May 28, 2013

PHILIPPINE STOCK EXCHANGE, INC.

3rd

Floor, Tower One and Exchange Plaza

Ayala Triangle, Ayala Avenue

Makati City

Attention: Ms. Janet A. Encarnacion

Head, Disclosure Department

Gentlemen:

Please find attached a copy of SEC Form 20-IS (Definitive Information

Statement) of Cebu Air, Inc. (the “Corporation”) which we have filed with the Securities

and Exchange Commission in connection with the Annual Meeting of the Stockholders of

the Corporation to be held on June 27, 2013.

Thank you.

Very truly yours,

ROSALINDA F. RIVERA

Corporate Secretary

/mhd

Airline Operations Center, Manila Domestic Airport, Pasay City, Philippines

Trunkline: (632) 802-7000

COVER SHEET

1 5 4 6 7 5

SEC Registration Number

C E B U A I R , I N C .

(Company’s Full Name)

A I R L I N E O P E R A T I O N S C E N T E R ,

D O M E S T I C R O A D , P A S A Y C I T Y

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

Atty. Rosalinda F. Rivera

Corporate Secretary 802-7000

(Contact Person) (Company Telephone Number)

1 2 3 1 2 0 - I S Fourth Thursday of June

Month Day (Form Type) Month Day (Fiscal Year) (Annual Meeting)

Definitive Information Statement

N/A

(Secondary License Type, If Applicable)

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

JUNE 27, 2013

Notice is hereby given that the Annual Meeting of the Stockholders of CEBU AIR, INC. will be

held on June 27, 2013 at 5:00 p.m. at the Ruby Ballroom of CROWNE PLAZA MANILA GALLERIA,

Ortigas Avenue corner Asian Development Bank Avenue, Quezon City.

The Agenda for the meeting is as follows:

1. Proof of notice of the meeting and existence of a quorum.

2. Reading and approval of the Minutes of the Annual Meeting of Stockholders held on June 28,

2012.

3. Presentation of Annual Report and approval of Financial Statements for the preceding year.

4. Election of Board of Directors.

5. Election of External Auditor.

6. Ratification of all acts of the Board of Directors and Management since the last annual meeting.

7. Consideration of such other matters as may properly come during the meeting.

8. Adjournment.

For convenience in registering your attendance, please have available some form of identification,

such as Voter’s I.D., or Driver’s License.

Pursuant to Section 2, Article VII of the Amended By-Laws of Cebu Air, Inc., proxies must be

received by the Corporate Secretary for inspection and recording not later than five (5) working days

before the time set for the meeting, or not later than June 20, 2013. We are not, however, soliciting

proxies.

Registration starts at 4:00 p.m. and will close at exactly 5:15 p.m. Only stockholders of record as

of May 23, 2013 shall be entitled to vote.

By Authority of the Chairman

ROSALINDA F. RIVERA

Corporate Secretary

Airline Operations Center, Manila Domestic Airport, Pasay City, Philippines

Trunkline: (632) 802-7000

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Date, Time and Place of Meeting of Security Holders

Date Time and Place of Meeting : June 27, 2013

5:00 P.M.

Ruby Ballroom

Crowne Plaza Manila Galleria

Ortigas Avenue corner

Asian Development Bank Avenue

Quezon City, Metro Manila

Complete Mailing Address of Principal Office : 2nd

Floor Doña Juanita Marquez Lim

Building, Osmeña Blvd., Cebu City

Approximate date on which the Information : June 5, 2013

Statement is first to be sent or given to

security holders

Dissenters’ Right of Appraisal

Any stockholder of the Corporation may exercise his appraisal right against the proposed actions which qualify as instances giving rise to the exercise of such right pursuant to and subject to the compliance with the requirements and procedure set forth under Title X of the Corporation Code of the Philippines. There are no matters to be acted upon by the stockholders at the Annual Meeting of the Stockholders to be held on June 27, 2013 which would require the exercise of the appraisal right.

Interest of Certain Persons in or Opposition to Matters to be acted upon

None of the following persons have any substantial interest, direct or indirect, in any matter

to be acted upon other than election to office:

1. Directors or officers of the Corporation at any time since the beginning of the last fiscal

year;

2. Nominees for election as directors of the Corporation;

3. Associate of any of the foregoing persons.

Voting Securities and Principal Holders Thereof

(a) The Corporation has 605,953,330 outstanding shares as of April 30, 2013. Every

stockholder shall be entitled to one vote for each share of stock held as of the established

record date.

(b) All stockholders of record as of May 23, 2013 are entitled to notice and to vote at the

Corporation’s Annual Meeting of Stockholders.

(c) Section 8, Article VII of the By-Laws of the Corporation states that, for purposes of

determining the stockholders entitled to notice of, or to vote or be voted at any meeting

of stockholders or any adjournments thereof, or entitled to receive payment of any

dividends or other distribution or allotment of any rights, or for the purpose of any

other lawful action, or for making any other proper determination of stockholders, the

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Board of Directors may provide that the stock and transfer books be closed for a stated

period, which shall not be more than sixty (60) days nor less than thirty (30) days before

the date of such meeting. In lieu of closing the stock and transfer books, the Board of

Directors may fix in advance a date as the record date for any such determination of

stockholders. A determination of stockholders of record entitled to notice of or to vote

or be voted at a meeting of stockholders shall apply to any adjournment of the meeting;

provided, however, that the Board of Directors may fix a new record date for the

adjourned meeting.

Election of Directors

Section 1 (a), Article II of the By-Laws of the Corporation provides that the directors of the

Corporation shall be elected by plurality vote at the annual meeting of the stockholders for that

year at which a quorum is present. At each election for directors, every stockholder shall have the

right to vote, in person or by proxy, the number of shares owned by him for as many persons as

there are directors to be elected, or to cumulate his votes by giving one candidate as many votes as

the number of such directors multiplied by the number of his shares shall equal, or by distributing

such votes on the same principle among any number of candidates.

The report attached to this SEC Form 20-IS is the management report to stockholders

required under SRC Rule 20 to accompany the SEC Form 20-IS and is hereinafter referred to as

the “Management Report”.

Security Ownership of Certain Record and Beneficial Owners and Management

Security Ownership of Certain Record and Beneficial Owners of more than 5% of the Corporation’s

voting securities as of April 30, 2013

Title of

Class

Names and addresses of record

owners and relationship with the

Corporation

Name of beneficial

owner and

relationship with

record owner

Citizenship

Number of

Shares Held

% to Total

Outstanding

Common CPAir Holdings, Inc.

43/F Robinsons Equitable Tower,

ADB Avenue corner Poveda

Street, Ortigas Center, Pasig City

(stockholder)

JG Summit

Holdings, Inc.

(See note 1)

Filipino 400,816,841 66.15%

Common PCD Nominee Corporation

(Non-Filipino)

37/F Tower 1, The Enterprise

Center, Ayala Ave. corner Paseo

de Roxas, Makati City

(stockholder)

PDTC Participants

and their clients

(See note 2)

Non-Filipino 136,441,271

(See note 3)

22.52%

Common PCD Nominee Corporation

(Filipino)

37/F Tower 1, The Enterprise

Center, Ayala Ave. corner Paseo

de Roxas, Makati City

(stockholder)

PDTC Participants

and their clients

(See note 2)

Filipino 60,855,209

10.04%

Notes:

1. CPAir Holdings, Inc. is a wholly-owned subsidiary of JG Summit Holdings, Inc. Under the By-Laws of CPAir Holdings,

Inc., the President is authorized to represent the corporation at all functions and proceedings. The incumbent President of

CPAir Holdings, Inc. is Mr. Lance Y. Gokongwei.

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2. PCD Nominee Corporation is the registered owner of the shares in the books of the Corporation’s transfer agent. PCD

Nominee Corporation is a corporation wholly-owned by Philippine Depository and Trust Corporation, Inc. (formerly the

Philippine Central Depository) (“PDTC”), whose sole purpose is to act as nominee and legal title holder of all shares of

stock lodged in the PDTC. PDTC is a private corporation organized to establish a central depository in the Philippines and

introduce scripless or book-entry trading in the Philippines. Under the current PDTC system, only participants (brokers and

custodians) will be recognized by PDTC as the beneficial owners of the lodged shares. Each beneficial owner of shares

though his participant will be the beneficial owner to the extent of the number of shares held by such participant in the

records of the PCD Nominee.

3. Out of the PCD Nominee Corporation (Non-Filipino) account, “The Hongkong and Shanghai Banking Corp. Ltd. -Clients’

Acct.” holds for various trust accounts the following shares of the Corporation as of April 30, 2013:

No. of shares % to Outstanding

The Hongkong and Shanghai Banking Corp. Ltd. -Clients’ Acct. 72,042,695 11.89%

The securities are voted by the trustee’s designated officers who are not known to the Corporation.

