annual report
2010 contents
Who We Are / 2 Message to the Shareholders / 4 Board of Directors / 10 Senior Management & Consultants / 12 2010 Financial Performance Highlights / 14 Route Map & Destinations / 16 Our Fleet / 18 Our Products / 20 Cargo Services / 27 2010 Activity Highlights / 28 Corporate Social Responsibility / 32 Financial Statements / 35 Ticket & International Sales Offices / 110
who we are Our Vision Cebu Pacific is internationally renowned as the most successful low-cost carrier in the Asia-Pacific region. We take pride in being the best domestic airline and the Filipino traveler’s first choice. We are reputed for our unparalleled genuine, warm and caring service. We are recognized for our innovation and commitment to excellence, and we are the industry and academe benchmark for success. We are an employer of choice providing many opportunities for professional and personal growth in a learning, egalitarian and non-bureaucratic workplace. Our people are goal-oriented team players, empowered and disciplined, with a high sense of integrity, enthusiastically spreading the culture of fun throughout the world. Our equipment, facilities and systems enable us to ensure consistent highly efficient levels of operation. We have a deep sense of family extending beyond the airline, encompassing the communities we serve and the country we love.
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Our Mission
Our Core Values
Cebu Pacific brings people together through an affordable and reliable mode of travel, a consistently fun-filled experience delivered with a true heart and soul for service.
Accountability / We take responsibility for
We enhance the quality of life of the communities that we serve and are an active partner in our nation’s progress.
what we say, the decisions we make, and the actions we take. We meet out deadlines so that others can meet theirs.
Respect / We uphold the dignity and
uniqueness of each individual. We live by the Golden Rule.
Excellence / We strive to be the best we could ever be, in any situation, in any undertaking. We are not content with the status quo. Our service is impeccable.
Fun
/ We deliver excellent service in a fun-filled
manner. We find enjoyment in everything we do.
Integrity
/ We are honorable. We do what is right, not what is expedient.
Teamwork
/ We move in the same
direction, towards the same goal, collaborating and cooperating with each other to achieve our corporate goals. We value and harness the strengths of each team member.
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mess
Dear Shareholders, This is the first annual report of Cebu Pacific (PSE:CEB) as a publicly listed company after the successful Initial Public Offering (IPO) of its shares on the Philippine Stock Exchange (PSE) last October 26, 2010. Your confidence and support inspires us even more to execute our low-fare, low-cost carrier (LCC) model and deliver continuing growth and profitability.
to the sha
The year 2010 was a very rewarding year for your airline. Global demand for air travel rebounded as economic conditions improved. Statistics released by the International Air Transport Association (IATA) show global passenger traffic increased by 8.2% in 2010 after one of the biggest demand decline in aviation history in 2009. Although the Philippines air travel market was resilient in 2009, the recovery in the global economy bolstered demand growth in 2010. Based on data from the Civil Aeronautics Board (CAB), domestic passenger traffic increased 12.3% to 16.6 million in 2010 while international passenger volumes to and from the Philippines increased 13.7% to 14.0 million. The Philippine economy achieved real GDP growth rate of 7.3% in 2010, spurred by increased consumer spending, a rebound in exports and investments, and election-related spending. The airline industry benefited from better economic conditions, buoyed by relatively elastic domestic consumption and the large population of Overseas Filipino Workers. The stronger peso and low interest environment likewise worked in our favor. 4
Ricardo J. Romulo Chairman
sage
areholders
CEB achieved record profits, revenues, and passenger volumes in 2010 We are pleased to report to you that CEB posted record-breaking Net Income after Tax of 6.9 billion for the year ended December 31, 2010, more than double the previous year’s bottom line. Total Revenues for the year reached Php29.1 billion, 24.8% higher than the previous year. Our total passenger volumes grew faster than the market at 19.5% to 10.46 million in 2010, affirming our status as the Philippines’ largest national flag carrier in terms of passengers carried. Our international business led the growth in passenger volumes in 2010 as we carried 37.9% more passengers than the year before. International passenger volume reached 2.23 million as we added flight frequencies to high growth international markets such as Hong Kong, Singapore, Kuala Lumpur and Korea. We now fly 7 times daily to Hong Kong out of Manila, Clark and Cebu, 46 times weekly to Singapore, and 10 times weekly to Kuala Lumpur. We recently increased frequencies from Manila to Bangkok from 7 times to 10 times weekly and added a daily service to Incheon which increased total weekly frequency to Korea from 18 times to 25 times weekly. This will increase further as we launch 4 times weekly services from Manila to Pusan in June of this year. In 2010, CEB had the second largest market share of passenger traffic in and out of the Philippines.
Lance Y. Gokongwei President & CEO
Our domestic passenger volume increased by 15.3% to 8.23 million for the year ended December 31, 2010. We continue to dominate the domestic market on all important metrics - most passengers, most seats, highest load factor, and most destinations, routes and daily flights. We have consistently 5
captured almost half of the domestic passenger traffic and in 2010 we had a market share of 48.2%. We also dominate the Philippine cargo market with a market share of 51.6% in 2010.
Our commitment to maintaining a low-cost structure has bore fruit in 2010.
Passenger Revenues grew 26.4% to Php24.7 billion in 2010 due to robust demand across all markets. Seat load factor improved by 7.9% points to 85.4% and allowed us to increase average fares by 5.8% to Php2,357 in 2010. Cargo Revenues increased 24.4% to Php2.1 billion and accounted for 7.2% of Total Revenues for the year ended December 31, 2010.
Our relentless focus at keeping a low cost base has allowed us to offer lower fares. Cost ex-fuel per available seat kilometer (ASK) dropped 9.5% to Php1.23 in 2010. We have leveraged on our scale and continue to improve efficiencies to reduce our costs.
We have a comprehensive suite of ancillary travel products and services which cater to the varying needs of our passengers. Ancillary Revenues, which comprised 8.0% of Total Revenues, grew 10.12% to Php2.3 billion in 2010. Although there was a slight slowdown in unit revenues in 2010, we continue to develop and optimize Ancillary Revenues as this is a key driver of our business model. As of the first quarter of 2011, Ancillary Revenues per passenger has improved to Php260 from the 2010 average of Php223.
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In 2010, we worked our Airbus fleet at an average daily aircraft utilization of 13.9 block hours, one of the highest in the Airbus world and besting our Asian LCC peers. We managed to turn our aircraft 8.2 times a day without compromising on-time performance. Our average ontime performance of 88.0% was an alltime high and this reflects our team’s efforts to improve operating efficiencies. We believe that our low-cost business model has been successful in delivering exceptional returns to our shareholders. Our EBITDAR grew 49.2% to Php10.2 billion in 2010 resulting in a 5.7% point improvement in EBITDAR margin to 34.9%.
CEB’s healthy balance sheet is positioned to support business growth.
CEB has strengthened its brand through exceptional service and innovative marketing efforts.
Your company’s financial position remained solid with stronger cash flows and net gearing. Total assets as of December 31, 2010 increased to Php49.9 billion from Php35.3 billion a year ago as we acquired three new A320 aircraft in the last quarter of 2010. Equity rose to Php17.9 billion as of end 2010 from Php7.2 billion as of end 2009 on the back of strong earnings and proceeds from our IPO. We ended the year with a hefty cash balance of Php13.3 billion, including financial assets.
CEB has earned a reputation for delivering warm, genuine, and caring service in an upbeat and fun way. Our on-board games and, more recently, our world-famous Cabin Crew Flight Safety Dance on YouTube are examples of how we make sure our passengers not only reach their destination on-time but also have fun on the journey.
Our strong balance sheet poises us for further growth and allows us to meet challenges such as fuel and increased competition.
Our various marketing efforts have also gained traction. Our website www. cebupacificair.com is the top travel site in the Philippines according to a study conducted by comScore Media Metrix. We have also increased our online presence through social networking sites such as Facebook and Twitter. Our Facebook account has more than 190,000 fans, more than any other airline in the Philippines. On Twitter we have over 180,000 followers, marginally more than our low-cost carrier peers in Asia. In addition to Facebook and Twitter, we have set up our YouTube channel where we upload all our videos and audio-visual presentations.
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Outlook We will continue to pursue a disciplined growth strategy, ending 2011 with 37 aircraft consisting of 29 Airbus A320 family aircraft and eight ATR 72-500 turboprop aircraft. We have on order an additional 16 A320 aircraft which we will acquire from 2012 to 2014. Although we still see and capitalize on opportunities in the Philippine market, we expect our international sectors to grow at a faster rate. We plan to increase our international presence, particularly in the rapidly growing North Asia markets of Korea, Japan, and China, and creating better linkages from these markets to the various tourist destinations in the Philippines. As mentioned earlier, we have started expanding our Korea operations through additional services to Incheon and Pusan. We are also considering adding frequencies to China and Japan routes which we currently operate and also penetrating additional cities in these markets within the year. We believe that the LCC market in Asia will continue to grow given rising purchasing power and increasing aviation liberalization. One of the major challenges an airline has to face is increased competition. Several of our local competitors have accelerated capacity expansion late in 2010 and have indicated plans to grow further in 2011. The additional capacity added by these local carriers combined with the three A320 aircraft we added in the fourth quarter of 2010 have exerted pressure on yields moving into the first quarter of 2011. We have developed an unrivalled domestic network which gives us a competitive edge over the other local carriers. We likewise have the lowest cost base and a strong brand which gives us the ability to offer low fares more than any of our competitors. 8
Some foreign carriers have also started setting up and expanding their operations in the Philippines. We expect competition from foreign carriers to increase further as the Philippine government takes a more liberal stance on aviation policies to boost tourism and investments into the country. In March 2011, the government issued Executive Order (EO) 29 which will grant unrestricted third, fourth and fifth freedom rights to the country’s airports other than the Ninoy Aquino International Airport (NAIA) in Manila. We welcome competition so long as it is done on a level playing field. We believe that aviation liberalization based on reciprocity will be a long-term gain for the Philippines and its local carriers. We have since called on the government to review this policy to protect the Philippine air travel industry and allow local carriers to compete by getting the same air rights that foreign carriers will get under EO 29. We have a sustainable first mover advantage being the only successful LCC in the Philippines and we know we have the scale and the route network to compete head-on with any new entrant. We expect 2011 to be a tough year for CEB and the airline industry in general as fuel prices continue to rise amidst the turmoil in the Middle East and North Africa. From an average price of US$90/ bbl in 2010, jet fuel price is already at the US$130/bbl level as of March 2011. Fuel accounts for almost half of our operating costs and fuel price volatility will impact margins. Besides fuel hedging, we have taken several operational measures to ease the fuel cost pressure: • Fuel Surcharge: We started passing on fuel surcharges on our international routes beginning March 14, 2011
Acknowledgment and on domestic routes beginning March 22, 2011, the benefits of which we expect to build up in the second quarter of 2011.
We would like to take this opportunity to thank everyone who has contributed to the success of CEB throughout its 15 years of operation.
• Lite Fares: We continue to develop ancillary revenues by increasing rates and conversion and unbundling more of our services. On April 1, 2011, we introduced Lite Fares on all of our flights. These Lite Fares are lower by as much as 33% compared to our previous Go Fares but will exclude the free 15 kilograms baggage allowance. Domestic fares are lowered by as much as Php350 and international fares as much as Php800. However, under Lite Fares, which permanently replaces the popular ‘Go Lite’ fares, our passengers have to avail of Prepaid Baggage Allowance, similar to pre-paid cellular phone loads, if they want to check in bags.
We wish to express our sincere gratitude to you, our Shareholders, for your trust and support. In appreciation, we have declared on March 17, 2011, a regular cash dividend of Php2 per share and a special cash dividend of Php1 per share for shareholders of record as of April 14, 2011.
• Non-Fuel Cost Reduction: We have always believed that the lowest cost producer will win in the long run. As such, we emphasize cost discipline to our team and target a 5% to 6% yearon-year reduction in unit cost ex-fuel. We expect that the addition of brand new A320 aircraft to our fleet will improve, among others, maintenance and ownership costs. Fuel, in our view, may temper the planned expansion of our competitors. Some airlines have already deferred aircraft deliveries or have suspended underperforming routes in order to reduce their cost base. We, on the other hand, have the balance sheet to grow beyond our current orders and we are keen on taking advantage of the opportunity to accelerate growth.
Our commitment to you has likewise been demonstrated through the creation and implementation of a Share Buyback Program involving Php2.0 billion worth of CEB common shares. We would like to thank our Board of Directors for the continued guidance and leadership. We also acknowledge our management team and the entire CEB staff for their valuable contributions and commitment to the growth and success of CEB. Finally, we would like to thank the 50 million passengers who chose to fly with us since we started operations in 1996. We are committed to providing yearround low fares, safe and reliable flights, and most importantly, service with lots of smiles to the next 100 million passengers. Thank you for making us number one.
Ricardo J. Romulo Chairman
Lance Y. Gokongwei President & CEO 9
Ricardo J. Romulo Chairman
John L. Gokongwei, Jr. Director
Robina Y. Gokongwei-Pe Director 10
James L. Go Director
Frederick D. Go Director
board of directors Lance Y. Gokongwei
Jose F. Buenaventura
Antonio L. Go
Oh Wee Khoon
President & CEO
Director
Director
Director
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Hansley Heinrych C. See Chief Financial Officer
Victor Emmanuel B. Custodio VP - Flight Operations
Antonio Jose L. Rodriguez VP - Airport Services
Garry R. Kingshott
Chief Executive Adviser
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Mark Breen
Chief Operations Adviser
Rosita D. Menchaca VP - In-flight Services
Robin C. Dui
VP - Comptroller
Neil O’ Carroll
Maintenance Consultant
Candice Jennifer A. Iyog
VP - Marketing & Distribution
Jeanette U. Yu VP - Treasurer
Joseph G. Macagga
VP - Fuel & Cargo Operations
Michael S. Shau
VP - People & Administration Services
Alejandro B. Reyes
VP - Commercial Planning
senior management & consultants 13
key operating statistics
Years Ended December 31 2010 2009 2008
Passengers carried (‘000)
10,461
8,756
Available seats (‘000)
12,256
11,308
8,539
Seat load factor
85.4%
77.4%
78.0%
8 ppt
RPK (million)
8,860
7,056
5,653
1,804
25.6%
ASK (million)
10,379
9,369
7,365
1,010
10.8%
Number of sectors flown
87,345
80,725
6,620
8.2%
Fleet size at period end
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2010 vs. 2009 Inc (Dec) % change
6,663
1,705
56,872
29
19.5%
948
27
2
8.4%
6.9%
financial highlights
Years Ended December 31
(Php million)
2010
2009
2008 Inc (Dec) % change
Total revenues
29,089
23,311
19,682
Total operating expenses
22,639
20,147
17,954
6,450
3,164
1,728
3,286 103.9%
Net income (loss)
6,922
3,258
(3,260)
3,665 112.5%
Pre-tax core net income
5,781
2,135
919
3,647 170.8%
EBITDAR
10,156
6,806
4,338
3,350
49.2%
Total assets
49,937
35,323
32,562
14,614
41.4%
Total liabilities
32,030
28,068
28,565
3,962
14.1%
Equity
17,907
7,255
3,997
10,652
Basic/diluted earnings per share (Php)
11.78
Operating income (loss)
14
5.59
2010 vs. 2009
5,778
24.8%
2,492
12.4%
146.8%
(7.11) 6 110.7%
total revenues (Php m)
29,089
30,000
23,311
25,000 20,000
net income (loss) (Php m)
6,922
8,000 6,000
19,682
3,258
4,000
15,000
2,000
10,000 5,000
(2,000) (4,000)
2008
2009
2010
total assets 49,937 32,526
2010
(3,260)
(Php m)
50,000
30,000
2009
total equity
(Php m)
40,000
2008
17,907
18,000 15,000
35,323
12,000 9,000
20,000
6,000
10,000
7,255 3,997
3,000
2008
2009
2010
2008
2009
2010
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International
Brunei • China (Beijing) • China (Guangzhou) • China (Shanghai) • Hong Kong • Indonesia (Jakarta) • Japan (Osaka) • Korea (Busan) • Korea (Incheon) • Macau • Malaysia (Kota Kinabalu) • Malaysia (Kuala Lumpur) • Singapore • Taiwan (Taipei) • Thailand (Bangkok) • Vietnam (Ho Chi Minh)
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route map & destinations
Domestic
Bacolod • Boracay (Caticlan) • Busuanga (Coron) • Butuan • Calbayog • Cagayan de Oro • Catarman • Cauayan (Isabela) • Cebu • Clark • Cotabato • Davao • Dipolog • Dumaguete • General Santos • Iloilo • Kalibo • Legazpi • Laoag • Manila • Naga • Ozamiz • Pagadian • Puerto Princesa • Roxas • San Jose (Mindoro) • Siargao • Surigao • Tacloban • Tagbilaran • Tuguegarao • Virac • Zamboanga 17
our fleet
Airbus Cebu Pacific ended 2010 with 10 Airbus A319, and 14 Airbus A320 aircraft. Three brand-new Airbus A320 aircraft were delivered in the last quarter of 2010. The Airbus A320 has 180 seats, while the A319 has 156 seats. It is used for the airline’s international and domestic flights. Cebu Pacific’s brand-new Airbus A320 is equipped with the latest avionics from Thales and Rockwell Collins, both global leaders in aviation electronics. By the end of 2011, Cebu Pacific will be operating a fleet of 29 Airbus aircraft, making it one of the most modern aircraft fleets in the world. Between 2012 and 2014, Cebu Pacific will take delivery of an additional 16 brand-new Airbus A320 aircraft. 18
A320 Airbus Simulator On April 4, 2007, Cebu Pacific inaugurated the first and only flight simulator for Airbus aircraft in the Philippines. This multi-million dollar investment from CAE in Quebec, Canada has been used ever since for Cebu Pacific’s pilot training at Clark Aviation in Pampanga for its growing Airbus fleet.
ATR Cebu Pacific has a fleet of 8 ATR 72-500 aircraft manufactured by Avions de Transport Regional (ATR) based in Toulouse, France. The ATR’s reliability, ease of maintenance, and ability to land on short runways makes it the top choice in the turbo-prop class. An ATR aircraft has 72 seats, and its cabin is 9 inches wider than its competitors. Cebu Pacific first took delivery of its ATR aircraft in 2008, to service its Boracay and Laoag flights. It has since then expanded its ATR operations to destinations such as Siargao, Naga, Busuanga (Coron), among others. Several ATR aircraft is also based in Cebu to further expand its inter-island operations.
The full flight simulator replicates in every aspect the cockpit of the A320 aircraft. It also reproduces the visual atmosphere that the aircraft appears to be flying in, including thunderstorms, clouds, and the landing approaches of airports around the world. The CAE simulator also simulates sound and motion, including the banking and turning of the aircraft, accelerations, and the feel of tires as they roll across the bumps and cracks in the runway. Aircraft malfunctions, such as engine fire, smoke in the cockpit or electrical and hydraulic failures can also be replicated.
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our products
Lite Fares
Cebu Pacific was the first to introduce LiteFares in the Philippines, encouraging passengers to carry less baggage by offering lower fares. At the time of booking, passengers can purchase baggage allowance to save on time and money at check-in. Prepaid baggage options range from small (up to 15 kilos) to large (up to 30kilos). Hand-carried bags are still allowed, but limited to 7 kilos. This flexible product also allows passengers to choose which flights they will check in luggage, or which passengers in one booking will avail of the product. Aside from lower fares and lighter planes, the Lite Fare product and Prepaid Baggage Allowance also makes the check-in process and airport operations faster and easier to manage. It is also a standard low-cost carrier practice all over the world, but CEB’s prepaid baggage allowance option for passengers is up to 67% lower than other LCCs.
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Web Check-In Facility
Cebu Pacific is the first airline in the Philippines to offer passengers an option to check-in online. Cebu Pacific launched the service in 2010. Now, web check-in is available for all flights using an Airbus jet aircraft. Using the Manage Booking section in www.cebupacificair.com, passengers can check-in for their flights and select their seats. After responding to security questions, passengers can easily print their boarding passes. Guests can check-in via the web starting from 48 hours before a flight until 4 hours prior to departure time. Passengers on international flights with no check-in luggage can conveniently drop by the web check-in counter to present their travel documents at least 45 minutes before departure time. Meanwhile, passengers on domestic flights with no check-in luggage may go straight to the boarding gate. Guests should be at the gate at least 30 minutes before departure time. For more information, visit www.cebupacificair.com/travelservices/web-check-in-service.html.
Seat Selection
Cebu Pacific’s Seat Selection service allows passengers to choose their seats. Options include window, aisle, and exit row seats, or even seats beside companions or groups. Every time guests book a flight, they can select seats for a minimum fee. Standard seat selection (Php100) is available on most seats, but additional leg room and easy access to the aisle is also available with Premium seat selection (Php200).
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Payment Centers
Cebu Pacific offers even more avenues for passengers to book flights. Through payment centers, passengers without credit cards can book flights through the website and pay via the airline’s payment centers. Payment can be made in the following centers: • Over-the-counter at Robinsons Bank, Metrobank, Banco de Oro, and Banco de Oro remittance centers in Hong Kong and Macau • BancNet Online • ATM transactions using BancNet and Megalink member banks • LBC branches • Bayad Centers • Robinsons Department Store
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Sports Equipment Fee
Passengers can avail of Cebu Pacific’s Sports Equipment Service for a minimum fee of Php1,000 upon booking. This lets guests save up to 85% in costs versus loading equipment as excess baggage on selected routes. It also allows passengers to bring their own favorite sports equipment to their destinations, and not need to rent expensive sports equipment. The Sports Equipment Fee has been offered since 2009. Sports equipment covered by this service are: • • • • • •
Fun Shop
Bicycles Fishing Equipment Golf Clubs Scuba/Diving Equipment Surfboards/Wakeboards Bowling balls
Cebu Pacific presents a wide array of savory light snacks and drinks fit for everyone’s taste. The airline’s buy-onboard menu menu has new offerings every month, including croissant sandwiches, bagels, noodles, bread rolls, chips, softdrinks, juice, tea drinks, and brewed coffee. While in flight, passengers also get the chance to buy Cebu Pacific branded souvenirs like bags, toys and travel accessories. Moreover, CEB recently offered merchandise online wherein passengers can pay for items such as the CEB die-cast aircraft, and CEB comfort kit through the website, and have the items delivered to their seat onboard.
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Duty Free
The airline’s Duty Free offerings were launched in 2009 as a way to expand Cebu Pacific’s on-board offerings on international flights. Joining the Fun Shop are a wide range of world-class Duty Free cosmetics, skin care products, fragrances for men and women, jewelry, watches, travel accessories, children’s gifts and chocolates. Brands carried by Cebu Pacific include Estée Lauder, Marc Jacobs, L ‘Occitane, Elizabeth Arden, Clinique, Maybelline, Lancôme, L’Oréal, Swarovski, Pierre Cardin, Hello Kitty, and Godiva, among others. Prices range from as low as US$9 to US$155. With its Duty Free offerings, Cebu Pacific makes it easier for passengers to shop for souvenirs for friends and family, from the convenience of their seats while in flight. Cebu Pacific also accepts Visa and Mastercard on board for Duty Free purchases.
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Travelsure
Cebu Pacific partnered with the Malayan Insurance Co., Inc. to offer TravelSure travel insurance to passengers. TravelSure allows guests to travel with peace of mind upon arrival at their destination. TravelSure covers: • Emergency medical treatment in case of accident or sickness during travel • Unexpected travel circumstances like cancellations or delays due to weather, loss of travel documents or luggage, and other unforeseen events • Personal accidents • Recovery of travel expenses or reimbursement of the unused portion of travel and accommodation expenses
Fun Tours
Guests who wish to add hotel bookings and activities such as city tours, dinner cruises, outdoor activities and even admission to favorite amusement parks can do so through the Cebu Pacific Fun Tours website. Passengers can search for the greatest deals for destinations such as Brunei, Beijing and Osaka, at the same time as booking their Cebu Pacific flights. The Fun Tours site also features Fun Tours Travel Suggestions, recommending hotel promos, fun tour activities, and vacation themes. The latter can range from food tripping to beachhopping in the Philippines.
Hotels Plus
A related Fun Tours product, Hotels Plus focuses solely on Cebu Pacific passengers’ hotel bookings, exclusive of tours and flights. Guests can immediately view options for hotel accommodations in destinations such as Hong Kong, Singapore, Bangkok, Jakarta, Macau and Boracay, among many others with just a click of the mouse. Hotels are categorized according to budget hotels, 3-4 star hotels, 5-star hotels for easy selection. Included here are the best deals only Hotels Plus can offer—a true collaboration between Cebu Pacific and its partner hotels to give the best deals to its passengers.
