Accounting These amendments provide relief from discontinuing hedge accounting when novation of aderivative designated as a hedging instrument meets certain criteria and retrospectiveapplication is required. These amendments have no impact on the Group‟s financial position or performance since the Group does not apply hedge accounting.

Amendments to PAS 36, Impairment of Assets - Recoverable Amount Disclosures for

Nonfinancial AssetsThese amendments remove the unintended consequences of PFRS 13, Fair Value

Measurement , on the disclosures required under PAS 36. In addition, these amendmentsrequire disclosure of the recoverable amounts for assets or cash-generating units (CGUs) for

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which impairment loss has been recognized or reversed during the period. The additionaldisclosures required by these amendments are presented in the Group‟s consolidated financial

statements.

Philippine Interpretation based on International Financial Reporting Standards InterpretationsCommittee (IFRIC) 21, Levies IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered uponreaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. Retrospective application is required forIFRIC 21. This interpretation has no impact on the Group as it has applied the recognition principles under PAS 37, Provisions, Contingent Liabilities and Contingent Assets, consistentwith the requirements of IFRIC 21 in prior years.

Annual Improvements to PFRS (2010-2012 cycle)In the 2010 - 2012 annual improvements cycle, seven amendments to six standards were issued,

which included an amendment to PFRS 13. The amendment to PFRS 13 is effectiveimmediately and it clarifies that short-term receivables and payables with no stated interestrates can be measured at invoice amounts when the effect of discounting is immaterial. Thisamendment has no material impact to the Group.

Annual Improvements to PFRS (2011-2013 cycle)In the 2011 - 2013 annual improvements cycle, four amendments to four standards were issued,which included an amendment to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards. The amendment to PFRS 1 is effective immediately. It clarifies that anentity may choose to apply either a current standard or a new standard that is not yet mandatory, but permits early application, provided either standard is applied consistently throughout the periods presented in the entity‟s first PFRS financial statements. This amendment has no

impact to the Group as it is not a first time PFRS adopter.

New Accounting Standards, Amendments toExisting Standards and Interpretations Effective Subsequent to December 31, 2014The standards, amendments and interpretations which have been issued but not yet effective as atDecember 31, 2014 are disclosed below.

PFRS 9, Financial Instruments: Classification and Measurement

PFRS 9 (2010 version) reflects the first phase on the replacement of PAS 39 and applies to theclassification and measurement of financial assets and liabilities as defined in PAS 39.PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debtfinancial asset may, if the fair value option (FVO) is not invoked, be subsequently measured atamortized cost if it is held within a business model that has the objective to hold the assets tocollect the contractual cash flows and its contractual terms give rise, on specified dates, to cashflows that are solely payments of principal and interest on the principal outstanding. All otherdebt instruments are subsequently measured at fair value through profit or loss. All equityfinancial assets are measured at fair value either through other comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that isattributable to changes in credit risk must be presented in OCI. The remainder of the change infair value is presented in profit or loss, unless presentation of the fair value change in respect ofthe liability‟s credit risk in OCI would create or enlarge an accounting mismatch in profit orloss. All other PAS 39 classification and measurement requirements for financial liabilities

have been carried forward into PFRS 9, including the embedded derivative separation rules andthe criteria for using the FVO. The Group is currently assessing the impact of adopting this

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standard.

PFRS 9 (2010 version) is effective for annual periods beginning on or after January 1, 2015.This mandatory adoption date was moved to January 1, 2018 when the final version ofPFRS 9 was adopted by the Philippine Financial Reporting Standards Council (FRSC). Suchadoption, however, is still for approval by the Philippine Board of Accountancy (BOA). TheGroup will not opt to early adopt the standard.

Deferred

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This interpretation covers accounting for revenue and associated expenses by entities thatundertake the construction of real estate directly or through subcontractors. The SEC and theFRSC have deferred the effectivity of this interpretation until the final Revenue standard isissued by the International Accounting Standards Board (IASB) and an evaluation of therequirements of the final Revenue standard against the practices of the Philippine real estate

industry is completed. The Group does not expect that this interpretation will have materialfinancial impact in future financial statements.

The following new standards and amendments were already adopted by the FRSC but are still forapproval by BOA.

Effective in 2015

Amendments to PAS 19 , Employee Benefits - Defined Benefit Plans: Employee ContributionsPAS 19 requires an entity to consider contributions from employees or third parties whenaccounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as a negative benefit. These amendments clarify that, if the

amount of the contributions is independent of the number of years of service, an entity is permitted to recognize such contributions as a reduction in the service cost in the period inwhich the service is rendered, instead of allocating the contributions to the periods of service.This amendment is effective for annual periods beginning on or after January 1, 2015. It isexpected that this amendment would not be relevant to the Group since PAL‟s retirement plansare noncontributory.

Annual Improvements to PFRS (2010 to 2012 cycle)The Annual Improvements to PFRS (2010 to 2012 cycle) contain non-urgent but necessaryamendments to the following standards. These are effective for annual periods beginning on orafter January 1, 2015. Except as otherwise stated, the Group does not expect these amendmentsto have a significant impact on the consolidated financial statements.

PFRS 2, Share-based Payment - Definition of Vesting Condition This improvement is applied prospectively and clarifies various issues relating to thedefinitions of performance and service conditions which are vesting conditions, including:

a. A performance condition must contain a service condition b. A performance target must be met while the counterparty is rendering servicec. A performance target may relate to the operations or activities of an entity, or to those

of another entity in the same groupd. A performance condition may be a market or non-market conditione. If the counterparty, regardless of the reason, ceases to provide service during the

vesting period, the service condition is not satisfied.

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PFRS 3, Business Combinations - Accounting for Contingent Consideration in a Business

Combination The amendment is applied prospectively for business combinations for which theacquisition date is on or after July 1, 2014. It clarifies that a contingent consideration that isnot classified as equity is subsequently measured at fair value through profit or losswhether or not it falls within the scope of PAS 39. The Group shall consider thisamendment in future business combinations.

PFRS 8, Operating Segments - Aggregation of Operating Segments and Reconciliation of

the Total of the Reportable Segments‟ Assets to the Entity‟s Assets The amendments are applied retrospectively and clarify that:a. An entity must disclose the judgments made by management in applying the

aggregation criteria in the standard, including a brief description of operating segmentsthat have been aggregated and the economic characteristics (e.g., sales and grossmargins) used to assess whether the segments are „similar‟.

b. The reconciliation of segment assets to total assets is only required to be disclosed if

the reconciliation is reported to the chief operating decision maker, similar to therequired disclosure for segment liabilities.

PAS 16, Property, Plant and Equipment: Revaluation Method - Proportionate Restatementof Accumulated Depreciation, and PAS 38 , Intangible Assets: Revaluation Method - Proportionate Restatement of Accumulated Amortization The amendment is applied retrospectively and clarifies in PAS 16 and PAS 38 that the assetmay be revalued by reference to the observable data on either the gross or the net carryingamount. In addition, the accumulated depreciation or amortization is the difference betweenthe gross and carrying amounts of the asset.

PAS 24, Related Party Disclosures - Key Management Personnel

The amendment is applied retrospectively and clarifies that a management entity, which isan entity that provides key management personnel services, is a related party subject to therelated party disclosures. In addition, an entity that uses a management entity is required todisclose the expenses incurred for management services.

Annual Improvements to PFRS (2011 to 2013 cycle)The Annual Improvements to PFRS (2011 to 2013 cycle) contain non-urgent but necessaryamendments to the following standards. These are effective for annual periods beginning on orafter January 1, 2015 and are not expected to have a significant impact on the consolidatedfinancial statements.

PFRS 3, Business Combinations - Scope Exceptions for Joint ArrangementsThe amendment is applied prospectively and clarifies the following regarding the scopeexceptions within PFRS 3:

a. Joint arrangements, not just joint ventures, are outside the scope of PFRS 3. b. This scope exception applies only to the accounting in the financial statements of the

joint arrangement itself.

PFRS 13, Fair Value Measurement - Portfolio Exception The amendment is applied prospectively and clarifies that the portfolio exception inPFRS 13 can be applied not only to financial assets and financial liabilities, but also toother contracts within the scope of PAS 39.

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PAS 40, Investment Property The amendment is applied prospectively and clarifies that PFRS 3, and not the descriptionof ancillary services in PAS 40, is used to determine if the transaction is the purchase of anasset or business combination. The description of ancillary services in PAS 40 onlydifferentiates between investment property and owner-occupied property (i.e., property, plant and equipment).

Effective in 2016

Amendments to PAS 16, Property, Plant and Equipment, and PAS 38 , Intangible Assets -Clarification of Acceptable Methods of Depreciation and Amortization The amendments clarify the principle in PAS 16 and PAS 38 that revenue reflects a pattern ofeconomic benefits that are generated from operating a business (of which the asset is part)rather than the economic benefits that are consumed through use of the asset. As a result, arevenue-based method cannot be used to depreciate property, plant and equipment and mayonly be used in very limited circumstances to amortize intangible assets. The amendments are

effective prospectively for annual periods beginning on or after January 1, 2016, with earlyadoption permitted. These amendments are not expected to have any impact to the Group giventhat the Group is not using a revenue-based method to depreciate its noncurrent assets.

Amendments to PAS 16, Property, Plant and Equipment, and PAS 41 , Agriculture - Bearer

Plants The amendments change the accounting requirements for biological assets that meet thedefinition of bearer plants. Under the amendments, biological assets that meet the definition of bearer plants will no longer be within the scope of PAS 41. Instead, PAS 16 will apply. Afterinitial recognition, bearer plants will be measured under PAS 16 at accumulated cost (beforematurity) and using either the cost model or revaluation model (after maturity). Theamendments also require that produce that grows on bearer plants will remain in the scope of

PAS 41 measured at fair value less costs to sell. For government grants related to bearer plants,PAS 20, Accounting for Government Grants and Disclosure of Government Assistance, willapply. The amendments are retrospectively effective for annual periods beginning on or afterJanuary 1, 2016, with early adoption permitted. These amendments are not expected to haveany impact to the Group as the Group does not have any bearer plants.

Amendments to PAS 27, Separate Financial Statements - Equity Method in Separate FinancialStatements The amendments will allow entities to use the equity method to account for investments insubsidiaries, joint ventures and associates in their separate financial statements. Entities alreadyapplying PFRS and electing to change to the equity method in its separate financial statementswill have to apply that change retrospectively. For first-time adopters of PFRS electing to usethe equity method in its separate financial statements, they will be required to apply this methodfrom the date of transition to PFRS. The amendments are effective for annual periods beginningon or after January 1, 2016, with early adoption permitted. The Group shall consider theseamendments for future preparation of its separate financial statements.

PFRS 10, Consolidated Financial Statements and PAS 28 , Investments in Associates and Joint

Ventures - Sale or Contribution of Assets between an Investor and its Associate or JointVenture These amendments address an acknowledged inconsistency between the requirements inPFRS 10 and those in PAS 28 in dealing with the sale or contribution of assets between aninvestor and its associate or joint venture. The amendments require that a full gain or loss is

recognized when a transaction involves a business (whether it is housed in a subsidiary or not).A partial gain or loss is recognized when a transaction involves assets that do not constitute a

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business, even if these assets are housed in a subsidiary. These amendments are effective fromannual periods beginning on or after January 1, 2016. These amendments are not expected tohave any impact on the Group‟s financial statements.

Amendments to PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests in

Joint Operations The amendments to PFRS 11 require that a joint operator accounting for the acquisition of aninterest in a joint operation, in which the activity of the joint operation constitutes a businessmust apply the relevant PFRS 3 principles for business combinations accounting. Theamendments also clarify that a previously held interest in a joint operation is not remeasured onthe acquisition of an additional interest in the same joint operation while joint control isretained. In addition, a scope exclusion has been added to PFRS 11 to specify that theamendments do not apply when the parties sharing joint control, including the reporting entity,are under common control of the same ultimate controlling party.

The amendments apply to both the acquisition of the initial interest in a joint operation and the

acquisition of any additional interests in the same joint operation and are prospectively effectivefor annual periods beginning on or after January 1, 2016, with early adoption permitted. Theseamendments are not expected to have any impact to the Group.

PFRS 14, Regulatory Deferral Accounts PFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-regulation, to continue applying most of its existing accounting policies for regulatory deferralaccount balances upon its first-time adoption of PFRS. PFRS 14 is effective for annual periods beginning on or after January 1, 2016. Since the Group is an existing PFRS preparer, thisstandard would not apply.

Annual Improvements to PFRS (2012-2014 cycle)

The Annual Improvements to PFRS (2012-2014 cycle) are effective for annual periods beginning on or after January 1, 2016. Except as otherwise stated, the Group does not expectthese amendments to have a significant impact on the consolidated financial statements.

PFRS 5, Non-current Assets Held for Sale and Discontinued Operations - Changes in Methods of Disposal The amendment is applied prospectively and clarifies that changing from a disposal throughsale to a disposal through distribution to owners and vice-versa should not be considered to be a new plan of disposal, rather it is a continuation of the original plan. There is, therefore,no interruption of the application of the requirements in PFRS 5. The amendment alsoclarifies that changing the disposal method does not change the date of classification. TheGroup shall consider this amendment in future transactions.