Security Ownership of Management as of April 30, 2013

Title of

Class

Name of beneficial

Owner

Amount & nature of

beneficial ownership

Citizenship

% to Total

Outstanding

Named Executive Officers1

Common 1. Lance Y. Gokongwei 1 Direct Filipino *

- 2. Victor Emmanuel B. Custodio - Direct Filipino -

- 3. Antonio Jose L. Rodriguez - Direct Filipino -

- 4. Michael S. Shau - Direct Filipino -

- 5. Jeanette U. Yu - Direct Filipino -

Sub-Total 1 *

Common 6. Ricardo J. Romulo 1 Direct Filipino *

Common 7. John L. Gokongwei, Jr. 1 Direct Filipino *

Common 8. James L. Go 1 Direct Filipino *

Common 9. Jose F. Buenaventura 1 Direct Filipino *

Common 10. Robina Y. Gokongwei-Pe 1 Direct Filipino *

Common 11. Frederick D. Go 1 Direct Filipino *

Common 12. Antonio L. Go 1 Direct Filipino *

Common 13. Oh Wee Khoon 1 Direct Singaporean *

Common 14. Jaime I. Cabangis 10,000 Under PCD account Filipino *

- 15. Bach Johann M. Sebastian - Filipino -

- 16. Rosita D. Menchaca - Filipino -

- 17. Candice Jennifer A. Iyog - Filipino -

- 18. Joseph G. Macagga - Filipino -

- 19. Robin C. Dui - Filipino -

20. Alexander G. Lao - Filipino -

- 21. Alejandro B. Reyes - Filipino -

- 22. Rosalinda F. Rivera - Filipino -

- 23. William S. Pamintuan - Filipino -

10,008 *

All directors and executive officers as a group

unnamed

10,009

*

Notes:

1. As defined under Part IV (B) (1) (b) of SRC Rule 12, the “named executive officers” to be listed refer to the Chief Executive

Officer and those that are the four (4) most highly compensated executive officers as of April 30, 2013.

* less than 0.01%

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Shares owned by foreigners

The total number of shares owned by foreigners as of April 30, 2013 is 136,441,272 common

shares.

Voting Trust Holders of 5% or more - as of April 30, 2013

There are no persons holding more than 5% of a class under a voting trust or similar

agreement.

Changes in Control

There has been no change in the control of the Corporation since the beginning of its last

fiscal year.

Directors and Executive Officers

Information required hereunder is incorporated by reference to the section entitled “Board

of Directors and Executive Officers of the Registrant” on Item 8, pages 30 to 36 of the Management

Report.

The incumbent directors of the Corporation are expected to be nominated by management

for re-election this year.

The incumbent members of the Nomination Committee of the Corporation are as follows:

1. John L. Gokongwei, Jr. 4. Frederick D. Go

2. James L. Go (Chairman) 5. Oh Wee Khoon (independent director)

3. Lance Y. Gokongwei

The incumbent members of the Audit Committee of the Corporation are as follows:

1. John L. Gokongwei, Jr. 4. Frederick D. Go

2. James L. Go 5. Antonio L. Go (independent director) (Chairman)

3. Lance Y. Gokongwei 6. Oh Wee Khoon (independent director)

The incumbent members of the Remuneration and Compensation Committee of the

Corporation are as follows:

1. John L. Gokongwei, Jr. 4. Frederick D. Go

2. James L. Go (Chairman) 5. Antonio L. Go (independent director)

3. Lance Y. Gokongwei

Information required by the SEC under SRC Rule 38 on the nomination and election of

Independent Directors.

The following criteria and guidelines shall be observed in the pre-screening, short listing, and nomination

of Independent Directors:

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A. Definition

1. An independent director is a person who, apart from his fees and shareholdings, is

independent of management and free from any business or other relationship which could, or

could reasonably be perceived to, materially interfere with his exercise of independent

judgment in carrying out his responsibilities as a director in the corporation and includes,

among others, any person who:

1.1 Is not a director or officer or substantial stockholder of the corporation or of its

related companies or any of its substantial shareholders except when the same shall

be an independent director of any of the foregoing;

1.2 Does not own more than two percent (2%) of the shares of the corporation and/or its

related companies or any of its substantial shareholders;

1.3 Is not a relative of any director, officer or substantial shareholder of the corporation,

any of its related companies or any of its substantial shareholders. For this purpose,

relatives include spouse, parent, child, brother, sister, and the spouse of such child,

brother or sister;

1.4 Is not acting as a nominee or representative of any director or substantial shareholder

of the corporation, and/or any of its related companies and/or any of its substantial

shareholders, pursuant to a Deed of Trust or under any contract or arrangement;

1.5 Has not been employed in any executive capacity by the corporation, any of its

related companies and/or by any of its substantial shareholders within the last two (2)

years.

1.6 Is not retained, either personally or through his firm or any similar entity, as

professional adviser, by the corporation, any of its related companies and/or any of its

substantial shareholders, within the last two (2) years; or

1.7 Has not engaged and does not engage in any transaction with the corporation and/or

with any of its related companies and/or with any of its substantial shareholders,

whether by himself and/or with other persons and/or through a firm of which he is a

partner and/or a company of which he is a director or substantial shareholder, other

than transactions which are conducted at arms length and are immaterial.

2. No person convicted by final judgment of an offense punishable by imprisonment for a

period exceeding six (6) years, or a violation of this Code, committed within five (5) years

prior to the date of his election, shall qualify as an independent director. This is without

prejudice to other disqualifications which the corporation’s Manual on Corporate Governance

provides.

3. Any controversy or issue arising from the selection, nomination or election of independent

directors shall be resolved by the Commission by appointing independent directors from the

list of nominees submitted by the stockholders.

4. When used in relation to a company subject to the requirements above:

4.1 Related company means another company which is: (a) its holding company, (b) its

subsidiary, or (c) a subsidiary of its holding company; and

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4.2 Substantial shareholder means any person who is directly or indirectly the beneficial

owner of more than ten percent (10%) of any class of its equity security.

B. Qualifications and Disqualifications of Independent Directors

1. An independent director shall have the following qualifications:

1.1 He shall have at least one (1) share of stock of the corporation;

1.2 He shall be at least a college graduate or he has sufficient management experience to

substitute for such formal education or he shall have been engaged or exposed to the

business of the corporation for at least five (5) years;

1.3 He shall be twenty one (21) years old up to seventy (70) years old, however, due

consideration shall be given to qualified independent directors up to the age of eighty

(80);

1.4 He shall have been proven to possess integrity and probity; and

1.5 He shall be assiduous.

2. No person enumerated under Section II (5) of the Code of Corporate Governance shall

qualify as an independent director. He shall likewise be disqualified during his tenure under

the following instances or causes:

2.1 He becomes an officer or employee of the corporation where he is such member of

the board of directors/trustees, or becomes any of the persons enumerated under letter

A hereof;

2.2 His beneficial security ownership exceeds two percent (2%) of the outstanding

capital stock of the corporation where he is such director;

2.3 Fails, without any justifiable cause, to attend at least 50% of the total number of

Board meetings during his incumbency unless such absences are due to grave illness

or death of an immediate family.

2.4 Such other disqualifications that the Corporate Governance Manual provides.

C. Number of Independent Directors

All companies are encouraged to have independent directors. However, issuers of registered securities

and public companies are required to have at least two (2) independent directors or at least twenty

percent (20%) of its board size.

D. Nomination and Election of Independent Directors

1. The Nomination Committee (the “Committee”) shall have at least three (3) members, one of

whom is an independent director. It shall promulgate the guidelines or criteria to govern the

conduct of the nomination. The same shall be properly disclosed in the corporation’s

information or proxy statement or such other reports required to be submitted to the

Commission.

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2. Nomination of independent director/s shall be conducted by the Committee prior to a

stockholders’ meeting. All recommendations shall be signed by the nominating stockholders

together with the acceptance and conformity by the would-be nominees.

3. The Committee shall pre-screen the qualifications and prepare a final list of all candidates

and put in place screening policies and parameters to enable it to effectively review the

qualifications of the nominees for independent director/s.

4. After the nomination, the Committee shall prepare a Final List of Candidates which shall

contain all the information about all the nominees for independent directors, as required

under Part IV (A) and (C) of Annex "C" of SRC Rule 12, which list, shall be made available

to the Commission and to all stockholders through the filing and distribution of the

Information Statement, in accordance with SRC Rule 20, or in such other reports the

Corporation is required to submit to the Commission. The name of the person or group of

persons who recommended the nomination of the independent director shall be identified in

such report including any relationship with the nominee.

5. Only nominees whose names appear on the Final List of Candidates shall be eligible for

election as independent director/s. No other nomination shall be entertained after the Final

List of Candidates shall have been prepared. No further nominations shall be entertained nor

allowed on the floor during the actual annual stockholders' meeting.

6. Election of Independent Director/s

6.1 Except as those required under this Rule and subject to pertinent existing laws, rules

and regulations of the Commission, the conduct of the election of independent

director/s shall be made in accordance with the standard election procedures of the

company or its by-laws.

6.2 It shall be the responsibility of the Chairman of the Meeting to inform all

stockholders in attendance of the mandatory requirement of electing independent

director/s. He shall ensure that an independent director/s are elected during the

stockholders’ meeting.

6.3 Specific slot/s for independent directors shall not be filled-up by unqualified

nominees.

6.4 In case of failure of election for independent director/s, the Chairman of the Meeting

shall call a separate election during the same meeting to fill up the vacancy.

E. Termination/Cessation of Independent Directorship

In case of resignation, disqualification or cessation of independent directorship and only after

notice has been made with the Commission within five (5) days from such resignation,

disqualification or cessation, the vacancy shall be filled by the vote of at least a majority of the

remaining directors, if still constituting a quorum, upon the nomination of the Committee

otherwise, said vacancies shall be filled by the stockholders in a regular or special meeting called

for that purpose. An independent director so elected to fill a vacancy shall serve only for the

unexpired term of his predecessor in office.

The New By-Laws of the Corporation dated May 28, 2007 include the provisions of SRC Rule

38, as amended.