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Car Rental with Europcar
Cebu Pacific teamed up with the world’s leading leisure car rental company Europcar to provide guests a virtually worry-free travel experience. Represented in 170 countries, Europcar is CEB’s official land transport service for self and chauffeur-driven vehicles for its domestic and international destinations. For a smooth and relaxing travel experience, passengers can avail of Europcar’s transport services through CEB’s website, customer service and reservations hotline, travel agents, and walk-up booths at the airport. CEB flyers also get a special discount once they present their boarding passes at the Europcar booth. Joint services of this partnership are available in Manila and Cebu’s domestic and international airports.
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Cargo Services
Cebu Pacific provides airport-to-airport cargo services on its domestic and international routes. It also provides cargo pick-up services in selected areas in the Philippines. In addition, Cebu Pacific accepts cargo packages from domestic destinations that are not within CEB’s network. Deliveries to these destinations are made possible through special pro-ration agreements or interline agreements that CEB enters with airline partners such as Gulf Air, Continental Airlines, Qatar Airways, Saudi Arabian Airlines and Emirates. By the end of 2010, Cebu Pacific has managed over 125 corporate accounts that availed of CEB’s cargo services on a regular basis. Cebu Pacific intends to expand its direct corporate accounts to further increase its distribution reach. From January-December 2010, Cebu Pacific maintained more than 50% market share. Cebu Pacific closely manages the dealings of its cargo General Sales Agent (GSAs) with sub-agents. Further, CEB engages cargo GSAs for its international operations and generally specifies a territory for them. High performing cargo GSAs can operate more than one jurisdiction. As of December 31, 2010, Cebu Pacific had a network of 17 cargo GSAs in the Philippines and international destinations.
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2010
activity highlights Now RP’s Largest Carrier The Philippines’ largest national flag carrier, Cebu Pacific flew almost 10.5 million passengers from January to December 2010, an increase of 19.5% over 8.76 million in 2009. CEB’s growth was mainly driven by a 37.9% increase in international passengers, which numbered over 2.23 million in 2010. The airline flew 8.23 million domestic passengers, up by 15.3% from 7.14 million in 2009. The average load factor for the year for both domestic and international routes was 85.4%, an increase of 7.9 percentage points compared to last year. The airline’s Hong Kong and Singapore markets are up 29% and 45%, respectively, because of additional flight frequencies and our extensive network from Manila, Clark and Cebu. CEB also carried 65% more passengers to Kuala Lumpur in 2010. CEB’s entry into Brunei and Beijing also further strengthened its route network by providing passengers more access to North and Southeast Asian countries. In 2010, CEB increased frequencies to Greater China (Macau, Taipei, Guangzhou, Shanghai, Beijing and Hong Kong) from 68 to 80 times weekly. It also increased frequencies to Southeast Asia (Kota Kinabalu, Kuala Lumpur, Singapore, Ho Chi Minh, Brunei, Bangkok, Jakarta) from 58 to 80 times weekly, and to Korea and Japan from 19 to 21 times weekly. 28
ISO Upgrade Cebu Pacific gained an International Organization for Standardization (ISO) 9001:2008 Certificate last year, an upgrade of the airline’s ISO 9001:2000 Certificate obtained in February 2003. Switzerland-based ISO is the world’s largest developer and publisher of international standards. The ISO 9001:2008 certificate guarantees that Cebu Pacific has consistent business procedures covering all key processes in the airline. This includes effective monitoring processes, adequate records for all transactions, and mechanisms for continuous improvement. Cebu Pacific also made history with its original ISO 9002 Certificate and Aviation Quality and Safety (AQS) 9000/121 Certificate in 1999, when it was given the distinction of being the first airline in the world with system-wide certifications from both ISO and AQS. Other airlines are ISO-certified for certain divisions only, not as an entire organization. This ISO Certificate underscores how meticulous Cebu Pacific is as an airline, and how its passengers can rest assured of its world-class safety and quality management systems modeled on the latest best industry practices. Cebu Pacific’s rigid maintenance programs and comprehensive training programs for pilots, cabin crew, engineers and maintenance personnel have allowed the airline to pass the Civil Aviation Authority of the Philippines’ (CAAP) stringent audits every year, as well as audits conducted by other regulatory bodies.
Pagadian Launch
Brunei Launch
Local students greet and welcome the first passengers arriving from Cebu with a dance.
VP for Airport Services Jomar Rodriguez and Manager for Mindanao Sales Dina Garcia award the first passenger to check in for the maiden Pagadian-Manila flight with a round-trip ticket.
CEB executives Alex Reyes and Jomar Rodriguez award the first passenger to check in for the maiden Pagadian-Cebu flight with a round-trip ticket.
Thumbs up for Cebu Pacific’s new direct CebuPagadian flights!
CEB team with aviation and government partners formally open the ManilaBrunei route.
CEB VP for Marketing and Distribution, Candice Iyog launches the airline’s Brunei route in Manila.
CEB execs Candice Iyog and Jomar Rodriguez award the first passenger to check in for the maiden Brunei-Manila flight with a CEB round-trip ticket.
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Dancing Crew
Beijing Launch
The first passengers to check in for the Cebu Pacific maiden Beijing-Manila flight.
CEB and Chinese aviation officials formally open the airline’s Beijing-Manila route.
Passengers from Manila eagerly wait for the first Cebu Pacific Manila -Beijing flight.
CEB’s first Beijing flight and cabin crew give a thumbs up during the launch event at Terminal 3 in Manila.
Male cabin crew dance to ‘Men Without Hats’ “Safety Dance” with media onboard.
Cebu Pacific’s safety demo dance catches global attention, with the YouTube videos garnering more than 10 million hits.
website / call center Reservation Hotline in the Philippines: (+632) 7020-888 or (+6332) 230-8888 Group Bookings: groupbookings@cebupacificair.com 30
IPO Event
The original dancing crew with their Smile Magazine December 2010 covers.
Shane, Tracy and Paula are all smiles before they dance the Safety Demo to the tunes of Lady Gaga and Katy Perry on board one of Cebu Pacific’s flights.
Top CEB Executives in front of the Philippine Stock Exchange board after the airline’s official listing last October 2010.
CEB stock jumped to Php132 from the IPO price of Php125 when trading officially started.
CEB President and CEO Lance Gokongwei officially rings the start of trading, with CEB as a listed company on the Philippine Stock Exchange. He is shown here with JG Summit Holdings Inc. Chairman Emeritus John Gokongwei (3rd from left back row).
Website: www.cebupacificair.com
Social Networking Sites: TWITTER cebupacificair
Fun Tours: funtours.cebupacificair.com
FACEBOOK Cebu Pacific Air 31
corporate social responsibility Fly Cebu Pacific, help fight climate change
The Bright Skies for Every Juan program encourages travelers to help fund climate change solutions through donations they can make while booking their flights online. All donations made to Bright Skies go to the Climate Change Adaptation Program in the Sablayan community in Occidental Mindoro and to nearby Apo Reef Natural Park, the world’s largest contiguous atoll reef after the Great Barrier Reef. The WWF-CEB partnership, which began in 2008, aims to: • provide law enforcement within the restricted area in Sablayan • conduct socio-economic surveys • perform coral and fish surveys, and • give environmental education and information. To date, the WWF-CEB partnership has contributed one patrol boat for monitoring the Apo Reef Natural Park and other nearby marine-protected areas. Crew members on 25 motorized fishing boats have so far helped apprehend 15 violators.
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GMA Kapuso Foundation flies high with Cebu Pacific
Since 2009, CEB has been helping the GMA Kapuso Foundation fulfill its mission of reaching out to Filipino communities. CEB transported hundreds of GMA Kapuso Foundation’s sacks from December 2009 to February 2010, via flights from Manila to General Santos, Zamboanga, Davao and Butuan. On one of those trips, Cebu Pacific carried 8,200 kilos of shipment from Manila to General Santos City. Part of the cargo was for the Give-A-Gift Christmas project which gave out 149 sacks of bags and boxes of biscuits, canned goods, noodles, deflated balls, powdered juice and hygiene kits in Sultan Kudarat. Last January 2010, GMA Kapuso Foundation, with the help of CEB, continued to bring help to other regions of Mindanao. The group brought in more school materials to Siargao and Tawi-Tawi via flights from Manila to Butuan and Manila to Zamboanga. Hundreds of bags of school supplies containing notebooks, pad papers, pencils, sharpeners, crayons and erasers, amounting to 5,347 kilos all in all, were flown in and distributed by GMA Kapuso Foundation to eager school children.
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World Vision heroes’ Lakbay Pag-asa with Cebu Pacific
Global brands Gawad Kalinga & Cebu Pacific work for sustainable communities
Jesuit Volunteers Philippines Foundation, Inc.
(JVPFI)
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CEB continues to go beyond offering affordable trips to its passengers, as it brings World Vision sponsors to Roxas City for the World Vision-Cebu Pacific Lakbay Pag-Asa Project. An esteemed organization that addresses the causes of poverty and injustice, World Vision spearheaded the project with CEB to give sponsors a chance to meet and bond with their sponsored children. By building and strengthening sustainable communities in less privileged areas, Gawad Kalinga (GK) has helped countless Filipinos enjoy a better quality of life. As event partner, the country’s number one airline and Asia’s third-largest low-cost carrier, flew the Philippines’ GK delegates to the GK Global Summit last June 25 to 27, 2010. Apart from arranging the group’s ClarkSingapore-Clark and Manila-Singapore-Manila flights, the airline also extended a 200-kilo baggage allowance to the delegation for free.
CEB has been consistently supporting the Jesuit Volunteers Philippines Foundation, Inc. (JVPFI) since 2006. It continues to bring young university graduates and professionals to assist NGOs, schools, and other similar institutions involved in development work to its many domestic destinations in the Philippines.
financial statements
35
INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors Cebu Air, Inc. 2nd Floor, Doña Juanita Marquez Lim Building Osmeña Boulevard, Cebu City
We have audited the accompanying consolidated financial statements of Cebu Air, Inc. and Subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2010 and 2009, and the consolidated statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2010, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
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A member firm of Ernst & Young Global Limited
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cebu Air, Inc. and Subsidiaries as at December 31, 2010 and 2009, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2010 in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Vicky B. Lee-Salas Partner CPA Certificate No. 86838 SEC Accreditation No. 0115-AR-2 Tax Identification No. 129-434-735 BIR Accreditation No. 08-001998-53-2009, June 1, 2009, Valid until May 31, 2012 PTR No. 2641532, January 3, 2011, Makati City March 17, 2011
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CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31 2010
2009
ASSETS Current Assets Cash and cash equivalents (Note 7) Financial assets at fair value through profit or loss (Note 8) Receivables (Note 9) Expendable parts, fuel, materials and supplies (Note 10) Other current assets (Note 11) Total Current Assets Noncurrent Assets Property and equipment (Notes 12, 16, 27 and 28) Investment in joint ventures (Note 13) Available-for-sale investment (Note 8) Other noncurrent assets (Note 14) Total Noncurrent Assets
= P 9,763,288,972
=3,840,859,455 P
3,879,438,631 862,409,591 370,032,035 264,073,803 15,139,243,032
227,794,364 794,934,681 348,972,488 341,138,916 5,553,699,904
33,985,701,079 29,155,171,390 366,355,686 369,644,738 – 114,532,000 247,748,922 327,847,154 34,797,724,971 29,769,275,998 P 35,322,975,902 = P 49,936,968,003 =
LIABILITIES AND EQUITY Current Liabilities Accounts payable and other accrued liabilities (Note 15) Unearned transportation revenue (Note 3) Current portion of long-term debt (Notes 12 and 16) Due to related parties (Note 26) Total Current Liabilities Noncurrent Liabilities Long-term debt - net of current portion (Notes 12 and 16) Deferred tax liabilities - net (Note 24) Other noncurrent liabilities (Notes 17 and 22) Total Noncurrent Liabilities Total Liabilities Equity (Note 18) Common stock Capital paid in excess of par value Net unrealized losses on available-for-sale investment (Note 8) Retained earnings Total Equity
See accompanying Notes to Consolidated Financial Statements.
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= P 5,598,486,319 4,606,311,016
=4,999,811,707 P 3,469,155,354
2,056,043,837 35,529,304 12,296,370,476
1,862,763,608 73,716,757 10,405,447,426
16,376,664,867 153,130,071 3,203,752,687 19,733,547,625 32,029,918,101
15,247,363,123 138,129,877 2,277,073,622 17,662,566,622 28,068,014,048
613,236,550 8,405,568,120
582,574,750 4,703,920,250
– (2,714,902) 1,968,466,854 8,890,960,134 7,254,961,854 17,907,049,902 =35,322,975,902 = P 49,936,968,003 P
CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2010 REVENUE Sale of air transportation services: Passenger Cargo Ancillary revenue (Note 19)
Years Ended December 31 2009
2008
= P 24,656,078,237 2,095,612,223 2,337,108,499 29,088,798,959
= P 19,504,340,982 1,684,418,350 2,122,246,979 23,311,006,311
= P 17,104,394,200 1,338,530,768 1,239,219,090 19,682,144,058
11,417,488,512 2,461,807,197 2,289,945,384 2,100,929,764 1,604,855,579 1,335,983,655 694,888,478 639,480,811 93,293,869 22,638,673,249
8,857,014,923 2,631,833,249 2,568,940,713 1,917,683,713 1,723,886,536 994,694,826 822,510,363 580,896,015 49,503,211 20,146,963,549
9,607,705,976 1,946,910,478 1,846,503,289 1,546,753,381 1,062,847,730 852,012,389 562,833,635 510,724,614 17,992,031 17,954,283,523
6,450,125,710
3,164,042,762
1,727,860,535
(931,482,279) 576,978,771 474,255,226 237,495,750
(1,012,826,822) 418,182,126 685,574,528 8,848,551
(838,465,333) (1,507,231,078) (2,594,491,680) 14,231,024
107,631,255
–
–
25,248,534 490,127,257
(25,474,123) 74,304,260
15,530,008 (4,910,427,059)
6,940,252,967
3,238,347,022
(3,182,566,524)
17,759,687
(19,501,683)
77,321,481
6,922,493,280
3,257,848,705
(3,259,888,005)
Net unrealized losses on available-for-sale investment (Note 8) Benefit from income tax (Notes 8 and 24)
(3,878,432) 1,163,530
– –
– –
OTHER COMPREHENSIVE LOSS, NET OF TAX
(2,714,902)
–
–
= P 6,919,778,378
= P 3,257,848,705
(P =3,259,888,005)
= P 11.78
= P 5.59
(P =7.11)
EXPENSES Flying operations (Note 20) Aircraft and traffic servicing (Note 20) Repairs and maintenance (Note 20) Depreciation and amortization (Note 12) Aircraft and engine lease (Note 27) Reservation and sales General and administrative (Note 21) Passenger service Other expenses (Note 23) OPERATING INCOME OTHER INCOME (EXPENSE) Interest expense (Notes 16 and 17) Foreign exchange gains (losses) Fuel hedging gains (losses) (Note 8) Interest income (Notes 7 and 8) Fair value gains of financial assets designated at fair value through profit or loss (Note 8) Equity in net income (loss) of joint venture (Note 13) INCOME (LOSS) BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 24) NET INCOME (LOSS)
TOTAL COMPREHENSIVE INCOME (LOSS) Basic/Diluted Earnings (Loss) Per Share (Note 25)
See accompanying Notes to Consolidated Financial Statements.
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Balance at January 1, 2009 Net income Total comprehensive income Balance at December 31, 2009
Balance at January 1, 2010 Net income Other comprehensive income Total comprehensive income Issuance of shares Transaction costs Balance at December 31, 2010
Common Stock (Note 18) = P 582,574,750 – – – 30,661,800 – = P 613,236,550
Total Equity = P 3,997,113,149 3,257,848,705 3,257,848,705 = P 7,254,961,854
For the Year Ended December 31, 2009 Capital Paid in Excess Retained Earnings of Par Value (Note 18) (Deficit) = P 4,703,920,250 (P =1,289,381,851) – 3,257,848,705 – 3,257,848,705 = P 4,703,920,250 = P 1,968,466,854
Common Stock (Note 18) = P 582,574,750 – – = P 582,574,750
Total Equity = P 7,254,961,854 6,922,493,280 (2,714,902) 6,919,778,378 3,832,725,000 (100,415,330) = P 17,907,049,902
For the Year Ended December 31, 2010 Capital Paid in Net unrealized losses Excess of Par on available-for-sale Value (Note 18) investment (Note 8) Retained Earnings = P 4,703,920,250 = P– = P 1,968,466,854 – – 6,922,493,280 – (2,714,902) – – (2,714,902) 6,922,493,280 3,802,063,200 – – (100,415,330) – – = P 8,405,568,120 (P =2,714,902) = P 8,890,960,134
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
CEBU AIR, INC. AND SUBSIDIARIES
– – 112,000,000 135,574,750 = P 582,574,750
See accompanying Notes to Consolidated Financial Statements.
Balance at January 1, 2008 Net loss Total comprehensive income Appropriation of retained earnings Reversal of appropriation Issuance of stock dividends Issuance of shares Balance at December 31, 2008
Common Stock (Note 18 ) = P 335,000,000 – – – – 2,128,000,000 2,575,920,250 = P 4,703,920,250
1,000,000,000 (1,000,000,000) – (4,000,000,000) 4,000,000,000 – – (2,240,000,000) (2,240,000,000) – – – = P – (P =1,289,381,851) (P =1,289,381,851)
For the Year Ended December 31, 2008 Retained Earnings (Deficit) (Note 18) Capital Paid in Excess of Par Value (Note 18) Appropriated Unappropriated Total = P– = P 3,000,000,000 = P 1,210,506,154 = P 4,210,506,154 – – (3,259,888,005) (3,259,888,005) – – (3,259,888,005) (3,259,888,005)
– – – 2,711,495,000 = P 3,997,113,149
Total Equity = P 4,545,506,154 (3,259,888,005) (3,259,888,005)
CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 2010 2009
2008
CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax = P 6,940,252,967 = P 3,238,347,022 (P =3,182,566,524) Adjustments for: Depreciation and amortization (Note 12) 2,100,929,764 1,917,683,713 1,546,753,381 Interest expense (Notes 16 and 17) 931,482,279 1,012,826,822 838,465,333 Unrealized foreign exchange losses (gains) (574,806,957) (452,738,225) 1,597,352,394 Fuel hedging losses (gains) (Note 8) (474,255,226) (685,574,528) 2,594,491,680 Interest income (Notes 7 and 8) (237,495,750) (8,848,551) (14,231,024) Fair value gain of financial assets at fair value through profit or loss (Note 8) (107,631,255) – – Equity in net loss (income) of joint venture (Note 13) (25,248,534) 25,474,123 (15,530,008) Loss on disposal of property and equipment 4,050,103 – 276,782 Provision for credit losses on receivables (Note 9) 2,127,309 209,662,427 28,700,892 Operating income before working capital changes 8,559,404,700 5,256,832,803 3,393,712,906 Decrease (increase) in: Receivables 157,564,532 85,823,980 (331,349,493) Other current assets 77,065,113 1,842,289,762 (1,796,543,596) Expendable parts, fuel, materials and supplies (21,059,547) (193,665,823) (56,163,453) Financial assets at fair value through profit or loss (derivatives) (Note 8) 212,132,124 – 66,220,592 Increase (decrease) in: Accounts payable and other accrued liabilities 561,841,257 1,314,883,706 1,054,096,451 Unearned transportation revenue 1,137,155,662 794,633,434 1,075,187,974 Financial liabilities at fair value through profit or loss (derivatives) (Note 8) – (1,488,205,370) (701,797,655) Due to related parties (2,400,212) (60,627) (582,927) Noncurrent liabilities 50,624,954 (69,993,475) 283,355,255 Net cash generated from operations 10,732,328,583 7,542,538,390 2,986,136,054 Interest paid (803,117,030) (907,448,770) (738,285,460) Interest received 94,496,407 8,848,551 11,255,366 Net cash provided by operating activities 10,023,707,960 6,643,938,171 2,259,105,960 CASH FLOWS FROM INVESTING ACTIVITIES Advances to a related party (Notes 26 and 28) (3,662,583,961) (1,792,140,000) Acquisition of property and equipment (Notes 12 and 27) (2,361,432,894) (1,755,652,619) Proceeds from disposal of property and equipment (Note 12) 162,020,516 – Acquisition of other noncurrent assets (83,070,335) – Dividends received from a joint venture (Note 13) 21,959,482 19,443,595 Proceeds from disposal of other noncurrent assets – 142,066,972 Repayments of advances to a related party (Note 26) – 1,792,140,000 Additional investment in joint venture (Note 13) – (33,813,500) Net cash used in investing activities (5,923,107,192) (1,627,955,552) (Forward)
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– (1,661,765,957) – – – 12,396,036 – (270,950,400) (1,920,320,321)
2010 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common shares of stock (Note 18) = P 3,832,725,000 Payments of transaction costs (Note 18) (100,415,330) Repayments of long-term debt (1,791,793,102) Net repayments of borrowings from a related party (Note 28) (40,480,463) Net cash provided by (used in) financing activities 1,900,036,105
Years Ended December 31 2009
2008
= P– – (1,814,268,254)
= P 2,711,495,000 – (1,265,326,921)
(14,143,844)
(1,391,159,688)
(1,828,412,098)
55,008,391
(78,207,356)
7,239,271
28,603,013
NET INCREASE IN CASH AND CASH EQUIVALENTS
5,922,429,517
3,194,809,792
422,397,043
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
3,840,859,455
646,049,663
223,652,620
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 7)
= P 9,763,288,972
= P 3,840,859,455
= P 646,049,663
EFFECTS OF EXCHANGE RATE CHANGES IN CASH AND CASH EQUIVALENTS
See accompanying Notes to Consolidated Financial Statements.
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CEBU AIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.
Corporate Information Cebu Air, Inc. (the Parent Company) was incorporated and organized in the Philippines on August 18, 1988, to carry on, by means of aircraft of every kind and description, the general business of a private carrier or charter engaged in the transportation of passengers, mail, merchandise and freight, and to acquire, purchase, lease, construct, own, maintain, operate and dispose of airplanes and other aircraft of every kind and description, and also to own, purchase, construct, lease, operate and dispose of hangars, transportation depots, aircraft service stations and agencies, and other objects and service of a similar nature which may be necessary, convenient or useful as an auxiliary to aircraft transportation. The principal place of business of the Parent Company is at 2nd Floor, Doña Juanita Marquez Lim Building, Osmeña Boulevard, Cebu City. The Parent Company’s common stock was listed with the Philippine Stock Exchange (PSE) on October 26, 2010, the Parent Company’s initial public offering (IPO). The Parent Company’s ultimate parent is JG Summit Holdings, Inc. (JGSHI). The Parent Company is 65.36%-owned by CP Air Holdings, Inc. (CPAHI). In 1991, pursuant to Republic Act (RA) No. 7151, the Parent Company was granted a franchise to operate air transportation services, both domestic and international. In August 1997, the Office of the President of the Philippines gave the Parent Company the status of official Philippine carrier to operate international services. In September 2001, the Philippine Civil Aeronautics Board (CAB) issued the permit to operate scheduled international services and a certificate of authority to operate international charters. The Parent Company is registered with the Board of Investments (BOI) as a new operator of air transport on a non-pioneer status. Under the terms of the registration and subject to certain requirements, the Parent Company is entitled to certain fiscal and non-fiscal incentives, including among others, an income tax holiday (ITH) for a period of four years. The Parent Company can avail of bonus years in certain specified cases but the aggregate ITH availment (basic and bonus years) shall not exceed eight years (Note 24). Prior to the grant of the ITH and in accordance with the Parent Company’s franchise, which extends up to year 2031: a. The Parent Company is subject to franchise tax of five percent of the gross revenue derived from air transportation operations. For revenue earned from activities other than air transportation, the Parent Company is subject to regular corporate income tax (RCIT) and to real property tax. b. In the event that any competing individual, partnership or corporation received and enjoyed tax privileges and other favorable terms which tended to place the Parent Company at any disadvantage, then such privileges shall have been deemed by the fact itself of the Parent Company’s tax privileges and shall operate equally in favor of the Parent Company.