PFRS 7, Financial Instruments: Disclosures - Servicing Contracts PFRS 7 requires an entity to provide disclosures for any continuing involvement in atransferred asset that is derecognized in its entirety. The amendment clarifies that aservicing contract that includes a fee can constitute continuing involvement in a financialasset. An entity must assess the nature of the fee and arrangement against the guidance inPFRS 7 in order to assess whether the disclosures are required. The amendment is to beapplied such that the assessment of which servicing contracts constitute continuinginvolvement will need to be done retrospectively. However, comparative disclosures are notrequired to be provided for any period beginning before the annual period in which theentity first applies the amendments.

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PFRS 7, Applicability of the Amendments to PFRS 7 to Condensed Interim Financial

Statements This amendment is applied retrospectively and clarifies that the disclosures on offsetting offinancial assets and financial liabilities are not required in the condensed interim financialreport unless they provide a significant update to the information reported in the mostrecent annual report.

PAS 19, Employee Benefits - Regional Market Issue Regarding Discount Rate This amendment is applied prospectively and clarifies that market depth of high qualitycorporate bonds is assessed based on the currency in which the obligation is denominated,rather than the country where the obligation is located. When there is no deep market forhigh quality corporate bonds in that currency, government bond rates must be used.

PAS 34, Interim Financial Reporting - Disclosure of Information „Elsewhere in the Interim Financial Report‟

The amendment is applied retrospectively and clarifies that the required interim disclosures

must either be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included within the greaterinterim financial report (e.g., in the management commentary or risk report).

Effective in 2018

PFRS 9, Financial Instruments - Hedge Accounting and Amendments to PFRS 9, PFRS 7 andPAS 39PFRS 9 (2013 version) already includes the third phase of the project to replace PAS 39 which pertains to hedge accounting. This version of PFRS 9 replaces the rules-based hedgeaccounting model of PAS 39 with a more principles-based approach. Changes includereplacing the rules-based hedge effectiveness test with an objectives-based test that focuses on

the economic relationship between the hedged item and the hedging instrument, and the effectof credit risk on that economic relationship; allowing risk components to be designated as thehedged item, not only for financial items but also for non-financial items, provided that the riskcomponent is separately identifiable and reliably measurable; and allowing the time value of anoption, the forward element of a forward contract and any foreign currency basis spread to beexcluded from the designation of a derivative instrument as the hedging instrument andaccounted for as costs of hedging. PFRS 9 also requires more extensive disclosures for hedgeaccounting.

PFRS 9 (2013 version) has no mandatory effective date. The mandatory effective date ofJanuary 1, 2018 was eventually set when the final version of PFRS 9 was adopted by the FRSC.The adoption of the final version of PFRS 9, however, is still for approval by BOA.

The Group is currently assessing the impact of adopting this standard.

PFRS 9, Financial Instruments In July 2014, the final version of PFRS 9 was issued. PFRS 9 reflects all phases of the financialinstruments project and replaces PAS 39 and all previous versions of PFRS 9. The standardintroduces new requirements for classification and measurement, impairment, and hedgeaccounting. PFRS 9 is effective for annual periods beginning on or afterJanuary 1, 2018, with early application permitted. Retrospective application is required, butcomparative information is not compulsory. Early application of previous versions of PFRS 9 is permitted if the date of initial application is before February 1, 2015. The Group is currently

assessing the impact of adopting this standard.

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The following new standard and amendments issued by the IASB are yet to be adopted by the FRSC.

International Financial Reporting Standards (IFRS) 15, Revenue from Contracts withCustomers IFRS 15 was issued in May 2014 and establishes a new five-step model that will apply torevenue arising from contracts with customers. Under IFRS 15, revenue is recognized at anamount that reflects the consideration to which an entity expects to be entitled to in exchangefor transferring goods or services to a customer. The principles in IFRS 15 provide a morestructured approach to measuring and recognizing revenue. The new revenue standard isapplicable to all entities and will supersede all current revenue recognition requirements underIFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2017, with early adoption permitted.

Amendments to International Accounting Standards (IAS) 1, Presentation of Financial

Statements

In December 2014, the IASB issued the amendments to IAS 1. The amendments includenarrow-focus improvements in five areas; namely, materiality, disaggregation and subtotals,notes structure, disclosure of accounting policies and presentation of items of othercomprehensive income arising from equity accounted investments. The amendments areeffective on or after January 1, 2016.

Amendments to IFRS 10, Consolidated Financial Statements, IFRS 12 , Disclosure of Interests

in Other Entities, and IAS 28, Investments in Associates and Joint VenturesIn December 2014, the IASB issued Investment Entities: Applying the Consolidation Exception (amendments to IFRS 10, IFRS 12 and IAS 28). The amendments address certain issues thathave arisen in applying the investment entities exception under IFRS 10. The amendments areeffective on or after January 1, 2016.

The Group is currently assessing the impact of IFRS 15 and the amendments to IAS 1 andIFRS 10, IFRS 12 and IAS 28 and plans to adopt the new and amended standards on their requiredeffective dates once adopted locally.

Basis of Consolidation The consolidated financial statements consist of the financial statements of the Parent Company andits subsidiaries as at September 30, 2015 and December 31, 2014. The financial statements of thesubsidiaries are prepared using consistent accounting policies as those of the Parent Company.

The subsidiaries and the related percentages of ownership of the Parent Company as at September30, 2015 and December 31, 2014 are as follows:

The subsidiaries‟ operations and principal activity are as follows: ADSPI engages in development

and marketing of computerized airline reservation system; and Pacific Aircraft Ltd., Pearl AircraftLtd. and Peerless Aircraft Ltd., used to be the trustor or beneficiary in the lease of aircraft prior to

September 30, 2015 December 31, 2014

Direct Indirect Direct Indirect

PAL 97.92% 0.35% 97.92% 0.35%Abacus Distribution

Systems Philippines, Inc. (ADSPI) – 81.56% – 81.56%Pacific Aircraft Ltd. – – – 98.27%Pearl Aircraft Ltd. – – – 98.27%Peerless Aircraft Ltd – – – 98.27%

PR 82.33% – 82.33% –

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the refinancing of the lease. ADSPI is domiciled in the Philippines while the three othersubsidiaries were incorporated in Cayman Islands. The consolidated financial statements alsoinclude the financial statements of PAL Receivables Co. Ltd. (PRC), a structured entity (SE) overwhich PAL has control. The subsidiaries in Cayman Islands filed for dissolution on January 7, 2015and was deemed effective on April 7, 2015. As of September 30, 2015, these subsidiaries werealready removed from the consolidated financial statements.

Control is achieved when the Parent Company or its subsidiaries is exposed, or has rights, tovariable returns from its involvement with the investee and has the ability to affect those returnsthrough its power over the investee.

Specifically, the Parent Company or its subsidiaries controls an investee if and only if the followingcriteria are met:

Power over the investee (i.e., existing rights that give it the current ability to direct the relevantactivities of the investee)

Exposure, or rights, to variable returns from its involvement with the investee The ability to use its power over the investee to affect its returns

When the Parent Company or its subsidiaries has less than a majority of the voting or similar rightsof an investee, the Parent Company or its subsidiaries considers all relevant facts and circumstancesin assessing whether it has power over an investee, including:

The contractual arrangement with the other vote holders of the investee

Rights arising from other contractual arrangements

The Parent Company or its subsidiaries voting rights and potential voting rights

The Parent Company or its subsidiaries reassesses whether or not it controls an investee if facts and

circumstances indicate that there are changes to one or more of the three elements of control.Consolidation of a subsidiary begins when the Parent Company or its subsidiaries obtains controlover the subsidiary and ceases when it ceases to have control of the subsidiary. Assets, liabilities,income and expenses of a subsidiary acquired or disposed of during the year are included in theconsolidated statement of comprehensive income from the date the Group gains control until thedate control is lost.

Profit or loss and each component of OCI are attributed to the equity holders of the ParentCompany and to the noncontrolling interests, even if this results in the noncontrolling interestshaving a deficit balance.

The financial statements of the subsidiaries are prepared for the same reporting period as the ParentCompany. All intra-group balances, transactions, unrealized gains and losses, resulting from intra-group transactions and dividends are eliminated in full.

A change in the ownership interest in a subsidiary, without a loss of control, is accounted for as anequity transaction. When the Parent Company loses control of a subsidiary, it:

Derecognizes the assets (including goodwill) and liabilities of the subsidiary

Derecognizes the carrying amount of any noncontrolling interests

Derecognizes the cumulative translation differences recorded in equity

Recognizes the fair value of the consideration received

Recognizes the fair value of any investment retained

Recognizes any surplus or deficit in profit or loss

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Reclassified the Parent Company‟s share of components previously recognized in other

comprehensive income to profit or loss or retained earnings, as appropriate, as would berequired if the Parent Company had directly disposed of the related assets or liabilities.

Non-controlling interest represents the interest in the subsidiaries not held by the Parent Companyand are presented separately in the consolidated statement of comprehensive income andconsolidated statement of changes in equity and within equity in the consolidated statement offinancial position, separate from the equity attributable to the parent.

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

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist onlyof cash and cash equivalents as defined above.

Fair Value MeasurementThe Group measures financial instruments, such as AFS investments and derivatives, andnonfinancial assets such as building and improvements carried at revalued amounts, at fair value atthe end of reporting period.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. The fair valuemeasurement is based on the presumption that the transaction to sell the asset or transfer the

liability takes place either:

in the principal market for the asset or liability, or

in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to the Group.

The fair value of an asset or a liability is measured using the assumptions that market participantswould use when pricing the asset or liability, assuming that market participants act in theireconomic best interest.

A fair value measurement of a nonfinancial asset takes into account a market participant‟s ability to

generate economic benefits by using the asset in its highest and best use or by selling it to anothermarket participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for whichsufficient data are available to measure fair value, maximizing the use of relevant observable inputsand minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financialstatements are categorized within the fair value hierarchy, described as follows, based on the lowestlevel input that is significant to the fair value measurement as a whole:

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities

Level 2 - Valuation techniques for which the lowest level input that is significant to the fair

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value measurement is directly or indirectly observable

Level 3 - Valuation techniques for which the lowest level input that is significant to the fairvalue measurement is unobservable

For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair valuemeasurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilitieson the basis of the nature, characteristics and risks of the asset or liability and the level of the fairvalue hierarchy.

Financial Instruments Initial recognitionThe 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. Allregular way purchases and sales of financial assets are recognized on the trade date, i.e., the date theGroup commits to purchase or sell 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.

All financial assets and financial liabilities are recognized initially at fair value. In the case offinancial assets and financial liabilities not classified as at fair value through profit or loss, fairvalue at initial recognition includes any directly attributable transaction costs. Premiums onderivative instruments, representing the fair value of the instrument at inception, are included in theinitial recognition.

Classification of financial instrumentsFinancial instruments are classified as debt or equity in accordance with the substance of thecontractual arrangement. Interests, 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, at initial recognition, as financial assets at fair value through profit orloss, loans and receivables, held-to-maturity investments or AFS investments, or as derivativesdesignated as hedging instruments in an effective hedge as appropriate. Financial liabilities areclassified as either financial liabilities at fair value through profit or loss or other financialliabilities. The Group determines the classification of its financial instruments upon initialrecognition and, where allowed and appropriate, reevaluates this designation at every reporting

date.

“Day 1” difference Where the transaction price in a non-active market is different from the fair value from 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 difference between the transaction price and the fair value (a “Day 1” difference) in profit or loss unless itqualifies for recognition as some other type of asset. In cases where data used is not observable, thedifference between the transaction price and model value is only recognized in profit or loss whenthe inputs become observable or when the instrument is derecognized. For each transaction, theGroup determines the appropriate method of recognizing the “Day 1” difference amount.

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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, derivative financial instruments and those designated upon initialrecognition as at fair value through profit or loss.

Financial assets and financial liabilities are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term or are designated by management as at fair valuethrough profit or loss upon initial recognition. Derivatives, including separated embeddedderivatives, are also classified as held for trading unless they are designated as effective hedginginstruments as defined by PAS 39.

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 the embeddedderivative is prohibited.

Financial instruments may be designated as at fair value through profit or loss by management uponinitial recognition if any of the following criteria is met:

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

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 is evaluatedon a fair value basis, in accordance with a documented risk management or investment strategy

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

Financial assets and financial liabilities classified under this category are carried at fair value in theconsolidated statement of financial position, with any gains or losses on changes in fair valuesrecognized in profit or loss. Interest earned or incurred and dividend income is recorded when theright to receive payment has been established.

The Group accounts for its derivative transactions (including embedded derivatives) under thiscategory with fair value changes being reported directly to profit or loss.

Included under this category are the Group‟s derivative assets and liabilities.

Loans and receivables

Loans and receivables are nonderivative financial assets with fixed or determinable payments thatare not quoted in an active market. Such assets are carried at amortized cost using the effectiveinterest rate method less impairment, gains and losses are recognized in profit or loss when theloans and receivables are derecognized or impaired, and through the amortization process. Loansand receivables (or portion of loans and receivables) are included in current assets if maturity iswithin 12 months from the reporting date. Otherwise, these are classified as noncurrent assets.

Included under this category are the Group‟s cash and cash equivalents, receivables, securitydeposits and deposits on aircraft leases.