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Presented below is the Final List of Candidates for Independent Directors:

1. Mr. Antonio L. Go was elected as an independent director of the Corporation on 6 December

2007. He also currently serves as director and President of Equitable Computer Services, Inc. and

is Chairman of Equicom Savings Bank. He is also a director of Medilink Network, Inc.,

Maxicare Healthcare Corporation, Equicom Manila Holdings, United Industrial Corporation

Limited, Oriental Petroleum and Minerals Corporation, Pin-An Holdings, Inc., Equicom

Information Technology, and ALGO Leasing and Finance, Inc. He is also a trustee of Go Kim

Pah Foundation and Equitable Foundation, Inc. He graduated from Youngstown University,

United States with a Bachelor of Science degree in Business Administration. He attended the

International Advanced Management program at the International Management Institute, Geneva,

Switzerland as well as the Financial Planning/Control program at the ABA National School of

Bankcard Management, Northwestern University, United States.

2. Mr. Oh Wee Khoon was elected as an independent director of the Corporation effective 3

January 2008. He is the founder and managing director of Sobono Energy Private Limited. He is

also the Vice Chairman of the Sustainable Energy Association of Singapore. He graduated with

honours from the University of Manchester Institute of Science and Technology with a Bachelor

of Science degree in Mechanical Engineering. He obtained his Master’s degree in Business

Administration from the National University of Singapore.

The Certification of Independent Directors executed by the above-mentioned independent

directors are attached hereto as Annex “A” and Annex “B”, respectively.

The name of the person who recommended the nomination of the foregoing candidates for Independent

Directors is as follows:

CPAir Holdings, Inc. - controlling shareholder of the Corporation owning 66.15% of the

Corporation’s total outstanding capital stock as of April 30, 2013.

CPAir Holdings, Inc. has no relationship with Mr. Antonio L. Go and Mr. Oh Wee Khoon,

the candidates for independent directors of the Corporation.

Significant Employees

There are no persons who are not executive officers of the Corporation who are expected by

the Corporation to make a significant contribution to the business.

Family Relationships

1. Mr. James L. Go is the brother of Mr. John L. Gokongwei, Jr.

2. Mr. Lance Y. Gokongwei is the son of Mr. John L. Gokongwei, Jr.

3. Ms. Robina Gokongwei-Pe is the daughter of Mr. John L. Gokongwei, Jr.

4. Mr. Frederick D. Go is the nephew of Mr. John L. Gokongwei, Jr.

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Involvement in Certain Legal Proceedings of Directors and Executive Officers

To the best of the Corporation’s knowledge and belief and after due inquiry, none of the

Corporation’s directors or executive officers are involved in any of the following events for the past

five years and up to the date of this SEC Form 20-IS:

1. Any bankruptcy petition filed by or against any business of which such person was a

general partner or executive officer either at the time of the bankruptcy or within two

years prior to that time;

2. Any conviction by final judgment in a criminal proceeding;

3. Being subjected to any order, judgment, or decree, not subsequently reversed,

suspended or vacated, of any court of competent jurisdiction, domestic or foreign,

permanently or temporarily enjoining, barring, suspending or otherwise limiting their

involvement in any type of business, securities, commodities or banking activities; or

4. Being found by a domestic or foreign court of competent jurisdiction (in a civil action),

the Philippine SEC or comparable foreign body, or a domestic or foreign exchange or

other organized trading market or self regulatory organization, to have violated a

securities or commodities law or regulation and the judgment has not been reversed,

suspended, or vacated.

Certain Relationships and Related Party Transactions

The Corporation, in its regular conduct of business, had engaged in transactions with its

ultimate parent company, its joint venture and affiliates. See Note 26 (Related Party Transactions)

of the Notes to the Consolidated Financial Statements as of December 31, 2012 on pages 51 to 57 of

the audited consolidated financial statements as of December 31, 2012.

Information on the parent of the Corporation, the basis of control, and the percentage of

voting securities owned as of April 30, 2013:

Parent Company Number of Shares Held % Held

CPAir Holdings, Inc. 400,816,841 66.15%

Compensation of directors and executive officers

Summary Compensation Table

The following are our Company’s Chief Executive Officer (“CEO”) and four most highly compensated

executive officers for the years ended 2011, 2012 and 2013 estimates:

Name Position

Lance Y. Gokongwei President and CEO

Victor Emmanuel B. Custodio Vice President

Antonio Jose L. Rodriguez Vice President

Michael S. Shau Vice President

Jeanette U. Yu Vice President - Treasurer

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The following table identifies and summarizes the aggregate compensation of the Company’s CEO and

the four most highly compensated executive officers for the years ended 2011, 2012 and 2013 estimates:

Actual – Fiscal Year 2011

Salaries Bonuses Other

Income1

Total

CEO and four (4) most highly compensated executive

officers

1. Lance Y. Gokongwei – President and CEO

2. Victor Emmanuel B. Custodio – Vice President

3. Antonio Jose L. Rodriguez – Vice President

4. Michael S. Shau – Vice President

5. Jeanette U. Yu – Vice President-Treasurer P34,186,380 P3,062,481 P400,000 P37,648,861

Aggregate compensation paid to all officers and

directors as a group unnamed

P76,860,270

P6,516,539

P3,205,000

P86,581,809 1 Includes per diem of directors

Actual – Fiscal Year 2012

Salaries Bonuses Other

Income1

Total

CEO and four (4) most highly compensated executive

officers

1. Lance Y. Gokongwei – President and CEO

2. Victor Emmanuel B. Custodio – Vice President

3. Antonio Jose L. Rodriguez – Vice President

4. Michael S. Shau – Vice President

5. Jeanette U. Yu – Vice President-Treasurer P52,167,107 P4,490,873 P390,000 P57,047,980

Aggregate compensation paid to all officers and

directors as a group unnamed

P91,787,249

P7,751,597

P2,925,000

P102,463,846 1 Includes per diem of directors

Fiscal Year 2013 Estimates

Salaries Bonuses Other

Income1

Total

CEO and four (4) most highly compensated executive

officers

1. Lance Y. Gokongwei – President and CEO

2. Victor Emmanuel B. Custodio – Vice President

3. Antonio Jose L. Rodriguez – Vice President

4. Michael S. Shau – Vice President

5. Jeanette U. Yu – Vice President-Treasurer P55,970,963 P4,737,871 P390,000 P61,098,834

Aggregate compensation paid to all officers and

directors as a group unnamed

P95,160,200

P8,069,316

P3,030,000

P106,259,516 1 Includes per diem of directors

Standard Arrangements

Other than payment of reasonable per diem, there are no standard arrangements pursuant

to which directors of the Corporation are compensated, or are to be compensated, directly or

indirectly, for any services provided as a director for the last completed fiscal year and the ensuing

year.

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Other Arrangements

There are no other arrangements pursuant to which any director of the Corporation was

compensated, or is to be compensated, directly or indirectly, during the Corporation’s last

completed fiscal year, and the ensuing year, for any service provided as a director.

Employment Contracts and Termination of Employment and Change-in-Control Arrangement

There are no agreements between the Corporation and its directors and executive officers

providing for benefits upon termination of employment, except for such benefits to which they may

be entitled under the Corporation’s pension plans.

Warrants and Options Outstanding

There are no outstanding warrants or options held by the Corporation’s CEO, the named

executive officers, and all officers and directors as a group.

Independent Public Accountants

Sycip Gorres Velayo & Co. (SGV & Co.) has acted as the Corporation’s independent public

accountant. The same accounting firm is tabled for reappointment for the current year at the

annual meeting of stockholders. The representatives of the principal accountant have always been

present at prior year’s meetings and are expected to be present at the current year’s annual

meeting of stockholders. They may also make a statement and respond to appropriate questions

with respect to matters for which their services were engaged.

The current handling partner of SGV & Co. has been engaged by the Corporation in 2012

and is expected to be rotated every five years.

Action with respect to reports

The following are included in the agenda of the Annual Meeting of Stockholders for the

approval of the stockholders:

1. Reading and approval of the Minutes of the Annual Meeting of Stockholders held on

June 28, 2012.

2. Presentation of Annual Report and approval of Financial Statements for the preceding

year.

3. Election of Board of Directors.

4. Election of External Auditor.

5. Ratification of all acts of the Board of Directors and Management since the last annual

meeting.

A summary of the matters approved and recorded in the Minutes of the Annual Meeting of

the Stockholders last June 28, 2012 is as follows: (a) reading and approval of the minutes of the

Annual Meeting of Stockholders held on July 7, 2011; (b) presentation of annual report and

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approval of financial statements for the preceding year; (c) election of Board of Directors; (d)

election of external auditors; and (e) ratification of all acts of the Board of Directors and

management since the last annual meeting.

Brief description of material matters approved by the Board of Directors and Management and disclosed

to the SEC and PSE since the last annual meeting of stockholders held on June 28, 2012 for ratification

by the stockholders:

Date of Board Approval Description

June 28, 2012 Results of the Organizational Meeting of the Board of

Directors.

Voting Procedures

The vote required for approval or election:

Pursuant to Article VII, Section 3 of the By-Laws of the Corporation, no stockholders’

meeting shall be competent to decide any matter or transact any business, unless a majority of the

outstanding capital stock is present or represented thereat, except in those cases in which the

Corporation law requires the affirmative vote of a greater proportion.

The method by which votes will be counted:

Article VII, Section 4 of the By Laws provides that voting upon all questions at all meetings

of the stockholders shall be by shares of stock and not per capital.

Article VII, Section 2 of the By Laws also provides that stockholders may vote at all

meetings the number of shares registered in their respective names, either in person or by proxy

duly given in writing and duly presented to and received by the Corporate Secretary for inspection

and recording not later than five (5) working days before the time set for the meeting, except such

period shall be reduced to one (1) working day for meetings that are adjourned due to lack of the

necessary quorum. No proxy bearing a signature which is not legally acknowledged by the

Corporate Secretary shall be honored at the meetings. Proxies shall be valid and effective for five

(5) years, unless the proxy provides for a shorter period, and shall be suspended for any meeting

wherein the stockholder appears in person.