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On May 24, 2005, the Expanded-Value Added Tax (E-VAT) law was signed as RA No. 9337 or the E-VAT Act of 2005. The E-VAT law took effect on November 1, 2005 following the approval on October 19, 2005 of Revenue Regulation (RR) No. 16-2005 which provides for the implementation of the rules of the E-VAT law. Among the relevant provisions of RA No. 9337 are the following: a. The franchise tax of the Parent Company is abolished; b. The Parent Company shall be subject to RCIT; c. The Parent Company shall remain exempt from any taxes, duties, royalties, registration license, and other fees and charges; d. Change in RCIT rate from 32.00% to 35.00% for the next three years effective on November 1, 2005, and 30.00% starting on January 1, 2009 and thereafter; e. 70.00% cap on the input VAT that can be claimed against output VAT; and f. Increase in the VAT rate imposed on goods and services from 10.00% to 12.00% effective on February 1, 2006. On November 21, 2006, the President signed into law RA No. 9361, which amends Section 110 (B) of the Tax Code. This law, which became effective on December 13, 2006, provides that if the input tax, inclusive of the input tax carried over from the previous quarter exceeds the output tax, the excess input tax shall be carried over to the succeeding quarter or quarters. The Department of Finance through the Bureau of Internal Revenue issued RR No. 2-2007 to implement the provisions of the said law. Based on the regulation, the amendment shall apply to the quarterly VAT returns to be filed after the effectivity of RA No. 9361. On December 16, 2008, the Parent Company was registered as a Clark Freeport Zone (CFZ) enterprise and committed to provide air transportation services both domestic and international for passengers and cargoes at the Diosdado Macapagal International Airport. The said registration was valid for one year effective from December 9, 2009 until December 8, 2010, which was still valid as of December 31, 2010 through temporary operating permit. The registration provides incentives, rights and privileges such as imposition of five percent tax on gross income earned in lieu of national and local taxes. In accordance with Standing Interpretations Committee (SIC) 12, Consolidation - Special Purpose Entities, the consolidated financial statements include the accounts of Cebu Aircraft Leasing Limited (CALL), IBON Leasing Limited (ILL), Boracay Leasing Limited (BLL), Surigao Leasing Limited (SLL) and Sharp Aircraft Leasing Limited (SALL). CALL, ILL, BLL, SLL and SALL are SPEs in which the Parent Company does not have equity interest. CALL, ILL, BLL, SLL and SALL acquired the passenger aircraft for lease to the Parent Company under finance lease arrangements (Note 12) and funded the acquisitions through long-term debt (Note 16). The accompanying consolidated financial statements of the Parent Company and its special purpose entities (SPEs or subsidiaries) (the Group) were approved and authorized for issue by the board of directors (BOD) on March 17, 2011.
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2.
Summary of Significant Accounting Policies Basis of Preparation The accompanying consolidated financial statements of the Group have been prepared on a historical cost basis, except for financial assets and liabilities at fair value through profit or loss (FVPL) and available-for-sale (AFS) investment that have been measured at fair value. The financial statements of the Group are presented in Philippine peso, its functional currency. All values are rounded to the nearest peso except when otherwise indicated. Statement of Compliance The consolidated financial statements of the Group have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). Basis of Consolidation The consolidated financial statements include the financial statements of the Parent Company and the SPEs that it controls. SIC 12, prescribes guidance on the consolidation of SPE. Under SIC 12, an SPE should be consolidated when the substance of the relationship between the company and the SPE indicates that the SPE is controlled by the company. Control over an entity may exist even in cases where an enterprise owns little or none of the SPE’s equity, such as when an entity retains majority of the residual risks related to the SPE or its assets in order to obtain benefits from its activities. The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. All significant intercompany transactions and balances, including intercompany profits and unrealized profits and losses, are eliminated in the consolidation. Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PFRS and Philippine Interpretations which were adopted as of January 1, 2010. The following new and amended standards did not have an impact on the accounting policies, financial position or performance of the Group. New Standards and Interpretations • PFRS 2, Share-based Payment: Group Cash-settled Share-based Payment Transactions • PFRS 3 (Revised), Business Combinations and PAS 27 (Amended), Consolidated and Separate Financial Statements • PAS 39, Financial Instruments: Recognition and Measurement - Eligible Hedged Items • Philippine Interpretation on International Financial Reporting Interpretations Committee (IFRIC) 17, Distributions of Non-cash Assets to Owners Improvements to PFRSs 2008 • PFRS 5, Non-current Assets Held for Sale and Discontinued Operations Improvements to PFRSs 2009 • PFRS 2, Share-based Payment • PFRS 5, Non-current Assets Held for Sale and Discontinued Operations • PFRS 8, Operating Segments • PAS 1, Presentation of Financial Statements • PAS 7, Statement of Cash Flows • PAS 17, Leases
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• • • • •
PAS 36, Impairment of Assets PAS 38, Intangible Assets PAS 39, Financial Instruments: Recognition and Measurement Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation
Significant Accounting Policies Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates and other sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognized: Sale of air transportation services Passenger ticket and cargo waybill sales are initially recorded under ‘Unearned transportation revenue’ account in the consolidated statement of financial position until recognized under Revenue account in the consolidated statement of comprehensive income when the transportation service is rendered by the Group (e.g., when passengers and cargo are lifted). Unearned tickets are recognized as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and historical trends. The related commission is recognized as outright expense upon the receipt of payment from customers, and is included under ‘Reservation and sales’ account. Ancillary revenue Revenue from in-flight sales and other services are recognized when the goods are delivered or the services are carried out. Interest income Interest on cash, cash equivalents and other short-term cash investments is recognized as the interest accrues using the effective interest method. Expense Recognition Expenses are recognized when it is probable that a decrease in future economic benefits related to decrease in an asset or an increase in liability has occurred and the decrease in economic benefits can be measured reliably. Expenses that arise in the course of ordinary regular activities of the Group include, among others, the operating expenses on the Group’s operation. Cash and Cash Equivalents Cash represents cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of placement and that are subject to an insignificant risk of changes in value. Cash and cash equivalents, excluding cash on hand, are classified and accounted for as loans and receivables. Financial Instruments Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized using the settlement date accounting. Derivatives are recognized on a trade date basis.
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Initial recognition of financial instruments Financial instruments are recognized initially at the fair value of the consideration given. Except for financial instruments at FVPL, the initial measurement of financial assets includes transaction costs. The Group classifies its financial assets into the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, AFS investments and loans and receivables. Financial liabilities are classified into financial liabilities at FVPL and other financial liabilities carried at cost or amortized cost. The Group has no HTM investments as of December 31, 2010 and 2009. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every statement of financial position date. Determination of fair value The fair value of financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Any difference noted between the fair value and the transaction price is treated as expense or income, unless it qualifies for recognition as some type of asset or liability. ‘Day 1’ profit or loss Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from an observable market, the Group recognizes the difference between the transaction price and fair value (a ‘Day 1’ profit or loss) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where the transaction price used is made of data which is not observable, the difference between the transaction price and model value is only recognized in profit or loss, when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the ‘Day 1’ profit or loss amount. Financial assets and financial liabilities at FVPL Financial assets and financial liabilities at FVPL include financial assets and financial liabilities held for trading purposes, derivative instruments or those designated upon initial recognition as at FVPL. Financial assets and financial liabilities are designated by management on initial recognition when any of the following criteria are met: •
•
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The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or The assets or liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or
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The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.
As of December 31, 2010 and 2009, the Group’s financial assets at FVPL consist of derivative assets, as well as private and government debt and equity securities (Note 8). Financial assets and financial liabilities at FVPL are presented in the consolidated statement of financial position at fair value. Changes in fair value are reflected in profit or loss. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded in other revenue according to the terms of the contract, or when the right of the payment has been established. Derivatives recorded at FVPL The Group is a counterparty to certain derivative contracts such as commodity options. Such derivative financial instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently re-measured at fair value. Any gains or losses arising from changes in fair values of derivatives (except those accounted for as accounting hedges) are taken directly to profit or loss. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. For the purpose of hedge accounting, hedges are classified primarily as either: (a) a hedge of the fair value of an asset, liability or a firm commitment (fair value hedge); or (b) a hedge of the exposure to variability in cash flows attributable to an asset or liability or a forecasted transaction (cash flow hedge). The Group did not apply hedge accounting on its derivative transactions for the year ended December 31, 2010 and 2009. The Group enters into fuel derivatives to manage its exposure to fuel price fluctuations. Such fuel derivatives are not designated as accounting hedges. These derivatives are entered into for risk management purposes. The gains or losses on these instruments are accounted for directly as charges to or credits against current operations under ‘Fuel hedging gains (losses)’ account in profit or loss. As of December 31, 2010 and 2009, the Group has no embedded derivatives. AFS investments AFS investments are those non-derivative investments which are designated as such or do not qualify to be classified or designated as financial assets at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS investments are subsequently measured at fair value. The unrealized gains and losses are recognized directly in equity (other comprehensive income (loss)) under ‘Net unrealized gain (loss) on AFS investments’ account in the statement of financial position. When the investment is disposed of, the cumulative gain or loss previously recognized in the statement of comprehensive income is recognized in the statement of income. Where the Group holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Dividends earned while holding AFS investments are recognized in the statement of income when the right of the payment has been established. The losses arising from impairment of such investments are recognized in the statement of income and removed from the ‘Net unrealized gain (loss) on AFS investments’ account.
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The AFS investment of the Group represents a quoted equity security (Note 8). Receivables Receivables are non-derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. After initial measurement, receivables are subsequently carried at amortized cost using the effective interest method less any allowance for impairment loss. Amortized cost is calculated by taking into account any discount or premium on acquisition, and includes fees that are an integral part of the effective interest rate (EIR) and transaction costs. Gains and losses are recognized in profit or loss, when the receivables are derecognized or impaired, as well as through the amortization process. This accounting policy applies primarily to the Group’s trade and other receivables (Note 9) and certain refundable deposits (Note 14). Financial liabilities Issued financial instruments or their components, which are not designated at FVPL are classified as other financial liabilities where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, other financial liabilities are subsequently measured at cost or amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR. Any effects of restatement of foreign currency-denominated liabilities are recognized in profit or loss. This accounting policy applies primarily to the Group’s debt, accounts payable and other accrued liabilities and other obligations that meet the above definition (Notes 15, 16 and 17). Impairment of Financial Assets The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Assets carried at amortized cost If there is objective evidence that an impairment loss on financial assets carried at amortized cost (i.e., receivables) has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future 50
cash flows discounted at the asset’s original EIR. Time value is generally not considered when the effect of discounting is not material. The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss shall be recognized in profit or loss. The asset, together with the associated allowance accounts, is written-off when there is no realistic prospect of future recovery. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in the collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. The Group performs a regular review of the age and status of these accounts, designed to identify accounts with objective evidence of impairment and provide the appropriate allowance for impairment loss. The review is accomplished using a combination of specific and collective assessment approaches, with the impairment loss being determined for each risk grouping identified by the Group (Note 4). AFS investments The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Interest continues to be accrued at the original EIR on the reduced carrying amount of the asset and is recorded under interest income in profit or loss. If, in a subsequent year, the fair value of a debt instrument increases, and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is also reversed through profit or loss. For equity investments classified as AFS investments, objective evidence would include a significant or prolonged decline in the fair value of the investments below its cost. The determination of what is significant and prolonged is subject to judgment. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized is removed from other comprehensive income and recognized in profit or loss. Impairment losses on equity investments are not reversed through the statement of comprehensive income. Increases in fair value after impairment are recognized directly in other comprehensive income.
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Derecognition of Financial Instruments Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where: • •
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the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “passthrough” arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of ownership and retained control over the asset, or (b) has neither transferred nor retained the risks and rewards of the asset but has transferred the control over the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Offsetting Financial Instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements; thus, the related assets and liabilities are presented gross in the consolidated statement of financial position. Expendable Parts, Fuel, Materials and Supplies Expendable parts, fuel, materials and supplies are stated at lower of cost and net realizable value (NRV). Cost of flight equipment expendable parts, materials and supplies are stated at acquisition cost determined on a moving average cost method. Fuel is stated at cost on a weighted average cost method. NRV is the estimated selling price in the ordinary course of business less estimated costs to sell. Property and Equipment Property and equipment are carried at cost less accumulated depreciation, amortization and impairment loss, if any. The initial cost of property and equipment comprises its purchase price, any related capitalizable borrowing costs attributed to progress payments incurred on account of aircraft acquisition under construction and other directly attributable costs of bringing the asset to its working condition and location for its intended use. Cost also includes asset retirement obligation (ARO) relating to the leased passenger aircraft.
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Subsequent costs are capitalized as part of ‘Property and equipment’ account only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Subsequent costs such as actual costs of heavy maintenance visits for passenger aircraft are capitalized and depreciated based on the estimated number of years or flying hours, whichever is applicable, until the next major overhaul or inspection. Generally, heavy maintenance visits are required every five to six years for airframe and ten years or 20,000 flight cycles, whichever comes first, for landing gear. All other repairs and maintenance are charged against current operations as incurred. Construction in-progress are transferred to the related ‘Property and equipment’ account when the construction or installation and related activities necessary to prepare the property and equipment for their intended use are completed, and the property and equipment are ready for service. Construction in-progress is not depreciated until such time when the relevant assets are completed and available for use. Depreciation and amortization of property and equipment commence once the property and equipment are available for use and are computed using the straight-line method over the estimated useful lives (EULs) of the assets, regardless of utilization. The EULs of property and equipment of the Group follows: Passenger aircraft* Engines Rotables Ground Support Equipment EDP Equipment, mainframe and peripherals Transportation equipment Furniture, fixtures and office equipment Communication equipment Special tools Maintenance and test equipment Other equipment
15 years 15 years 15 years 5 years 3 years 5 years 5 years 5 years 5 years 5 years 5 years
* With residual value of 15.00%
Leasehold improvements are amortized over the shorter of their EULs or the corresponding lease terms. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss, in the year the item is derecognized. The assets’ residual values, useful lives and methods of depreciation and amortization are reviewed and adjusted, if appropriate, at each financial year-end. ARO The Group is contractually required under various lease contracts to restore certain leased aircraft to its original condition and to bear the cost of restoration at the end of the contract period. The Group recognizes the present value of these costs as ARO asset (included under ‘Property and equipment’) and ARO liability (included under ‘Noncurrent liabilities’). The Group depreciates ARO asset on a straight-line basis over the EUL of the related asset or the lease term, whichever is shorter, or written off as a result of impairment
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of the related asset. The Group amortizes ARO liability using the effective interest method and recognizes accretion expense (included in interest expense) over the lease term. The Group regularly assesses the provision for ARO and adjusts the related asset and liability (Note 3). Aircraft Maintenance and Overhaul Cost The Group recognizes aircraft maintenance and overhaul expenses in accordance with the contractual terms. The maintenance contracts are classified into two: (a) those based on time and material basis (TMB), and (b) power-by-the-hour (PBH) contract. For maintenance contract under TMB, the Group recognizes expenses based on expense as incurred method. For maintenance contract under PBH, the Group recognizes expense on an accrual basis. Investment in Joint Ventures A joint venture (JV) is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. A jointly controlled entity is a JV that involves the establishment of a separate entity in which each venturer has an interest. The Group’s 49.00% and 35.00% investments in Aviation Partnership (Philippines) Corporation (A-plus) and SIA Engineering (Philippines) Corporation (SIAEP) are accounted for under the equity method (Note 13). Under the equity method, the investments in JV are carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the JV, less any allowance for impairment in value. The consolidated statement of comprehensive income reflects the Group’s share in the results of operations of the JV. Impairment of Nonfinancial Assets This accounting policy applies primarily to the Group’s property and equipment and investments in JV. At each statement of financial position date, the Group assesses whether there is any indication that its nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an asset’s (or cash-generating unit’s) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cashgenerating unit). An assessment is made at each statement of financial position date as to whether there is any indication that a previously recognized impairment loss may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized.
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If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation expense is adjusted in future years to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining life. Common Stock Common stocks are classified as equity and recorded at par. Proceeds in excess of par value are recorded as ‘Capital paid in excess of par value’ in the consolidated statement of financial position. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds. Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from equity when approved and declared by the BOD, in the case of cash dividends; or by the BOD and shareholders, in the case of stock dividends. Provisions and Contingencies Provisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of a past event; (b) it is probable (i.e., more likely than not) that an outflow of assets embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense in profit or loss. Contingent liabilities are not recognized in the consolidated statement of financial position but are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized but disclosed in the consolidated financial statements when an inflow of economic benefits is probable. If it is virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the consolidated financial statements. Pension Costs Pension cost is actuarially determined using the projected unit credit method. This method reflects services rendered by employees up to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Actuarial valuations are conducted with sufficient regularity, with option to accelerate when significant changes to underlying assumptions occur. Pension cost includes current service cost, interest cost, expected return on any plan assets, actuarial gains and losses and the effect of any curtailment or settlement. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged against profit or loss when the net cumulative unrecognized actuarial gains and losses at the end of the previous period exceed 10.00% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. The excess actuarial gains or losses are recognized over the average remaining working lives of the employees participating in the plan. 55
The asset or liability recognized in the consolidated statement of financial position in respect of defined benefit retirement plan is the present value of the defined benefit obligation as of statement of financial position date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. The defined benefit obligation is calculated annually by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash inflows using risk-free interest rates that have terms to maturity approximating the terms of the related pension liability. Income Taxes Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted as of the statement of financial position date. Deferred tax Deferred tax is provided using the balance sheet liability method on all temporary differences, with certain exceptions, at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, with certain exceptions. Deferred tax assets are recognized for all deductible temporary differences with certain exceptions, and carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over RCIT and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient taxable profit will be available against which the deductible temporary differences and carryforward benefits of unused tax credits from excess MCIT and unused NOLCO can be utilized. Deferred tax assets, however, are not recognized when it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of transaction, affects neither the accounting income nor taxable profit or loss. Deferred tax liabilities are not provided on non-taxable temporary differences associated with interests in JV. With respect to interests in JV, deferred tax liabilities are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amounts of deferred tax assets are reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date, and are recognized to the extent that it has become probable that future taxable income will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted as of the statement of financial position date.
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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 profit or loss or other comprehensive income. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Leases The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: a. there is a change in contractual terms, other than a renewal or extension of the arrangement; b. a renewal option is exercised or an extension granted, unless that term of the renewal or extension was initially included in the lease term; c. there is a change in the determination of whether fulfillment is dependent on a specified asset; or d. there is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for (a), (c) and (d) scenarios above, and at the date of renewal or extension period for scenario (b). Group as lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included under ‘Property and equipment’ account with the corresponding liability to the lessor included under ‘Long-term debt’ account in the consolidated statement of financial position. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the EUL of the asset and the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term. Group as lessor Leases where the Group does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned.
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Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress, and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. The Group had not capitalized any borrowing costs for the years ended December 31, 2010 and 2009 as all borrowing costs from outstanding long-term debt relate to assets that are at state ready for intended use (Note 16). Foreign Currency Transactions Transactions in foreign currencies are initially recorded in the Group’s functional currency using the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency using the Philippine Dealing System (PDS) closing rate prevailing at the statement of financial position date. All differences are taken to the consolidated statement of comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the prevailing closing exchange rate as of the date of initial transaction. Earnings (Loss) Per Share (EPS) Basic EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares issued and outstanding during the year, adjusted for any subsequent stock dividends declared. Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. For the years ended December 31, 2010, 2009 and 2008, the Group does not have any dilutive potential ordinary shares. Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM). The CODM, who is responsible for resource allocation and assessing performance of the operating segment, has been identified as the President. The nature of the operating segment is set out in Note 6. Events after the Reporting Period Post-year-end events that provide additional information about the Group’s position at the statement of financial position date (adjusting event) are reflected in the consolidated financial statements. Post-year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements, when material. Standards Issued but not yet Effective Standards issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below. This listing is of standards and interpretations issued, which the Group reasonably expects to be applicable at a future date. The Group intends to adopt those standards when they become effective.
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PAS 24 (Amended), Related Party Disclosures The amended standard is effective for annual periods beginning on or after January 1, 2011. It clarifies the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for governmentrelated entities. The Group does not expect any impact on its financial position or performance. Early adoption is permitted for either the partial exemption for government-related entities or for the entire standard.
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PAS 32 (Amended), Financial Instruments: Presentation - Classification of Rights Issues The amendment to PAS 32 is effective for annual periods beginning on or after February 1, 2010 and amends the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency. This amendment will have no impact on the Group after initial application.
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PAS 12 (Amended), Income Taxes - Deferred Tax: Recovery of Underlying Assets The amendment to PAS 12 is effective for annual periods beginning on or after January 1, 2012. It provides a practical solution to the problem of assessing whether recovery of an asset will be through use or sale. It introduces a presumption that recovery of the carrying amount of an asset will normally be through sale.
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PFRS 7 (Amended), Financial Instruments - Disclosures: Transfers of Financial Assets The amendments to PFRS 7 are effective for annual periods beginning on or after July 1, 2011. The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.
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PFRS 9, Financial Instruments: Classification and Measurement PFRS 9, as issued in 2010, reflects the first phase of the work on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. The standard is effective for annual periods beginning on or after January 1, 2013. In subsequent phases, hedge accounting and derecognition will be addressed. The completion of this project is expected in early 2011. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Group’s financial assets. The Group will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.
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Philippine Interpretation IFRIC-14 (Amended), Prepayments of a Minimum Funding Requirement The amendment to Philippine Interpretation IFRIC-14 is effective for annual periods beginning on or after January 1, 2011, with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The amendment is deemed to have no impact on the financial statements of the Group.
59
•
Philippine Interpretation IFRIC-15, Agreements for the Construction of Real Estate This Interpretation, effective for annual periods beginning on or after January 1, 2012, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as a construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and rewards of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion.
•
Philippine Interpretation IFRIC-19, Extinguishing Financial Liabilities with Equity Instruments This Interpretation is effective for annual periods beginning on or after July 1, 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss. The adoption of this interpretation will have no effect on the financial statements of the Group.
Improvements to PFRSs 2010 Improvements to IFRSs is an omnibus of amendments to PFRSs. The amendments have not been adopted as they become effective for annual periods on or after either July 1, 2010. The amendments are listed below: • PFRS 3, Business Combinations • PFRS 7, Financial Instruments: Disclosures • PAS 1, Presentation of Financial Statements • PAS 27, Consolidated and Separate Financial Statements • Philippine Interpretation IFRIC-13, Customer Loyalty Programmes The Group, however, expects no impact from the adoption of the amendments on its financial position or performance.
3.
Significant Accounting Judgments and Estimates In the process of applying the Group’s accounting policies, management has exercised judgments and estimates in determining the amounts recognized in the consolidated financial statements. The most significant uses of judgment and estimates follow. Judgments a. Going concern The management of the Group has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Group is not aware of any material uncertainties that may cast significant doubts upon the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on a going concern basis.
60
b. Classification of financial instruments The Group exercises judgment in classifying a financial instrument, or its component, on initial recognition as either a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, financial liability or equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated statement of financial position. In addition, the Group classifies financial assets by evaluating, among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination of whether quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arm’s length basis. b. Fair values of financial instruments Where the fair values of certain financial assets and liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques, including the discounted cash flow model. The inputs to these models are taken from observable market data where possible, but where this is not feasible, estimates are used in establishing fair values. The judgments include considerations of liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For derivatives, the Group generally relies on counterparties’ valuation. The fair values of the Group’s financial instruments are presented in Note 5. c. Impairment of financial assets In determining whether an impairment loss should be recorded in profit or loss, the Group makes judgments as to whether there is any objective evidence of impairment as a result of one or more events that has occurred after initial recognition of the asset and that loss event or events has an impact on the estimated future cash flows of the financial assets or the group of financial assets that can be reliably estimated. This observable data may include adverse changes in payment status of borrowings in a group, or national or local economic conditions that correlate with defaults on assets in the portfolio. d. Classification of leases Management exercises judgment in determining whether substantially all the significant risks and rewards of ownership of the leased assets are transferred to the Group. Lease contracts, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased items, are capitalized. Otherwise, they are considered as operating leases. The Group also has lease agreements where it has determined that the risks and rewards related to the leased assets are retained with the lessors. Such leases are accounted for as operating leases (Note 27). e. Consolidation of SPEs The Group periodically undertakes transactions that may involve obtaining the right to control or significantly influence the operations of other companies. These transactions include the purchase of aircraft and assumption of certain liabilities. Also, included are transactions involving SPEs and similar vehicles. In all such cases, management makes an assessment as to whether the Group has the right to control or significantly influence the SPEs, and based on this assessment, the SPE is consolidated as a subsidiary or 61
associated company. In making this assessment, management considers the underlying economic substance of the transaction and not only the contractual terms. f.