Held-to-maturity investments

Quoted nonderivative financial assets with fixed or determinable payments and fixed maturities areclassified as held to maturity when the Group has the positive intention and ability to hold them to

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maturity. Investments intended to be held for an undefined period are not included in thisclassification. Where the Group sells other than an insignificant amount of held-to-maturityinvestments, the entire category would be tainted and reclassified as AFS investments. Other long-term investments that are intended to be held to maturity, such as bonds, are subsequently measuredat amortized cost. This cost is computed as the amount initially recognized minus principalrepayments, plus or minus the cumulative amortization using the effective interest rate method ofany difference between the initially recognized amount and the maturity amount. This calculationincludes fees paid or received between parties to the contract that are an integral part of theeffective interest rate, issuance costs and all other premiums and discounts. For investments carriedat amortized cost, gains and losses are recognized in profit or loss when the investments arederecognized or impaired, and through the amortization process. Assets under this category areclassified as current assets if maturity is within 12 months from the reporting date. Otherwise, theseare classified as noncurrent assets.

The Group has no held-to-maturity investments as of September 30, 2015 and December 31, 2014.

AFS investmentsAFS investments are nonderivative financial assets that are designated as available-for-sale or arenot classified in any of the three preceding categories. After initial recognition, AFS investmentsare measured at fair value, with unrealized gains or losses recognized in OCI and as a separatecomponent of equity until the investment is derecognized or until the investment is determined to beimpaired at which time the cumulative gain or loss previously reported in equity is included in profit or loss. The effective yield and (where applicable) results of foreign exchange restatementfor AFS debt investments are reported immediately in profit or loss. These financial assets (or portion of these financial assets) are classified as noncurrent assets unless the intention is to disposesuch assets within 12 months from the reporting date.

AFS investments represent the Group‟s investments in equity instruments and club shares as shown

in Note 9.

Other financial liabilitiesOther financial liabilities pertain to financial liabilities that are not held for trading nor designatedas at fair value through profit or loss upon the inception of the liability. These include liabilitiesarising from operations (e.g., payables and accruals) or borrowings (e.g., long-term obligations).The liabilities are recognized initially at fair value and are subsequently carried at amortized cost,taking into account the impact of applying the effective interest rate method of amortization(or accretion) of any related premium, discount and any directly attributable transaction costs. Otherfinancial liabilities (or portions of other financial liabilities) are included in current liabilities whenthey are expected to be settled within 12 months from the reporting date or the Group does not havean unconditional right to defer settlement of the liabilities for at least 12 months from the reporting

date.

Included under this category are the Group‟s notes payable, accounts payable, payable to anassociate, accrued expenses, obligations under aircraft finance leases, long-term debt and depositson subleased aircraft (included under “Reserves and other noncurrent liabilities” in the consolidatedstatements of financial position).

Derivatives and hedge accounting Freestanding derivativesFor the purpose of hedge accounting, hedges are classified primarily either as: (a) a hedge of thefair value of a recognized asset or liability or an unrecognized firm commitment (fair value hedge);(b) a hedge of the exposure to variability in cash flows attributable to an asset or liability or aforecasted transaction (cash flow hedge); or (c) hedge of a net investment in a foreign operation.The Group did not designate its derivative transactions as cash flow or fair value hedge during the

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period ended September 30, 2015 and year ended December 31, 2014.

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 thehedging instrument, the hedged item or transaction, the nature of the risk being hedged and how theentity will assess the hedging instrument‟s effectiveness in offsetting the exposure to changes in thehedged item‟s fair value or cash flows attributable to the hedged risk. Such hedges are assessed onan ongoing basis to determine that they actually have been highly effective throughout the financialreporting 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 OCI, net of related deferred income tax. The ineffective portion is immediately recognized in profit or loss.

For cash flow hedges with critical terms that match those of the hedged items and where there are

no basis risks (such as the pay-fixed, receive-floating interest rate swaps), the Group expects thehedges 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 thehedges and the hedged items to ensure that they continue to match, and by evaluating the continuedability of the counterparties to perform their obligations under the derivative contracts.

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

30 data points whichever is longer.

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

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

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 profit or loss.

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

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

The Group assesses whether an embedded derivative is required to be separated from the hostcontract and accounted for as a derivative when the entity first becomes a party to the contract.

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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, in whichcase reassessment is required. The Group determines whether a modification to cash flows issignificant by considering the extent to which the expected future cash flows associated with theembedded derivative, the host contract or both have changed and whether the change is significantrelative 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 has transferred its rights to receive cash flows from the asset or has assumed anobligation to pay them in full without material delay to a third party under a “pass -through”arrangement

The Group has transferred its rights to receive cash flows from the asset and either (a) has

transferred substantially all the risks and rewards of ownership of the asset, or (b) has neithertransferred nor retained substantially all the risks and rewards of ownership of the asset, but hastransferred 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 ownership of the asset nortransferred control of the asset, the asset is recognized to the extent of the Group‟s continuinginvolvement in the asset.

A financial liability is derecognized when the obligation under the liability is discharged, cancelledor 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 modification istreated as the 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 reporting date, whether there is objective evidence that a financial asset orgroup of financial assets is impaired. If such evidence exists, any impairment loss is recognized in profit or loss.

Financial assets carried at amortized cost The Group first assesses whether impairment exists individually for financial assets that are

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

For financial assets carried at amortized cost, whenever it is probable that the Group will not collectall amounts due according to the contractual terms of receivables, an impairment loss has beenincurred. In relation to receivables, a provision for impairment is made when there is objective

evidence (such as the probability of insolvency or significant financial difficulties of the debtor)that the Group will not be able to collect all of the amounts due under the original terms of the

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invoice. The amount of the loss is measured as the difference between the asset‟s carrying amountand the present value of estimated future cash flows discounted at the financial asset‟s original

effective interest rate. The carrying amount of the asset is reduced either directly or through the useof an allowance account. Any loss determined is recognized in profit or loss. Impaired receivablesare derecognized when there is no realistic prospect of future recovery and all collateral has beenrealized.

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

AFS investmentsIn case of equity investments classified as AFS investments, objective evidence of impairmentwould include a significant or prolonged decline in the fair value of the investments below theircost. When there is evidence of impairment loss, the cumulative loss, measured as the difference

between the acquisition cost and the current fair value, less any impairment loss on that financialasset previously recognized in profit or loss, is removed from OCI and recognized in profit or loss.

Impairment losses on investment in equity instruments are not reversed through income. Increasesin fair value after impairment are recognized in OCI.

In the case of debt instruments classified as AFS, impairment is assessed based on the same criteriaas financial assets carried at amortized cost. Future interest income continues to be accrued basedon the reduced carrying amount using the rate of interest used to discount cash flows for the purpose of measuring impairment loss. If, in subsequent year, the fair value of a debt instrumentincreases and the increase can be objectively related to an event occurring after the impairment losswas recognized in profit or loss, the impairment loss is reversed through profit or loss.

Offsetting of Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount reported in the consolidatedstatement of financial position if there is a currently enforceable legal right to offset (i.e., rights thatare not dependent on the occurrence of a future event) the recognized amounts and there is anintention to settle on a net basis, to realize the assets and settle the liabilities simultaneously. This isnot generally the case with master netting agreements, and the related assets and liabilities are presented gross in the consolidated statement of financial position.

Expendable Parts, Fuel, Materials and SuppliesExpendable parts, fuel, materials and supplies are stated at the lower of cost and net realizablevalue. Cost, which includes the purchase price and other costs incurred in bringing these

expendable parts, fuel, materials and supplies to their present location or condition, is determinedusing the moving weighted average method. Net realizable value represents replacement cost ofthese expendable parts, fuel, materials and supplies, considering factors such as age and physicalcondition of these assets.

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

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Assets Held for Sale Noncurrent assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. The asset must beavailable for immediate sale in its present condition subject only to terms that are usual andcustomary for sales of such asset and its sale must be highly probable. For the sale to be highly probable, (a) an appropriate level of management must be committed to a plan to sell the asset,(b) an active program must have been initiated, (c) the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value, (d) the sale should be expected to qualifyfor recognition as a completed sale within one year from the date of classification and(e) actions required to complete the plan should indicate that it is unlikely that significant changesto the plan will be made or that the plan will be withdrawn. Noncurrent assets classified as held forsale are measured at the lower of their previous carrying amount and fair value less costs to sell.

Impairment loss is recognized for any subsequent write-down of the asset to fair value less costs tosell. Gain for any subsequent increase in fair value less costs to sell of an asset is also recognized, but not in excess of the cumulative impairment loss that has been recognized.

If the Group has classified an asset as held for sale but the criteria as set out above are no longermet, the Group ceases to classify the asset as held for sale. The Group measures a noncurrent assetthat ceases to be classified as held for sale at the lower of (a) its carrying amount before the assetwas classified as held for sale, adjusted for any depreciation, amortization or revaluations thatwould have been recognized had the asset not been classified as held for sale, and (b) itsrecoverable amount at the date of the subsequent decision not to sell.

Investment in an AssociateAn associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not controlor joint control over those policies.

The Group‟s investments in its associate are accounted for using the equity method. Under theequity method, the investment in an associate is initially recognized at cost. Goodwill relating toinvestment in associate is included in the carrying amount of the investment. Any excess of theGroup‟s share in the net fair value of the associate‟s identifiable assets and liabilities over the costof the investment is included as income in the determination of the Group‟s share in profit and lossof the associate in the period the investment is acquired. The carrying amount of the investment isadjusted to recognize changes in the Group‟s share of net assets of the associate after the acquisitiondate. Distributions received from the associate reduces the carrying amount of the investment.

The consolidated statement of comprehensive income reflects the Group‟s share in profit or loss of

the associate after the date of the acquisition. Any change in OCI of the investee is presented as part

of the Group‟s OCI. In addition, when there has been a change recognized directly in the equity ofthe associate, the Group recognizes its share in the change, when applicable, in the consolidatedstatement of changes in equity. Unrealized gains and losses resulting from transactions between theGroup and the associate are eliminated to the extent of the interest in the associate.

The aggregate of the Group‟s share of profit or loss of an associate is shown in the consolidated

statement of comprehensive income and represents profit or loss after tax of the associate.

The financial statements of the associate are prepared for the same reporting period as the Group.When necessary, adjustments are made to bring the accounting policies in line with those of theGroup. After application of the equity method, the Group determines whether it is necessary torecognize an impairment loss on its investment in its associate. At each reporting date, the Groupdetermines whether there is objective evidence that the investment in the associate is impaired. Ifthere is such evidence, the Group calculates the amount of impairment as the difference between the

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recoverable amount (higher of value in use and fair value less costs to sell) of the investment inassociate and its carrying value, then recognizes the loss in the consolidated statement ofcomprehensive income.

Upon loss of significant influence over the associate, the Group measures and recognizes anyretained investment at its fair value. Any difference between the carrying amount of the associateupon loss of significant influence and the fair value of the retained investment and proceeds fromdisposal is recognized in profit or loss.

Property and EquipmentProperty and equipment (except buildings and improvements) are stated at cost less accumulateddepreciation and any impairment in value. Buildings and improvements are stated at revaluedamounts less accumulated depreciation and any impairment in value. Revalued amounts weredetermined based on valuations performed by various qualified and independent appraisers.Revaluations are made with sufficient regularity.

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 ofthe revaluation is recognized as OCI credited directly to equity as “Revaluation increment - net ofdeferred income tax”. Any resulting decrease is directly charged against the related revaluationincrement previously recognized in respect of the same asset and any excess is charged against profit or loss.

The initial cost of property and equipment comprises its purchase price, any related capitalizable borrowing costs attributed to predelivery payments incurred on account of aircraft acquisition andother qualifying assets under construction, and other directly attributable costs of bringing the assetto its working condition and location for its intended use. Manufacturers‟ credits received from

aircraft and engine manufacturers which were directly applied against the price of the aircraft arerecorded upon delivery of the related aircraft and engines as a reduction from the cost of the property and equipment (including those under finance lease).

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

Depreciation, which commences when the asset is available for its intended use, is computed on a

straight-line basis over the following estimated useful lives of the assets:

Number of Years

Passenger aircraft (owned and under finance lease) 4 to 20Engines 12 to 20Other aircraft 5 to 10Buildings and improvements 8 to 40Rotable and reparable parts 3 to 18Ground property and equipment 3 to 8

Leasehold improvements are amortized over the term of the lease or life of the improvements ofthree to four years, whichever is shorter. Assets under finance lease are depreciated over the term ofthe lease or the useful life of the asset, whichever is shorter, unless there is reasonable certainty that

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the ownership of the asset will transfer to the Group (e.g., bargain purchase option). In which case,the asset is depreciated over its useful life.

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

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

The portion of “Revaluation increment - net of deferred income tax” is transferred to deficit whenthese are realized through depreciation or upon the disposal or retirement of buildings andimprovements.

When items of property and equipment are sold or retired, their costs, accumulated depreciation andamortization, any impairment in value and related revaluation increment are eliminated from theaccounts. Any gain or loss resulting from their disposal is recognized in profit or loss.

“Construction in progress” represents aircraft modifications in progress and buildings andimprovements and other ground property under construction, while “Predelivery payments”represents advance payments for aircraft acquisition. “Construction in progress” and “Predelivery

payments” are not depreciated until such time when the construction of the relevant assets iscompleted and when assets are available for their intended use.