Article II, Section 1 (a) provides that the directors of the Corporation shall be elected by

plurality vote at the annual meeting of the stockholders for that year at which a quorum is present.

At each election of directors, every stockholder shall have the right to vote, in person or by proxy,

the number of shares owned by him for as many persons as there are directors to be elected, or to

cumulate his votes by giving one candidate as many votes as the number of such directors

multiplied by the number of his shares shall equal, or by distributing such votes on the same

principle among any number of candidates.

The Secretary shall record all the votes and proceedings of the stockholders and of the

directors in a book kept for that purpose.

Restriction that Limits the Payment of Dividends on Common Shares

None.

1

Information Required by the SEC Pursuant to SRC Rule 20

PART 1 - BUSINESS AND GENERAL INFORMATION

Item 1. Business

Cebu Air, Inc. (the Company) is an airline that operates under the trade name “Cebu Pacific Air” and is

the leading low-cost carrier in the Philippines. It pioneered the “low fare, great value” strategy in the

local aviation industry by providing scheduled air travel services targeted to passengers who are willing to

forego extras for fares that are typically lower than those offered by traditional full-service airlines while

offering reliable services and providing passengers with a fun travel experience.

The Company was incorporated in August 26, 1988 and was granted a 40-year legislative franchise to

operate international and domestic air transport services in 1991. It commenced its scheduled passenger

operations in 1996 with its first domestic flight from Manila to Cebu. In 1997, it was granted the status as

an official Philippine carrier to operate international services by the Office of the President of the

Philippines pursuant to Executive Order (EO) No. 219. International operations began in 2001 with

flights from Manila to Hong Kong.

In 2005, the Company adopted the low-cost carrier (LCC) business model. The core element of the LCC

strategy is to offer affordable air services to passengers. This is achieved by having: high-load, high-

frequency flights; high aircraft utilization; a young and simple fleet composition; and low distribution

costs.

The Company‟s common stock was listed with the Philippine Stock Exchange (PSE) on October 26,

2010, the Company‟s initial public offering (IPO).

As of December 31, 2012, the Company operates an extensive route network serving 60 domestic routes

and 31 international routes with a total of 2,288 scheduled weekly flights. It operates from six hubs,

including the Ninoy Aquino International Airport (NAIA) Terminal 3 located in Pasay City, Metro

Manila; Mactan-Cebu International Airport located in Lapu-Lapu City, part of Metropolitan Cebu;

Diosdado Macapagal International Airport (DMIA) located in Clark, Pampanga; Davao International

Airport located in Davao City, Davao del Sur; Ilo-ilo International Airport located in Ilo-ilo City, regional

center of the western Visayas region; and Kalibo International Airport in Kalibo, Aklan.

As of December 31, 2012, the Company operates a fleet of 41 aircraft which comprises of ten Airbus

A319, 23 Airbus A320 and eight ATR 72-500 aircraft. It operates its Airbus aircraft on both domestic

and international routes and operates the ATR 72-500 aircraft on domestic routes, including destinations

with runway limitations. The average aircraft age of the Company‟s fleet is approximately 3.87 years as

of December 31, 2012.

The Company has three principal distribution channels: the internet; direct sales through booking sales

offices, call centers and government/corporate client accounts; and third-party sales outlets. Aside from

passenger service, it also provides airport-to-airport cargo services on its domestic and international

routes. In addition, the Company offers ancillary services such as cancellation and rebooking options, in-

flight merchandising such as sale of duty-free products on international flights, baggage and travel-related

products and services.

2

The percentage contributions to the Company‟s revenues of its principal business activities are as follows:

For the Years Ended December 31

2012 2011 2010

Passenger Services 85.1% 86.2% 89.0%

Cargo Services 6.3% 6.5% 7.2%

Baggage fee 7.5% 6.4% 2.7%

Ancillary Services 1.1% 1.0% 1.1%

100.0% 100.0% 100.0%

No material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets

not in the ordinary course of business was made in the past three years. The Company has not been

subjected to any bankruptcy, receivership or similar proceeding in the said period.

Distribution Methods of Products or Services

The Company has three principal distribution channels: the internet; direct sales through booking sales

offices, call centers and government/corporate client accounts; and third-party sales outlets.

Internet

In January 2006, the Company introduced its internet booking system. Through www.cebupacificair.com,

passengers can book flights and purchase services online. The system also provides passengers with real

time access to the Company‟s flight schedules and fare options.

Booking Offices and Call Centers

As of December 31, 2012, the Company has a network of eight booking offices located throughout the

Philippines and one booking office located in Hong Kong. It directly operates these booking offices

which also handle customer service issues, such as customer requests for change of itinerary. In addition,

the Company operates two in-house call centers, one in Manila and the other in Cebu. It also uses a third-

party call centre outsourcing service to help accommodate heavy call traffic. Its employees who work as

reservation agents are also trained to handle customer service inquiries and to convert inbound calls into

sales. Purchases made through call centers can be settled through various modes, such as credit cards,

payment centers and authorized agents.

Government/Corporate Client Accounts

As of December 31, 2012, the Company has government and corporate accounts for passenger sales. It

provides these accounts with direct access to its reservation system and seat inventory as well as credit

lines and certain incentives. Further, clients may choose to settle their accounts by post-transaction

remittance or by using pre-enrolled credit cards.

Third Party Sales Outlets

As of December 31, 2012, the Company has a network of distributors in the Philippines selling its

domestic and international air services within an agreed territory or geographical coverage. Each

distributor maintains and grows its own client base and can impose on its clients a service or transaction

fee. Typically, a distributor‟s client base would include agents, travel agents or end customers. The

Company also has a network of foreign general sales agents, wholesalers, and preferred sales agents who

market, sell and distribute the Company‟s air services in other countries.

3

Publicly Announced New Product or Service

The Company continues to analyze its route network. It can opt to increase frequencies on existing routes

or add new routes/destinations. It can also opt to eliminate unprofitable routes and redeploy capacity.

The Company plans to expand its fleet over the course of the next three years to 55 aircraft by the end of

2015 (net of redelivery of four leased aircraft). The additional aircraft will support the Company‟s plans

to increase frequency on current routes and to add new city pairs and destinations. The Company has

increased frequencies on domestic routes such as Manila to Tuguegarao; Cebu to Bacolod, Butuan,

Cagayan de Oro, Siargao, Caticlan and Pagadian; and international routes such as Manila to Singapore. A

total of 10 domestic routes were also launched, paving the way for more air travel in various parts of the

Philippines. This includes flights from Davao to Dipolog and from Zamboanga to Cagayan de Oro, routes

which were previously served by buses plying 12-14 hour rides. It also launched direct flights from

Manila to Hanoi, Siem Reap and Xiamen as well as from Cebu to Bankok and Kuala Lumpur. The

Company also pioneered direct flights from Iloilo to Hongkong and Singapore. The Company is slated

to launch twice weekly Manila-Bali (Denpasar) flights in March 16, 2013. It will also launch its long-

haul operations with its first Manila to Dubai flight on October 7, 2013. The Manila-Dubai will be

operated on the Airbus A330-300 aircraft with a configuration of more than 400 all-economy class seats.

The Company will lease up to eight Airbus A330-300 aircraft for its long-haul operations. The Company

will take delivery of two Airbus A330-300 aircraft this year, and an additional two in 2014. The Airbus

A330-300 has a range of up to 11 hours which means the Company could serve markets such as

Australia, Middle East, parts of Europe and the US.

Further, the Company has turned into firm orders its existing options for seven Airbus A320 aircraft for

delivery between 2015 and 2016. The Company has also placed a new firm order for 30 Airbus A321neo

(New Engine Option) aircraft with options for a further ten Airbus A321neos. Airbus A321neos will be a

first of its type to operate in the Philippines, being a larger and longer-haul version of the familiar Airbus

A320. These 220-seater aircraft will have a much longer range which will enable the Company to serve

cities in Australia, India and Northern Japan, places the A320 cannot reach. This order for A321neo

aircraft will be delivered between 2017 and 2021.

The Company has also signed a joint venture agreement with CAE, world leader in aviation training, to

establish an aviation training center for airlines in the Asia Pacific region. The joint venture is known as

the Philippine Academy for Aviation Training, Inc. (PAAT) and is located in Clark Freeport Zone,

northwest of Manila. On January 24, 2012, the Company broke ground in Clark, Pampanga and the

facility was formally inaugurated on December 3, 2012. The new training center will be a world-class,

one-stop training center for the Company and a hub for training services for other airlines. The facility

will initially cater to Airbus A319/320/321 series pilot type-rating training requirements, among others. It

will be initially equipped with two Airbus A320 Full Flight Simulators with the capability to expand by

two additional simulators. Training is also expected to be added for other aviation personnel in the future,

such as cabin crew, dispatch, ground handling personnel and cadets. Each simulator can train/certify

approximately 300-700 pilots per simulator per year.

Competition

The Philippine aviation authorities deregulated the airline industry in 1995 eliminating certain restrictions

on domestic routes and frequencies which resulted in fewer regulatory barriers to entry into the Philippine

domestic aviation market. On the international market, although the Philippines currently operates under

a bilateral framework, whereby foreign carriers are granted landing rights in the Philippines on the basis

of reciprocity as set forth in the relevant bilateral agreements between the Philippine government and

foreign nations, in March 2011, the Philippine government issued EO 29 which authorizes the Civil

4

Aeronautics Board (CAB) and the Philippine Air Panels to pursue more aggressively the international

civil aviation liberalization policy to boost the country‟s competitiveness as a tourism destination and

investment location.