Determination of functional currency PAS 21 requires management to use its judgment to determine the entity’s functional currency such that it most faithfully represents the economic effects of the underlying transactions, events and conditions that are relevant to the entity. In making this judgment, each entity in the Group considers the following: a) the currency that mainly influences sales prices for financial instruments and services (this will often be the currency in which sales prices for its financial instruments and services are denominated and settled); b) the currency in which funds from financing activities are generated; and c) the currency in which receipts from operating activities are usually retained. The Group’s consolidated financial statements are presented in Philippine peso, which is also the Parent Company’s functional currency.
g. Contingencies The Group is currently involved in certain legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the defense in these matters and is based upon an analysis of potential results. The Group currently does not believe that these proceedings will have a material adverse effect on the Group’s financial position and results of operations. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (Note 27). Estimates The key assumptions concerning the future and other sources of estimation uncertainty at the statement of financial position date that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next year are discussed below: a. Estimation of allowance for credit losses on receivables The Group maintains allowance for impairment losses at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, the length of the Group’s relationship with the agents, customers and other counterparties, the payment behavior of agents and customers, other counterparties and other known market factors. The Group reviews the age and status of receivables, and identifies accounts that are to be provided with allowances on a continuous basis. The provisions for credit losses on receivables are discussed in more detail in Note 9. b. Determination of NRV of expendable parts, fuel, materials and supplies The Group’s estimates of the NRV of expendable parts, fuel, materials and supplies are based on the most reliable evidence available at the time the estimates are made, of the amount that the expendable parts, fuel, materials and supplies are expected to be realized. In determining the NRV, the Group considers any adjustment necessary for obsolescence, which is generally providing 100.00% for nonmoving items for more than one year. A new assessment is made of NRV in each subsequent period. When the circumstances that previously caused expendable parts, fuel, materials and supplies to
62
be written-down below cost no longer exist or when there is a clear evidence of an increase in NRV because of a change in economic circumstances, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised NRV. The details of expendable parts, fuel, materials and supplies are disclosed in Note 10. c. Estimation of ARO The Group is contractually required under certain lease contracts to restore certain leased passenger aircraft to stipulated return condition and to bear the costs of restoration at the end of the contract period. Since the first operating lease entered by the Group in 2001, these costs are accrued based on an internal estimate which includes estimates of certain redelivery costs at the end of the operating aircraft lease. The Group recognizes the present value of these costs as ARO asset and ARO liability. Assumptions used to compute ARO are reviewed and updated annually by the Group. In 2010, the Group contracted a third-party engineer to reassess the amount of future restoration costs. Based on the reassessment, the Group recognized additional ARO asset and ARO liability amounting to P =705.7 million (Note 17). As of December 31, 2010 and 2009, the present value of the cost of restoration is computed based on the Group’s average borrowing cost. The amount and timing of recorded expenses for any period would differ if different judgments were made or different estimates were utilized. The recognition of ARO would increase noncurrent assets and noncurrent liabilities, which results in increase of depreciation expense and interest expense. The details and the carrying value of ARO asset and liability are disclosed in Notes 12 and 17, respectively. d. Estimation of useful lives and residual values of property and equipment The Group estimates the useful lives of its property and equipment based on the period over which the assets are expected to be available for use. The Group estimates the residual value of its property and equipment based on the expected amount recoverable at the end of its useful life. The Group reviews annually the EULs and residual values of property and equipment based on factors that include physical wear and tear, technical and commercial obsolescence and other limits on the use of the assets. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the EUL or residual value of property and equipment would increase recorded depreciation and amortization expense and decrease noncurrent assets. The details and the carrying value of property and equipment are disclosed in Note 12. e. Recognition of deferred tax assets The Group assesses the carrying amounts of deferred income taxes at each statement of financial position date and reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies.
63
As of December 31, 2010 and 2009, the Group had certain gross deductible and taxable temporary differences which are expected to expire or reverse within the ITH period, and for which deferred tax assets and deferred tax liabilities were not set up on account of the Parent Company’s ITH. The details of deferred tax asset are disclosed in Note 24. f.
Impairment of nonfinancial assets The Group assesses the impairment of nonfinancial assets, particularly property and equipment and investment in JV, whenever events or changes in circumstances indicate that the carrying amount of the nonfinancial asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following: • • •
significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for overall business; and significant negative industry or economic trends.
An impairment loss is recognized whenever the carrying amount of an asset or investment exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. The fair value less cost to sell is the amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or investments or, if it is not possible, for the cash-generating unit to which the asset belongs. In determining the present value of estimated future cash flows expected to be generated from the continued use of the assets, the Group is required to make estimates and assumptions that can materially affect the consolidated financial statements. The carrying values of property and equipment and investment in JV are disclosed in Notes 12 and 13, respectively. g. Estimation of pension and other employee benefit costs The determination of the obligation and cost of pension and other employee benefits is dependent on the selection of certain assumptions used in calculating such amounts. Those assumptions include, among others, discount rates and salary increase rates (Note 22). Actual results that differ from the Group’s assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Group believes that the assumptions are reasonable and appropriate, significant differences between actual experiences and assumptions may materially affect the cost of employee benefits and related obligations. The Group also estimates other employee benefit obligations and expense, including the cost of paid leaves based on historical leave availments of employees, subject to the Group’s policy. These estimates may vary depending on the future changes in salaries and actual experiences during the year. 64
The present value of the defined benefit obligation and other details of the retirement plan and other employee benefit cost are disclosed in Note 22. h. Passenger revenue recognition Passenger sales are recognized as revenue when the obligation of the Group to provide transportation service ceases, either (a) when transportation services are already rendered or (b) when the Group estimates that unused tickets are already expired. The value of unused tickets is included as unearned transportation revenue in the consolidated statement of financial position and recognized as revenue based on estimates. These estimates are based on historical experience. While actual results may vary from these estimates, the Group believes it is unlikely that materially different estimates for future refunds, exchanges, and forfeited tickets would be reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time the estimates were made. As of December 31, 2010 and 2009, the balances of the Group’s unearned transportation revenue amounted to P =4.6 billion and P =3.5 billion, respectively. Ticket sales that are not expected to be used for transportation are recognized as revenue using estimates regarding the timing of recognition based on the terms and conditions of the tickets and historical trends.
4.
Financial Risk Management Objectives and Policies The Group’s principal financial instruments, other than derivatives, comprise cash and cash equivalents, financial assets at FVPL, AFS investments, receivables, payables and interestbearing borrowings. The main purpose of these financial instruments is to finance the Group’s operations and capital expenditures. The Group has various other financial assets and liabilities, such as trade receivables and trade payables which arise directly from its operations. The Group also enters into fuel derivatives to manage its exposure to fuel price fluctuations. The Group’s BOD reviews and approves policies for managing each of these risks and they are summarized in the succeeding paragraphs, together with the related risk management structure. Risk Management Structure The Group’s risk management structure is closely aligned with that of its ultimate parent. The Group has its own BOD which is ultimately responsible for the oversight of the Group’s risk management process which involves identifying, measuring, analyzing, monitoring and controlling risks. The risk management framework encompasses environmental scanning, the identification and assessment of business risks, development of risk management strategies, design and implementation of risk management capabilities and appropriate responses, monitoring risks and risk management performance, and identification of areas and opportunities for improvement in the risk management process. The Group and the ultimate parent with its other subsidiaries (JGSHI Group) created the following separate board-level independent committees with explicit authority and responsibility for managing and monitoring risks. Each BOD has created the board-level Audit Committee to spearhead the managing and monitoring of risks. 65
Audit Committee The Group’s Audit Committee assists the Group’s BOD in its fiduciary responsibility for the over-all effectiveness of risk management systems, and both the internal and external audit functions of the Group. Furthermore, it is also the Audit Committee’s purpose to lead in the general evaluation and to provide assistance in the continuous improvements of risk management, control and governance processes. The Audit Committee also aims to ensure that: a. financial reports comply with established internal policies and procedures, pertinent accounting and auditing standards and other regulatory requirements; b. risks are properly identified, evaluated and managed, specifically in the areas of managing credit, market, liquidity, operational, legal and other risks, and crisis management: c. audit activities of internal and external auditors are done based on plan, and deviations are explained through the performance of direct interface functions with the internal and external auditors; and d. the Group’s BOD is properly assisted in the development of policies that would enhance the risk management and control systems. Enterprise Risk Management Group (ERMG) The fulfillment of the risk management functions of the Group’s BOD is delegated to the ERMG. The ERMG is primarily responsible for the execution of the Enterprise Risk Management (ERM) framework. The ERMG’s main concerns include: • • • •
formulation of risk policies, strategies, principles, framework and limits; management of the fundamental risk issues and monitoring of relevant risk decisions; support to management in implementing the risk policies and strategies; and development of a risk awareness program.
Corporate Governance Compliance Officer Compliance with the principles of good corporate governance is one of the objectives of the Group’s BOD. To assist the Group’s BOD in achieving this purpose, the Group’s BOD has designated a Compliance Officer who shall be responsible for monitoring the actual compliance of the Group with the provisions and requirements of good corporate governance, identifying and monitoring control compliance risks, determining violations, and recommending penalties for such infringements for further review and approval of the Group’s BOD, among others. Day-to-day Risk Management Functions At the business unit or company level, the day-to-day risk management functions are handled by four different groups, namely: 1. Risk-taking personnel - this group includes line personnel who initiate and are directly accountable for all risks taken. 2. Risk control and compliance - this group includes middle management personnel who perform the day-to-day compliance check to approved risk policies and risks mitigation decisions. 3. Support - this group includes back office personnel who support the line personnel. 4. Risk management - this group pertains to the Group’s Management Committee which makes risk mitigating decisions within the enterprise-wide risk management framework.
66
ERM Framework The Group’s BOD is also responsible for establishing and maintaining a sound risk management framework and is accountable for risks taken by the Group. The Group’s BOD also shares the responsibility with the ERMG in promoting the risk awareness program enterprise-wide. The ERM framework revolves around the following eight interrelated risk management approaches: 1. Internal Environmental Scanning - it involves the review of the overall prevailing risk profile of the business unit to determine how risks are viewed and addressed by management. This is presented during the strategic planning, annual budgeting and mid-year performance reviews of the business unit. 2. Objective Setting - the Group’s BOD mandates the Group’s management to set the overall annual targets through strategic planning activities, in order to ensure that management has a process in place to set objectives which are aligned with the Group’s goals. 3. Risk Assessment - the identified risks are analyzed relative to the probability and severity of potential loss which serves as a basis for determining how the risks should be managed. The risks are further assessed as to which risks are controllable and uncontrollable, risks that require management’s attention, and risks which may materially weaken the Group’s earnings and capital. 4. Risk Response - the Group’s BOD, through the oversight role of the ERMG, approves the Group’s responses to mitigate risks, either to avoid, self-insure, reduce, transfer or share risk. 5. Control Activities - policies and procedures are established and approved by the Group’s BOD and implemented to ensure that the risk responses are effectively carried out enterprise-wide. 6. Information and Communication - relevant risk management information are identified, captured and communicated in form and substance that enable all personnel to perform their risk management roles. 7. Monitoring - the ERMG, Internal Audit Group, Compliance Office and Business Assessment Team constantly monitor the management of risks through risk limits, audit reviews, compliance checks, revalidation of risk strategies and performance reviews. Risk Management Support Groups The Group’s BOD created the following departments within the Group to support the risk management activities of the Group and the other business units: 1. Corporate Security and Safety Board (CSSB) - under the supervision of ERMG, the CSSB administers enterprise-wide policies affecting physical security of assets exposed to various forms of risks. 2. Corporate Supplier Accreditation Team (CORPSAT) - under the supervision of ERMG, the CORPSAT administers enterprise-wide procurement policies to ensure availability of supplies and services of high quality and standards to all business units. 3. Corporate Management Services (CMS) - the CMS is responsible for the formulation of enterprise-wide policies and procedures. 4. Corporate Planning and Legal Affairs (CORPLAN) - the CORPLAN is responsible for the administration of strategic planning, budgeting and performance review processes of the business units. 5. Corporate Insurance Department (CID) - the CID is responsible for the administration of the insurance program of business units concerning property, public liability, business interruption, money and fidelity, and employer compensation insurances, as well as in the procurement of performance bonds. 67
Risk Management Policies The main risks arising from the use of financial instruments are credit risk, liquidity risk and market risk, namely foreign currency risk, commodity price risk and interest rate risk. The Group’s policies for managing the aforementioned risks are summarized below. Credit Risk Credit risk is defined as the risk of loss due to uncertainty in a third party’s ability to meet its obligation to the Group. The Group trades only with recognized, creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are being subjected to credit verification procedures. In addition, receivable balances are monitored on a continuous basis resulting in an insignificant exposure in bad debts. With respect to credit risk arising from the other financial assets of the Group, which comprise cash in bank and cash equivalents and certain derivative instruments, the Group’s exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying amount of these instruments. Maximum exposure to credit risk without taking account of any credit enhancement The table below shows the gross maximum exposure to credit risk (including derivative assets) of the Group as of December 31, 2010 and 2009, without considering the effects of collaterals and other credit risk mitigation techniques.
Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities Loans and receivables Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14)
2010
2009
= P 2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165
=– P – – – –
489,917,466 3,879,438,631
227,794,364 227,794,364
114,532,000
–
9,748,864,734
3,826,551,232
465,134,940 134,819,376 86,576,474 175,878,801 862,409,591 9,240,000 = P 14,614,484,956
564,785,691 – 40,389,601 189,759,389 794,934,681 9,240,000 =4,858,520,277 P
*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under ‘Other noncurrent assets’ account in the consolidated statements of financial position.
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Risk concentrations of the maximum exposure to credit risk Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical location. Such credit risk concentrations, if not properly managed, may cause significant losses that could threaten the Group's financial strength and undermine public confidence. In order to avoid excessive concentrations of risk, identified concentrations of credit risks are controlled and managed accordingly. The Group’s credit risk exposures, before taking into account any collateral held or other credit enhancements, are categorized by geographic location as follows: 2010
Philippines Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial Instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities Loans and receivables Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14)
= P 159,862,560 948,259,200 1,108,121,760
Asia (excluding Philippines)
Europe
Others
Total
= P 17,853,621 = P 1,525,694,362 = P 382,679,360 69,221,278 – – 87,074,899 1,525,694,362 382,679,360
= P 2,086,089,903 1,017,480,478 3,103,570,381
– 1,108,121,760
– 87,074,899
– 1,525,694,362
285,950,784 668,630,144
285,950,784 3,389,521,165
136,094,034 1,244,215,794
206,652,904 293,727,803
147,170,528 1,672,864,890
– 668,630,144
489,917,466 3,879,438,631
–
–
–
114,532,000
114,532,000
9,461,735,841
287,128,893
–
–
9,748,864,734
349,540,164 71,058,584
84,845,412 4,248,439
30,749,364 6,633,159
– 52,879,194
465,134,940 134,819,376
86,576,474 77,620,296 584,795,518
– 59,537,007 148,630,858
– 38,721,498 76,104,021
– – 52,879,194
86,576,474 175,878,801 862,409,591
– – 9,240,000 – 9,240,000 = P 11,290,747,153 = P 729,487,554 = P 1,758,208,911 = P 836,041,338 = P 14,614,484,956
*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under ‘Other noncurrent assets’ account in the consolidated statement of financial position.
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2009 Asia (excluding Philippines)
Philippines Financial assets at FVPL (Note 8) Derivative financial instruments not designated as accounting hedges Loans and receivables Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Due from related parties Others** Refundable deposits*** (Note 14)
= P–
= P 227,794,364
3,603,491,343
223,059,889
403,862,479 40,389,601 21,433,462 465,685,542 – = P 4,069,176,885
143,956,471 – 642,642 144,599,113 – = P 595,453,366
Europe
Total
= P–
= P 227,794,364
–
3,826,551,232
16,966,741 564,785,691 – 40,389,601 167,683,285 189,759,389 184,650,026 794,934,681 9,240,000 9,240,000 = P 193,890,026 = P 4,858,520,277
* Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees. *** Included under ‘Other noncurrent assets’ account in the consolidated statement of financial position.
The Group has no concentration of risk with regard to various industry sectors. The major industry relevant to the Group is the transportation sector and financial intermediaries. Credit quality per class of financial assets The Group rates its financial assets based on an internal and external credit rating system. The table below shows the credit quality by class of financial assets based on internal credit rating of the Group (gross of allowance for impairment losses) as of December 31, 2010 and 2009. 2010 Neither Past Due Nor Specifically Impaired Past Due High Standard Substandard or Individually Grade Grade Grade Impaired Financial assets at FVPL (Note 8) Derivative financial instruments not designated as accounting hedges Loans and receivables: Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14)
= P 489,917,466
= P–
= P–
= P–
= P 489,917,466
9,748,864,734
–
–
–
9,748,864,734
296,387,293 134,819,376
96,158,122 –
– –
78,920,400 –
471,465,815 134,819,376
86,576,474 45,199,323
– 83,708,347
– –
– 273,224,396
86,576,474 402,132,066
9,240,000 = P 10,811,004,666
– = P 179,866,469
– – 9,240,000 = P– = P 352,144,796 = P 11,343,015,931
*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under ‘Other noncurrent assets’ account in the consolidated statement of financial position.
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Total
2009 Neither Past Due Nor Specifically Impaired High Standard Substandard Grade Grade Grade Financial assets at FVPL (Note 8) Derivative financial instruments not designated as accounting hedges Loans and receivables: Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Due from related parties Others** Refundable deposits*** (Note 14)
Past Due or Individually Impaired
Total
= P 227,794,364
= P–
= P–
= P–
= P 227,794,364
3,826,551,232
–
–
–
3,826,551,232
481,749,690 40,389,601 186,328,128
– – –
– – –
89,366,876 – 242,617,195
571,116,566 40,389,601 428,945,323
9,240,000 = P 4,772,053,015
– = P–
– = P–
– = P 331,984,071
9,240,000 = P 5,104,037,086
*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under ‘Other noncurrent assets’ account in the consolidated statement of financial position.
High grade cash and cash equivalents are short-term placements and working cash fund placed, invested, or deposited in foreign and local banks belonging to the top ten banks in terms of resources and profitability. High grade accounts are accounts considered to be of high value. The counterparties have a very remote likelihood of default and have consistently exhibited good paying habits. Standard grade accounts are active accounts with propensity of deteriorating to mid-range age buckets. These accounts are typically not impaired as the counterparties generally respond to credit actions and update their payments accordingly. Substandard grade accounts are accounts which have probability of impairment based on historical trend. These accounts show propensity to default in payment despite regular follow-up actions and extended payment terms. Past due or individually impaired accounts consist of past due but not impaired receivables amounting to P =119.6 million and P =86.5 million as December 31, 2010 and 2009, respectively, and past due and impaired receivables amounting to P =232.6 million and P =245.5 million as of December 31, 2010 and 2009, respectively. Past due but not impaired receivables are secured by cash bonds from major sales and ticket offices recorded under ‘Accounts payable and other accrued liabilities’ account in the consolidated statement of financial position. For the past due and impaired receivables, specific allowance for impairment losses amounted to P =232.6 million and P =245.5 million as of December 31, 2010 and 2009, respectively (Note 9). For financial assets such as designated financial assets at FVPL and AFS investments, the Group assesses their credit quality using external credit ratings from Standard & Poor’s (S&P). Financial assets with at least A- are identified as high grade, at least B- as standard grade and not rated (NR) if the credit rating is not performed by an external credit rating agency.
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Below is a summary of the Group’s external credit rating classification: 2010 Neither Past Due Nor Specifically Impaired Past Due High Standard or Individually Grade Grade Not Rated Impaired Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private BBB+ BB+ BB B+ BNR
= P– – – – – – –
= P 47,785,600 160,021,480 81,662,412 234,719,360 159,862,560 – 684,051,412
= P– – – – – 1,402,038,491 1,402,038,491
= P– = P 47,785,600 – 160,021,480 – 81,662,412 – 234,719,360 – 159,862,560 – 1,402,038,491 – 2,086,089,903
– –
1,017,480,478 1,701,531,890
– 1,402,038,491
– 1,017,480,478 – 3,103,570,381
285,950,784 285,950,784
– 1,701,531,890
– 1,402,038,491
– 285,950,784 – 3,389,521,165
– 114,532,000 = P 285,950,784 = P 1,816,063,890
– = P 1,402,038,491
– 114,532,000 = P– = P 3,504,053,165
Government BB Quoted equity securities AAFS investments (Note 8) Quoted equity securities BBB-
Total
The following tables show the aging analysis of the Group’s receivables: Neither Past Due Nor Impaired Trade receivables Interest receivable Due from related parties Others*
2010 Past Due But Not Impaired 31-60 days
= P 392,545,415 = P 29,123,386 134,819,376
–
86,576,474 – 128,907,670 – = P 742,848,935 = P 29,123,386
91-180 days
Over 180 days
Past Due and Impaired
Total
= P 24,822,321 = P 12,190,557
= P 6,453,261
= P 6,330,875
471,465,815
–
–
134,819,376
61-90 days
–
–
– – – – 86,576,474 739,356 38,400,282 7,831,493 226,253,265 402,132,066 = P 25,561,677 = P 50,590,839 = P 14,284,754 = P 232,584,140 = P 1,094,993,731
*Include nontrade receivables from derivative counterparties and employees
Trade receivables Due from related parties Others*
2009 Past Due But Not Impaired
Neither Past Due Nor Impaired
91-180 days
Over 180 days
Past Due and Impaired
31-60 days
61-90 days
Total
= P 481,749,690
= P 45,462,279
= P 13,771,807
= P 17,361,412
= P 6,440,503
= P 6,330,875
= P 571,116,566
40,389,601 186,328,128 = P 708,467,419
– 3,431,261 = P 48,893,540
– – = P 13,771,807
– – = P 17,361,412
– – = P 6,440,503
– 239,185,934 = P 245,516,809
40,389,601 428,945,323 = P 1,040,451,490
*Include nontrade receivables from derivative counterparties and employees
72
Collateral or credit enhancements As collateral against trade receivables from sales ticket offices or agents, the Group requires cash bonds from major sales ticket offices or agents ranging from P =50,000 to =2.1 million depending on the Group’s assessment of sales ticket offices and agents’ credit P standing and volume of transactions. As of December 31, 2010 and 2009, outstanding cash bonds (included under ‘Accounts payable and other accrued liabilities’ account in the consolidated statement of financial position) amounted to P =136.9 million and =101.0 million, respectively (Note 15). There are no collaterals for impaired receivables. P Impairment assessment The Group recognizes impairment losses based on the results of its specific/individual and collective assessment of its credit exposures. Impairment has taken place when there is a presence of known difficulties in the servicing of cash flows by counterparties, infringement of the original terms of the contract has happened, or when there is an inability to pay principal overdue beyond a certain threshold. These and the other factors, either singly or in tandem, constitute observable events and/or data that meet the definition of an objective evidence of impairment. The two methodologies applied by the Group in assessing and measuring impairment include: (1) specific/individual assessment; and (2) collective assessment. Under specific/individual assessment, the Group assesses each individually significant credit exposure for any objective evidence of impairment, and where such evidence exists, accordingly calculates the required impairment. Among the items and factors considered by the Group when assessing and measuring specific impairment allowances are: (a) the timing of the expected cash flows; (b) the projected receipts or expected cash flows; (c) the going concern of the counterparty’s business; (d) the ability of the counterparty to repay its obligations during financial crises; (e) the availability of other sources of financial support; and (f) the existing realizable value of collateral. The impairment allowances, if any, are evaluated as the need arises, in view of favorable or unfavorable developments. With regard to the collective assessment of impairment, allowances are assessed collectively for losses on receivables that are not individually significant and for individually significant receivables when there is no apparent nor objective evidence of individual impairment yet. A particular portfolio is reviewed on a periodic basis in order to determine its corresponding appropriate allowances. The collective assessment evaluates and estimates the impairment of the portfolio in its entirety even though there is no objective evidence of impairment yet on an individual assessment. Impairment losses are estimated by taking into consideration the following deterministic information: (a) historical losses/write-offs; (b) losses which are likely to occur but have not yet occurred; and (c) the expected receipts and recoveries once impaired. Liquidity Risk Liquidity is generally defined as the current and prospective risk to earnings or capital arising from the Group’s inability to meet its obligations when they become due without recurring unacceptable losses or costs. The Group’s liquidity management involves maintaining funding capacity to finance capital expenditures and service maturing debts, and to accommodate any fluctuations in asset and liability levels due to changes in the Group’s business operations or unanticipated events created by customer behavior or capital market conditions. The Group maintains a level of cash and cash equivalents deemed sufficient to finance operations. As part of its liquidity 73
risk management, the Group regularly evaluates its projected and actual cash flows. It also continuously assesses conditions in the financial markets for opportunities to pursue fund raising activities. Fund raising activities may include obtaining bank loans and availing of export credit agency facilities. Financial assets The analysis of financial assets held for liquidity purposes into relevant maturity grouping is based on the remaining period at the statement of financial position date to the contractual maturity date or if earlier the expected date the assets will be realized. Financial liabilities The relevant maturity grouping is based on the remaining period at the statement of financial position date to the contractual maturity date. When counterparty has a choice of when the amount is paid, the liability is allocated to the earliest period in which the Group can be required to pay. When an entity is committed to make amounts available in installments, each installment is allocated to the earliest period in which the entity can be required to pay. The tables below summarize the maturity profile of financial instruments based on remaining contractual undiscounted cash flows as of December 31, 2010 and 2009: Less than one month Financial Assets Financial assets at FVPL Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments Quoted equity securities Loans and receivables Cash and cash equivalents Receivables: Trade receivables Interest receivable Due from related parties* Others ** (Forward)
74
2010 3 to 12 months
1 to 3 months
1 to 5 years
More than 5 years
Total
= P 51,745,229 – 51,745,229
= P 6,510,240 32,606,000 39,116,240
– 51,745,229
– 39,116,240
– 15,616,356
– 2,181,716,999
285,950,784 3,923,913,357
285,950,784 6,212,108,181
– 51,745,229
139,059,297 178,175,537
351,425,270 367,041,626
– 2,181,716,999
– 3,923,913,357
490,484,567 6,702,592,748
–
–
–
–
104,120,000
104,120,000
9,776,460,386
–
–
–
–
9,776,460,386
386,222,100
56,120,518
11,647,971
11,144,351
–
465,134,940
134,819,376
–
–
–
–
134,819,376
86,576,474 – 135,284,134 39,319,282 = P 10,571,107,699 = P 273,615,337
= P 13,472,306 = P 1,868,966,549 = P 2,299,273,923 = P 4,239,968,247 2,144,050 312,750,450 1,338,688,650 1,686,189,150 15,616,356 2,181,716,999 3,637,962,573 5,926,157,397
– – – 86,576,474 969,633 305,752 – 175,878,801 = P 379,659,230 = P 2,193,167,102 = P 4,028,033,357 = P 17,445,582,725
Financial Liabilities On-balance sheet Financial liabilities at amortized cost Accounts payable and other accrued liabilities*** Due to related parties* Long-term debt Others****
= P 1,538,738,776 = P 1,469,497,765 = P 1,727,247,931 35,529,304 213,007,746 – 1,787,275,826
– 566,294,911 – 2,035,792,676
– 2,079,034,332 – 3,806,282,263
= P 361,781,897
= P 19,886,872
5,117,153,241
– – 10,616,930,315 8,713,422,758 923,451,428 – 11,902,163,640 8,733,309,630
35,529,304 22,188,690,062 923,451,428 28,264,824,035
Off-balance sheet Contingent liability*****
– – 6,711,777,434 24,777,021,191 – 31,488,798,625 = P 1,787,275,826 = P 2,035,792,676 = P 10,518,059,697 = P 36,679,184,831 = P 8,733,309,630 = P 59,753,622,660 *Receivable and payable on demand **Include nontrade receivables from derivative counterparties and employees ***Excluding government-related payables ****Included under ‘Other noncurrent liabilities’ in the consolidated statement of financial position. *****Pertains to capital expenditure commitments (Note 27)
Financial Assets Financial assets at FVPL Derivative financial instruments not designated as accounting hedges Loans and receivables Cash and cash equivalents Receivables Trade receivables Due from related parties* Others** Financial Liabilities Financial liabilities at amortized cost Accounts payable and other accrued liabilities*** Due to related parties* Long-term debt Others****
Less than one month
1 to 3 months
2009 3 to 12 months
1 to 5 years
More than 5 years
Total
= P–
= P 75,690,598
= P 227,552,424
= P–
= P–
= P 303,243,022
3,841,124,922
–
–
–
–
3,841,124,922
500,388,829
42,657,317
21,739,545
–
–
564,785,691
40,389,601 189,759,389 = P 4,571,662,741
– – = P 118,347,915
– – = P 249,291,969
– – = P–
– – = P–
40,389,601 189,759,389 = P 4,939,302,625
= P 454,140,097 = P 4,176,669,268
= P 33,120,435
= P–
= P–
= P 4,663,929,800
73,716,757 – – – – 73,716,757 – 553,806,613 1,884,006,031 9,135,034,372 7,443,503,843 19,016,350,859 – – – 910,665,374 – 910,665,374 = P 527,856,854 = P 4,730,475,881 = P 1,917,126,466 = P 10,045,699,746 = P 7,443,503,843 = P 24,664,662,790
*Receivable and payable on demand **Include nontrade receivables from derivative counterparties and employees ***Excluding government-related payables ****Included under ‘Other noncurrent liabilities’ in the consolidated statement of financial position.