Asset Retirement Obligation (ARO)

PAL is required under various aircraft lease agreements to restore the leased aircraft to their originalcondition and to bear the cost of dismantling and restoration at the end of the lease term. PAL provides for these costs over the terms of the leases through contribution to a maintenance reservefund (MRF), based on aircraft hours flown until the next scheduled checks. If the estimated cost ofdismantling and restoration is expected to exceed the cumulative MRF or where the leaseagreement does not require contribution of MRF, an additional obligation is recognized over theremaining term of the leases. The amount of obligation is carried at amortized cost using theeffective interest rate method.

Investment PropertiesInvestment properties include parcels of land, buildings and improvements not used in operations.

Investment properties are measured initially at cost, including any transaction costs. The carryingamount includes the cost of replacing part of an existing investment property at the time that cost isincurred (if the recognition criteria are met) and excludes the costs of day-to-day servicing of aninvestment property.

Investment properties (except land) are subsequently measured at cost less accumulateddepreciation and any impairment in value. Land is subsequently carried at cost less any impairmentin value.

Depreciation of depreciable investment properties is calculated on a straight-line basis over theestimated 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 or commencement of an operating lease to another

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party. Transfers are made from investment properties when, and only when, there is a change inuse, evidenced by commencement of owner-occupation or commencement of development with aview 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 the new cost ofthe investment property. The related revaluation increment is closed to deficit.

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

Impairment of Property and Equipment and Investment PropertiesThe carrying values of property and equipment 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 estimated

recoverable amounts, the assets or cash generating units are written down to their recoverableamounts. The recoverable amount is the greater of fair value less costs to sell and value-in-use. Inassessing value-in-use, the estimated future cash flows are discounted to their present value using a 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, therecoverable amount is determined for the cash generating unit to which the asset belongs.Impairment losses, if any, are recognized in profit or loss.

Recovery of impairment losses recognized in prior periods is recorded when there is an indicationthat the impairment losses recognized for the asset no longer exist or have decreased. The recoveryis recognized in profit or loss. However, the increased carrying amount of the asset due to reversalof an impairment loss is recognized only to the extent that it does not exceed the carrying amount

(net of accumulated depreciation and amortization) that would have been determined hadimpairment loss not been recognized for that asset in prior years.

LeasesThe determination of whether the arrangement is, or contains a lease, is based on the substance ofthe arrangement at inception date of whether the fulfillment of the arrangement depends on the useof a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment ismade after the inception of the lease if any of the following applies: (a) there is a change incontractual terms, other than a renewal or extension of the arrangement; (b) a renewal option isexercised or extension granted, unless the term of the renewal or extension was initially included inthe lease term; (c) there is a change in the determination of whether fulfillment is dependent on aspecified asset; or (d) there is substantial change to the asset.

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

Group as Lessee

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

Lease payments are apportioned between financing charges and reduction of the lease liability so asto achieve a constant rate of interest on the remaining balance of the liability. Financing charges

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are charged directly against profit or loss.

Leases where the lessor retains substantially all the risks and rewards of ownership of the asset areclassified as operating leases. Operating lease expense is recognized in profit or loss on a straight-line basis over the terms of the lease agreements. The aggregate benefit of incentives provided bythe lessor is recognized as a reduction of rental expense over the lease term on a straight-line basis.

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

Group as LessorLeases where the Group does not transfer substantially all the risks and rewards of ownership of theassets are classified as operating leases. Lease income is recognized on a straight-line basis over thelease term. Initial direct costs incurred in negotiating operating leases are added to the carryingamount of the leased asset and recognized over the lease term on the same basis as the rentalincome. Contingent rents are recognized as revenue in the period in which they are earned.

Provisions and ContingenciesProvisions are recognized when (a) the Group has a present obligation (legal or constructive) as aresult of a past event; (b) it is probable that an outflow of resources embodying economic benefitswill be required to settle the obligation; and (c) a reliable estimate of the amount of the obligation

can be made. Where the Group expects a provision to be reimbursed, for example under aninsurance contract, the reimbursement is recognized as a separate asset but only when thereimbursement is virtually certain. If the effect of the time value of money is material, provisionsare determined by discounting the expected future cash flows at a pretax rate that reflects currentmarket assessments of the time value of money and, where appropriate, the risks specific to theliability. Where discounting is used, the increase in the provision due to the passage of time isrecognized as interest expense.

Contingent liabilities are not recognized in the consolidated statement of financial position. Theyare disclosed in the notes to consolidated financial statements unless the possibility of an outflow ofresources embodying economic benefits is remote. A contingent asset is not recognized in theconsolidated statement of financial position but disclosed in the notes to consolidated financial

statements when an inflow of economic benefits is probable. If it is virtually certain that an inflowof economic benefits will arise, the asset and the related income are recognized in the consolidatedfinancial statements.

EquityCapital stock is measured at par value of all shares issued. Incremental costs incurred directlyattributable to the issuance of new shares are shown in equity as a deduction from proceeds, net oftax.

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

Deficit represents the cumulative balance of net income or loss, net of any dividend declaration.

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Revenue and Related CommissionsPassenger ticket, cargo waybill sales and related fuel and insurance surcharges, excluding portionrelating to awards under the Frequent Flyer Program, are initially recorded as “Unearnedtransportation revenue” in the consolidated statement of financial position until recognized as“Revenue” in the consolidated statement of comprehensive income when the transportation serviceis rendered (e.g., when passengers and cargo are flown/lifted). Passenger tickets which remainedunutilized are recognized as revenue after 13 months, which considers the ticket expiration andrefunds processing period. Revenue from charter, mail, excess baggage and other transport-relatedand ancillary services revenue are recognized upon completion of services rendered. Revenue fromcharter arrangements is recognized when the related charter service is rendered. Revenue from in-flight sales are recognized upon delivery to and acceptance of the goods by customers. Revenue ismeasured at the fair value of the consideration received or receivable, excluding sales taxes,discounts and commissions.

The related commission is recognized as expense when the transportation service is provided and isincluded as part of “Reservation and sales” in the consolidated statement of comprehensive income.

Manufacturer‟s credits that are not applied to aircraft and engines purchased, and whose risks andrewards are retained with the Group, are recognized as income as it is earned.

Commissions under codeshare arrangements where PAL is the marketing airline and is consideredan agent are recognized as revenue when the passenger or cargo is flown or lifted by the operatingairline. Revenue is recognized on a net basis. PAL determines whether it is acting as principal oragent in its revenue arrangements. Considerations to determine that PAL is acting as principalinclude: (1) PAL has the primary responsibility to provide the service to the customer,(2) PAL bears the inventory and credit risks, and (3) PAL has the latitude in establishing prices.

Liability Under Frequent Flyer Program

PAL operates a frequent flyer program called “Mabuhay Miles.” A portion of passenger revenueattributable to the award of frequent flyer miles, estimated based on expected utilization of these benefits, is deferred until utilized. The fair value of the consideration received in respect of theinitial sale is allocated to the award credits based on its fair value. The fair value of the milesexpected to be redeemed is estimated using the applicable fare based on the historical redemption.The deferred revenue is included under “Reserves and other noncurrent liabilities” in theconsolidated statement of financial position. Any remaining unutilized benefits are recognized asrevenue upon redemption or expiry.

Interest and Dividend IncomeInterest on cash, cash equivalents and other short-term and long-term cash investments isrecognized as interest accrues using the effective interest rate method. Dividend income from AFS

equity investments is recognized when the Group‟s right to receive payment is established.

Other Comprehensive Income (Loss)Other comprehensive income (loss) comprises items of income and expense (including items previously presented under the consolidated statement of changes in equity) that are not recognizedin profit or loss for the year in accordance with PFRS. Other comprehensive income (loss) of theGroup includes gains and losses on changes in fair value of AFS investments, changes inrevaluation increment of property and equipment and remeasurement gains or losses on defined benefit plans.

Short-term Employee BenefitsShort-term employee benefits include items such as salaries and wages, social security contributionsand nonmonetary benefits, if expected to be settled wholly within twelvemonths after the reporting date in which the employees rendered the related services. Short-term

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employee benefits are recognized as expense as incurred. When an employee has rendered serviceto the Group during the reporting period, the Group recognizes the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service as a liability (accruedexpense), after deducting any amount already paid.

Retirement Benefits Cost and Other Long-term Employee BenefitsAccrued employee benefits, as presented in the consolidated statement of financial position, consistof retirement benefits under defined benefit plans and other long-term employee benefits.

Retirement benefitsAccrued retirement benefits is the present value of the defined benefit obligation at the end of thereporting period reduced by the fair value of plan assets, adjusted for any effect of limiting a netdefined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method. The retirement benefits cost comprise of service cost, net interest onthe net defined benefit liability or asset and remeasurements of net defined benefit liability or asset.

Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in profit or loss. Past service costs are recognizedwhen plan amendment or curtailment occurs. These amounts are calculated periodically byindependent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the netdefined benefit liability or asset that arises from the passage of time which is determined byapplying the discount rate based on government bonds to the net defined benefit liability or asset at

the beginning of the year, taking account of any changes in the net deferred benefit liability or assetduring the period as a result of contribution or benefit payment. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss.

Remeasurements comprising actuarial gains and losses, difference between interest income andactual return on plan assets and any change in the effect of the asset ceiling (excluding net intereston defined benefit liability) are recognized immediately in OCI in the period in which they arise.Remeasurements are not reclassified to profit or loss in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are notavailable to the creditors of the Group, nor can they be paid directly to the Group. The fair value of plan assets is based on market price information. When no market price is available, the fair value

of plan assets is estimated by discounting expected future cash flows using a discount rate thatreflects both the risk associated with the plan assets and the maturity or expected disposal date ofthose assets (or, if they have no maturity, the expected period until the settlement of the relatedobligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the presentvalue of economic benefits available in the form of refunds from the plan or reductions in futurecontributions to the plan.

The Group‟s right to be reimbursed of some or all of the expenditure required to settle a defined benefit obligation is recognized as a separate asset at fair value when and only when reimbursementis virtually certain.

Termination benefitsTermination benefits are employee benefits provided in exchange for the termination of an

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employee‟s employment as a result of either the Group‟s decision to terminate an employee‟semployment before the normal retirement date or an employee‟s decision to accept an offer of benefits in exchange for the termination of employment.

A liability and expense for termination benefit is recognized at the earlier of when the entity can nolonger withdraw the offer of those benefits and when the entity recognizes related restructuringcosts. Initial recognition and subsequent changes to termination benefits are measured inaccordance with the nature of the employee benefit, as either post-employment benefits, short-termemployee benefits, or other long-term employee benefits.

Other long-term employee benefitsOther long-term employee benefits are measured using the projected unit credit method. Actuarialgains and losses on these employee benefits are recognized in full in profit or loss.

Borrowing CostsBorrowing costs are capitalized if they are directly attributable to the acquisition or construction of

a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare theasset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs arecapitalized until the assets are substantially ready for their intended use.

To the extent that the Group borrows funds generally and uses them for the purpose of obtaining aqualifying asset, the Group determines the amount of borrowing costs eligible for capitalization byapplying a capitalization rate to the expenditures on that asset. The capitalization rate shall be theweighted average of the borrowing costs applicable to the borrowings of the Group that areoutstanding during the period, other than borrowings made specifically for the purpose of obtaininga qualifying asset. The amount of borrowing costs that the Group capitalizes during a period shallnot exceed the amount of borrowing costs it incurred during that period. All other borrowing costsare expensed as incurred.

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

Income TaxesCurrent income taxCurrent income tax assets and liabilities for the current and prior periods are measured at theamount expected to be recovered from or paid to the taxation authorities. The tax rates and tax lawsused to compute the amounts are those that have been enacted or substantively enacted as of end ofreporting period.

Current income tax relating to items recognized directly in equity is recognized in equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect tosituations in which applicable tax regulations are subject to interpretation and establishes provisionswhere appropriate.

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

Deferred income tax liabilities are recognized for all taxable temporary differences, including assetrevaluations. Deferred income tax assets are recognized for all deductible temporary differences,carry forward benefits of unused tax credits from the excess of minimum corporate income tax(MCIT) over the regular corporate income tax and unused net operating loss carryover (NOLCO),

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to the extent that it is probable that sufficient future taxable profits will be available against whichthe deductible temporary differences and carry forward benefits of unused tax credits and unused NOLCO can be utilized. Deferred income tax, however, is not recognized when it arises from theinitial recognition of an asset or liability in a transaction that is not a business combination and, atthe time of the transaction, affects neither the accounting profit nor taxable profit or loss. Deferredincome tax liabilities are not provided on nontaxable temporary differences associated withinvestments in domestic subsidiaries and associates. With respect to investments with othersubsidiaries and associates, deferred income tax liabilities are recognized except where the timingof reversal of the temporary differences can be controlled by the parent or investor and it is probable that the temporary difference will not reverse in the foreseeable future.

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

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

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss.Deferred tax items are recognized in correlation to the underlying transaction either in OCI ordirectly in equity.

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 the deferredincome taxes relate to the same taxable entity and the same taxation authority.

Foreign Currency-denominated Transactions and TranslationsTransactions denominated in currencies other than the Philippine Peso are recorded using theexchange rate prevailing at the date of the transaction. Outstanding monetary assets and liabilitiesdenominated in foreign currencies are translated using the closing rate of exchange at the end of thereporting period. Any resulting foreign exchange gains or losses are taken to income or loss in theconsolidated statement of comprehensive income.