Currently, the Company faces intense competition on both its domestic and international routes. The

level and intensity of competition varies from route to route based on a number of factors. Principally, it

competes with other airlines that service the routes it flies. However, on certain domestic routes, the

Company also considers alternative modes of transportation, particularly sea and land transport, to be

competitors for its services. Substitutes to its services also include video conferencing and other modes

of communication.

The Company‟s competitors in the Philippines are Philippine Airlines (“PAL”), a full-service Philippine

flag carrier; Air Philippine Express a low-cost domestic operator that has the same major shareholders as

PAL (but separate management team) and which code shares with PAL on certain domestic routes and

leases certain aircraft from PAL; Air Asia Philippines; Zest Air; and South East Asian Airlines (Seair).

Most of the Company‟s domestic and international destinations are also serviced by theses airlines.

According to CAB data, the Company is the leading domestic airline in the Philippines by passengers

carried, with a market share of 46.1% for the year ended December 31, 2012.

The Company is the leading regional low-cost airline offering services to more destinations and serving

more routes with a higher frequency between the Philippines and other ASEAN countries than any other

airline in the Philippines. The Company currently competes with the following LCC‟s and full-service

airlines in its international operations: AirAsia, Tiger Airways (Tiger), Jetstar Airways, PAL, Cathay

Pacific, Singapore Airlines, Thai Airways, among others.

Raw Materials

Fuel is a major cost component for airlines. The Company‟s fuel requirements are classified by location

and sourced from various suppliers.

The Company‟s fuel suppliers at its international stations include PTT-Bangkok Aviation, Petronas-Kuala

Lumpur, Shell-Singapore, SK Corp-Korea and Kuwait Aviation-Hongkong, among others. It also

purchases fuel from PTT Philippines and Phoenix Petroleum. The Company purchases fuel stocks on a

per parcel basis, in such quantities as are sufficient to meet its monthly operational requirements. Most of

the Company‟s contracts with fuel suppliers are on a yearly basis and may be renewed for subsequent

one-year periods.

Dependence on One or a Few Major Customers and Identify any such Major Customers

The Company‟s business is not dependent upon a single customer or a few customers that a loss of

anyone of which would have a material adverse effect on the Company.

Transactions with and/or Dependence on Related Parties

The Company‟s significant transactions with related parties are described in detail in Note 26 of the Notes

to Consolidated Financial Statements.

5

Patents, Trademarks, Licenses, Franchises, Concessions and Royalty Agreements

Trademarks

The Company has registered the “Cebu Pacific” and the Cebu Pacific feather-like device trademarks with

the Philippine Intellectual Property Office (PIPO). In the Philippines, certificates of registration of a trade

mark filed with the PIPO prior to the effective date of the Philippine Intellectual Property Code (PIPC) in

1998 are generally effective for a period of 20 years from the date of the certificate, while those filed after

the PIPC became effective are generally effective for a shorter period of ten years, unless terminated

earlier. The Company currently has no trademark applications pending with the PIPO. However, it has

27 trademark applications pending with the China Trademark Office. The Company has also registered

the business name “Cebu Pacific Air” with the Department of Trade and Industry (DTI). Registering a

business name with the DTI precludes another entity engaged in the same or similar business from using

the same business name as one that has been registered. A registration of a business name shall be

effective for five years from the initial date of registration and must be renewed within the first three

months following the expiration of the five-year period from the date of original registration.

Licenses / Permits

The Company operates its business in a highly regulated environment. The Company‟s business depends

upon the permits and licenses issued by the government authorities or agencies for its operations which

include the following:

Legislative Franchise to Operate a Public Utility

Certificate of Public Convenience and Necessity

Letter of Authority

Air Operator Certificate

Certificate of Registration

Certificate of Airworthiness

The Company also has to seek approval from the relevant airport authorities to secure airport slots for its

operations.

Franchise

In 1991, pursuant to Republic Act (RA) No. 7151, the Company was granted a franchise to operate air

transportation services, both domestic and international. In accordance with the Company‟s franchise,

this extends up to year 2031:

a) The 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

Company is subject to regular corporate income tax 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 Company at any disadvantage, then

such privileges shall have been deemed by the fact itself of the Company‟s tax privileges and shall

operate equally in favor of the Company.

Kindly refer to Note 1 of the Notes to Consolidated Financial Statements.

6

Government Approval of Principal Products or Services

The Company operates its business in a highly regulated environment. The Company‟s business depends

upon the permits and licenses issued by the government authorities or agencies for its operations which

include the following:

Legislative Franchise to Operate a Public Utility

Certificate of Public Convenience and Necessity

Letter of Authority

Air Operator Certificate

Certificate of Registration

Certificate of Airworthiness

The Company also has to seek approval from the relevant airport authorities to secure airport slots for its

operations.

Effects of Existing or Probable Government Regulations on the Business

Civil Aeronautics Administration and CAAP

Policy-making for the Philippine civil aviation industry started with RA 776, known as the Civil

Aeronautics Act of the Philippines (the “Act”), passed in 1952. The Act established the policies and laws

governing the economic and technical regulation of civil aeronautics in the country. It established the

guidelines for the operation of two regulatory organizations, CAB for the regulation of the economic

activities of airline industry participants and the Air Transportation Office, which was later transformed

into the CAAP, created pursuant to RA 9497, otherwise known as the Civil Aviation Authority Act of

2008.

The CAB is authorized to regulate the economic aspects of air transportation, to issue general rules and

regulations to carry out the provisions of RA 776, and to approve or disapprove the conditions of carriage

or tariff which an airline desires to adopt. It has general supervision and regulation over air carriers,

general sales agents, cargo sales agents, and airfreight forwarders, as well as their property, property

rights, equipment, facilities and franchises.

The CAAP, a government agency under the supervision of the Department of Transportation and

Communications for purposes of policy coordination, regulates the technical and operational aspects of

air transportation in the Philippines, ensuring safe, economic and efficient air travel. In particular, it

establishes the rules and regulations for the inspection and registration of all aircraft and facilities owned

and operated in the Philippines, determine the charges and/or rates pertinent to the operation of public air

utility facilities and services, and coordinates with the relevant government agencies in relation to airport

security. Moreover, CAAP is likewise tasked to operate and maintain domestic airports, air navigation

and other similar facilities in compliance with the International Civil Aviation Organization (ICAO), the

specialized agency of the United Nations whose mandate is to ensure the safe, efficient and orderly

evolution of international civil aviation.

The Company complies with and adheres to existing government regulations.

Category 2 Rating

In early January 2008, the Federal Aviation Administration (FAA) of the United States (U.S.)

downgraded the aviation safety ranking of the Philippines to Category 2 from the previous Category 1

7

rating. The FAA assesses the civil aviation authorities of all countries with air carriers that operate to the

U.S. to determine whether or not foreign civil aviation authorities are meeting the safety standards set by

the ICAO. The lower Category 2 rating means a country either lacks laws or regulations necessary to

oversee airlines in accordance with minimum international standards, or its civil aviation authority is

deficient in one or more areas, such as technical expertise, trained personnel, recordkeeping or inspection

procedures. Further, it means Philippine carriers can continue flying to the U.S. but only under heightened

FAA surveillance or limitations. In addition, the Philippines has been included in the “Significant Safety

Concerns” posting by the ICAO as a result of an unaddressed safety concern highlighted in the recent

ICAO audit. As a result of this unaddressed safety concern, Air Safety Committee (ASC) of the

European Union banned all Philippine commercial air carriers from operating flights to and from Europe.

The ASC based its decision on the absence of sufficient oversight by the CAAP.

Recently, the ICAO has lifted the significant safety concerns on the ability of CAAP to meet global

aviation standards. The ICAO SSC Validation Committee reviewed the corrective actions, evidence and

documents submitted by the Philippines to address the concerns and determined that the corrective actions

taken have successfully addressed and resolved the audit findings. The CAAP is now focused on

regaining the FAA‟s category 1 rating.

Although the Company does not currently operate flights to the U.S. and Europe, this development opens

the opportunity for the Company to establish new routes to other countries that base their decision on

flight access on the FAA and ASC‟s evaluation.

EO 28 and 29

In March 2011, the Philippine government issued EO 28 which provides for the reconstitution and

reorganization of the existing Single Negotiating Panel into the Philippine Air Negotiating Panel (PANP)

and Philippine Air Consultation Panel (PACP) (collectively, the Philippine Air Panels). The PANP shall

be responsible for the initial negotiations leading to the conclusion of the relevant ASAs while the PACP

shall be responsible for the succeeding negotiations of such ASAs or similar arrangements.

Also in March 2011, the Philippine government issued EO 29 which authorizes the CAB and the

Philippine Air Panels to pursue more aggressively the international civil aviation liberalization policy to

boost the country‟s competitiveness as a tourism destination and investment location. Among others, EO

29 provides the following:

In the negotiation of the ASAs, the Philippine Air Panels may offer and promote third, fourth and

fifth freedom rights to the country‟s airports other than the NAIA without restriction as to frequency,

capacity and type of aircraft, and other arrangements that will serve the national interest as may be

determined by the CAB; and

Notwithstanding the provisions of the relevant ASAs, the CAB may grant any foreign air carriers

increases in frequencies and/or capacities in the country‟s airports other than the NAIA, subject to

conditions required by existing laws, rules and regulations. All grants of frequencies and/or capacities

which shall be subject to the approval of the President shall operate as a waiver by the Philippines of

the restrictions on frequencies and capacities under the relevant ASAs.