Market Risk Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in foreign currency exchange rates, interest rates, commodity prices or other market changes. The Group’s market risk originates from its holding of foreign exchange instruments, interest-bearing instruments and derivatives.
75
Foreign currency risk Foreign currency risk arises on financial instruments that are denominated in a foreign currency other than the functional currency in which they are measured. It is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group has transactional currency exposures. Such exposures arise from sales and purchases in currencies other than the Parent Company’s functional currency. During the years ended December 31, 2010, 2009 and 2008, approximately 24.40%, 23.20% and 21.10%, respectively, of the Group’s total sales are denominated in currencies other than the functional currency. Furthermore, the Group’s capital expenditures are substantially denominated in US Dollar. As of December 31, 2010 and 2009, 68.32% and 73.91%, respectively, of the Group’s financial liabilities were denominated in US Dollar, respectively. The Group does not have any foreign currency hedging arrangements. The tables below summarize the Group’s exposure to foreign currency risk. Included in the tables are the Group’s financial assets and liabilities at carrying amounts, categorized by currency.
Financial Assets Financial Assets at FVPL Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments: Quoted equity securities Cash and cash equivalents Receivables Refundable deposits**
US Dollar
Hong Kong Dollar
2010 Singaporean Dollar
Other Currencies*
Total
= P 2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165
= P– – – – –
= P– – – – –
= P– – – – –
= P 2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165
489,917,466 3,879,438,631
– –
– –
– –
489,917,466 3,879,438,631
114,532,000 1,567,055,465 348,009,633 9,240,000 5,918,275,729
45,463,367 6,836,340 – 52,299,707
13,116,910 36,788,388 – 49,905,298
258,013,947 70,264,523 – 328,278,470
114,532,000 1,883,649,689 461,898,884 9,240,000 6,348,759,204
Financial Liabilities Accounts payable and other accrued liabilities*** Long-term debt Others****
2,527,277,204 35,990,964 45,849,225 79,987,436 2,689,104,829 18,432,708,704 – – – 18,432,708,704 923,451,428 – – – 923,451,428 = P 21,883,437,336 = P 35,990,964 = P 45,849,225 = P 79,987,436 = P 22,045,264,961 * Other currencies include Malaysian ringgit, Korean won, New Taiwan dollar, Japanese yen, Australian dollar and Euro. ** Included under ‘Other noncurrent assets’ account in the consolidated statement of financial position. ***Excluding government-related payables **** Included under ‘Other noncurrent liabilities’ in the consolidated statement of financial position.
Financial Assets Financial Assets at FVPL Derivative financial instruments not designated as accounting hedges Cash and cash equivalents Receivables Refundable deposits** (Forward)
76
US Dollar
Hong Kong Dollar
2009 Singaporean Dollar
Other Currencies*
Total
= P 227,794,364 66,485,872 473,305,027 9,240,000 = P 776,825,263
= P– 35,259,013 16,017,938 – = P 51,276,951
= P– 37,841,597 13,207,009 – = P 51,048,606
= P– 139,543,036 72,026,367 – = P 211,569,403
= P 227,794,364 279,129,518 574,556,341 9,240,000 = P 1,090,720,223
Financial Liabilities Accounts payable and other accrued liabilities*** Long-term debt Others****
= P 2,724,153,551 = P 34,577,933 = P 21,349,961 = P 68,484,838 = P 2,848,566,283 17,110,126,731 – – – 17,110,126,731 910,665,374 – – – 910,665,374 = P 20,744,945,656 = P 34,577,933 = P 21,349,961 = P 68,484,838 = P 20,869,358,388 * Other currencies include Malaysian ringgit, Korean won, New Taiwan dollar, Japanese yen, Australian dollar and Euro. ** Included under ‘Other noncurrent assets’ account in the consolidated statement of financial position. ***Excluding government-related payables **** Included under ‘Other noncurrent liabilities’ in the consolidated statement of financial position.
The exchange rates used to restate the Group’s foreign currency-denominated assets and liabilities as of December 31, 2010 and 2009 follow:
US dollar Singapore dollar Hong Kong dollar
2010 = P 43.84 to US$1.00 = P 34.16 to SGD1.00 = P 5.64 to HKD1.00
2009 =46.20 to US$1.00 P =33.11 to SGD1.00 P =5.99 to HKD1.00 P
The following table sets forth the impact of the range of reasonably possible changes in the US dollar - Philippine peso exchange value on the Group’s pre-tax income for the years ended December 31, 2010, 2009 and 2008 (in thousands). 2010 2009 2008 Changes in foreign exchange value = P5 (P =5) = P5 (P =5) = P5 (P =5) Change in pre-tax income (P =1,833,907) = P 1,833,907 (P =2,161,052) = P 2,161,052 (P =1,836,122) = P 1,836,122 Change in equity = P 13,063 (P =13,063) – – – –
Other than the potential impact on the Group’s pre-tax income and change in equity from AFS investments, there is no other effect on equity. The Group does not expect the impact of the volatility on other currencies to be material. Commodity price risk The Group enters into commodity derivatives to manage its price risks on fuel purchases. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Depending on the economic hedge cover, the price changes on the commodity derivative positions are offset by higher or lower purchase costs on fuel. A change in price by US$10.00 per barrel of jet fuel affects the Group’s fuel costs in pre-tax income by =989.8 million, P P =938.3 million and P =707.9 million as of December 31, 2010, 2009 and 2008, respectively, in each of the covered periods, assuming no change in volume of fuel is consumed. Interest rate risk Interest rate risk arises on interest-bearing financial instruments recognized in the consolidated statement of financial position and on some financial instruments not recognized in the consolidated statement of financial position (i.e., some loan commitments, if any). The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debt (Note 16).
77
Commercial loans from foreign banks (Note 16) Floating rate US Dollar LIBOR 6 months + margin
US Dollar LIBOR 6 months + margin
7,482,058 8,614,643
US$1,132,585
>1-2 years
>3-4 years
7,741,580 8,923,533
7,986,369 9,218,455
US$1,181,953 US$1,232,086
>2-3 years
US$1,693,626
<1 year
US$1,777,678
>1-2 years
>3-4 years
US$1,865,176 US$1,958,488
>2-3 years
1,484,287 1,556,977 1,635,135 1,361,101 US$9,964,765 US$10,171,620 US$10,558,668 US$10,579,556
<1 year ECA-backed loans from foreign banks (Note 16) Floating rate US Dollar London Interbank Offering Rate (LIBOR) 6 months + margin US$1,211,956 US Dollar LIBOR 3 months + margin 7,268,522 8,480,478 Commercial loans from foreign banks (Note 16) Floating rate 65,439,910 72,731,619
US$7,291,709
>5 years
104,150,051 117,484,686
US$13,334,635
Total (In US Dollar)
= P 392,351,552
Fair Value
4,565,938,174 4,248,601,240 5,150,528,642 4,640,952,792
= P 584,590,468
Total (in Philippine Peso)
US$1,700,951
>4-5 years
December 31, 2009
US$–
>5 years
US$8,995,919
Total (In US Dollar)
= P 415,611,458
Total (in Philippine Peso)
= P 365,629,445
Fair Value
– – 6,037,500 264,683,997 234,616,294 US$9,515,958 US$72,731,619 US$123,522,186 = P 5,415,212,639 = P 4,875,569,086
8,231,612 9,515,958
US$1,284,346
>4-5 years
December 31, 2010
The following tables show information about the Group’s long-term debt that are exposed to interest rate risk and are presented by maturity profile:
The following table sets forth the impact of the range of reasonably possible changes in interest rates on the Group’s pre-tax income for the years ended December 31, 2010, 2009 and 2008. 2010 Changes in interest rates Changes in pre-tax income
2009
1.50%
(1.50%)
1.50%
(P =42,709,321)
= P 42,709,321
(P =17,090,428)
2008 (1.50%)
1.50%
= P 17,090,428 (P =185,959,218)
(1.50%) = P 185,959,218
Fair value interest rate risk Fair value interest rate risk is the risk that the value/future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to interest rate risk relates primarily to the Group’s financial assets designated at FVPL. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s pre-tax income, through the impact of mark-to-market of financial assets designated at FVPL which are recognized in profit or loss.
Changes in market interest rates Changes in pre-tax income
2010 1.50% (1.50%) (P =210,554,767) = P 248,358,396
Other than the potential impact on the Group’s pre-tax income, there is no other effect on equity.
5.
Fair Value Measurement The methods and assumptions used by the Group in estimating the fair value of its financial instruments are: Cash and cash equivalents (excluding cash on hand), Receivables and Accounts payable and other accrued liabilities Carrying amounts approximate their fair values due to the relatively short-term maturity of these instruments. Investments in quoted equity securities Fair values are based on quoted prices published in markets. Amounts due from and due to related parties Carrying amounts of due from/to related parties, which are receivable/payable and due on demand, approximate their fair values. Non-interest bearing refundable deposits The fair values are determined based on the present value of estimated future cash flows using prevailing market rates. The Group used discount rates of 6.93% in 2010 and 8.72% in 2009. Derivative instruments The fair values of fuel derivatives are based on quotes obtained from an independent counterparty.
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Long-term debt The fair value of long-term debt is determined using the discounted cash flow methodology, with reference to the Group’s current incremental lending rates for similar types of loans. The discount curve used range from 3.29% to 3.72% as of December 31, 2010 and from 6.14% to 6.88% as of December 31, 2009. The following table summarizes the carrying amounts and fair values of all the Group’s financial instruments. 2010 Carrying Value Far Value Financial Assets Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities Loans and receivables Cash and cash equivalents (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others* Refundable deposits** (Note 14) Total financial assets Financial Liabilities Financial liabilities at amortized cost: Accounts payable and other accrued liabilities*** (Note 15) Due to related parties Long-term debt****(Note 16) Others***** Total financial liabilities
2009 Carrying Value
= P 2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165
= P 2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165
= P– – – – –
= P– – – – –
489,917,466 3,879,438,631
489,917,466 3,879,438,631
227,794,364 227,794,364
227,794,364 227,794,364
114,532,000
114,532,000
–
–
9,763,288,972
9,763,288,972
3,840,859,455
3,840,859,455
465,134,940 465,134,940 134,819,376 134,819,376 86,576,474 86,576,474 175,878,801 175,878,801 9,240,000 5,870,794 10,749,470,563 10,746,101,357 = P 14,628,909,194 = P 14,625,539,988
564,785,691 – 40,389,601 189,759,389 9,240,000 4,645,034,136 = P 4,872,828,500
564,785,691 – 40,389,601 189,759,389 5,123,925 4,640,918,061 = P 4,868,712,425
= P 5,117,153,241 = P 5,117,153,241 35,529,304 35,529,304 18,432,708,704 16,164,927,534 923,451,428 923,451,428 = P 24,508,842,677 = P 22,241,061,507
= P 4,663,929,800 73,716,757 17,110,126,731 910,665,374 = P 22,758,438,662
= P 4,663,929,800 73,716,757 14,503,855,491 910,665,374 = P 20,152,167,422
* Include nontrade receivables from derivative counterparties and employees ** Included under ‘Other noncurrent assets’ account in the consolidated statements of financial position *** Excluding government-related payables **** Includes current portion ***** Included under ‘Other noncurrent liabilities’ in the consolidated statements of financial position.
80
Fair Value
The Group uses the following hierarchy for determining and disclosing the fair value of financial assets designated at FVPL, derivative financial instruments and AFS investments by valuation techniques: (a) Level 1: quoted (unadjusted) prices in an active market for identical assets or liabilities; (b) Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and (c) Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The table below shows the Group’s financial instruments carried at fair value hierarchy classification: 2010 Level 1 Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities
Level 2
2009 Level 1
Level 2
= P 2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165
= P– – – – –
= P– – – – –
= P– – – – –
– 3,389,521,165
489,917,466 489,917,466
– –
227,794,364 227,794,364
114,532,000 = P 3,504,053,165
– = P 489,917,466
– = P–
– = P 227,794,364
There are no financial instruments measured at Level 3. There were no transfers within any hierarchy level of fair value measurements for the years ended December 31, 2010 and 2009, respectively.
6.
Segment Information The Group has one reportable operating segment, which is the airline business (systemwide). This is consistent with how the Group’s management internally monitors and analyzes the financial information for reporting to the CODM, who is responsible for allocating resources, assessing performance and making operating decisions. The revenue of the operating segment was mainly derived from rendering transportation services. All sales are made to external customers.
81
Segment information for the reportable segment is shown in the following table:
Revenue Net income (loss) Depreciation and amortization Interest expense Interest income
2010 = P 30,510,408,495 6,922,493,280 2,100,929,764 931,482,279 237,495,750
2009 = P 24,423,611,516 3,257,848,705 1,917,683,713 1,012,826,822 8,848,551
2008 = P 19,711,905,090 (3,259,888,005) 1,546,753,381 838,465,333 14,231,024
The reconciliation of total revenue reported by reportable operating segment to revenue in the consolidated statements of comprehensive income is presented in the following table:
Total segment revenue of reportable operating segment Nontransport revenue and other income Total revenue
2010
2009
2008
= P 29,088,798,959
= P 23,311,006,311
= P 19,682,144,058
1,421,609,536 = P 30,510,408,495
1,112,605,205 = P 24,423,611,516
29,761,032 = P 19,711,905,090
The reconciliation of total income reported by reportable operating segment to total comprehensive income in the consolidated statements of comprehensive income is presented in the following table:
Total segment income of reportable segment Add (deduct) unallocated items: Nontransport revenue and other income Nontransport expenses and other charges Benefit from (provision for) income tax Net income (loss) Other comprehensive loss Total comprehensive income (loss)
2010
2009
2008
= P 6,450,125,710
= P 3,164,042,762
= P 1,727,860,535
1,421,609,536
1,112,605,205
29,761,032
(931,482,279)
(1,038,300,945)
(4,940,188,091)
(17,759,687) 6,922,493,280 (2,714,902) = P 6,919,778,378
19,501,683 3,257,848,705 â&#x20AC;&#x201C; = P 3,257,848,705
(77,321,481) (3,259,888,005) â&#x20AC;&#x201C; (P =3,259,888,005)
The Groupâ&#x20AC;&#x2122;s major revenue-producing asset is the fleet of aircraft owned by the Group, which is employed across its route network (Note 12). The Group has no significant customer which contributes 10.00% or more to the revenues of the Group.
7.
Cash and Cash Equivalents This account consists of: Cash on hand Cash in banks Short-term placements (Note 26)
82
2010 = P 14,424,238 669,548,018
2009 = P 14,308,223 2,021,058,418
9,079,316,716 = P 9,763,288,972
1,805,492,814 = P 3,840,859,455
Cash in banks earns interest at the respective bank deposit rates. Short-term placements, which represent money market placements, are made for varying periods of up to three months depending on the immediate cash requirements of the Group, and earn an average interest of 4.24%, 2.20% and 0.50% in 2010, 2009 and 2008, respectively, on short-term placements denominated in Philippine peso. Moreover, short-term placements in US dollar earn an average of 1.20% in 2010. Interest income on cash and cash equivalents, presented in the consolidated statements of comprehensive income, amounted to P =133.5 million, P =8.8 million and P =11.3 million in 2010, 2009 and 2008, respectively.
8.
Investment and Trading Securities Financial Assets at FVPL This account consists of:
Designated at FVPL Quoted debt securities: Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges
2010
2009
= P 2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165
=– P – – – –
489,917,466 = P 3,879,438,631
227,794,364 =227,794,364 P
On June 30, 2010, the Group acquired from JGSHI the financial assets designated at FVPL and AFS by execution of deed of assignment. At inception, the Group classified this group of debt and equity securities as financial assets designated at FVPL since their performance are managed and evaluated on a fair value basis in accordance with the Group’s documented investment strategy. The information about these financial instruments is reported to management on that basis. As of December 31, 2010, the Group earned interest income of P =104.0 million from debt securities as financial assets designated at FVPL. The financial assets designated at FVPL are shown inclusive of unrealized gain amounting to =107.6 million. P Commodity options The Group enters into fuel derivatives to manage its exposure to fuel price fluctuations. Such fuel derivatives are not designated as accounting hedges. The gains or losses on these instruments are accounted for directly as a charge against or credit to profit or loss. As of December 31, 2010 and 2009, the Group has outstanding fuel hedging transactions with notional quantity of 845,000 US barrels and 420,000 US barrels, respectively. The notional quantity is the amount of the derivatives’ underlying asset or liability, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The
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options can be exercised at various calculation dates with specified quantities on each calculation date. The options have various maturity dates through December 31, 2011. Fair value changes on derivatives The changes in fair value of all derivative financial instruments not designated as accounting hedges follow:
Balance at beginning of period Derivative assets Derivative liabilities Net changes in fair value of derivatives Fair value of settled instruments Balance at end of period Attributable to: Derivative assets
2010
2009
= P 227,794,364 – 227,794,364 474,255,226 702,049,590 (212,132,124) = P 489,917,466
=– P (1,945,985,534) (1,945,985,534) 685,574,528 (1,260,411,006) 1,488,205,370 =227,794,364 P
= P 489,917,466
=227,794,364 P
AFS Investment This account represents investment in a quoted equity security. As of December 31, 2010, the carrying value of AFS investment amounted to P =114.5 million. In 2010, the Group recognized unrealized loss on AFS amounting to P =2.7 million, net of tax amounting to P =1.2 million.
9.
Receivables This account consists of:
Trade receivables (Note 26) Interest receivable Due from related parties (Note 26) Others Less allowance for credit losses
2010 = P 471,465,815 134,819,376 86,576,474 402,132,066 1,094,993,731 232,584,140 = P 862,409,591
2009 =571,116,566 P – 40,389,601 428,945,323 1,040,451,490 245,516,809 =794,934,681 P
Trade receivables are non-interest bearing and generally have 30 to 90 days terms. In 2010, there was reclassification of advances to suppliers from ‘Receivables’ to ‘Other current assets’. The Group made the reclassification to make receivables purely financial assets since advances to suppliers are to be settled through goods and services. Others include receivable under a sublease agreement amounting to P =225.4 million with another airline company denominated in US dollar. This receivable is fully provided with allowance for credit losses.
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The changes in the allowance for credit losses on receivables follow: 2010
Balance at beginning of year Unrealized foreign exchange gain on allowance for credit losses Provision for credit losses (Note 21) Write-off Balance at end of year
Balance at beginning of year Provision for credit losses (Note 21) Balance at end of year
Trade Receivables = P 6,330,875
Others = P 239,185,934
Total = P 245,516,809
– 2,127,309 (2,127,309) = P 6,330,875
(12,932,669) – – = P 226,253,265
(12,932,669) 2,127,309 (2,127,309) = P 232,584,140
2009 Others
Total
= P 29,523,507 209,662,427 = P 239,185,934
= P 35,854,382 209,662,427 = P 245,516,809
Trade Receivables = P 6,330,875 – = P 6,330,875
As of December 31, 2010 and 2009, the specific allowance for credit losses on trade receivables and other receivables amounted to P =6.3 million and P =226.3 million, and =6.3 million and P P =239.2 million, respectively. In 2010, the Group has written off receivables amounting to P =2.1 million. The provision for credit loss in 2009 relates to other receivables.
10. Expendable
Parts, Fuel, Materials and Supplies
This account consists of: At cost: Expendable parts Fuel Materials and supplies
2010
2009
= P 246,212,162 100,926,756 22,893,117 = P 370,032,035
= P 172,061,131 155,635,257 21,276,100 = P 348,972,488
The cost of expendable and consumable parts, and materials and supplies recognized as expense (included under ‘Repairs and maintenance’ account in the consolidated statement of comprehensive income) for years ended December 31, 2010, 2009 and 2008 amounted to =172.2 million, = P P 94.5 million and P =63.9 million, respectively. 11. Other
Current Assets
This account consists of: Prepaid rent Advances to suppliers Prepaid insurance Prepaid fuel tax Others
2010 = P 135,568,016 50,042,184 39,089,719 36,306,139 3,067,745 = P 264,073,803
2009 = P 127,689,069 141,523,959 42,014,640 23,456,483 6,454,765 = P 341,138,916
Prepaid rent pertains to advance rental on aircraft under operating lease and on office spaces in airports (Note 27).