The functional currency of PAL is the US Dollar (USD). As of the reporting date, the assets andliabilities of this subsidiary are translated into the presentation currency of the Group at the rate ofexchange ruling at the reporting date and its statement of comprehensive income accounts aretranslated at the weighted average exchange rates for the year. The exchange differences arising on

the translation are recognized in the consolidated statement of comprehensive income and reportedas a separate component of equity as “Cumulative translation adjustment”. On disposal of a foreignentity, the deferred cumulative amount recognized in the consolidated statement of comprehensiveincome relating to that particular foreign operation shall be recognized in profit or loss. Exchangedifferences arising from elimination of intragroup balances and intragroup transactions arerecognized in profit or loss.

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

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Events After the Reporting DatePost year-end events that provide additional information about the Group‟s position at the reporting

date (adjusting events), if any, are reflected in the consolidated financial statements. Post year-endevents that are not adjusting events are disclosed in the notes to consolidated financial statementswhen material.

2. Cash and Cash Equivalents


(In Thousands)

Cash on hand and in banks P=5,766,320 P=8,161,024Cash equivalents 2,731,886 2,633,128

P=8,498,206 P=10,794,152

3. Receivables

September 30, 2015 December 31, 2014(In Thousands)

General traffic P=6,630,754 P=5,405,889Receivable from related parties 5,540,431 4,912,407 Non-trade* 6,507,589 6,595,705

18,678,774 16,914,001Less: allowance for doubtful accounts 5,286,892 4,858,003

P=13,391,882 P=12,055,998

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

4. Expendable Parts, Fuel, Materials and Supplies


At cost: (In Thousands)

Fuel P=880,329 P=1,152,458Materials and supplies 260,240 231,932Expendable parts 586,746 627,747

1,727,315 2,012,137At net realizable value - expendable parts 72,728 74,268

P=1,800,043 P=2,086,405

5. Other Current Assets


(In Thousands)Prepayments P=1,722,069 P=2,590,864Security deposits 3,664,671 2,452,467Derivative assets 1,686,197 1,423,627Others 91,329 106,886

P=7,164,266 P=6,573,844

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6. Property and Equipment


(In Thousands)At Cost

Cost:Passenger aircraft P=49,815,118 P=43,971,546Other aircraft and leasehold improvements 1,959,409 1,707,502Engines 6,826,040 6,594,408Rotable and reparable parts 9,834,089 10,387,777Ground property and equipment 10,731,605 9,666,927

79,166,261 72,328,160

Accumulated Depreciation:Passenger aircraft (10,288,864) (9,854,522)Other aircraft and leasehold improvements (538,884) (402,660)Engines (3,691,454) (3,711,451)Rotable and reparable parts (4,941,514) (5,463,470)

Ground property and equipment (8,850,965) (8,283,119)(28,311,681) (27,715,222)

Net book value 50,854,580 44,612,938Construction in progress 199,313 613,878Predelivery payments 7,096,582 9,975,141

Total P=58,150,475 P=55,201,957

At Appraised Value

Buildings and improvements:Appraised value P=972,726 P=929,295Accumulated depreciation and

amortization (396,986) (266,964)

Net Book Value P=575,740 P=662,331

Fleet


Owned:Bombardier DHC 8-400 5 5Bombardier DHC 8-300 4 4Airbus 340-300 6 10Airbus 330-300 – 2Airbus 320-200 – 2

Under finance lease:

Boeing 777-300ER 3 3Airbus 320-200 8 8Airbus 321-231 3 –

Under operating lease:Boeing 777-300ER 3 3Airbus 330-300 15 15Airbus 321-231 16 14Airbus 320-200 18 18Airbus 319-100 – 1

81 85

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7. Investment Properties


(In Thousands)Cost

Land P=1,357,771 P=1,297,147Buildings and improvements 37,231 35,568

1,395,002 1,332,715Accumulated Depreciation and

Impairment Loss

Buildings and improvements (37,231) (35,568)

Net Book Value P=1,357,771 P=1,297,147

8. Assets Held for Sale

September 30, 2015 December 31, 2014(In Thousands)

Grounded aircraft and engine P= – P=1,374,905Parcel of land – 22,370Rotable and reparable parts 140,493 –

P=140,493 P=1,397,275

In 2014, a parcel of land and the remaining grounded aircraft and engines were classified asassets held for sale and measured based on their fair value less costs to sell. These assets weresold in 2015.

In 2015, PAL classified the rotable and reparable parts of the sold B747-400 as assets held forsale as management intends to sell the asset to an identified buyer and that the asset is availablefor immediate sale in its present condition. Impairment loss amounting to P=339.08 million(included under “Other income (charges) - net” in the consolidated statement of comprehensive

income for the period ended September 30, 2015) was recognized, representing the difference between the carrying amount of rotable and reparable parts and its fair value less costs to sellamounting to P=140.49 million as of September 30, 2015.

9. Investments

AFS investmentsThe Group‟s AFS investments include investments in MacroAsia Corporation (MAC)

(amounting to P=184.80 million and P=215.60 million as of September 30, 2015 and December 31,2014 and, respectively), certain quoted equity investments and club shares (amounting to P=2.72million and P=2.60 million as of September 30, 2015 and December 31, 2014, respectively) andunquoted equity investments (amounting to P=39.99 million and P=286.11 million as of September30, 2015 and December 31, 2014, respectively).

Investment in an associateIn 2013, PAL acquired 40% interest in Fortunate Star Limited (FSL), which is the holdingcompany of various entities with whom PAL has operating lease agreements. FSL wasincorporated on May 13, 2013 and has registered office address in Cayman Islands.

PAL‟s interest in FSL is accounted for using the equity method in the consolidated financial

statements. FSL prepares financial statements for the same period as PAL.

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The following tables present the summarized unaudited significant financial information of FSLas at September 30, 2015 and 2014:


(In Thousands)Current assets P=9,004,618 P=9,669,360 Noncurrent assets 44,771,091 44,347,555Current liabilities 4,490,437 4,176,477 Noncurrent liabilities 33,364,980 35,569,942

Equity P=15,920,292 P=14,270,496

Carrying amount of PAL‟s interest in FSL P=6,368,126 P=5,708,198

For the Period Ended September 30 2015 2014

(In Thousands)Lease income P=3,477,916 P=3,944,043

Depreciation (1,586,704) (1,925,993)

Other operating expenses – (169,067)

Financing charges (1,202,802) (1,057,023) Interest income 257,241 5,975

Others (121) 300,610

Net income/total comprehensive incomefor the period P=945,530 P=1,098,545

PAL's share in net income for the period P=378,212 P=439,418

The carrying amount of the investment of P=6.37 billion and P=5.71 billion as of September 30,2015 and December 31, 2014 includes deposits for stock subscription under a Deposit forSubscription Agreement amounting to P=5.49 billion and P=5.25 billion. As of September 30,2015, the related shares of stock have not been issued to PAL.

10. Other Noncurrent Assets


(In Thousands)Long-term security deposits P=7,328,208 P=6,097,704Manufacturers‟ credits 1,435,230 2,102,243

Derivative assets 312,784 951,083Deposits on aircraft leases 4,770,674 1,156,932Others 275,226 333,805

P=14,122,122 P=10,641,767

Other noncurrent assets include long-term security deposits and miscellaneous receivable fromaircraft manufacturer.

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11. Notes Payable


(In Thousands)Allied Banking Corporation P= – P=380,290

Philippine National Bank – 268,663Horizon Global Investments Ltd. – 9,395,400Other local banks 3,044,015 5,545,524

P=3,044,015 P=15,589,877

12. Accounts Payable


(In Thousands)Accounts Payable - General P=3,020,318 P=4,404,966Payables to Related Parties 1,620,259 1,661,152

Others 2,852,693 1,776,438P=7,493,270 P=7,842,556

Other accounts payable include collections made by the Group where the Group acts as thecollection agent, passenger and freight deposits.

13. Accrued Expenses and Other Current Liabilities


(In Thousands)Payable to an associate P= – P=7,844,175Accrued expenses:

Landing and take-off fees andground handling charges 7,137,887 6,779,273

Maintenance 4,716,584 4,203,994Others 3,571,192 4,013,936

Derivative liabilities 3,189,599 3,390,218

P=18,615,272 P=26,231,596

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

14. Long-term Obligations


(In Thousands)Obligations under finance leases P=25,513,201 P=21,375,654Long-term debt 23,864,282 9,928,611

49,377,483 31,304,265Less: current portion 7,905,682 9,114,925

P=41,471,801 P=22,189,340

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15. Reserves and Other Noncurrent Liabilities


(In Thousands)Provisions P=2,171,553 P=2,096,874Asset Retirement Obligation (ARO) 1,076,364 827,153Derivatives liabilities 1,098,936 795,075Other noncurrent liabilities 1,144,082 1,339,829

P=5,490,935 P=5,058,931

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

16. Revenues and Expenses

Details of other revenues are as follows:


2015 2014

(In Thousands)Transport-related revenue P=5,228,965 P=4,547,172Lease income 2,716,086 2,735,692 Non-transport revenue 200,169 219,533

P=8,145,220 P=7,502,397

The significant components of expenses by nature are as follows:


2015 2014

(In Thousands)Fuel and oil P=22,760,620 P=29,129,651Aircraft lease rentals 11,378,861 7,485,618Repairs and maintenance 7,939,531 5,762,992Crew and staff costs 6,479,508 5,694,583Ground handling charges 4,660,667 4,647,586Depreciation, amortization and

obsolescence 3,311,618 3,127,299Landing and take-off fees 2,793,054 2,603,242Passenger food 2,582,241 2,467,524Reservation and selling costs 1,366,777 1,472,109Utilities 1,153,845 959,981Professional fees 849,534 593,523Flight amenities 767,485 739,050Outside services 208,179 211,082

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17. Financial Risk Management Objectives and Policies

Risk Management Structure BODThe BOD is mainly responsible for the overall risk management approach and for the approval ofrisk strategies and policies of the Group.

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

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

Financial Risk ManagementThe Group‟s principal financial instruments, other than derivatives, consist of loans and borrowingsand cash and cash equivalent. The main purpose of these financial instruments is to raise financingfor the Group‟s operations. The Group has various other financial assets and financial liabilities

such as receivables, accounts payable, accrued expenses and deposits which arise directly from itsoperations.

The main risks arising from the use of financial instruments are market risks (consisting of foreignexchange risk, cash flow interest rate risk, and fuel price risk), liquidity risk, counterparty risk andcredit risk.

The Group uses derivative instruments to manage its exposures to currency and fuel price risksarising from the Group‟s operations and its sources of financing. The details of PAL‟s derivativetransactions, including the risk management objectives and the accounting results, are discussed inthis note.

Market risksThe Group‟s operating, investing and financing activities are directly affected by changes in foreignexchange rates, interest rates and fuel prices. Increasing market fluctuations in these variables mayresult in significant equity, cash flow and profit volatility risks for the Group. For this reason, theGroup seeks to manage and control these risks primarily through its regular operating and financingactivities, and through the execution of a documented hedging strategy.Management of financial market risk is a key priority for the Group. The Group generally appliessensitivity analysis in assessing and monitoring its market risks. Sensitivity analysis enablesmanagement 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 and fuel price risk are based on the historical volatility for each market factor, withadjustments being made to arrive at what the Group considers to be reasonably possible.

Foreign exchange riskThe Group is exposed to foreign exchange rate fluctuations arising from its revenue, expenses and borrowings in currencies other than its functional currency. The Group manages this exposure bymatching its receipts and payments for each individual currency. Any surplus is sold as soon as

practicable. PAL also uses foreign currency forward contracts and options to hedge a portion of itsexposure.

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PAL‟s significant foreign currency-denominated monetary assets and liabilities (in Philippine Pesoequivalent) are as follows:


(In Thousands)Financial Assets and Financial Liabilities

Financial assets: Cash P=2,388,615 P=4,477,848Receivables 10,152,586 13,131,906Others* 3,553,864 3,575,800

16,095,065 21,185,554

Financial liabilities:Accounts payable (519,637) (507,396)Accrued expenses (5,689,264) (4,885,429)Others** (507,929) (771,631)

(6,716,830) (6,164,456) Net foreign currency-denominated financial assets 9,378,235 15,021,098

Nonfinancial Liabilities Accrued employee benefits (7,092,414) (6,449,271)Provisions (2,171,554) (2,096,874)

(9,263,968) (8,546,145)

Net Foreign Currency-denominated Monetary

Assets P=114,267 P=6,474,953

* Includes miscellaneous deposits and security deposits.** Substantially pertaining to notes payable to a local bank.

The Group recognized P=94.26 million foreign exchange gain and P=581.81 million foreign exchangeloss for the nine months ended September 30, 2015 and year ended December 31, 2014,respectively, included under “Other income (charges) - net” in the consolidated statements ofcomprehensive income arising from the translation and settlement of these foreign currency-denominated financial and nonfinancial instruments. PAL‟s foreign currency-denominatedexposures comprise primarily of Philippine peso (PHP) and Japanese Yen (JPY). Other foreigncurrency exposures include Canadian dollar (CAD), Euro (EUR), Australian dollar (AUD),Singaporean dollar (SGD), Chinese Yuan (CNY), Thai Baht (THB) and Hong Kong dollar (HKD).

Cash flow interest rate riskThe Group‟s exposure to cash flow interest rate risk arises from the regular repricing of interest onits floating-rate loans. The Group‟s policy on interest rate risk is designed to limit the Group‟sexposure to fluctuating interest rates. The ratio of floating rate to the total borrowings is 0.59:1 and0.15:1 as of September 30, 2015 and December 31, 2014, respectively.