The issuance of the foregoing EOs may significantly increase competition.

Air Passenger Bill of Rights

The Air Passenger Bill of Rights (the “Bill”), which was formed under a joint administrative order of the

Department of Transportation and Communications, the CAB and the Department of Trade and Industry,

was signed and published by the Government on 11 December 2012 and came into effect on 21

8

December 2012. The Bill sets the guidelines on several airline practices such as overbooking, rebooking,

ticket refunds, cancellations, delayed flights, lost luggage and misleading advertisement on fares.

The Company is not adversely affected by the passage of the Bill.

Republic Act (RA) No. 10378 - Common Carriers Tax Act

RA No. 10378, otherwise known as the Common Carriers Tax Act, was signed into law on March 7,

2013. This act recognizes the principle of reciprocity as basis for the grant of income tax exceptions to

international carriers and rationalizes other taxes imposed thereon by amending sections 28(A)(3)(a), 109,

108 and 236 of the National Internal Revenue Code, as amended.

Among the relevant provisions of the act follows:

a.) An international carrier doing business in the Philippines shall pay a tax of two and one-half percent

(2 1/2 %) on its Gross Philippine Billings, provided, that international carriers doing business in the

Philippines may avail of a preferential rate or exemption from the tax herein imposed on their gross

revenue derived from the carriage of persons and their excess baggage on the basis of an applicable

tax treaty or international agreement to which the Philippines is a signatory or on the basis of

reciprocity such that an international carrier, whose home country grants income tax exemption to

Philippine carriers, shall likewise be exempt from the tax imposed under this provision;

b.) International air carriers doing business in the Philippines on their gross receipts derived from

transport of cargo from the Philippines to another country shall pay a tax of three percent (3%) of

their quarterly gross receipts;

c.) VAT exemption on the transport of passengers by international carriers.

While the removal of CCT takes away the primary constraint on foreign carrier‟s capacity growth and

places the Philippines on an almost level playing field with that of other countries, this may still be a

positive news for the industry as a whole, as it may drive tourism into the Philippines. With Cebu

Pacific‟s dominant network, the Company can benefit from the government‟s utmost support for tourism.

Research and Development

The Company incurred minimal amounts for research and development activities, which do not amount to

a significant percentage of revenues.

Cost and Effects of Compliance with Environmental Laws

The operations of the Company are subject to various laws enacted for the protection of the environment.

The Company has complied with the following applicable environmental laws and regulations:

Presidential Decree No. 1586 (Establishing an Environmental Impact Assessment System) which

directs every person, partnership or corporation to obtain an Environmental Compliance Certificate

(ECC) before undertaking or operating a project declared as environmentally critical by the President

of the Philippines. Petro-chemical industries, including refineries and fuel depots, are considered

environmentally critical projects for which an ECC is required. The Company has obtained ECCs for

the fuel depots it operates and maintains for the storage and distribution of aviation fuel for its

aircraft.

9

RA 8749 (The Implementing Rules and Regulations of the Philippine Clean Air Act of 1999) requires

operators of aviation fuel storage tanks, which are considered as a possible source of air pollution, to

obtain a Permit to Operate from the applicable regional office of the Enrivonment Management

Bureau (EMB). The Company‟s aviation fuel storage tanks are subject to and are compliant with this

requirement.

RA 9275 (Implementing Rules and Regulations of the Philippine Clean Water Act of 2004) requires

owners or operators of facilities that discharge regulated effluents to secure from the Laguna Lake

Development Authority (LLDA) (Luzon area) and/or the applicable regional office of the EMB

(Visayas and Mindanao areas) a Discharge Permit, which is the legal authorization granted by the

Department of Energy and Natural Resources for the discharge of waste water. The Company‟s

operations generate waste water and effluents for the disposal of which a Discharge Permit was

obtained from the LLDA and the EMB of Region 7 which enables it to discharge and dispose of

liquid waste or water effluent generated in the course of its operations at specifically designated areas.

The Company also contracted the services of government-licensed and accredited third parties to

transport, handle and dispose its waste materials.

Compliance with the foregoing laws does not have a material effect to the Company‟s capital

expenditures, earnings and competitive position.

On an annual basis, the Company spends approximately P138,600 in connection with its compliance with

applicable environmental laws.

Employees

As of December 31 2012, the Company has 3,002 permanent full time employees, categorized as follows:

Division: Employees

Operations 2,276

Commercial 432

Support Departments(1)

294

3,002

Note: (1)

Support Departments include the Office of the General Manager, Corporate Finance and Legal Affairs

Department, People Department, Administrative Services Department, Procurement Department,

Information Systems Department, Comptroller Department, Internal Audit Department and Treasury

Department.

The Company‟s employees are not unionized, and it has not experienced any labor strikes or work

stoppages in the past three years.

Risk

The major business risks facing the Company are as follows:

(1) Cost and Availability of Fuel

The cost and availability of fuel are subject to many economic and political factors and events

occurring throughout the world, the most important of which are not within the Company‟s control.

Fuel prices have been subject to high volatility, fluctuating substantially over the past several years.

10

Any increase in the cost of fuel or any decline in the availability of adequate supplies of fuel could

have a material adverse effect on the Company‟s operations and profitability.

The Company implements various fuel management strategies to manage the risk of rising fuel

prices including hedging.

(2) Competition

The Company faces intense competition on its domestic and international routes, both from other

low-cost carriers and from full-service carriers. Its existing competitors or new entrants into the

market may undercut its fares in the future, increase capacity on their routes or attempt to conduct

low-fare or low-cost airline operations of their own in an effort to increase market share, any of

which could negatively affect the Company‟s business. The Company also faces competition from

ground and sea transportation alternatives, including buses, trains, ferries, boats and cars, which are

the principal means of transportation in the Philippines. Video teleconferencing and other methods

of electronic communication, and improvements therein, also add a new dimension of competition to

the industry as they, to a certain extent, provide lower-cost substitutes for air travel.

The Company focuses on areas of costs, on-time performance, service delivery and scheduling to

remain competitive.

(3) Lack of Marketing Alliance

Many airlines have marketing alliances with other airlines under which they market and advertise

their status as marketing alliance partners. The Company is not a member of any such marketing

alliance with respect to its passenger services. Its lack of alliance could harm its business and

competitive ability.

The Company may try to enter into code sharing agreements, interlining agreements or any other

marketing alliances in the future.

(4) Economic Downturn

The deterioration in the financial markets has heralded a recession in many countries, which led to

significant declines in employment, household wealth, consumer demand and lending and, as a

result, has adversely affected economic growth in the Philippines and elsewhere. Since a substantial

portion of airline travel, for both business and leisure, is discretionary, the airline industry tends to

experience adverse financial results during general economic downturns. Any deterioration in the

economy could negatively affect consumer sentiment and lead to a reduction in demand for flying

which could adversely affect the Company‟s business. The Company could also experience

difficulty accessing the financial markets, which could make it more difficult or expensive to obtain

funding in the future.

(5) Availability of Debt Financing

The Company‟s business is highly capital intensive. It has historically required debt financing to

acquire aircraft and expects to incur significant amounts of debt in the future to fund the acquisition

of additional aircraft, its operations, other anticipated capital expenditures, working capital

requirements and expansion overseas. Failure to obtain additional financing could adversely affect

the Company‟s ability to grow its business and its future profitability.

11

(6) Foreign Exchange and Interest Rate Fluctuations

The Company‟s exposure to foreign exchange rate fluctuations is principally in respect of its U.S.

dollar-denominated long-term debt as well as a majority of its operating costs, such as U.S. dollar-

denominated purchases of aviation fuel. On the other hand, the Company‟s exposure to interest rate

fluctuations is relative to debts incurred which have floating interest rates. In such cases, any

significant devaluation of the Philippine peso and any significant increases in interest rates will result

to increased obligations that could adversely impact the Company‟s result of operations.

The Company may enter into derivative contracts in the future to hedge foreign exchange exposure.

In addition, the Company may fix the interest rates for a portion of its loans.

(7) Airport and Air Traffic Control Infrastructure Constraints

The Company relies on operational efficiency to reduce unit costs and provide reliable service. Any

delay to the addition of capacity at airports or upgrade of facilities in the Philippines could affect the

Company‟s operational efficiency.

(8) Reliance on Third Party Facilities and Service Providers

The Company‟s inability to lease, acquire or access airport facilities and service providers on

reasonable terms to support its growth or to maintain its current operations would have a material

adverse effect on our business, prospects, financial condition and results of operations. Furthermore,

the Company‟s reliance on third parties to provide essential services on its behalf gives the Company

less control over the efficiency, timeliness and quality of services.

(9) Safety and Security

The Company is exposed to potentially significant losses in the event that any of its aircraft is lost or

subject to an accident, terrorist incident or other disaster. In addition, any such event would give rise

to significant costs related to passenger claims, repairs or replacement of a damaged aircraft and its

temporary or permanent loss from service. Moreover, aircraft accidents or incidents, even if fully

insured, are likely to create a public perception that the airline is less safe than other airlines, which

could significantly reduce its passenger volumes and have a material adverse effect on its business,

prospects, financial condition and results of operations. Terrorist attacks could also result in

decreased seat load factors and yields and could result in increased costs, such as increased fuel

expenses or insurance costs.

The Company is committed to operational safety and security. Its commitment to safety and security

is reflected in its rigorous aircraft maintenance program and flight operations manuals, intensive

flight crew, cabin crew and employee training programs and strict compliance with applicable

regulations regarding aircraft and operational safety and security.