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86
and Equipment
Engines
= P 667,265,547
= P 27,015,574,371 = P 1,110,493,473
= P 6,174,321 1,062,698 – – 7,237,019 3,407,186 940,470 – 4,347,656 = P 2,889,363
= P 54,222,266 10,402,157 – – 64,624,423 34,648,972 6,933,482 – 41,582,454 = P 23,041,969
Furniture, Fixtures and Office Communication Equipment Equipment
87,047,351 46,311,472 (1,802,621) 131,556,202
= P 645,242,966 249,857,038 – (96,278,255) 798,821,749
Rotables
500,303,926 95,647,460 (9,535,490) 586,415,896
5,608,304,763 1,802,923,773 (91,815,044) 7,319,413,492
= P 29,082,449,841 = P 1,861,014,616 4,617,905,673 – 1,480,356,826 – (845,724,477) (164,105,247) 34,334,987,863 1,696,909,369
Cost Balance at January 1, 2010 Additions Reclassification Disposals/others Balance at December 31, 2010 Accumulated Depreciation and Amortization Balance at January 1, 2010 Depreciation and amortization Disposals/others Balance at December 31, 2010 Net Book Value at December 31, 2010
Cost Balance at January 1, 2010 Additions Reclassification Disposals/others Balance at December 31, 2010 Accumulated Depreciation and Amortization Balance at January 1, 2010 Depreciation and amortization Disposals/others Balance at December 31, 2010 Net Book Value at December 31, 2010
Passenger Aircraft (Notes 16 and 28)
The composition and movements in this account follow:
12. Property
10,720,871 498,330 – 11,219,201 = P 1,171,379
= P 11,933,090 457,490 – – 12,390,580
Special Tools
= P 119,371,566
125,785,164 42,305,054 – 168,090,218
= P 226,290,672 61,171,112 – – 287,461,784
Ground Support Equipment
= P 113,392,832
306,959,766 60,803,986 – 367,763,752
= P 401,958,225 79,198,359 – – 481,156,584
EDP Equipment, Mainframe and Peripherals
5,596,765 124,379 – 5,721,144 = P 689,233
= P 5,697,385 712,992 – – 6,410,377
2010 Maintenance and Test Equipment
2010
Sub-total
29,327,430 9,744,465 – 39,071,895 = P 28,141,606
= P 59,654,657 7,558,844 – – 67,213,501
Other Equipment
= P 57,301,394
84,204,878 15,353,198 (29,514) 99,528,562
6,781,597,560 2,082,688,638 (116,588,571) 8,747,697,627
Total
– 6,865,298,784 – 2,100,929,764 – (116,588,571) – 8,849,639,977 = P 4,788,168,629 = P 33,985,701,079
= P 3,409,527,269 = P 36,020,470,174 3,027,480,866 8,069,677,765 (1,513,991,489) – (134,848,017) (1,254,806,883) 4,788,168,629 42,835,341,056
Construction In-progress
= P 58,199,717 = P 29,141,598,900
68,991,712 19,343,695 (13,405,902) 74,929,505
= P 123,328,105 = P 132,976,761 = P 32,473,261,186 – 13,870,536 5,022,002,718 33,634,663 – 1,513,991,489 (132,812) (13,718,075) (1,119,958,866) 156,829,956 133,129,222 37,889,296,527
Leasehold Transportation Improvements Equipment
= P 4,886,541 1,287,780 – – 6,174,321 2,590,665 816,521 – 3,407,186 = P 2,767,135
28,088,534 6,560,438 – 34,648,972 = P 19,573,294
Communication Equipment
= P 45,918,941 8,303,325 – – 54,222,266
Furniture, Fixtures and Office Equipment Special Tools
10,198,179 522,692 – 10,720,871 = P 1,212,219
261,769,001 45,190,765 – 306,959,766 = P 94,998,459
5,584,468 12,297 – 5,596,765 = P 100,620
= P 5,599,173 98,212 – – 5,697,385
Maintenance and Test Equipment
21,214,435 8,112,995 – 29,327,430 = P 30,327,227
= P 39,896,606 19,758,051 – – 59,654,657
Other Equipment
73,985,295 10,219,583 – 84,204,878 = P 39,123,227
= P 327,772,983 = P 110,312,277 74,185,242 – – 13,015,828 – – 401,958,225 123,328,105
Total
4,880,882,072 1,901,658,770 (943,282) 6,781,597,560 = P 25,691,663,626
= P 29,729,768,952 2,765,379,784 13,015,828 (34,903,378) 32,473,261,186
Sub-total
– 4,948,558,353 – 1,917,683,713 – (943,282) – 6,865,298,784 = P 3,409,527,269 = P 29,155,171,390
= P 2,800,329,434 = P 32,637,587,343 622,213,663 3,417,786,209 (13,015,828) – – (34,903,378) 3,409,527,269 36,020,470,174
Construction In-progress
54,125,739 14,865,973 – 68,991,712 = P 63,985,049
= P 84,131,582 48,845,179 – – 132,976,761
EDP Equipment, Mainframe and Leasehold Transportation Peripherals Improvements Equipment
2009
92,674,545 33,110,619 – 125,785,164 = P 100,505,508
= P 172,712,317 53,578,355 – – 226,290,672
Ground Support Equipment
= P 11,187,696 745,394 – – 11,933,090
53,823,013 34,167,620 (943,282) 87,047,351 = P 558,195,615
3,922,697,367 421,807,112 1,685,607,396 78,496,814 – – 5,608,304,763 500,303,926 = P 23,474,145,078 = P 1,360,710,690
Rotables = P 452,887,018 227,259,326 – (34,903,378) 645,242,966
Engines
= P 27,135,964,502 = P 1,445,988,273 1,946,485,339 415,026,343 – – – – 29,082,449,841 1,861,014,616
Cost Balance at January 1, 2009 Additions Reclassification Disposals/others Balance at December 31, 2009 Accumulated Depreciation and Amortization Balance at January 1, 2009 Depreciation and amortization Disposals Balance at December 31, 2009 Net Book Value at December 31, 2009
Cost Balance at January 1, 2009 Additions Reclassification Disposals/others Balance at December 31, 2009 Accumulated Depreciation and Amortization Balance at January 1, 2009 Depreciation and amortization Disposals Balance at December 31, 2009 Net Book Value at December 31, 2009
Passenger Aircraft (Note 16)
2009
Passenger Aircraft Held as Securing Assets Under Various Loans In 2005 and 2006, the Group entered into Export Credit Agency (ECA)-backed loan facilities (ECA loans) to partially finance the purchase of ten Airbus A319 aircraft. In 2007, the Group also entered into a commercial loan facility to partially finance the purchase of two Airbus A320 aircraft, one CFM 565B4/P engine, two CFM 565B5/P engines and one Quick Engine Change (QEC) Kit. In 2008, the Group entered into both ECA loans and commercial loans to partially finance the purchase of six Avion de Transport Regional (ATR) 72-500 turboprop aircraft. Then in 2009, ECA loans were availed to finance the purchase of two ATR 72-500 turboprop aircraft. In 2010, the Group entered into ECA loan to finance the purchase of three Airbus A320 aircraft. Under the terms of the ECA loan and the commercial loan facilities (Note 16), upon the event of default, the outstanding amount of loan (including accrued interest) will be payable by CALL or ILL or BLL or SLL or SALL, or by the guarantors which are CPAHI and JGSHI. Failure to pay the obligation will allow the respective lenders to foreclose the securing assets. As of December 31, 2010 and 2009, the carrying amounts of the securing assets (included under the ‘Property and equipment’ account) amounted to P =26.6 billion and P =23.6 billion, respectively. On July 18, 2010, one ATR 72-500 turboprop aircraft was damaged due to a hard landing at the Ninoy Aquino International Airport (NAIA). On November 30, 2010, the Group received insurance proceeds and terminated the related loan. Accordingly, rights over the aircraft went to the insurers. Operating Fleet As of December 31, 2010 and 2009, the Group’s operating fleet follows:
Owned (Note 16): Airbus A319 Airbus A320 ATR 72-500 Under operating lease (Note 27): Airbus A320
2010
2009
10 5 7
10 2 8
9 31
9 29
Construction in-progress represents the cost of aircraft and engine construction in progress and buildings and improvements and other ground property under construction. Construction in-progress is not depreciated until such time when the relevant assets are completed and available for use. As of December 31, 2010 and 2009, the Group’s capitalized pre-delivery payments as construction-in-progress amounted to P =4.8 billion and =3.4 billion, respectively. P As of December 31, 2010 and 2009, the gross amount of fully depreciated property and equipment which are still in use by the Group amounted to P =430.4 million and =345.0 million, respectively. P
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13. Investment
in Joint Ventures
This account represents the Group’s 49.00% and 35.00% interest in A-plus and SIAEP, respectively. These jointly controlled entities were established for the purpose of providing line, light and heavy maintenance services to foreign and local airlines, utilizing the facilities and services at airports in the country, as well as aircraft maintenance and repair organizations. A-plus was incorporated on May 24, 2005 and started commercial operations on July 1, 2005 while SIAEP was incorporated on July 27, 2008 and started commercial operations on August 17, 2009. The movements in the carrying values of the Group’s investments in A-plus and SIAEP follow:
Cost Accumulated Equity in Net Income (Loss) Balance at beginning of period Equity in net income (loss) for the period Dividends received Balance at end of period Net Carrying Value
Cost Balance at beginning of period Additions Balance at end of period Accumulated Equity in Net Income (Loss) Balance at beginning of period Equity in net income (loss) for the period Dividends received Balance at end of period Net Carrying Value
A-plus = P 87,012,572
2010 SIAEP = P 304,763,900
Total = P 391,776,472
21,590,662 30,485,667 (21,959,482) 30,116,847 = P 117,129,419
(47,011,448) (5,237,133) – (52,248,581) = P 252,515,319
(25,420,786) 25,248,534 (21,959,482) (22,131,734) = P 369,644,738
A-plus
2009 SIAEP
Total
= P 87,012,572 – 87,012,572
= P 270,950,400 33,813,500 304,763,900
= P 357,962,972 33,813,500 391,776,472
24,157,910 16,876,347 (19,443,595) 21,590,662 = P 108,603,234
(4,660,978) (42,350,470) – (47,011,448) = P 257,752,452
19,496,932 (25,474,123) (19,443,595) (25,420,786) = P 366,355,686
Selected financial information of A-plus and SIAEP follows:
Total current assets Total assets Total current liabilities Total liabilities Net income (loss)
2010 A-plus SIAEP = P 389,229,753 = P 198,601,718 440,003,102 827,498,709 199,744,327 136,071,974 199,744,327 136,071,974 62,215,647 (14,963,237)
2009 A-plus SIAEP = P 320,311,261 = P 180,571,520 395,640,695 824,131,114 163,605,255 79,651,426 172,079,904 79,651,426 34,441,525 (121,001,344)
The fiscal year-end of A-plus and SIAEP is every March 31. The undistributed earnings of A-plus included in the consolidated retained earnings amounted to P =30.1 million and P =21.6 million as of December 31, 2010 and 2009, respectively, which is not currently available for dividend distribution unless declared by A-plus. The Group has no share of any contingent liabilities or capital commitments as of December 31, 2010 and 2009. 89
14. Other
Noncurrent Assets
This account consists of:
Creditable withholding tax Refundable deposits Others
2010 = P 105,122,460 9,240,000 213,484,694 = P 327,847,154
2009 =106,718,423 P 9,240,000 131,790,499 =247,748,922 P
Refundable deposits pertain to security deposits provided to lessor for aircraft under operating lease. Others include option and commitment fees.
15. Accounts
Payable and Other Accrued Liabilities
This account consists of:
Accrued expenses Trade payables (Note 26) Airport and other related fees payable Advances from agents and others Accrued interest payable (Note 16) Other payables
2010 = P 2,756,352,038 1,995,958,241 435,286,079 159,557,017 118,666,608 132,666,336 = P 5,598,486,319
2009 =2,680,026,500 P 1,653,174,194 330,026,161 116,676,592 160,873,352 59,034,908 =4,999,811,707 P
Accrued Expenses The Groupâ&#x20AC;&#x2122;s accrued expenses include accruals for:
Maintenance Compensation and benefits Advertising and promotion Landing and take-off fees Training costs Ground handling charges Navigational charges Repairs and services Rent (Note 27) Fuel Aircraft insurance Catering supplies Reservation costs Others
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2010 = P 637,721,177 519,578,237 292,832,984 237,135,007 221,810,780 185,902,242 185,830,569 115,290,273 71,405,104 66,914,013 41,059,836 38,441,922 11,773,991 130,655,903 = P 2,756,352,038
2009 =867,799,823 P 189,958,024 189,072,676 255,145,076 147,092,481 174,394,466 156,160,771 213,394,866 59,030,433 120,563,391 40,622,537 38,819,586 12,087,036 215,885,334 =2,680,026,500 P
Others represent accrual of professional fees, security, utilities and other expenses. Trade Payables Trade payables, which consist mostly of payables related to the purchase of inventories, are non interest-bearing and are normally settled on a 60-day term. These inventories are necessary for the daily operations and maintenance of the aircraft, which include aviation fuel, expendables parts, equipment and in-flight supplies. Airport and Other Related Fees Payable Airport and other related fees payable are amounts payable to the Philippine Tourism Authority and Air Transportation Office on aviation security, terminal fees and travel taxes. Interest Payable Interest payable is related to long-term debt and normally settled quarterly throughout the year. Advances from Agents and Others Advances from agents and others represent cash bonds required from major sales and ticket offices or agents. Other Payables Other payables are non interest-bearing and have an average term of two months. This account includes commissions payable, refunds payable and other tax liabilities such as withholding taxes and output VAT.
16. Long-term
Debt
This account consists of: 2010
ECA loans
Interest Rates 3.37% to 5.83% 0.86% to 2.54% (US Dollar LIBOR 6 months + margin or 3 months + margin)
Commercial loans from foreign banks
4.11% to 5.67% 1.64% to 2.12% (US Dollar LIBOR 6 months + margin)
Less current portion
Maturities Various dates through 2022
Various dates through 2017
US Dollar US$242,476,310
Philippine Peso Equivalent = P 10,630,161,421
117,484,686 359,960,996
5,150,528,642 15,780,690,063
54,455,626
2,387,334,644
6,037,500 60,493,126 420,454,122 46,898,810 US$373,555,312
264,683,997 2,652,018,641 18,432,708,704 2,056,043,837 = P 16,376,664,867
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2009
ECA loans
Commercial loans from foreign banks
Interest Rates 3.37% to 5.83%
4.11% to 5.67% 4.75% to 5.25% (US Dollar LIBOR 6 months + margin)
Less current portion
Maturities Various dates through 2018 Various dates through 2017
US Dollar
Philippine Peso Equivalent
US$300,086,362
= P 13,863,989,944
61,266,782
2,830,525,329
8,995,919 70,262,701 370,349,063 40,319,559 US$330,029,504
415,611,458 3,246,136,787 17,110,126,731 1,862,763,608 = P 15,247,363,123
ECA Loans In 2005 and 2006, the Group entered into ECA-backed loan facilities to partially finance the purchase of ten Airbus A319 aircraft. The security trustee of the ECA loans established CALL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to twelve-year finance lease agreements. The quarterly rental payments made by the Parent Company to CALL correspond to the principal and interest payments made by CALL to the ECA-backed lenders. The quarterly lease rentals to CALL are guaranteed by CPAHI and JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases. In 2008, the Group entered into ECA-backed loan facilities to partially finance the purchase of six ATR 72-500 turboprop aircraft. The security trustee of the ECA loans established BLL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to ten-year finance lease agreements. The semiannual rental payments made by the Parent Company to BLL corresponds to the principal and interest payments made by BLL to the ECA-backed lenders. The semi-annual lease rentals to BLL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases. In 2009, the Group entered into ECA-backed loan facilities to fully finance the purchase of two ATR 72-500 turboprop aircraft. The security trustee of the ECA loans established SLL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to ten-year finance lease agreements. The semiannual rental payments made by the Parent Company to SLL corresponds to the principal and interest payments made by SLL to the ECA-backed lenders. The semi-annual lease rentals to SLL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases. In 2010, the Group entered into ECA-backed loan facilities to fully finance the purchase of three Airbus A320 aircraft. The security trustee of the ECA loans established SALL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to twelve-year finance lease agreements. The quarterly rental payments made by the Parent Company to SALL corresponds to the principal and interest payments made by SALL to the ECA-backed lenders. The quarterly lease rentals to SALL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases.
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The terms of the ECA-backed facilities, which are the same for each of the ten Airbus A319 aircraft, eight ATR 72-500 turboprop aircraft and three Airbus A320 aircraft, follow: • •
•
•
•
• •
Term of 12 years starting from the delivery date of each Airbus A319 aircraft and Airbus A320, and ten years for each ATR 72-500 turboprop aircraft. Annuity style principal repayments for the first four Airbus A319 aircraft, eight ATR 72-500 turboprop aircraft and three Airbus A320 aircraft, and equal principal repayments for the last six Airbus A319 aircraft. Principal repayments shall be made on a semi-annual basis for ATR 72-500 turboprop aircraft. Principal repayments shall be made on a quarterly basis for Airbus A319 and A320 aircraft. Interest on loans from the ECA lenders related to CALL and BLL shall be at fixed rates, which range from 3.78% to 5.83% in 2010, 2009 and 2008. Interest on loans from ECA lenders related to SLL shall be fixed at 3.37% for one aircraft and US dollar LIBOR 6 months plus margin for the other aircraft. Interest on loans from the ECA lenders related to SALL for the three Airbus A320 aircraft shall be US dollar LIBOR 3 months plus margin. As provided under the ECA-backed facility, CALL, BLL, SLL and SALL cannot create or allow to exist any security interest, other than what is permitted by the transaction documents or the ECA administrative parties. CALL, BLL, SLL and SALL must not allow impairment of first priority nature of the lenders’ security interests. The ECA-backed facilities also provide for the following events of default: (a) nonpayment of the loan principal or interest or any other amount payable on the due date, (b) breach of negative pledge, covenant on preservation of transaction documents, (c) misrepresentation, (d) commencement of insolvency proceedings against CALL or BLL or SLL or SALL or CALL or BLL or SLL or SALL becomes insolvent, (e) failure to discharge any attachment or sequestration order against CALL’s, BLL’s, SLL’s and SALL’s assets, (f) entering into an undervalued transaction, obtaining preference or giving preference to any person, contrary to the laws of the Cayman Islands, (g) sale of any aircraft under ECA financing prior to discharge date, (h) cessation of business, (i) revocation or repudiation by CALL or BLL or SLL or SALL, the Group, JGSHI or CPAHI of any transaction document or security interest, and (j) occurrence of an event of default under the lease agreement with the Parent Company. Upon default, the outstanding amount of loan will be payable, including interest accrued. Also, the ECA lenders will foreclose on secured assets, namely the aircraft. An event of default under any ECA loan agreement will occur if an event of default as enumerated above occurs under any other ECA loan agreement.
On November 30, 2010, the Parent Company pre-terminated the lease agreement with BLL. The outstanding balance of the related loans and accrued interests amounting to = P 638.1 million (US$14.5 million) and = P 13.0 million (US$0.3 million), respectively, were also pre-terminated. The proceeds from the insurance claim on the related aircraft were used to settle the loan and accrued interest. JGSHI was released as guarantor on the related loans. As of December 31, 2010 and 2009, the total outstanding balance of the ECA loans amounted to = P 15.8 billion (US$360.0 million) and = P 13.9 billion (US$300.1 million), respectively. Interest expense amounted to = P 623.4 million, = P 732.8 million and = P 614.6 million in 2010, 2009 and 2008, respectively.
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Commercial Loans from Foreign Banks In 2007, the Group entered into a commercial loan facility to partially finance the purchase of two Airbus A320 aircraft, one CFM 565B4/P engine, two CFM 565B5/P engines and one QEC Kit. The security trustee of the commercial loan facility established ILL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to (a) ten-year finance lease arrangement for the aircraft, (b) six-year finance lease arrangement for the engines and (c) five-year finance lease arrangement for the QEC Kit. The quarterly rental payments of the Parent Company correspond to the principal and interest payments made by ILL to the commercial lenders and are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft, the engines and the QEC Kit for a nominal amount at the end of such leases. In 2008, the Group also entered into a commercial loan facility, in addition to ECA-backed loan facility, to partially finance the purchase of six ATR 72-500 turboprop aircraft. The security trustee of the commercial loan facility established BLL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company. The commercial loan facility is payable in 12 equal, consecutive, semi-annual installments starting six months after the utilization date. The terms of the commercial loans from foreign banks follow: • • • •
•
• • •
Term of ten years starting from the delivery date of each Airbus A320 aircraft. Terms of six and five years for the engines and QEC Kit, respectively. Term of six years starting from the delivery date of each ATR 72-500 turboprop aircraft. Annuity style principal repayments for the two Airbus A320 aircraft and six ATR 72-500 turboprop aircraft, and equal principal repayments for the engines and the QEC Kit. Principal repayments shall be made on a quarterly and semi-annual basis for the two Airbus A320 aircraft, engines and the QEC Kit and six ATR 72-500 turboprop aircraft, respectively. Interest on the commercial loan facility for the two Airbus A320 aircraft shall be US dollar LIBOR 3 months plus margin. On February 29, 2009, the interest rates on the two Airbus A320 aircraft, engines and QEC Kit were fixed ranging from 4.11% to 5.67%. Interest on the commercial loan facility for the six ATR 72-500 turboprop aircraft shall be US dollar LIBOR 6 months plus margin. The commercial loan facility provides for material breach as an event of default. Upon default, the outstanding amount of loan will be payable, including interest accrued. The lenders will foreclose on secured assets, namely the aircraft.
As of December 31, 2010 and 2009, the total outstanding balance of the commercial loans from foreign banks amounted to P =2.7 billion (US$60.5 million) and P =3.2 billion (US$70.3 million), respectively. Interest expense amounted to P =137.7 million, P =173.1 million and P =157.8 million in 2010, 2009 and 2008, respectively.
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17. Other
Noncurrent Liabilities
This account consists of: 2010 = P 2,070,145,159 923,451,428 210,156,100 = P 3,203,752,687
ARO Accrued maintenance Pension liability (Note 22)
2009 =1,194,091,048 P 910,665,374 172,317,200 =2,277,073,622 P
ARO The Group is legally required under certain lease contracts to restore certain leased passenger aircraft to stipulated return conditions and to bear the costs of restoration at the end of the contract period. These costs are accrued based on an internal estimate made by the work of both third party and the Group’s engineers in 2007, which includes estimates of certain redelivery costs at the end of the operating aircraft lease (see Note 3). In 2010, the Group employed third party professionals to reevaluate the Group’s estimates on ARO. In relation to this, the Group recorded additional ARO asset and liability amounting to P =705.7 million. The rollforward analysis of the Group’s ARO follows:
Balance at beginning of year Additional provision for the year* Accretion expense** Capitalized during the year*** Payment of restorations during the year Balance at end of year
2010 = P 1,194,091,048 705,651,245 170,402,866 – – = P 2,070,145,159
2009 =1,258,139,119 P – 106,955,190 211,006,826 (382,010,087) =1,194,091,048 P
*Related to the change in accounting estimates for the recognized ARO liability **Included under interest expense account in the consolidated statements of comprehensive income ***Related to recognized ARO liability for two additional Airbus A320 aircraft under operating lease agreements entered in 2009
Accrued Maintenance This account pertains to accrual of maintenance costs of aircraft based on the number of flying hours but will be settled beyond one year based on management’s assessment.