Fuel price risk PAL is exposed to price risk on jet fuel purchases. This risk is managed by a combination ofstrategies with the objective of managing price levels within an acceptable band through varioustypes of derivative and hedging instruments. In managing this significant risk, PAL has a portfolioof swaps, collars, vanilla options, swaptions and spreads. PAL 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.

PAL uses a VaR computation to estimate the potential three-day loss in the fair value of its fuelderivatives. The VaR computation is a risk analysis tool designed to statistically estimate the

7/23/2019 PHI 17Q-Sep 2015


maximum potential loss at a given confidence interval from adverse movement in fuel prices.

Assumptions and limitations of VaR

The VaR methodology employed by PAL uses a three-day period due to the assumption that not all positions could be undone in a single day given the size of the positions. The VaR computationmakes use of Monte Carlo simulation with multi-factor models. Multi-factor models ensure that thesimulation process takes into account mean reversion tendency and seasonality of fuel prices. Itcaptures the complex dynamics of the term structure of commodity markets, such as contango and backwardation. The VaR estimates are made assuming normal market conditions using a 95%confidence interval and are determined by observing market data movements over a 90-day period.

The estimated potential three-day losses on its fuel derivative transactions, as calculated in the VaRmodel, amounted to P=255.89 million and P=268.95 million as of September 30, 2015 and December31, 2014, respectively.

The high, average and low VaR amounts are as follows:

High Average Low

(In Thousands)

January 1, 2015 to September 30, 2015 P=469,153 P=255,889 P=159,869

January 1, 2014 to December 31, 2014 277,299 99,181 3,241

Liquidity riskLiquidity risk arises from the possibility that the Group may encounter difficulties in raising fundsto meet commitments from financial instruments (e.g., long-term obligations) or that a market forderivatives may not exist in some circumstances.

The Group‟s objectives to manage its liquidity profile are: (a) to ensure that adequate funding is

available at all times; (b) to meet commitments as they arise without incurring unnecessary costs;(c) to be able to access funding when needed at the least possible cost; and (d) to maintain anadequate time spread of refinancing maturities.

The tables below summarize the maturity analysis of the Group‟s financial liabilities based oncontractual undiscounted payments (principal and interest):

As of September30, 2015

<1 Year >1-<2 Years >2-<3 Years >3-<4 Years >4-<5 Years >5 Years Total

(In Thousands) Accounts payable and accrued

expenses* P=20,159,600 P= – P= – P= – P= – P= – P=20,159,600

Payable to an associate** 3,055,348 – – – – – 3,055,348

23,214,948 – – – – – 23,214,948

Obligation under finance lease**** 3,677,732 3,657,126 3,636,568 4,221,955 3,067,992 10,209,158 28,470,531Long-term debt***** 5,713,288 5,534,019 5,350,208 5,168,597 4,266,913 – 26,033,025Derivative instruments:

Contractual receivable (945,986) – – – – – (945,986)Contractual payable 893,676 – – – – – 893,676

Fuel derivatives 1,504,914 786,152 – – – – 2,291,066

Premium liability 900,139 210,693 – – – – 1,110,832

11,743,763 10,187,990 8,986,776 9,390,552 7,334,905 10,209,158 57,853,144

P=34,958,711 P=10,187,990 P=8,986,776 P=9,390,552 P=7,334,905 P=10,209,158 P=81,068,092

* Excludes nonfinancial liabilities amounting to P =2,759,470

**Includes interest amounting to P =11,333

***Includes interest amounting to P =2,957,331

****Includes interest amounting to P =2,168,744

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As of December 31, 2014<1 Year >1-<2 Years >2-<3 Years >3-<4 Years >4-<5 Years >5 Years Total

(In Thousands) Accounts payable and accrued

expenses* P=20,413,464 P= – P= – P= – P= – P= – P=20,413,464Payable to an associate** 8,127,692 – – – – – 8,127,692

Notes payable*** 15,828,296 – – – – – 15,828,29644,369,452 – – – – – 44,369,452

Obligation under finance lease**** 2,886,670 2,882,419 2,877,990 2,873,337 3,479,698 8,932,878 23,932,992Long-term debt***** 7,075,273 2,754,821 448,921 – – – 10,279,015Derivative instruments:

Contractual receivable (616,607) – – – – – (616,607)Contractual payable 577,683 – – – – – 577,683Fuel derivatives 1,999,619 (156,008) – – – – 1,843,601Premium liability 433,486 511,602 – – – – 945,088

12,356,114 5,992,834 3,326,911 2,873,337 3,479,698 8,932,878 36,961,772

P=56,725,566 P=5,992,834 P=3,326,911 P=2,873,337 P=3,479,698 P=8,932,878 P=81,331,224

* Excludes nonfinancial liabilities amounting to P =2,426,250

**Includes interest amounting to P =283,517***Includes interest amounting to P =238,419

****Includes interest amounting to P =2,557,338

*****Includes interest amounting to P =350,448

The Group‟s total financial liabilities due to be settled currently amounting to P=34.96 billion andP=56.73 billion as of September 30, 2015 and December 31, 2014, respectively, include liabilitiesaggregating to P=23.21 billion and P=44.37 billion, respectively, that management considers asworking capital. Accounts payable and accrued expenses and payable to an associate of P=23.21 billion and P=28.54 billion as of September 30, 2015 and December 31, 2014, respectively, includeliabilities that are payable on demand but are expected to be renegotiated in the future. For theother liabilities amounting to P=11.74 billion and P=12.36 billion as of September 30, 2015 andDecember 31, 2014, respectively, management expects to settle these from the Group‟s cash to begenerated from operations.

The following are the Group‟s financial assets as of September 30, 2015 and December 31, 2014used to manage liquidity risk, particularly those financial liabilities that will mature in less than ayear:

September 30, 2015

<1 Year

>1-<2

Years

>2-<3

Years

>3-<4

Years

>4-<5

Years

>5

Years Total

(In Thousands)

Cash P=5,766,320 P= – P= – P= – P= – P= – P=5,766,320

Loans and receivables:Cash equivalents 2,731,886 – – – – – 2,731,886

Short-term investments 28,380 – – – – – 28,380

Receivables - net 11,989,621 – – – – – 11,989,621

P=20,516,207 P= – P= – P= – P= – P= – P=20,516,207

December 31, 2014

<1 Year>1-<2Years

>2-<3Years

>3-<4Years

>4-<5Years

>5Years Total

(In Thousands)Cash P=8,161,024 P= – P= – P= – P= – P= – P=8,161,024Loans and receivables:

Cash equivalents 2,633,128 – – – – – 2,633,128Receivables - net 10,915,083 – – – – – 10,915,083

P=21,709,235 P= – P= – P= – P= – P= – P=21,709,235

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Counterparty risk

The Group‟s counterparty risk encompasses issuer risk on investment securities, credit risk on cashin banks, time deposits and security deposits and settlement risk on derivatives. The Groupmanages its counterparty risk by transacting with counterparties of good financial condition andselecting 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. The Group also enters into master netting arrangements and implementscounterparty and transaction limits to avoid concentration of counterparty risk.

The table below shows the maximum counterparty exposure after taking into account any collateraland other credit enhancements of the Group:

September 30, 2015

Gross

Maximum

Exposure

Fair

Value of

Collateral

Net

Exposure to

Credit Risk

Financial

Effect of

Collateral

or Credit

Enhancements

(In Thousands)

Cash in banks and cash equivalents P=7,644,880 P= – P=7,644,880 P= –

Short-term investments 28,380 – 28,380 –

Receivables - net 11,989,621 2,468,228 9,647,938 2,341,683

Derivative instruments 1,998,981 – 1,998,981 –

Margin deposits, lease deposits and others 14,275,447 – 14,275,447 –

P=35,937,309 P=2,468,228 P=33,595,626 P=2,341,683

December 31, 2014

GrossMaximumExposure

FairValue of

Collateral

NetExposure toCredit Risk

FinancialEffect of

Collateralor Credit

Enhancements

(In Thousands)Cash in banks and cash equivalents P=9,854,701 P= – P=9,854,701 P= – Receivables - net 10,915,083 1,552,031 9,497,362 1,417,721Derivative instruments 2,374,710 – 2,374,710 – Margin deposits, lease deposits and others 8,993,411 – 8,993,411 –

P=32,137,905 P=1,552,031 P=30,720,184 P=1,417,721

Credit risk

The Group‟s exposure to credit risk arises from the possibility that agents, financial institutions andother counterparties may fail to fulfill their agreed obligations and that the collaterals held may not be sufficient to cover the Group‟s claims. To manage such risk, the Group, through its Credit andCollection Department, employs a credit evaluation process prior to the accreditation 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 Group, to the best of its knowledge, has no significant concentration of credit risk with anycounterparty.

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18. Financial Instruments

Fair Values The table below presents the Group‟s financial instruments measured at fair value and financialinstruments for which fair values are disclosed:


Carrying

Value Fair Value

CarryingValue Fair Value

(In Thousands)

Financial Assets

AFS investments:Quoted equity investments P=187,516 P=187,516 P=218,195 P=218,195

Derivative asset - fair value through profit or loss 1,998,981 1,998,981 2,374,710 2,374,710

Loans and receivables - margin deposits, lease

deposits and others 14,718,983 14,716,735 8,993,411 8,990,190

Financial Liabilities

Derivative liabilities - fair valuethrough profit or loss 4,288,455 4,288,455 4,185,293 4,185,293

Financial liabilities carried at amortized cost:Obligations under finance leases 25,513,201 25,561,531 21,375,654 21,318,431Long-term debt 23,864,282 24,654,274 9,928,611 9,954,203

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accruedexpenses approximate their fair value due to the short-term nature of these accounts. As ofSeptember 30, 2015 and December 31, 2014, AFS investments amounting to P=39.99 million andP=286.11 million, respectively, were carried at cost since these are investments in unquoted equityshares and the fair values cannot be measured reliably.

Following methods and assumptions are used to estimate the fair value of each class of financialinstruments that is different from their carrying amount:

Equity investments (available-for-sale investments)The fair values of quoted equity investments are based on market prices in active markets.

Margin deposits, lease deposits and othersThe fair value of margin deposits, lease deposits and others is determined using discounted cashflow techniques based on prevailing market rates. Discount rates used are 1.58% and 2.31% forSeptember 30, 2015 and December 31, 2014, respectively.

Long-term obligations and short-term, fixed rate notes payable

The fair value of long-term obligations (whether fixed or floating) is generally based on the presentvalue of expected cash flows with discount rates that are based on risk-adjusted benchmark rates (inthe case of floating rate liabilities with quarterly repricing, the carrying value approximates the fairvalue in view of the recent and regular repricing based on current market rates). The discount ratesused for USD-denominated loans ranged from 1.13% to 3.17% and 1.23% to 4.27% for September30, 2015 and December 31, 2014, respectively.

The carrying value of the short-term, fixed rate notes payable approximates its fair value due to theshort-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 forward exchange

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rates for contracts with similar maturity profiles.

The fair values of fuel derivatives that are actively traded in an organized and liquid market are based on published prices. In the absence of an active and liquid market, and depending on the typeof instrument and the underlying commodity, the fair value of fuel derivatives is determined by theuse of either present value methods or standard option valuation models. The valuation inputs onthese fuel derivatives are based on assumptions developed from observable information, including(but not limited to) the forward curve derived from published or futures prices adjusted for factorssuch as seasonality considerations and the volatilities that take into account the impact of spot prices and the long-term price outlook of the underlying commodity.

Fair Value Hierarchy

As of September 30, 2015Fair value measurement using

Total

Quoted prices

in active

markets(Level 1)

Significant

observable

inputs(Level 2)

Significant

unobservable

inputs(Level 3)

(In Thousands)

Assets and liabilities measured

at fair value: AFS investments

Quoted equity shares P=187,516 P=187,516 P= – P= – Derivative financial assets:

Fuel derivatives 1,980,717 – 1,980,717 –

Currency forwards 5,292 – 5,292 –

Structured currency derivatives 12,972 – 12,972 – Derivative financial liabilities:

Fuel derivatives 4,271,783 – 4,271,783 –

Structured currency derivatives 16,672 – 16,672 –

Property and equipment 575,740 – – 575,740Assets held for sale 140,493 – – 140,493

Assets and liabilities for which

fair values are disclosed:

Margin deposits, lease depositsand others 14,716,735 – 14,716,735 –

Obligations under financeleases 25,561,531 – 25,561,531 –

Long-term debt 24,654,274 – 24,654,274 –

Investment properties 2,043,799 – – 2,043,799

As of December 31, 2014Fair value measurement using

Total

Quoted prices

in active

markets

(Level 1)

Significant

observable

inputs

(Level 2)

Significant

unobservable

inputs

(Level 3)

(In Thousands)Assets and liabilities measured

at fair value: AFS investments

Quoted equity shares P=218,195 P=218,195 P= – P= – Derivative financial assets:

Fuel derivatives 2,340,528 – 2,340,528 – Currency forwards 23,667 – 23,667 – Structured currency derivatives 10,515 – 10,515 –

Derivative financial liabilities:

Fuel derivatives 4,184,174 – 4,184,174 – Structured currency derivatives 1,119 – 1,119 –

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Fair value measurement using

Total

Quoted prices

in active

markets

(Level 1)

Significant

observable

inputs

(Level 2)

Significant

unobservable

inputs

(Level 3)

Property and equipment 662,331 – – 662,331Assets held for sale 1,397,275 – – 1,397,275

Assets and liabilities for which

fair values are disclosed:

Margin deposits, lease depositsand others 8,990,190 – 8,990,190 –

Obligations under financeleases 21,318,431 – 21,318,431 –

Long-term debt 9,954,203 – 9,954,203 – Investment properties 1,952,543 – – 1,997,543

There were no transfers between hierarchy levels during the nine months ended September 30, 2015and year ended December 31, 2014.