(10) Maintenance Cost and Performance of Maintenance Repair Organizations

As the fleet ages, maintenance and overhaul expenses will increase. Any significant increase in

maintenance and overhaul expenses and the inability of maintenance repair organizations to provide

satisfactory service could adversely affect the business.

The Company enters into long term contracts to manage maintenance and overhaul expenses.

12

(11) Reliance on Automated Systems and the Internet

The Company depends on automated systems to operate its business, including, among others, its

website, its reservation and its departure control systems. Any disruption to its website or online

reservation and telecommunication services could result in losses, increased expenses and could

harm its reputation.

(12) Dependence on the Efforts of Executive Officers and Other Key Management

The Company‟s success depends to a significant extent upon the continued services of its executive

officers and other key management personnel. The unavailability of any of its executive officers and

other key management or failure to recruit suitable or comparable replacements could have a

material adverse effect on its business, prospects, financial condition and results of operations.

(13) Retaining and Attracting Qualified Personnel

The Company‟s business model requires it to have highly skilled, dedicated and efficient pilots,

engineers and other personnel. Its growth plans will require the Company to hire, train and retain a

significant number of new employees in the future. However, from time to time, the airline industry

has experienced a shortage of skilled personnel, particularly pilots and engineers. The Company

competes against full-service airlines which offer wage and benefit packages that exceed those

offered by the Company. The inability of the Company to hire, train and retain qualified employees

at a reasonable cost could result in inability to execute its growth strategy, which would have a

material adverse effect on its business, prospects, financial condition and results of operations. In

addition, the Company may find it increasingly challenging to maintain its corporate culture as it

replaces or hires additional personnel.

The Company may have to increase wages and benefits to attract and retain qualified personnel.

(14) Availability of Insurance

Insurance is fundamental to airline operations. Because of terrorist attacks or other world events,

certain aviation insurance could become unavailable or available only for reduced amounts of

coverage that are insufficient to comply with the levels of coverage required by the Company‟s

aircraft lenders and lessors or applicable government regulations. Any inability to obtain insurance,

on commercially acceptable terms or at all, for the Company‟s general operations or specific assets

would have a material adverse effect on its business, prospects, financial condition and results of

operations.

(15) Regulations

The Company has no control over applicable regulations. Changes in the interpretation of current

regulations or the introduction of new laws or regulations could have a material adverse effect on its

business, prospects, financial condition and results of operations.

(16) Catastrophes and Other Factors Beyond the Company‟s Control

Like other airlines, the Company is subject to delays caused by factors beyond its control, including

weather conditions, traffic congestion at airports, air traffic control problems and increased security

measures. In the event that the Company delays or cancels flights for any of these reasons, revenues

and profits would be reduced and the Company‟s reputation would suffer which could result in a loss

of customers.

13

(17) Unionization, Work Stoppages, Slowdowns and Increased Labor Costs

At present, the Company has a non-unionized workforce. However, in the event the employees

unionize, it could result to demands that may increase operating expenses and adversely affect the

Company‟s profitability. Likewise, disagreements between the labor union and management could

result to work slowdowns or stoppages or disruptions which could be harmful to the business.

(18) Restrictions under the Philippine Constitution and other Laws

The Company is subject to nationality restrictions under the Philippine Constitution and other laws,

limiting ownership of public utility companies to citizens of the Philippines or corporations or

associations organized under the laws of the Philippines of which at least 60% of the capital stock

outstanding is owned and held by citizens of the Philippines. There is a risk that these ownership

restrictions may be breached which could result in the revocation of the Company‟s franchise

generally and its rights to fly on certain international routes.

(19) Relationship with Third Party Sales Outlets

While part of the Company‟s strategy is to increase bookings through the internet, sales through third

party sales outlets remain an important distribution channel. There is no assurance that the Company

will be able to maintain favorable relationships with them nor be able to suitably replace them. The

Company‟s revenues could be adversely impacted if third parties who sell its air services elect to

prioritize other airlines.

(20) Outbreaks

Any present or future outbreak of contagious diseases could have a material adverse effect on the

Company‟s business, prospects, financial condition and results of operations.

(21) Domestic Concentration

Since the Company‟s operations have focused and, at least in the near term, will continue to focus on

air travel in the Philippines, it would be materially and adversely affected by any circumstances

causing a reduction in demand for air transportation in the Philippines, including adverse changes in

local economic and political conditions, negative travel advisories issued by foreign governments,

declining interest in the Philippines as a tourist destination, or significant price increases linked to

increases in airport access costs and fees imposed on passengers.

(22) Investment Risk

The Company has investment securities, the values of which are dependent on fluctuating market

prices. Any negative movement in the market price of the Company‟s investments could affect the

Company‟s results of operations.

The foregoing risks are not all inclusive. Other risks that may affect the Company‟s business and

operations may not be included in the above disclosure.

14

Item 2. Properties

As of the December 31, 2012, the Company does not own any land or buildings. It leases the office space

used for its corporate headquarters from the Philippine Aerospace Development Corp., while it leases its

hangar, aircraft parking and other operational space from the Manila International Airport Authority.

Kindly refer to Notes 12, 16 and 29 of the Notes to Consolidated Financial Statements for the detailed

discussions on Properties, Leases, Purchases and Capital Expenditure Commitments.

Item 3. Legal Proceedings

The Company is subject to law suits and legal actions in the ordinary course of business. The Company

is not a party to, and its properties are not subject of, any material pending legal proceedings that could be

expected to have a material adverse effect on the Company‟s financial position or result of operations.

PART II - OPERATIONAL AND FINANCIAL INFORMATION

Item 4. Market for Registrant’s Common Equity and Related Stockholder Matter

Market Information

The principal market for the Company‟s common equity is the Philippine Stock Exchange (PSE). Sales

prices of the common stock follow:

High Low

Year 2012

October to December 2012 P63.50 P54.30

July to September 2012 70.00 52.40

April to June 2012 71.40 62.00

January to March 2012 77.00 63.80

High Low

Year 2011

October to December 2011 P77.40 P62.50

July to September 2011 92.00 67.30

April to June 2011 98.15 76.75

January to March 2011 114.00 74.50

As of May 20, 2013, the latest trading date prior to the completion of this report, sales price of the

common stock is at P80.00.

Holders

The number of shareholders of record as of April 30, 2013 was 84. Common shares outstanding as of

April 30, 2013 were 605,953,330.

15

List of Top 20 Stockholders of Record

As of April 30, 2013

Number of % to Total

Name of Stockholders Shares Held Outstanding

1. CPAir Holdings, Inc. 400,816,841 66.15%

2. PCD Nominee Corporation (Non-Filipino) 136,441,271 22.52%

3. PCD Nominee Corporation (Filipino) 60,855,209 10.04%

4. JG Summit Holdings, Inc. 6,595,190 1.09%

5. Pacita K. Yap &/or Philip K. Yap 700,000 0.12%

6. BNC Ingredients Corporation 180,000 0.03%

7. BNC Ingredients Corporation 60,000 0.01%

8. Pablo M. Pagtalunan &/or Francisca P. Pagtalunan 50,000 0.01%

9. Elizabeth Yu Gokongwei 40,000 0.01%

9. Girme L. Gutierrez &/or Carmencita R. Gutierrez 40,000 0.01%

10. Ricardo Sy Po 36,400 0.01%

11. Philippine British Assurance Co., Inc. 20,000 0.00%

12. Raul Veloso Del Mar 16,000 0.00%

13. Alfonso S. Teh 12,500 0.00%

14. Randy U. Cortez &/or Grace M. 10,000 0.00%

15. Antonio M. Suarez 8,000 0.00%

16. Mario H. Liuag &/or Lydia P. Liuag 7,000 0.00%

17. Eric Macario Bernabe 5,000 0.00%

17. Estevez Villaruz (Esvill), Inc. 5,000 0.00%

18. Brigida T. Guingona 4,800 0.00%

19. Francisco Paulino V. Cayco 4,000 0.00%

19. Sally Chua Co 4,000 0.00%

19. Vicente Lim Co 4,000 0.00%

20. Eric Macario Bernabe 3,000 0.00%

20. Virginia M. Lopez 3,000 0.00%

Other stockholders 32,119 0.01%

Total Outstanding 605,953,330 100.00%

Dividends

On June 28, 2012, the Parent Company‟s BOD approved the declaration of a regular cash dividend in the

amount P=1 per common share to all stockholders of record as of July 18, 2012 and payable on August 13,

2012.

On March 17, 2011, the Board of Directors (BOD) of the Company approved the declaration of a regular

cash dividend in the amount of P2.00 per share and a special cash dividend in the amount of P1.00 per

share from the unrestricted retained earnings of the Company to all stockholders of record as of April 14,

2011 and payable on May 12, 2011.

Recent Sales of Unregistered Securities

Not Applicable. All shares of the Company are listed in the PSE.

16

Item 5. Management's Discussion and Analysis or Plan of Operation

The following discussion should be read in conjunction with the accompanying consolidated financial

statements and notes thereto, which form part of this Report. The consolidated financial statements and

notes thereto have been prepared in accordance with the Philippine Financial Reporting Standards

(PFRS).