18. Equity The details of the Parent Company’s common stock follow:
Beginning of year Issuance of stock dividends Issuance of shares during the year End of year
2010 = P 582,574,750 –
2009 =582,574,750 P –
2008 =335,000,000 P 112,000,000
30,661,800 = P 613,236,550
– =582,574,750 P
135,574,750 =582,574,750 P
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The Parent Company has 1.34 billion authorized shares at = P 1.00 par value per share. As of December 31, 2010 and 2009, all of the Parent Company’s issued common stocks are outstanding. Capital Management The primary objective of the Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximize shareholder value. The Group manages its capital structure, which composed of paid up capital and retained earnings, and makes adjustments to these ratios in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital structure or issue capital securities. No changes have been made in the objective, policies and processes as they have been applied in previous years. The Group’s debt-to-capital ratios follow:
(a) Long term debt (Note 16) (b) Capital (c) Debt-to-capital ratio (a/b)
2010 = P 18,432,708,704 17,907,049,902 1.0:1
2009 =17,110,126,731 P 7,254,961,854 2.4:1
The JGSHI Group’s policy is to keep the debt to capital ratio at the 2:1 level as of December 31, 2010 and 2009. Such ratio is currently being managed on a group level by the Group’s ultimate parent. Appropriation of Retained Earnings On May 21, 2007, the Parent Company’s BOD appropriated P =300.0 million from its unrestricted retained earnings as of December 31, 2006 for purposes of the Parent Company’s re-fleeting program. The BOD approved further the appropriation of =2.7 billion from its unrestricted retained earnings as of December 31, 2007. The P appropriation will be used for purposes of the Group’s re-fleeting and expansion programs, and settlement of certain maturing loans. On March 4, 2008, the Parent Company’s BOD approved the additional appropriation of =1.0 billion from its unrestricted retained earnings as of December 31, 2007 for the same P purpose. Subsequently on September 22, 2008, the Parent Company’s BOD and stockholders approved the reversal of the total appropriated retained earnings of P =4.0 billion and such amount was made part of the unrestricted retained earnings. Issuance of Common Shares of Stock On October 26, 2010, the Parent Company listed with the PSE its common stock, wherein it offered 212,419,700 shares to the public at P =125.00 per share. Of the total shares sold, 30,661,800 shares are newly issued shares with total proceeds amounting to P =3.8 billion. The Parent Company incurred transaction costs incidental to the IPO amounting to =100.4 million, which is charged against ‘Capital paid in excess of par value’ in the P consolidated statement of financial position.
96
19. Ancillary
Revenue
Ancillary revenue consists of:
Excess baggage fees Rebooking, refunds and cancellation fees Others
2010
2009
2008
= P 778,395,570
= P 733,642,196
= P 465,318,108
423,397,044 1,135,315,885
690,763,508 697,841,275
344,043,895 429,857,087
= P 2,337,108,499
= P 2,122,246,979
= P 1,239,219,090
Others pertain to revenues from in-flight sales and services provided through reservation system such as advance seat selection, website administration as well as commissions.
20. Operating
Expenses
Flying Operations Flying operations consists of:
Aviation fuel expense Flight deck Aircraft insurance Others
2010 = P 9,807,825,079 1,365,724,876 152,573,085 91,365,472
2009 = P 7,360,258,422 1,171,174,972 146,903,306 178,678,223
2008 = P 8,502,271,999 877,482,118 123,828,503 104,123,356
= P 11,417,488,512
= P 8,857,014,923
= P 9,607,705,976
Aircraft and Traffic Servicing Aircraft and traffic servicing consists of:
Airport charges Ground handling Others
2010 = P 1,405,341,791 758,912,700 297,552,706 = P 2,461,807,197
2009 = P 1,625,449,978 768,108,059 238,275,212 = P 2,631,833,249
2008 = P 1,159,209,189 583,514,333 204,186,956 = P 1,946,910,478
Repairs and maintenance Repairs and maintenance expenses relate to the cost of maintaining, repairing and overhauling of all aircraft and engines, technical handling fees on pre-flight inspections and cost of aircraft spare parts and other related equipment.
21. General
and Administrative Expenses
This account consists of staff-related expenses, provision for credit losses on receivables (Note 9), travel and transportation, rent, non-aircraft repairs and maintenance, utilities and insurance.
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22. Employee
Benefits
Employee Benefit Cost Total personnel expenses, consisting of salaries, expense related to defined benefit plans and other employee benefits, are included in flying operations, aircraft traffic and servicing, repairs and maintenance, reservation and sales, general and administrative, and passenger service. Defined Benefit Plan The Parent Company has an unfunded, noncontributory, defined benefit plan covering substantially all of its regular employees. The benefits are based on years of service and compensation on the last year of employment. As of January 1, 2010, 2009 and 2008, the assumptions used to determine pension benefits of the Parent Company follow:
Average remaining working life Discount rate Salary rate increase
2010 10 years 9.93% 5.50%
2009 9 years 13.49% 5.50%
2008 9 years 10.22% 7.00%
As of December 31, 2010, 2009 and 2008, the discount rate used in determining the pension liability is 8.65%, 9.93% and 13.49%, which is determined by reference to market yields at the statement of financial position date on Philippine government bonds. The amounts recognized as pension liability (included under â&#x20AC;&#x2DC;Other noncurrent liabilitiesâ&#x20AC;&#x2122; account in the consolidated statements of financial position) follow (Note 17):
Present value of defined benefit obligation (PVO) Unrecognized actuarial gain (loss) Pension liability at end of year
2010
2009
= P 230,193,900 (20,037,800) = P 210,156,100
=160,237,500 P 12,079,700 =172,317,200 P
Movements in unrecognized actuarial gain (loss) follow:
Balance at beginning of year Amortization of actuarial gain Actuarial loss due to PVO Balance at end of year
2010 = P 12,079,700 â&#x20AC;&#x201C; (32,117,500) (P =20,037,800)
2009 =62,577,400 P (5,937,300) (44,560,400) =12,079,700 P
Movements in the defined benefit liability follow:
Balance at beginning of year Pension expense during year Benefits paid during year Balance at end of year
98
2010 = P 172,317,200 40,229,800 (2,390,900) = P 210,156,100
2009 =153,990,700 P 19,261,800 (935,300) =172,317,200 P
Components of pension expense included in the consolidated statements of comprehensive income follow:
Current service cost Interest cost Past service cost Amortization of actuarial gain Total pension expense
2009 =12,867,400 P 12,331,700 – (5,937,300) =19,261,800 P
2010 = P 24,318,200 15,911,600 – – = P 40,229,800
2008 =14,592,600 P 10,337,000 12,384,600 (672,500) =36,641,700 P
Changes in the present value of the defined benefit obligation follow: 2009 =91,413,300 P 12,867,400 12,331,700 (935,300) 44,560,400 =160,237,500 P
2010 = P 160,237,500 24,318,200 15,911,600 (2,390,900) 32,117,500 = P 230,193,900
Balance at beginning of year Current service cost Interest cost Benefits paid Actuarial loss Balance at end of year
Amounts for the current and previous periods follow: 2010 Present value of retirement obligation Experience adjustments – (gain)/loss
23. Other
2009
= P 230,193,900 = P 160,237,500
(1,435,700)
1,445,500
2008
2007
2006
= P 91,413,300 = P 101,178,300
= P 124,264,500
1,199,000
(10,200,000)
(13,402,800)
Expenses
This account consists mainly of bank charges.
24. Income
Taxes
Provision for (benefit from) income tax consists of:
Current: MCIT Deferred
2010
2009
2008
= P 1,595,963 16,163,724 = P 17,759,687
=4,585,763 P (24,087,446) (P =19,501,683)
=– P 77,321,481 =77,321,481 P
Provision for income tax pertains to RCIT or minimum corporate income tax (MCIT) and deferred income tax. Income taxes include corporate income tax, as discussed below, and final taxes paid at the rate of 20.00% and 7.50% on peso-denominated and foreign currency-denominated shortterm placements and cash in banks, respectively, which are final withholding taxes on gross interest income.
99
Effective November 1, 2005, RA No. 9337, an act amending the National Internal Revenue Code (NIRC of 1997), provides that the RCIT rate shall be 35.00% until January 1, 2009. Starting January 1, 2009 the RCIT rate shall be 30.00%. Interest allowed as a deductible expense is reduced by an amount equivalent to 42.00% of interest income subjected to final tax starting November 1, 2005 until December 31, 2008. Starting January 1, 2009, interest allowed as deductible expense shall be reduced by 33.00% of interest income subjected to final tax. The NIRC of 1997 also provides for rules on the imposition of a 2.00% MCIT on the gross income as of the end of the taxable year beginning on the fourth taxable year immediately following the taxable year in which the Parent Company commenced its business operations. Any excess MCIT over the RCIT can be carried forward on an annual basis and credited against the RCIT for the three immediately succeeding taxable years. In addition, the NIRC of 1997 allows the Parent Company to deduct from its taxable income for the current year its accumulated net operating losses carried over (NOLCO) from the immediately preceding three consecutive taxable years. Details of the Parent Company’s NOLCO and MCIT are as follows: NOLCO Year Incurred 2008 2009 2010
Amount =81,434,888 P 79,186,012 533,255,953 =693,876,853 P
Expired =– P – – =– P
Balance =81,434,888 P 79,186,012 533,255,953 =693,876,853 P
Expiry Year 2011 2012 2013
Amount =4,585,763 P 1,595,963 =6,181,726 P
Expired =– P – =– P
Balance =4,585,763 P 1,595,963 =6,181,726 P
Expiry Year 2012 2013
MCIT Year Incurred 2009 2010
The Parent Company has the following registrations with the BOI as a new operator of air transport on a non-pioneer status under the Omnibus Investments Code of 1987 (Executive Order 226):
Batch First Second Third
Date of Registration December 14, 2005 June 4, 2008 November 3,2010
Registration Number 2005-213 2008-119 2010-180
ITH Period 2007-2010 2010-2013 2011-2016
Number of Aircraft 20 8 3 31
On the above registrations, the Parent Company can avail of bonus years in certain specified cases but the aggregate ITH availment (basic and bonus years) shall not exceed eight years.
100
As of December 31, 2010, the Parent Company has complied with externally imposed capital requirements set by the BOI in order to avail the ITH incentives for the first and second batch aircraft of registered activity (Note 1). The components of the Group’s deferred tax assets and liabilities follow:
Deferred tax assets on: ARO - liability NOLCO Allowance for impairment losses on receivables Unrealized foreign exchange loss Accrued retirement costs MCIT Unrealized loss on AFS investment* Deferred tax liabilities on: Unrealized foreign exchange gain ARO - asset Double depreciation Unrealized gain on derivative asset Unrealized gain on financial assets designated at FVPL Net deferred tax liabilities
2010
2009
= P 621,043,542 208,163,056
=358,227,314 P 48,186,270
69,775,242 56,819,216 63,046,830 6,181,726 1,163,530 1,026,193,142
73,655,043
536,349,550
586,658,102 248,190,060 194,506,665 117,679,009
369,252,479 110,720,283 194,506,665 –
32,289,377 1,179,323,213 = P 153,130,071
– 674,479,427 =138,129,877 P
–
51,695,160 4,585,763 –
* Movement under other comprehensive income (loss)
The Group’s recognized deferred tax assets and deferred tax liabilities are expected to be reversed more than twelve months after the statement of financial position date. The Group has the following gross deductible and taxable temporary differences which are expected to reverse within the ITH period, and for which deferred tax assets and deferred tax liabilities, respectively, were not set up on account of the Parent Company’s ITH.
Deductible temporary differences: Accrued expenses Taxable temporary differences: ARO - asset Derivative asset Foreign exchange gain - net
2010
2009
= P 297,646,860
=24,081,919 P
= P 307,286,348 97,654,104 – = P 404,940,452
294,671,234 227,794,364 209,902,587 =732,368,185 P
101
A reconciliation of the statutory income tax rate to the effective income tax rate follows: Statutory income tax rate Adjustments resulting from: Income subject to ITH Interest income subjected to final tax Unrecognized deferred tax assets and liabilities Nondeductible items Equity in net (income ) loss of JV Effect of change in income tax rates Effective income tax rate
2010 30.00%
2009 30.00%
2008 35.00%
(29.71) (0.49)
(27.33) (0.08)
5.03 0.01
0.41 0.16 (0.11) â&#x20AC;&#x201C; 0.26%
(3.46) 0.03 0.24 â&#x20AC;&#x201C; (0.60%)
(37.62) â&#x20AC;&#x201C; 0.15 (5.00) (2.43%)
Entertainment, Amusement and Recreation (EAR) Expenses Current tax regulations define expenses to be classified as EAR expenses and set a limit for the amount that is deductible for tax purposes. EAR expenses are limited to 0.50% of net sales for sellers of goods or properties or 1.00% of net revenue for sellers of services. For sellers of both goods or properties and services, an apportionment formula is used in determining the ceiling on such expenses. The Parent Company recognized EAR expenses (allocated under different expense accounts in the consolidated statements of comprehensive income) amounting to P =4.8 million, P =12.7 million, and P =10.7 million in 2010, 2009 and 2008, respectively.
25. Earnings
Per Share
The following reflects the income and share data used in the basic/dilutive EPS computations: 2010 (a) Net income (loss) attributable to common shareholders (b) Weighted average number of common shares for basic EPS (c) Basic/diluted earnings (loss) per share
= P 6,922,493,280
2009
2008
= P 3,257,848,705 (P =3,259,888,005)
587,685,050
582,574,750
= P 11.78
= P 5.59
458,297,986 (P =7.11)
The Group has no dilutive potential common shares in 2010, 2009 and 2008.
26. Related
Party Transactions
The Group has entered into transactions with its ultimate parent, its JV and affiliates principally consisting of advances, sale of passenger tickets, reimbursement of expenses, regular banking transactions, maintenance and administrative service agreements. In addition to the related information disclosed elsewhere in the financial statements, the following are the year-end balances in respect of transactions with related parties, which were carried out in the normal course of business on terms agreed with related parties during the year.
102
The significant transactions and outstanding balances of the Group with the related parties follow. Consolidated Statement of Financial Position Cash and Cash Equivalents
Due from Related Parties
Due to Related Trade Parties Receivables
December 31, 2010
= P–
= P–
= P 350,000
= P–
= P–
December 31, 2009
–
–
42,357,610
–
= P 6,200
December 31, 2010
–
58,814,274
–
–
–
December 31, 2009
–
900,670
–
–
–
December 31, 2010
–
26,929,793
–
–
71,153,167
December 31, 2009
–
35,416,334
–
–
11,647,754
December 31, 2010
–
832,407
–
–
–
December 31, 2009
–
4,072,597
–
–
–
December 31, 2010
4,552,678,192
–
858,368
5,631
150,859
December 31, 2009
225,301,492
–
563,510
48,544
511,746
December 31, 2010
–
–
33,709,732
2,183,937
6,241,941
December 31, 2009
–
–
30,666,495
1,809,752
2,157,837
Digitel Telecommunication December 31, 2010
Trade Payables
Ultimate parent company JGSHI
CPAHI
JV in which the Parent Company is a venturer A-plus
SIAEP
Other related parties Robinsons Savings Bank (RSB) Universal Robina Corporation (URC)
(DIGITEL) Robinsons Land Corporation (RLC) Summit Publishing, Inc. (SPI) JG Petrochemical Corporation (JGPC) Robinsons Inc.
Unicon Insurance Brokers
Total
–
–
–
1,671,261
–
December 31, 2009
–
–
–
1,964,812
241,740
December 31, 2010
–
–
–
281,841
21,113
December 31, 2009
–
–
129,142
314,339
315,858
December 31, 2010
–
–
–
855,930
–
December 31, 2009
–
–
–
630,178
–
December 31, 2010
–
–
–
263,484
–
December 31, 2009
–
–
–
3,396
–
December 31, 2010
–
–
611,204
1,131,598
3,677,235
December 31, 2009
–
–
–
500,914
–
December 31, 2010
–
–
–
–
3,512
December 31, 2009
–
–
–
–
–
= P 86,576,474 = P 35,529,304 = P 6,393,682
= P 81,247,827
December 31, 2010 = P 4,552,678,192 December 31, 2009
= P 225,301,492
= P 40,389,601
= P 73,716,757
= P 5,271,935
= P 14,881,135
103
Consolidated Statement of Comprehensive Income Year
Sale of Air Transportation Service
Interest Income
Repairs and Maintenance
2010 2009 2008
= P– – –
= P– – –
= P 259,226,381 260,736,827 178,272,202
2010 2009 2008
263,606 – –
– – –
– 4,053,972 –
2010 2009 2008
715,413 692,339 –
28,960,516 240,915 10,890
– – –
URC
2010 2009 2008
23,185,728 21,576,590 17,997,037
– – –
– – –
DIGITEL
2010 2009 2008
15,921,059 11,499,788 10,196,168
– – –
– – –
RLC
2010 2009 2008
6,035,538 7,723,286 2,566,877
– – –
– – –
SPI
2010 2009 2008
2,484,213 2,026,424 841,467
– – –
– – –
JGPC
2010 2009 2008
830,006 40,398 146,366
– – –
– – –
Robinsons Inc.
2010 2009 2008
11,592,290 – –
– – –
– – –
Total
2010 2009 2008
= P 61,027,853 = P 43,558,825 = P 31,747,915
= P 28,960,516 = P 240,915 = P 10,890
= P 259,226,381 = P 264,790,799 = P 178,272,202
JV in which the Parent Company is a venturer A-plus
SIAEP
Other related parties RSB
*Other related parties pertain to entities which are subsidiaries of JGSHI and therefore, entities under common control.
There are no impairment losses recorded against outstanding balances with related parties as of December 31, 2010, 2009 and 2008. Also, these transactions are unsecured, interestfree and short-term in nature.
104
The Group’s significant transactions with related parties follow: 1. In 2010 and 2009, the Group provides non interest-bearing advances to JGSHI recorded as ‘Due from related parties’. In 2010, total advances made to JGSHI amounted to =3.7 billion, which was settled on June 30, 2010 by assigning debt and equity securities P amounting to P =3.7 billion (Note 28). In 2009, total advances made to JGSHI amounted to P =1.8 billion, which were settled in the same year. 2. Expenses advanced by the Group on behalf of CPAHI. The said expenses are subject to reimbursement and are recorded under ‘Receivables’ in the consolidated statements of financial position. 3. The Group entered into a Shared Services Agreement with A-plus. Under the aforementioned agreement, the Group will render certain administrative services to A-plus which include payroll processing and certain information technology-related functions. The Group also entered into a Ground Support Equipment (GSE) Maintenance Services Agreement with A-plus. Under the GSE Maintenance Services Agreement, the Group shall render routine preventive maintenance services on certain ground support equipment used by A-plus in providing technical GSE to airline operators in major airports in the Philippines. The Group also performs repair or rectification of deficiencies noted and supply replacement components. 4. For the aircraft maintenance program, the Group engaged SIAEC to render line maintenance, light aircraft checks and technical ramp handling services at various domestic and international airports which were performed by A-plus, and to maintain and provide aircraft heavy maintenance services which was performed by SIAEP. Cost of services are recorded as ‘Repairs and maintenance’ in the consolidated statements of comprehensive income and any unpaid amount as of statement of financial position date as trade payable under ‘Accounts payable and other accrued liabilities’. 5. The Group maintains deposit accounts and short-term investments with RSB which is reported as ‘Cash and cash equivalents’. The Group also incurs liabilities to RSB for loan payments of its employees and to URC primarily for the rendering of payroll service to the Group which are recorded as ‘Due to related parties’. 6. The Group provides air transportation services to certain related parties, for which unpaid amounts are recorded as trade receivables under ‘Receivables’ in the consolidated statements of financial position. The Group also purchases goods from URC for in-flight sales and recorded as trade payable, if unpaid, in the consolidated statements of financial position. The compensation of the Group’s key management personnel by benefit type follows:
Short-term employee benefits Post-employment benefits
2010
2009
2008
= P 118,221,095
= P 92,213,212
= P 84,568,078
1,528,853
3,404,135
259,203
= P 119,749,948
= P 95,617,347
= P 84,827,281
There are no agreements between the Group and any of its directors and key officers providing for benefits upon termination of employment, except for such benefits to which they may be entitled under the Group’s pension plans.
105
27. Commitments
and Contingencies
Operating Aircraft Lease Commitments The Group entered into operating lease agreements with certain leasing companies which cover the following aircraft: A320 aircraft The following table summarizes the specific lease agreements on nine Airbus A320 aircraft: Date of Lease Agreement
Original Lessors
December 23, 2004 CIT Aerospace International (CITAI)
New Lessors Wilmington Trust SP Services (Dublin) Limited*
No. of Units
Lease Term
2
May 2005 - May 2012 June 2005 - June 2012
April 23, 2007
Celestial Aviation Trading Inishcrean Leasing 17 Limited (CAT 17) Limited (Inishcrean)**
1
October 2007 – October 2016
May 29, 2007
CITAI
4
March 2008 - March 2014 April 2008 - April 2014 May 2008 - May 2014 October 2008 – October 2014
March 14, 2008
Celestial Aviation Trading GY Aviation Lease 19 Limited (CAT 19) 0905 Co. Limited***
2
January 2009 – January 2017
–
* Effective November 21, 2008 for the first aircraft and December 9, 2008 for the second aircraft. ** Effective June 24, 2009. *** Effective March 25, 2010.
On March 14, 2008, the Group entered into an operating lease agreement with CAT 19 for the lease of two Airbus A320 aircraft, which were delivered in 2009. On the same date, the Group also entered into another lease agreement with Celestial Aviation Trading 23 Limited (CAT 23) for the lease of two additional Airbus A320 aircraft to be received in 2012. In November 2010, the Group signed an amendment to the operating lease agreements with CAT 23, advancing the delivery of the two Airbus A320 aircraft from 2012 to 2011. Lease agreements with CITAI, CAT 17 and CAT 19 were amended to effect the novation of lease rights by the original lessors to new lessors as allowed under the existing lease agreements. Boeing 757 aircraft On August 22, 2001, the Group entered into aircraft operating lease agreements with PALSI, Inc. (PALSI) and Pegasus Aviation IV, Inc. (Pegasus) for the lease of one B757-236 aircraft from each company. The respective lease terms are for a period of seven years. The delivery dates of the aircraft which were leased from Pegasus and PALSI were December 13, 2001 and February 18, 2002, respectively. The lease agreements expired on December 13, 2008 and February 18, 2009, and the two aircraft were returned to the lessors in June and October 2009. Under the aforementioned aircraft lease agreements, the Group paid PALSI and Pegasus monthly maintenance expenses based on billing statements (included in ‘Accounts payable and other accrued liabilities’ account in the consolidated statements of financial position) throughout the lease term.
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On March 18, 2006, the Group entered into a sub-lease agreement with Air Slovakia for the sub-lease of the two B757-236 aircraft which were leased from PALSI and Pegasus. The sublease agreements were for a period of two years, which expired on February 18, 2009 and December 13, 2008. Rent income earned (included in the consolidated statements of comprehensive income) under the aforementioned sub-lease agreement amounted to =131.7 million and P P =204.3 million in 2009 and 2008, respectively. Future minimum lease payments under the above-indicated operating aircraft leases follow: 2010
Within one year After one year but not more than five years Over five years
2009
2008
US dollar
Philippine peso equivalent
US dollar
Philippine peso equivalent
US$37,805,531
= P 1,657,394,460
US$33,749,946
= P 1,559,247,483
113,948,252 8,408,350
4,995,491,378 368,622,089
118,485,725 25,541,362
5,474,040,499 1,180,010,948
US$160,162,133
= P 7,021,507,927
US$177,777,033
US dollar
Philippine peso equivalent
US$27,900,136 = P 1,325,814,463
97,286,394 35,857,829
4,623,049,443 1,703,964,034
= P 8,213,298,930 US$161,044,359 = P 7,652,827,940
Lease expenses relating to aircraft leases (included in â&#x20AC;&#x2DC;Aircraft and engine leaseâ&#x20AC;&#x2122; account in the consolidated statements of comprehensive income) amounted to P =1.6 billion, =1.7 billion and P P =1.1 billion in 2010, 2009 and 2008, respectively. Operating Non-Aircraft Lease Commitments The Group has entered into various lease agreements for its hangar, office spaces, ticketing stations and certain equipment. These leases have remaining lease terms ranging from one to ten years. Certain leases include a clause to enable upward revision of the annual rental charge ranging from 5.00% to 10.00%. Future minimum lease payments under these noncancellable operating leases follow: 2010
2009
2008
= P 101,622,518
=92,283,350 P
=76,145,138 P
After one year but not more than five years
443,485,392
406,896,291
432,109,782
Over five years
124,367,033
230,752,642
280,466,642
= P 669,474,943
=729,932,283 P
=788,721,562 P
Within one year
Lease expenses relating to both cancellable and non-cancellable non-aircraft leases (allocated under different expense accounts in the consolidated statements of comprehensive income) amounted to P =231.2 million, P =239.7 million and P =149.2 million in 2010, 2009 and 2008, respectively. Aircraft and Spare Engine Purchase Commitments As of December 31, 2009, the Group has existing commitments to purchase 15 additional new Airbus A320 aircraft, which are scheduled for delivery between 2010 and 2014, and one spare engine to be delivered in 2011. In 2010, the Group exercised its option to purchase five Airbus A320 aircraft and entered into a new commitment to purchase two Airbus A320 aircraft to be delivered between 2011 and 2014. As of December 31, 2010, the Group has existing commitments to purchase 22 new Airbus A320 aircraft, three of which were delivered on October 28, December 10 and December 22, 2010, respectively. The remaining
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19 Airbus A320 aircraft are scheduled to be delivered between 2011 and 2014, and one spare engine is to be delivered in 2011. Also in 2007, the Group has a commitment to purchase six ATR 72-500 turboprop aircraft and has exercised an option to purchase additional four ATR 72-500 turboprop aircraft. These turboprop aircraft will cater to destinations in the country’s smaller airports. The Group has taken delivery of the initial six aircraft in 2008 and the remaining two were received during the first quarter of 2009. One ATR 72-500 turboprop aircraft is scheduled for delivery in March 2011. The Group terminated the purchase commitment for one ATR 72-500 turboprop aircraft. The above-indicated commitments relate to the Group’s re-fleeting and expansion programs. Capital Expenditure Commitments The Group’s capital expenditure commitments relate principally to the acquisition of aircraft fleet, aggregating to P =31.5 billion as of December 31, 2010.