Derivative Financial InstrumentsThe derivative financial instruments set out in this section have been entered into to achieve PAL‟srisk management objectives. PAL‟s derivative financial instruments are accounted for at fair valuethrough profit or loss.

The following table provides information about PAL‟s derivative financial instruments outstandingand the related fair values:


Asset Liability Asset Liability

Fuel derivatives

Current P=1,667,933 P=3,172,847 P=1,389,445 P=3,389,100 Noncurrent 312,784 1,098,936 951,083 795,074Currency forwards* 5,292 – 23,667 – Structured currency derivatives* 12,972 16,672 10,515 1,119

P=1,998,981 P=4,288,455 P=2,374,710 P=4,185,293*All outstanding currency derivatives will mature within one year

As of September 30, 2015 and December 31, 2014, the positive and negative fair values ofderivative positions that will be settled in 12 months or less are classified under “Other currentassets” (₱1.69 billion as of September 30, 2015 and ₱1.42 billion as of December 31, 2014) and“Accrued expenses” (P=3.19 billion as of September 30, 2015 and P=3.39 billion as of December 31,2014). The positive and negative fair values of derivative positions that will settle in more than 12

months are classified under “Other noncurrent assets” (P=312.78 million as of September 30, 2015and P=951.08 million as of December 31, 2014) and “Other noncurrent liabilities” (P=1.10 billion asof September 30, 2015 and P=795.08 million as of December 31, 2014), respectively.

Fuel derivativesPAL is dependent on jet fuel to run its operations, and jet fuel costs have become a larger portion ofPAL‟s expenses due to the increase in all energy prices over the years. Approximately 29.81% and39.27% of its operating expenses represent jet fuel consumption for September 30, 2015 and for theyear ended December 31, 2014, respectively. 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. PALdoes not purchase or hold any derivative financial instruments for trading purposes.

There are no outstanding fuel derivatives accounted for as cash flow hedges as of September 30,2015 and December 31, 2014.

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PAL‟s fuel derivatives not accounted for as cash flow hedges still provide economic hedges against jet fuel price risk. These derivatives include plain vanilla call options, swaps, collars, swaptionsand option (call and put) spreads. These fuel derivatives are carried at fair values in theconsolidated statements of financial position, with fair value changes reported immediately inconsolidated statements of comprehensive income.

Currency forwardsPAL‟s currency forwards are carried at fair value in the consolidated statements of financial position, with the fair value changes being reported immediately in consolidated statements ofcomprehensive income. PAL‟s outstanding currency forwards consist of short-term buy USD andsell various currencies (i.e., JPY and AUD). The net positive fair value of these forwards amountsto P=5.29 million and P=23.67 million as of September 30, 2015 and December 31, 2014,respectively.

Structured currency derivatives

PAL enters into structured currency derivatives consisting of option structures with combination ofcalls and puts. These contracts are carried at fair value in the consolidated statements of financial position and the fair value changes from these derivatives are recognized directly in profit or loss.Outstanding structured currency derivatives as of September 30, 2015 and December 31, 2014 arecomposed of options to buy USD and sell various currencies (i.e., AUD, JPY, CAD and SGD). Thenet fair value of these option structures as of September 30, 2015 and December 31, 2014 amountsto (P=3.70) million and P=9.40 million, respectively.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of

Operations

Results of Operations

For the Quarter July to September

For the quarter ended September 30, 2015, the Company generated a total comprehensive incomeof P=611.2 million, a significant turnaround from the same quarter total comprehensive loss of the previous year of P=192.3 million

The aggregate revenues for the third quarter of the current year increased to P=26,034.3 million fromlast year‟s same period total of P=25,029.5 million. The increase in revenues was brought mainly bythe effect of the depreciation of the Philippine peso vis a vis the US dollar from P=43.65 perUS$ 1.00 in 2014 to P=47.00 per US$ 1.00 in 2015. Had there been no change in the exchange rateof the PHPeso versus the USDollar, revenues, as compared against the same period total of the

previous fiscal year, would have decreased by P=289.6 million. The decrease was mainly attributableto cargo revenues by P=618.5 million as a result of the globally low cargo market in 2015 as well asthe effect of port congestion in Manila which PAL benefitted from in 2014. The improvement in passenger revenues by P=378.9 million was brought about mainly by the introduction of new routessuch as New York via Vancouver, Dubai, Jinjiang, and Osaka and Nagoya originating from Cebuand the increased flight frequencies to Honolulu, Haneda in Japan, and Dammam and Abu Dhabi inMiddle East.

Total operating expenses for the quarter was up by P=634.4 million over last year‟s same quartertotal of P=25,155.4 million. The increase in expenses was brought mainly by the effect of thedepreciation of the Philippine peso vis a vis the US dollar. Had there been no change in theexchange rate of the PHPeso versus the USDollar, expenses , as compared against the same periodtotal of the previous fiscal year, would have decreased by P=649.0 million. This was mainly on

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account of lower expenses related to flying operations countered by higher general andadministrative, maintenance expense and passenger service.

Flying operations dropped to P=15,340.9 million, 3.9% lower than the previous year‟s figure ofP=15,966.6 million due to the decline in fuel costs but offset in part by the increase in aircraft leasecharges, transportation expense and cockpit crew costs. Fuel costs, which remain to be PAL‟s biggest operating expense, registered a 22.9% decrease over last year‟s figure of P=9,892.6 millionas a result of the huge drop in jet fuel prices per barrel from an average US$ 129.74 in 2014 toUS$ 83.06 in 2015. The additional seven (7) A321s and three (3) A330 HGW to PAL‟s fleet

resulted in higher lease charges by P=1,290.7 million. The increase in number of flights on the otherhand, resulted in higher transportation expense and cockpit crew costs by P=306.3 million.

General and administrative expenses rose to P=1,044.8 million from P=664.5 million year ago levelmainly due to various fees incurred related to financing activities.

The increase in number of aircraft resulted in higher maintenance expenses by 18.5% or P=423.2

million.

Passenger service expenses grew by 8.1% or P=150.2 million over last year‟s same period total ofP=1,853.3 million primarily due to cabin crew costs as a result of the increase in number of flights.

Availment of new loans resulted in higher financing charges by 13.8% or P=64.5 million over the previous year ‟s figure of P=467.9 million.

The Company recognized “Other income-net” of P=408.5 million, P=335.5 million higher comparedwith the P=73.0 million figure last year. The favorable variance was mainly contributed by the proceeds from the sale of shares in Abacus International Holdings, Ltd. offset by the effect ofincrease in mark to market loss for derivative instruments during the third quarter.

The Company recognized “Other comprehensive income” of P=363.3 million and P=129.8 million forthe quarters ended September 30, 2015 and 2014, respectively. The effect of foreign exchangetranslation contributed mainly to higher comprehensive income this period.

For the Period January to September

The Company generated a total comprehensive income of P=6,546.5 million for the nine monthsended September 30, 2015, a significant improvement of P=6,377.5 million from the previous year‟stotal comprehensive income of P=169.1 million.

Total revenues for the nine months ended September 30, 2015 amounted to P=81,979.7 million, up

by P=7,998.8 million or 10.8% better than last year‟s same period figure of P=73,981.0 million. Thegrowth was attributable mainly to higher passenger revenues and other revenues generated duringthe period. Increase in number of passengers by 30.0% mainly for Americas, Australia, Japan andMiddle East routes coupled by the effect of interlining arrangement with PAL Express in thedomestic sectors contributed to the favorable revenue performance during the current period. Otherrevenues include excess baggage revenues, ancillary revenues and lease income arising fromaircraft operating lease arrangements with an entity under common control and another airline.

Total expenses in the current period moderately increased by P=3,261.2 million or 4.5% higher overthe previous year‟s same period total of P=73,129.0 million. Expenses related to maintenance, passenger service, general and administrative and reservation and sales offset by the reduction inflying operations contributed to the variance.

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Maintenance expenses, one of PAL‟s biggest costs, rose by 36.6% over the year ago figure ofP=6,048.5 million. The increase of P=2,215.2 million was mainly due to aircraft and enginemaintenance services for the newly acquired aircraft.

Passenger service expenses went up by P=636.4 million or 11.3% higher than last year‟s total of P=5,647.3 million. This was mainly due to higher costs related to cabin crew benefits and passengerfood due to increase in number of passengers as a result of increase in number of flights.

General and administrative expenses grew by P=506.3 million or 23.1% as a result of various fees paid for the financing of three (3) A321 aircraft during the current period and additional obligationsincurred.

Reservation and sales increased from P=4,495.8 million to P=4,808.9 million mainly on account ofhigher selling expenses incurred to support the growth in ticket sales.

Flying operations expenses include jet fuel costs which represent the biggest expense of PAL. The

decline in average jet fuel price per barrel from US$ 129.73 in 2014 to US$ 86.56 in 2015 reducedfuel cost by P=6,369.0 million from P=29,129.7 million for the period January to September 2014 toP=22,760.6 million for the same period of the current year. However, this was countered by theincrease in aircraft lease charges, transportation expense and cockpit crew costs. Aircraft leasecharges went up by P=3,893.2 million due to the acquisition of seven (7) A321s and three (3) A330HGW. Transportation expenses as well as cockpit crew costs grew by P=1,429.9 million mainly as aresult of more flights operated in the current nine month period compared with the year before.

Financing charges amounted to P=1,490.9 million for the current nine month period versus P=1,278.7million in the previous period. The increase of P=212.2 million or 16.6% was mainly due to newloans availed during the current period.

For the period January to September 2015, the Company recognized “Other income-net” of P=1,631.3 million versus P=225.4 million in the previous year. The favorable variance amounting toP=1,406.0 million was mainly due to the income generated from the sale of shares in AbacusInternational Holdings, Ltd. in 2015.

The Company recognized “Other comprehensive income” of P=438.3 million for the nine monthsended September 30, 2015 as against last year‟s “Other comprehensive loss” of P=69.0 million. Theeffect of foreign exchange translation contributed mainly to the current period positive results. Thiswas slightly offset by the resulted losses on fair value adjustments as the market values of theCompany‟s quoted investments decreased in both periods.

Financial Condition

As of September 30, 2015, the Company‟s consolidated total assets stood at P=114,231.1 million,P=5,009.1 million higher than the December 31, 2014 balance of P=109,222.0 million. This wasmainly brought about by the increase in total noncurrent assets by P=6,893.5 million compared withthe December 31, 2014 balance of P=76,314.4 million, offset by the decrease in total current assets by P=1,884.4 million over the December 31, 2014 balance of P=32,907.7 million.

Cash and cash equivalents balance was reduced to P=8,498.2 million, 21.3% lower than theP=10,794.2 million December 31, 2014 balance primarily due to payment of various short termloans.

Receivable balance as of September 30, 2015 increased by P=1,335.9 million from the December 31,2014 figure of P=12,056.0 million mainly due to trade receivables arising from passenger ticket salesas well as the increase in net receivables from related parties.

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Expendable parts, fuel, materials and supplies reflected a decline of P=286.4 million or 13.7% fromthe December 31, 2014 balance of P=2,086.4 million mainly due to reduction in fuel inventory.

Other current assets grew to P=7,164.3 million or 9.0% higher than the December 31, 2014 figure ofP=6,573.8 million primarily due to increase in security deposits related to fuel hedging transactionsoffset by the application of prepayments and deposits on fuel and spare parts.

Noncurrent assets climbed to P=83,207.8 million from P=76,314.4 million in December 2014 mainlyon account of security deposits for various leased aircraft and engines coupled by the effect ofacquisition of three (3) A321 aircraft under finance lease.

Total liabilities decreased by P=1,537.5 million from the December 31, 2014 balance of P=105,537.5million. The significant drop was brought about by the reduction in current liabilities by P=21,895.1million offset by the increase in noncurrent liabilities by P=20,357.6 million.

Total current liabilities dropped by 30.5% from P=71,839.9 million as of December 31, 2014 toP= 49,944.9 million which was attributable to the payment of various short term loans.

The escalation in noncurrent liabilities was largely traceable to the increase in long-term obligations- net of current portion by P=19,282.5 million. This was brought about by additional obligationsincurred for the three A321 aircraft under finance lease and for working capital purposes.

As of September 30, 2015, the consolidated stock holders‟ equity substantially increased toP=10,231.1 million from the December 31, 2014 balance of P=3,684.5 million. The increase ofP=6,546.5 million was brought about by the total comprehensive income recognized for the ninemonths period ended September 30, 2015.

The Company‟s key performance indicators are the following:

1. Total Comprehensive Income

The Company‟s consolidated total comprehensive income attributable to parent for the ninemonths ended September 30, 2015 amounted to P=6,432.3 million, an increase of 3821.2 % fromlast year ‟s P=164.0 million.