Within one year After one year but not more than five years
December 31, 2010 Philippine peso US dollar equivalent US$153,097,113 = P 6,711,777,434 565,169,279 24,777,021,191 US$718,266,392 = P 31,488,798,625
Contingencies The Group has pending suits and claims for sums of money against certain general sales agents which are either pending decision by the courts or being contested, the outcome of which are not presently determinable. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the defense in these matters and is based upon an analysis of potential results. The Group currently does not believe that these proceedings will have a material adverse effect on the Group’s financial position and results of operations. The Parent Company has a pending tax preassessment, the outcome of which is not presently determinable.
28. Supplemental
Disclosures to the Consolidated Statements of Cash Flows
The principal noncash activities of the Group were as follows: a. On June 30, 2010, JGSHI settled its payable to the Group through transfer of quoted debt and equity securities amounting to P =3.7 billion and accrued interest receivable amounting to P =71.4 million. The transfer price was at fair value. These investments are classified by the Group as designated financial assets at FVPL and AFS investments amounting to P =3.5 billion and P =118.4 million, respectively (Notes 8 and 26). b. On February 28, 2010, the Group sold an engine for P =89.5 million with a book value of
=72.2 million to a third party maintenance service provider (buyer). The transaction was P settled through direct offset against the Group’s US-dollar denominated liability to the buyer amounting to P =88.3 million.
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c. On December 31, 2010, the Group recognized a liability based on the schedule of predelivery payments amounting to P =286.0 million with a corresponding debit to ‘Construction-in progress’ account. The liability was paid on January 3, 2011. d. In 2010, the additions in ‘Passenger aircraft’ account include increase in ARO asset amounting to P =705.7 million due to change in accounting estimates. In 2009, the additions in ‘Passenger aircraft’ account include capitalized ARO asset related to new operating lease agreements amounting to P =211.0 million (Note 17). The above capitalized ARO asset has corresponding recognition of ARO liability with the same amount. e. In 2010, the Group acquired three passenger aircraft by assuming direct liabilities (Notes 12 and 16). This transaction is considered as a non-cash financing activity. Presentation of cash flows from financing activities Beginning 2010, cash flows arising from financing activities with related parties are reported on a net basis since turnover for cash receipts and payments for these items is quick, the amounts are large, and the maturities are short. The 2009 and 2008 cash flows presentation have been aligned with the 2010 cash flows presentation.
29. Events
After the Statement of Financial Position Date
From January 1, 2011 up to March 17, 2011, a total of 5,554,280 common shares of the Parent Company were acquired by JGSHI. On February 28, 2011, the BOD of the Parent Company approved the creation and implementation of a share buyback program (SBP). The SBP will involve up to P =2.0 billion worth of the Parent Company’s common share. The SBP shall commence upon approval and shall end upon utilization of the said amount, or as may be otherwise determined by the BOD. On March 7, 2011, the Group received one ATR 72-500 turboprop aircraft. On March 17, 2011, the BOD of the Parent Company approved the declaration of a regular cash dividend in the amount of P =2.00 per share and a special cash dividend in the amount of =1.00 per share from the unrestricted retained earnings of the Parent Company to all P stockholders of record as of April 14, 2011 and payable on May 12, 2011.
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ticket and international sales offices Metro Manila Access Universe #24 Bohol Avenue South Triangle, Quezon City Tel: (02) 928-8911 to 12 / (02) 924-1348 Express Ticket Office Terminal 1, Manila Domestic Airport, Pasay City Hours: 4:00 AM - 8:00 PM, Daily Hankook Air Services, Inc. 101, The Le Domaine Condo, 104 Tordesillas St Salcedo Village Makati Tel# 8940086 Robinson’s Galleria West Lane, Level 1, Ortigas Ave. Pasig City Hours: 10:00 AM - 9:00 PM, Daily Robinsons Place Manila Beside Adriatico Entrance (in front of Malate-Adriatico Grand Residences) Hours: 7:00 AM - 9:00 PM, Daily Samonette Philippines, Inc 2859 Danlig St Pinagkaisahan Makati City Tel: 8820159 / Fax# 8820156 Summit World Manila Level 5, SM Megamall Mandaluyong City Tel: (02) 631-2277 / 6350775 Supersonic Services Makati G/F, Collonade Res. C. Palanca St. Legaspi Village, Makati City Tel: (02) 840 2952 / 893 9614 T3 Sales Office Level 3, Departure Hall, Naia Terminal 3 Andrews Ave., Pasay City Universal Storefront Services Corp (USSC) 711 EDSA Cubao, QC Tel: 4493888
Luzon Caritas Tours & Travel • Vigan Branch Rm. 32 Colegio Business Center Nuevo Segovia St. Vigan City, Ilocos Sur Tel: (077) 722-21-41 • Laoag Branch 2/F New Area Bldg., JP Rizal St. Laoag Ilocos Sur Tel: 077 6320396 East Asia Ticketing Services Inc. 178 Rizal Ave., Puerto Princesa Tel: (048) 4341329/ 4335541 • Airport Branch Puerto Princesa Airport Tel: (048) 4341680/ 4341624 • Coron Branch Brgy 3 Don Pedro St. Coron, Palawan Tel: (048) 7231224 Eurogate Travel and Tours 103 Fields Ave., Balibago Angeles, Pampanga Tel: (045) 892-0962 / 892-4749 Gateway 21 Holidays • Naga Branch CBD Plaza Hotel, Near SM - Naga across Central Bus Terminal CBD II, Brgy. Triangulo, Naga City Tel: (054) 472-5777 / 475-5202 • Legaspi City Airport Branch Airport Site, Mayon Airport Canteen, Legazpi City Tel: (052) 480-5055 / 820-2121 • Metroglass Office Branch Peñaranda St. Legazpi City Tel: (052) 480-5005 / 820-5252 • Masbate Branch Masbate Lodge, Quezon St., Masbate City Tel: (056) 333-2184 / 487-5103 • San Jose (Mindoro) Branch Liboro St. San Jose Occ. Mindoro Tel: (043) 491-2134
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• Sorsogon Branch Sorsogon Commercial Piot, Sorsogon City Tel: (056) 421-5756 / 421-55555 • Virac Branch 019 Sta Cruz St. Virac Catanduanes Tel: (052) 811-1738 GD Travel and Ground Services • Cauayan Branch E&A Canciller Bldg, Canciller Avenue, Cauayan City Tel: (078) 652-2719 / 353-0207 • Tuguegarao Branch Metropolitan Cathedral Building Rizal St., Tuguegarao City Tel: (078) 8461312 Golden Ace Resoures • Legazpi Airport Branch Airport Site, Legazpi City Tel: (052) 480-9667 • Legazpi Branch Casablanca Hotel Penaranda, Legazpi City Tel: (052) 481-2328 • Naga Branch (Head Office) #2 Taal St., Mayon Ave., Naga City 4400 Tel: (054) 473-9669 • Crown Hotel Naga Branch Crown Hotel, Elias Angeles St., Naga City Tel: (+63 54) 478-8933 • Virac Branch San Juan St., Virac, Catanduanes Tel: (052) 811-2788 Goodluck Travel World Services #67 Rizal St., Centro 10 Virac, Tuguegarao City Tel: (078) 8449387 Kendi Air Travel Agency Burgos St., Brgy 6, San Jose, Occidental Mindoro Tel: (043) 491-4745
Mindanao RCL Ticketing Outlet 183 National Highway Brgy., 5 Coron Palawan Tel: (048) 725-4425 Robinsons Place-Imus Level 4, Aguinaldo Highway Imus, Cavite Hours: 10:00 AM - 8:00 PM, Daily Small World Travel and Tours Agency Company #28 G/F Butagan Bldg., Balzain Hi way, Tuguegarao City Tel: (078) 844-8267 Supersonic Services Clark Unit 106 Marlim Mansions, Balibago Angeles Tel: (045) 892-5397 Travel Ilocandia Tours & Travel Ground Floor CF Bldg., #80 Gen. Luna Street 2900 Laoag City Ilocos City Tel: (077) 770-5050/ 770-4049 Fax: (077) 771-1295
Visayas Cebu Airport Ticket Office Mactan International Airport Lapu-Lapu, Cebu City Hours: 1:00 AM - 9:00 PM, Sun / Mon / Thu / Fri Hours: 5:00 AM - 9:00 PM, Tue / Wed / Sat Robinsons Place-Cebu F. Ramos St. Cebu City Hours: 9:00 AM - 8:00 PM, Daily
ANCER Travel & Tours G/F Hotel Alindahaw Rizal Ave., San Francisco District 7016 Pagadian City, Zamboanga del Sur Tel: (062) 215-3831
• Kalibo Branch Toting Reyes St. Kalibo, Aklan Tel: (036) 268-2913 • Roxas Airport Branch Roxas City, Airport Tel: (036) 621-4548 / 643-0994
Caberte Travel And Tours 2/F Caberte Bldg., Rizal Ave. Balangasan District, Pagadian City Tel: (062) 214-3181 / 850-7179
• Gaisano Mall Branch Gaisano Mall Roxas Arnaldo Blvd., Roxas City Tel: ( 036) 621-0307
Davao Importer & Distributor, Inc. J. Catolico Sr. Street 9500 Gen. Santos City South Cotabato Tel: (083) 302-3456 TeleFax: (083) 552-8336
MARG Services Del Pilar St., Brgy Mabolo Catarman, Northern Samar Tel: (055) 500-9041 Ramar Services
Dipag Travel Agency 106 Bonifacio Street 7100 Dipolog City Zamboanga del Norte Tel: (065) 212-8229 / 212-6516 Fax: (065) 909-0209
• Dipolog Branch Door 4 – Balbosa Building, Gen. Luna St., Dipolog City TeleFax: (035) 212-9005 • Dumaguete Branch 479 M.F. Perdices St. Dumaguete City 6200 Tel: (035) 225-6850 / 422-9281 Fax: (035) 422-1788
ECL Travel And Tours 2/F GEEGE Megamall, Tinago 7200 Ozamiz City, Misamis Occ. Telefax no. : (088) 521-5912
Skyliner Services
Exceline Travel & Tours Osmena Street, Central Barangay 7100 Dipolog City Zamboanga del Norte TeleFax: (065) 212-4888 / 908-0778
• Ayala Center Branch South Parking Area Cebu City Tel: (032) 234-2582 • Ayala Center Branch 4/F, Metro Ayala Mall, Cebu City Tel: ( 032) 268-7502
Ilang-Ilang Travel Agency B. Aquino St. cor. Cabrera St., Gatas Pagadian City Zamboanga del Sur Tel: (062) 214-2777 / 215-2222 TeleFax: (062) 214-1300
MAVES Services
• Elizabeth Mall Branch G/F, E Mall, Leon Kilat cor. N. Bacalso Street, Cebu City Tel: (032) 255-3773
• Gaisano City Branch G/F Gaisano City Iloilo Luna St., La Paz, Iloilo City Hours: 9:00am - 7:30pm
• SM City Branch Lower G/F North Reclamation Area, Cebu City Tel: (032) 238-2687
Marian Air, Inc. 044 Montilla Blvd., 8600 Butuan City, Agusan del Norte Tel: (O85) 341-8879 / 225-9012 TeleFax: (085) 341-6958
• Iloilo Airport Branch Iloilo Airport, Cabatuan, Iloilo Hours: 5:00am - 7:00pm
Summit World
Summit World Philippines
• Bacolod Branch Victoria Arcade Rizal St. Bacolod City Tel: (034) 434-2021 to 23
• Cotabato Branch No. 17 Hua Hing Bldg. Door No. 4, Sinsuat Ave. Cotabato City Tel: (064) 421-8873 to 74 Fax: (064) 421-1206
• Marymart (Main) Branch Rm127 G/F Marymart Mall, Valeria St., Iloilo City Tel.: (033) 5087144 Fax : (033) 3374322 / 5087144 Hours: 9:00am - 5:30pm • SM City Branch LGF SM City-Iloilo Sen. Benigno Aquino Ave., Diversion Road, Mandurriao, Iloilo City Hours: 10:00am - 8:00pm Jonar Resources • Aklan Branch Toting Reyes St. Kalibo, Aklan Tel: (036) 268-7264 / 262-7249
• Tacloban Branch Senator Enaje St. Tacloban City Tel: (053) 325-7747 to 49 / 321-9410
• Davao del Sur Branch 2/F Victoria Plaza Mall, Bajada 8000 Davao City, Davao del Sur Tel: (082) 224-0961-62 / 300-7888 Fax: (082) 305-1124
Tarsier Tours and Travel Services • Branch Office G/F Metro Center Hotel, Tagbilaran City Tel: (038) 235-3541 / 411-3615 • Branch Office Aldea Commercial Bldg. JS Torralba Street Tagbilaran City, Bohol Tel: (038) 411-3615
• Zamboanga del Sur Branch G/F Lantaka Hotel Bldg. NS Valderroza St. 7000 Zamboanga City Zamboanga del Sur Tel: (062) 993-1146 / 993-1166 TeleFax: (062) 991-3675
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Pacific Wide Travel & Tours Mezzanine Floor, Gaisano Mall J. Catolico Sr. Street 9500 Gen. Santos City, South Cotabato TeleFax: (083) 301-7820 QSC Travel & Tours G/F Quality Shopping Center Washington Street, 50th Barangay 7200 Ozamiz City, Misamis Occ. Tel: (088) 521-5365 / 521-1525 Ramar Services Balboza Bldg., General Luna Street 7100 Dipolog City Zamboanga del Norte TeleFax: (065) 212-9005 / (0933) 275-3998 Sky Team Services, Inc. 2/F KCC Mall of Gensan J. Catolico, Sr. Street 9500 Gen. Santos City South Cotabato TeleFax: (083) 301-0083 Sade Marketing 03765 Narciso Street 8400 Surigao City Surigao del Norte Tel: (086) 826-0259 TeleFax: (086) 231-7369 Virgox Travel Agency And Cargo Handling Services 2/F Chua Building, Kaimo cor. Narciso Streets, 8400 Surigao City Surigao del Norte Tel: (086) 826-5550
Bangkok
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Beijing
Guangzhou
Beijing Meiya International Air Service Co., Ltd. RM709,China Life Tower, No.16 Chaowai St. Chaoyang District, Beijing 100020 Tel: 86-10-85699606 Fax: 86-10-85699618
Hong Thai International Travel Service Ltd. Rm.A-D, 7/F., Guang Fa Garden Building No.498 Huanshidong Road, Guangzhou, China 510075 Tel: (86-20) 876-08833 Fax: (86-20) 876-04355
China Space Travel Service Co., Ltd. 6/F., Building A Shimao Mansiion No. 92 Jiangguo Road, Chaoyang Dist. Beijing, 100022, China Tel: 86-10-65812757 Fax: 86-10-85891188 Pacific Aviation Marketing (Beijing) Ltd. Unit 1108, 11/F., Tower 3 Beijing International Center No. 38 Dong San Huan Bei Road Chao Yang District Beijing 100026, China Tel: 86-10-85879358 / 400 678 3993 Fax:86-10-85261084
Brunei Anthony Tours And Travel Agency Sdn Bhd No1 Lot 20171 Jalan Laksamana Abdul Razak Km2 Jalan Tutong Bandar Seri Begawan Tel: (673) 222-2666 / 222-7965 Fax: (673) 222-7889 Pan Bright Travel Services
Aviation (Thailand) Co. Ltd, 140/17 ITF 11th Flr. Silom Road, Suriyawongse, Bangrak, Bangkok Tel: (662) 235-8280 to 83 / (668) 0591 0022 Fax: (662) 231-6488
• BSB Branch Office Suite 101-102, Bangunan HJ Ahmad Laksamana, 38-39Jalan Sultan Bandar Seri Begawan Negara Brunei Darussalam Tel: (673) 224-0985 / 2240980 Fax: (673) 224-0979
Thai Sky NTT Tours Co., Ltd. 1362 Suthisarnvinijchai Rd., Dindaeng, Bangkok 10400 Thailand Tel: (662) 693-7888 / 6550 Fax: (662) 693-7575
• Kuala Belait Branch Office 37 Jalan Pretty PO BO 218 Kuala Belait KA 1189 Negara Brunei Darusallam Tel: (673) 3341154 / 3341143 Fax: (673) 333 5704
Meiya Air Service & Tour Co. Ltd. RM 910 Main Tower G.D. International Hotel, 339 Huanshi Dong Lu Guangzhou, China 510098 Tel: (86-20) 223-72818 Fax: (86-20) 223-73109
Ho Chi Minh Exotissimo Travel Vietnam Company Limited 64 Dong Du street, District 1 Ho Chi Minh City, Vietnam Tel: (84-8) 38272-911 Fax: (84-8) 38272-912 • Branch Office SC4-1 My Khanh 3 Nguyen Duc Canh St. District 7 Ho Chi Minh City, Vietnam Tel: (848) 5412-2761 Fax: (848) 5412-2759 • Branch Office 41 Thao Dien, District 2 Ho Chi Minh City, Vietnam Tel: (848) 3519-4111 Fax: (848) 3519-4379 Lac Hong Voyages Co., Ltd. 71/2/24 Nguyen Bac Street Ward 3, Tan Binh District Ho Chi Minh City, Vietnam Tel: (84-8) 3991-9256 / 3991-9219 Ext 103. 104, l05, & 106 Fax: (84-8) 3991-9257 Worldwide Agency Co. Ltd 12th Floor Green Power Bldg. 35 Ton Duc Thang, Ben Nghe Ward District 1 Ho Chi Minh City, Vietnam Tel: (84 8) 2221 7660 / 2221 7620 Ext.116 Fax: (84 8) 2221 7655
Hong Kong
Kota Kinabalu
Room 407, 4th Floor Mirror Tower 61 Mody Road, Tsim ShaTsui East Kowloon, Hong Kong Tel: (852) 2722-0609/ 2722-0804 Fax: (852) 2722-1993
Popular Express Travel Sdn Bhd 33 Jalan Tugu, Kampung Air 88000 Kota Kinabalu Sabah Malaysia Tel: (6088) 214-692 / 221-313 Fax: (6088) 213-036
Jakarta
Skyzone Tours & Travel (Borneo) Sdn Bhd Suite G-02(b), G/F Menara MAA No. 6, Lorong Api-Api 1, 88000 Kota Kinabalu, Sabah Malaysia Tel: (6088) 448-871 Fax: (6088) 447-217
Pt. Andalan Usaha Cemerlang • Main Office JI. Petogogan 2, No.13 A Block A - Kebayoran Baru, Jakarta Selatan 12160, Indonesia Tel: (6221) 7279-0111 Fax: (6221) 7279-0222 • West Jakarta Branch Grogol JL. Dr. Muwardi 3 No. 37, Grogol Jakarta 11450 Tel: (6221) 569-60874 Fax: (6221) 569-60765 • Surabaya Branch Sales Office JL Gunungsari Indah JJ/46 Surabaya 60223 Indonesia Tel: (6231) 4005-9329 Fax: (6231) 766-7239 Pt AVS Indonesia G/F Wisma Mandiri Building, JI. MH Thamrin No. 5 Jakarta 10340 Tel: (6221) 391-5506 Fax: (6221) 392-9948
Korea Global Vision Ways • SEL Office Rm 902, Kwang Hwa Mun Bldg 211 Sejongno Chongno-Ku, Seoul, Korea Tel: (822) 3708-8585 to 90 Fax: (822) 3708-8580 • Busan Office 18F Hanjin Haeun Bldg. 79-9 Juangangdong 4-ga, Jung-gu, Busan, Korea 600-755 Tel: (8251) 462-0686 Fax: (8251) 468-1540
Kuala Lumpur Bestour & Travel (M) Sd. Bhd. Lot 3.10 3rd Flr. Wisma Cosway Jalan Raja Chulan 50200 Kuala Lumpur, Malaysia Tel: (603) 2142-1741 Fax: (603) 2143-2048 Golden Deluxe Travel Service Agency Sd. Bhd. 10-1 Jalan Khoo Teik Ee Off Jalan Imbi 55100 Kuala Lumpur Tel: (603) 2144-9888 / 2144 6888 Fax: (603) 2142-8631 Skyzone Tours & Travel Sd. Bhd. Lot 3.05-08, 3/F Shaw Parade Changkat Thambi Dollah 55100 Kuala Lumpur, Malaysia Tel: (603) 2118-7888 Fax: (603) 2118-7899
Macau Macau 24 Hours Travel Agency Limited Unit 10B, AIA Tower No. 251A-301 Avenida Comercial De Macau, Macau Tel: (853) 2875-3126 Fax: (853) 2875-3173 New Sintra Tours Ltd. Macau Pier Office Rm. 2003 Nova Jetfoil Terminal Tel: (853) 287-28050 Fax: (853) 287-28053 STDM Tours-Travel Agency Ltd. Rua De Bruxelas No. 70 Praca Kin Heng Long Ed Heng Hoi Kuok, Kin Fu Kuok R/C W. Macau Tel: (853) 283-55700 Fax: (853) 283-55736
Osaka Air System Inc. Hommachi Hua Tong Bldg. 5F 5-16, 4-chome, Hommachi Chuo-ku, Osaka 541-0053 Japan Tel: (06-626) 52535 Fax: (06-626) 52501
Shanghai China Air Service Ltd. Shanghai Office Rm 805, No. 28 Jin Ling Road (W), Jin Ling Mansion Shanghai, China 200021 Tel: (86-21) 515-03966 / 515-03977 Fax: (86-21) 330-80774 Shanghai Citic International Travel Co. Ltd. Rm 1609, 1018, Xikang Road Shanghai, China 200060 Tel: (86-21) 517-80659 / 51780606 Fax: (86-21) 322-70623
Singapore Metro Tours Singapore PTE LTD 11 Cavenagh Road #01–09 Holiday Inn Park View Singapore 229616 Tel: (65) 6735-7155 / 6735-2669 Fax: (65) 6735-7592 Pen Travel and Tours Singapore PTE LTD 304 Orchard Road #03-75 Lucky Plaza Singapore 238863 Tel: (65) 6737-9231 / 6735-1600 Fax: (65) 6735-1604 Worldwide Aviation Sales PTE LTD 100 Tras Street #09-01 Amara Corporate Tower Singapore 079027 Tel: (65) 6220-5966 Fax: (65) 6220-3173
Taipei Aviation Travel Services Co. Ltd. 10 Floor, No.19 Sec. 3, Nan-King East Road Taipei 104, Taiwan Tel: (886-2) 2509-6665 / 2509-6632 Fax: (886-2) 2509-6623
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Independent Public Accountants Sycip, Gorres, Velayo & Co. SGV Building, 6760 Ayala Avenue Makati City, Philippines Legal Counsel Romulo, Mabanta, Buenaventura, Sayoc & de los Angeles Law Office 30/F Citibank Tower 8741 Paseo de Roxas Makati City, Philippines Stock Transfer and Dividend Paying Agent Banco de Oro Unibank, Inc. 15/F BDO South Tower Makati Avenue corner H.V. dela Costa Street Makati City, Philippines Investor Relations investor.relations@cebupacificair.com 114
CEBU AIR, INC. Airline Operations Center Builiding Manila Domestic Airport Complex Old Domestic Road Pasay City 1301 Philippines