2. Current Ratio

The Company has a current ratio of 0.62:1 as of September 30, 2015 compared to 0.46:1 as ofDecember 31, 2014.

3. Debt to Equity Ratio

Debt to equity ratio as of September 30, 2015 was 5.12 compared to 12.73 as of December 31,2014.

4. Earnings Per Share

The Company‟s earnings per share based on net income and total comprehensive income are atP=0.24 and P=0.26 for the nine months ended September 30, 2015 and at P=0.01 for the ninemonths ended September 30, 2014.

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The manner by which the Company calculates the above indicator is as follows:

Current Ratio – Current Assets over Current LiabilitiesDebt to Equity Ratio – Notes Payable plus Current and Noncurrent Long-term

Obligations over Total EquityEarnings (Loss) Per Share – Net Income (Loss) or Total Comprehensive Income

(Loss) Attributable to Holders of Parent Company over Common Shares Issued andOutstanding

TOP FIVE KEY PERFORMANCE INDICATORS OF PAL

Mission Statement Key Performance Indicator Measurement Methodology

To maintain aircraft with thehighest degree of airworthiness,

reliability and presentability inthe most cost and effectivemanner

Aircraft Maintenance CheckCompletion

Number of checks performedless number of maintenance

delays over number of checks performed

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

Number of aircraft relatedaccidents/incidents

By occurrence andmonitoring by FlightOperations Safety Office

To achieve On-Time Performanceon all flights operated

Percentage Deviation fromIndustry Standards (OTPParticipation)

Number of flights operatedless number of flights delayedover total flights operated

To provide safe, on time, qualityand cost effective inflight servicefor total passenger satisfaction

Number of safety violationsincurred by cabin crew

Number of incidents of safetyviolation incurred by cabincrew per month

To maximize revenue generationin passenger and cargo salesthrough increased yields bydiversifying market segments andefficient management of seatinventory and cargo space

Net Revenues generated from passengers and cargoes carried

Percentage Deviation fromBudget/Forecasted Revenues

Other than those that have already been disclosed, there are no known trends, demands,commitments, events or uncertainties that may have a material impact on the Group‟s liquidity.

i. On July 22, 2008, the SC rendered an adverse decision in the case entitled “Flight Attendants andStewards Association of the Philippines (FASAP) vs. the Philippine Airlines” ordering PAL to

reinstate the retrenched FASAP members and pay back wages inclusive of allowances and othermonetary benefits plus 10% attorney‟s fees. PAL filed a Motion for Reconsideration. On October2, 2009, the Motion for Reconsideration was denied with finality and affirmed the July 22, 2008decision with modification in that the award of attorney‟s fees and expenses of litigation is reducedto P=2.0 million. On November 3, 2009, PAL filed a Second Motion for Reconsideration. OnSeptember 7, 2011, the SC issued a resolution denying with finality PAL‟s Second Motion forReconsideration.

In a subsequent turnaround, the SC, on October 4, 2011, issued another resolution recalling theSeptember 7, 2011 resolution which denied the Second Motion for Reconsideration. Apparently,there has been violation of its internal rules when the wrong division ended up deciding on the

case. The SC En Banc thus accepted and took cognizance of PAL‟s Second Motion forReconsideration and the case was re-raffled to a new Member-in Charge.

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FASAP filed a Motion for Reconsideration of the October 4, 2011 resolution of the SC En Banc. Ina resolution dated March 13, 2012, the SC denied FASAP‟s Motion for Reconsideration andaffirmed the recall of the September 7, 2011 resolution. FASAP filed Motion for Leave to Admitthe Motion for Reconsideration dated April 4, 2012, which was granted by the SC in a resolutiondated April 24, 2012.

The SC has yet to decide on PAL‟s Second Motion for Reconsideration and FASAP‟s Motion forReconsideration.

On September 9, 2010 FASAP filed a Notice of Strike for alleged Unfair Labor Practice on thegrounds of PAL‟s refusal to submit counter proposal and/or conclude the remaining term of2005-2010 CBA, address age and gender discrimination, salary increase and rice subsidy. Attempts by the National Conciliation and Mediation Board (NCMB) to amicably settle the labor disputefailed. Thus, on October 6, 2010 the DOLE Secretary assumed jurisdiction over the labor disputeand directed the parties to submit their respective position papers and other pleadings.

On December 23, 2010, the DOLE issued a Decision in favor of FASAP granting salary increaseand monthly rice allowance for the period July 16, 2007 to July 15, 2010 and higher compulsoryretirement from 45 to 60 years old. On April 1, 2011 DOLE Secretary issued a Decision on thePAL‟s Motion for Partial Reconsideration and Motion for Clarification. The DOLE Secretaryaffirmed with modification the December 23, 2010 DOLE Decision in that the award of monthlyrice allowance for the first year of the CBA effective July 16, 2007 was reduced from P=1,800 toP=1,500. PAL was also directed to reinstate 9 flight pursers who were retired at age 55 during the pendency of the case and to pay them full back wages and benefits. The 9 flight pursers who wereretired at age 55 were reinstated and those active cabin attendants due for retirement at age 55 wereallowed to continue until age 60 without prejudice to further or other legal action on the issue. OnMay 17, 2011 PAL elevated the case to the CA via a Petition for Certiorari with prayer for

issuance of a Temporary Restraining Order and Preliminary Mandatory Injunction. On June 18,2013, the CA rendered a Decision which partly granted the Petition insofar as the salary increaseand the compulsory age retirement are concerned. FASAP filed a Motion for Reconsiderationagainst which PAL filed its Comment. FASAP filed its Reply. On May 29, 2014, the CA deniedFASAP‟s Motion for Reconsideration. FASAP filed a Petition for Review with the SC. The groupof purser Pauline Gopez filed a Petition for Intervention. PAL filed its Comment to the Petition.The Commission on Human Rights filed a Motion for Leave of Court to file Petition forIntervention dated January 26, 2015. The case is still pending with the SC.

In 2007, the U.S. Department of Justice (U.S. DOJ) based in Washington D.C. commenced aninvestigation on airlines operating to/from the U.S. for possible violation of U.S. Anti-trust lawsfor both passenger and cargo services covering the period January 1, 1999 to July 11, 2007. For its

part, PAL received subpoenas from the U.S. DOJ in 2007. While the investigations remain pending to date, the U.S. DOJ has not communicated with PAL since the early part of 2010. PALis also a defendant in a case entitled In re Transpacific Air Transportation Antitrust Litigation, a putative class action also for possible violation of U.S. Anti-trust laws brought before the NorthernDistrict of California against air carriers operating passenger air services to and from the U.S.From the time PAL was impleaded as defendant in this case in 2009, the court has granted motionsfiled and defended by the defendant airlines which effectively narrowed the claims of the plaintiffs.To date, however, this case remains pending and hearings on the merit have not started.

PAL is a petitioner in various cases pending before the Court of Tax Appeals (CTA) for the refundof excise taxes paid by PAL under protest in connection with its importation of commissary itemsused for operation in the amount of P=169.8 million. On August 27, 2014, the Supreme Court (SC)rendered judgment upholding PAL‟s entitlement to exemption and ordered the full refund of theexcise taxes paid under protest for one of the cases representing the February 2007 importation of

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liquors, cigarettes and wine. PAL received the motions for reconsideration filed by theCommissioner of Internal revenue and the Commissioner of Customs. The motions are pendingresolution by the SC. All other cases are ongoing with the CTA.

Aside from the importation of commissary items, PAL is also seeking refund of excise taxes paidunder protest on its importation of aviation fuel. PAL filed various cases with the CTA in theaggregate amount of P=3.3 billion and hearings are now ongoing with the CTA.

In line with its claims for refund of the foregoing taxes on fuel importation for its domesticoperations, PAL has likewise filed for the Declaration of Nullity of a 2002 Department of Energy(DOE) Certification, a one-liner summation stating “there is locally available jet fuel in reasonablequantity, quality and price”, thereby effectively overriding PAL‟s exemption under its charterwhich states that tax exemption is enjoyed by PAL if there is no locally available aviation fuel in“reasonable quantity, quality or price.” On July 12, 2010, PAL obtained a Preliminary Injunctionissued by the Regional Trial Court (RTC) against the Department of Finance (DOF) and DOE,enjoining the latter from implementing the 2002 DOE Certification. On February 27, 2014, PAL

obtained a decision from the RTC declaring the aforementioned 2002 DOE certification as null andvoid and further declaring permanent the preliminary injunction previously issued. Presently, thecase is pending review before the SC for resolution.

Other than the foregoing legal proceedings involving PAL, there are no known events that willtrigger direct or contingent financial obligation that is material to the Group, including any defaultor acceleration of an obligation.

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

iii.

Commitments for capital expenditures

In August 2012, PAL entered into two separate Purchase Agreements with Airbus. The firstPurchase Agreement is for a firm order of 44 Airbus “A320 family” aircraft and options for 20Airbus “A320 family” aircraft for delivery in years 2013 to 2020. The other Purchase Agreementis for a firm order of ten Airbus 330-300 aircraft and options for ten Airbus 330 -300 aircraft fordelivery in years 2013 to 2016. In September 2012, PAL exercised its right to purchase all of theten Airbus 330-300 option aircraft by virtue of an amendment agreement to the PurchaseAgreement. In March 2014, PAL entered into an amendment agreement with Airbus and reducedits Airbus 330-300 aircraft orders by five and simultaneously exercised eight of its options for theAirbus “A320 Family” aircraft and purchased Airbus 321-231 NEO aircraft for delivery in years2020 to 2022. PAL did not exercise the remaining twelve options. In January 2015, by virtue of

another amendment to the Purchase Agreement, PAL revised the delivery of its firm orders of tenAirbus 321-231 aircraft in 2015 and ten aircraft in 2016 to five aircraft in 2015 and five in 2016.The remaining delivery for ten aircraft has been deferred to years 2020 to 2024. In addition to this,PAL ordered two more A321-231 NEO aircraft for delivery in 2024. As of September 30, 2015, atotal of 34 aircraft (19 Airbus 321-231 and 15 Airbus 330-300) have been delivered to andaccepted by PAL under the Purchase Agreements.

iv. There are no known trends, events or uncertainties that have had or that are reasonably expected tohave material favorable or unfavorable impact on net sales or revenues or income from continuingoperations.

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

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

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

1. Cash and cash equivalents- H- (21%)2. Short-term investments- H-100%3. Receivables- H- 11%4. Expendable parts, fuel, materials and supplies- H- (14%)5. Other current assets- H- 9%6. Assets held for sale- H- (90%)7. Property and equipment-net- H- 5%8. Investment properties- H- 5%9. Investment in an associate- H- 12%10. Available-for-sale investments- H-(55%)

11.

Deferred income tax assets- H- 5%12. Other noncurrent assets- H- 33%13. Notes payable- H- (80%); V- (12%)14. Current portion of long-term obligations- H- (13%)15. Accrued expenses and other current liabilities- H- (29%); V- (8%)16. Long-term obligations-net of current portion- H- 87%; V-16%17. Accrued employee benefits- H- 10%18. Reserves and other noncurrent liabilities- H- 9%19. Other components of equity- H- (7%)20. Deficit- H- (19%); V-7%21. Non-controlling interests- H- 152%22. Passenger revenue- H- 12%

23.

Other revenue- H- 9%24. Flying operations- V- (7%)25. Maintenance- H- 37%26. Passenger service- H- 11%27. Reservation and sales- H- 7%28. General and administrative- H- 23%29. Other expenses- H- 125%30. Financing charges- H- 17%31. Share in net income of an associate- H- (14%)32. Other income- net- H- 624%33. Net income- H- 2465%; V- 7%34. Total other comprehensive loss- H- (735%)

35.

Total comprehensive income- H- 3772%; V- 8%

All of these material changes were explained in the management‟s discussion and analysis offinancial 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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PAL HOLDINGS, INC and SUBSIDIARIES

AGING OF ACCOUNTS RECEIVABLE

As of September 30, 2015 (Unaudited)

(Amounts in Thousands PHP)

Outstanding Over Over Over Over Over Over Items under

Amount Current 30 Days 60 Days 90 Days 120 Days 180 Days 1 Year Litigation

TRADE RECEIVABLES 6,730,645 4,412,885 497,298 323,696 277,333 360,037 405,322 454,074 -

NON-TRADE RECEIVABLES 11,948,129 312,639 7,201,390 40,041 23,743 22,151 108,274 2,920,662 1,319,229

TOTAL 18,678,774 4,725,524 7,698,688 363,737 301,076 382,188 513,596 3,374,736 1,319,229

ALLOWANCE FOR D.A. 5,286,892

RECEIVABLES - NET 13,391,882

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FINANCIAL SOUNDNESS INDICATORS

30-Sep-15 31-Dec-14

CURRENT RATIO 0.62 0.46

LIQUIDITY RATIO 0.44 0.32

DEBT-TO-EQUITY RATIO 5.12 12.73

ASSET-TO-EQUITY RATIO 11.17 29.64

30-Sep-15 30-Sep-14

INTEREST RATE COVERAGE RATIO 5.10 1.19

SOLVENCY RATIO 0.18 0.07

PROFITABILITY RATIOS:

PROFIT MARGIN 0.07 0.00

RETURN ON ASSETS 0.05 0.00

RETURN ON EQUITY 0.59 0.08

PHI 17Q-Sep 2015

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