Results of Operations

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Revenues

The Company generated revenues of P37.904 billion for the year ended December 31, 2012, 11.7%

higher than the P33.935 billion revenues earned last year. Growth in revenues is accounted for as

follows:

Passenger Revenues

Passenger revenues increased by P3.009 billion or 10.3% to P32.252 billion for the year ended December

31, 2012 from P29.242 billion registered in 2011. This increase was primarily due to the 11.1% growth

in passenger volume to 13.3 million from 11.9 million for the year ended December 31, 2011 driven by

the increased number of flights and higher seat load factor of 82.7% in 2012. Number of flights went up

by 12.5% year on year primarily as a result of the increase in the number of aircraft operated to 41 aircraft

as of December 31, 2012 from 37 aircraft as of end 2011. The reinstatement of fuel surcharge also

contributed to improved passenger revenues in 2012. Increase in revenues, however, was partially offset

by the reduction in average fares by 2.1% to P2,232 from P2,280 in 2011, partly due to elimination of free

baggage allowance from the fare as part of the Company‟s unbundling of fares strategy.

Cargo Revenues

Cargo revenues grew by P187.655 million or 8.6% to P2.381 billion for the year ended December 31,

2012 from P2.193 billion for the year ended December 31, 2011 following the increase in the volume and

average freight charges of cargo transported in 2012.

Baggage Fee and Ancillary Revenues

Baggage fee and Ancillary revenues went up by P0.772 billion or 30.9% to P3.272 billion for the year

ended December 31, 2012 from P2.500 billion posted last year. As part of its unbundling of fares

strategy, the Company commenced charging for every checked-in luggage with the elimination of free

baggage allowance. Improved online bookings also contributed to the increase. Online bookings

accounted for 51.0% of the total tickets sold during the year compared to 48.6% in 2011.

Expenses

The Company incurred operating expenses of P35.244 billion for the year ended December 31, 2012,

15.2% higher than the P30.599 billion operating expenses recorded for the year ended December 31,

2011. Increase in expenses due to seat growth was partially offset by the strengthening of the Philippine

peso against the U.S. dollar as referenced by the appreciation of the Philippine peso to an average of

P42.22 per U.S. dollar for the year ended December 31, 2012 from an average of P43.31 per U.S. dollar

last year based on the Philippine Dealing and Exchange Corporation (PDEx) weighted average rates.

Operating expenses increased as a result of the following:

Flying Operations

Flying operations expenses moved up by P2.668 billion or 15.4% to P20.019 billion for the year ended

December 31, 2012 from P17.350 billion charged in 2011. Aviation fuel expenses grew by 15.4% to

P17.562 billion from P15.221 billion for the year ended December 31, 2011 consequent to the increase in

the volume of fuel consumed as a result of the increased number of flights year on year. Rise in aviation

17

fuel expenses was further influenced by the surge in aviation fuel prices as referenced by the increase in

the average published fuel MOPS price of U.S.$126.83 per barrel in the twelve months ended December

31, 2012 from U.S.$125.50 average per barrel in the same period last year. Higher flight deck expenses

owing to higher pilot costs, including training, also contributed to the increase in flying operations

expenses.

Aircraft and Traffic Servicing

Aircraft and traffic servicing expenses increased by P442.120 million or 14.8% to P3.433 billion for the

year ended December 31, 2012 from P2.991 billion registered in 2011 as a result of the overall increase in

the number of flights flown in 2012. Higher expenses were particularly attributable to more international

flights operated for which airport and ground handling charges were generally higher compared to

domestic flights. International flights increased by 12.0% year on year.

Depreciation and Amortization

Depreciation and amortization expenses grew by P453.0 million or 19.6% to P2.768 billion for the year

ended December 31, 2012 from P2.315 billion for the year ended December 31, 2011. Depreciation and

amortization expenses increased consequent to the arrival of two Airbus A320 aircraft during the last

quarter of 2011 and four Airbus A320 aircraft in 2012.

Repairs and Maintenance

Repairs and maintenance expenses went up by P434.778 million or 14.4% to P3.462 billion for the year

ended December 31, 2012 from P3.027 billion posted last year. Increase was driven by the overall

increase in the number of flights which was offset in part by the appreciation of the Philippine peso

against the U.S. dollar as referenced by the strengthening of the Philippine peso to an average of P42.22

per U.S. dollar for the twelve month ended December 31, 2012 from an average of P43.31 per U.S. dollar

in 2011.

Aircraft and Engine Lease

Aircraft and engine lease expenses moved up by P315.522 million or 18.4% to P2.034 billion in the year

ended December 31, 2012 from P1.718 billion charged for the year ended December 31, 2011. Increase

in aircraft and engine lease expenses was due to the lease of two Airbus A320 aircraft and three

ATR 72-550 engine during the last quarter of 2011 and four Airbus A320 aircraft in 2012. Increase was

partially reduced by the return of two leased Airbus A320 aircraft in June 2012 and the effect of the

appreciation of the Philippine peso against the U.S. dollar during the current period.

Reservation and Sales

Reservation and sales expenses increased by P145.966 million or 9.9% to P1.627 billion for the year

ended December 31, 2012 from P1.481 billion registered last year. This was mainly due to the increase in

commission expenses and online bookings relative to the overall growth in passenger volume year on

year.

General and Administrative

General and administrative expenses grew by P133.265 million or 16.2% to P953.718 million for the year

ended December 31, 2012 from P820.453 million incurred in 2011. Growth in general and administrative

expenses was primarily attributable to the increased flight and passenger activity in 2012.

Passenger Service

Passenger service expenses went up by P68.973 million or 9.1% to P825.758 million for the year ended

December 31, 2012 from P756.786 million posted for the year ended December 31, 2011 consequent to

the additional cabin crew hired. Increased passenger liability insurance premiums relative to the increase

in the number of aircraft also contributed to the increase.

18

Operating Income

As a result of the foregoing, the Company finished with an operating income of P2.660 billion for the

year ended December 31, 2012, 20.3% lower than the P3.336 billion operating income earned last year.

Other Income (Expenses)

Interest Income

Interest income dropped by P231.627 million or 35.8% to P415.771 million for the year ended December

31, 2012 from P647.398 million recorded in 2011 consequent to the sale of the Company‟s quoted debt

investment securities in 2012.

Fuel Hedging Gains

Fuel hedging gains of P258.544 million for the year ended December 31, 2012 resulted from the higher

mark-to-market valuation on fuel hedging positions consequent to the significant increase in fuel prices

from end of 2012.

Foreign Exchange Gains

Net foreign exchange gains of P1.205 billion for the year ended December 31, 2012 resulted from the

appreciation of the Philippine peso against the U.S. dollar as referenced by the strengthening of the

Philippine peso to P41.05 per U.S. dollar for the twelve months ended December 31, 2012 from P43.84

per U.S. dollar for the twelve months ended December 31, 2011. The Company‟s major exposure to

foreign exchange rate fluctuations is in respect of U.S. dollar denominated long-term debt incurred in

connection with aircraft acquisitions.

Equity in Net Income of Joint Venture

The Company had equity in net income of joint venture of P54.384 million for the year ended December

31, 2012, P12.066 million or 28.5% higher than the P42.318 million equity in net income of joint venture

earned last year. Increase in this account was due to the increase in net income from the current

operations of Aviation Partnership (Philippines) Corporation (A-plus) and SIA Engineering (Philippines)

Corporation (SIAEP) in 2012.

Fair Value Losses of Financial Assets designated at Fair Value through Profit or Loss (FVPL)

No fair value losses on FVPL was recognized for the year ended December 31, 2012 as a result of the sale

of the related quoted debt and equity investment securities in 2012.

Interest Expense

Interest expense increased by P69.795 million or 10.5% to P732.592 million for the year ended December

31, 2012 from P662.797 million registered in 2011. Increase was due to higher interest expense incurred

brought by the additional loans availed to finance the acquisition of two Airbus A320 aircraft in the last

quarter of 2011 and four Airbus A320 aircraft in 2012 partially reduced by the effect of the strengthening

of the Philippine peso against the U.S.dollar during the current period.

Income before Income Tax

As a result of the foregoing, the Company recorded income before income tax of P3.867 billion for the

year ended December 31, 2012, slightly higher by 3.2% or P119.996 million than the P3.747 billion

income before income tax posted for the year ended December 31, 2011.

Provision for Income Tax

Provision for income tax for the year ended December 31, 2012 amounted to P297.387 million, of which,

P30.081 million pertains to current income tax recognized as a result of the taxable income in 2012.

Provision for deferred income tax amounted to P267.305 million resulting from the recognition of

deferred tax liabilities on future taxable amounts during the year.

19

Net Income

Net income for the year ended December 31, 2012 amounted to P3.570 billion, a decline of 1.5% from the

P3.624 billion net income earned in 2011.

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Revenues

The Company generated revenues of P33.935 billion for the year ended December 31, 2011, 16.7%

higher than the P29.089 billion revenues earned last year. Growth in revenues is accounted for as

follows:

Passenger Revenues

Passenger revenues increased by P3.351 billion or 13.0% to P29.242 billion for the year ended December

31, 2011 from P25.891 billion registered in 2010. This increase was primarily due to the 14.1% growth

in passenger volume to 11.9 million from 10.5 million for the year ended December 31, 2010 driven by

the increased number of flights and higher seat load factor of 86.3% in 2011. Number of flights went up

by 10.5% year on year primarily as a result of the increase in the number of aircraft operated to 37 aircraft

as of December 31, 2011 from 31 aircraft as of end 2010. The reinstatement of fuel surcharge also

contributed to improved passenger revenues in 2011. Increase in revenues, however, was partially offset

by the reduction in average fares by 3.3% to P2,280 from P2,357 in 2010, partly due to elimination of free

baggage allowance from the fare as part of the Company‟s unbundling of fares strategy.

Cargo Revenues

Cargo revenues grew by P97.672 million or 4.7% to P2.193 billion for the year ended

December 31, 2011 from P2.096 billion for the year ended December 31, 2010 following the increase in

the volume and average freight charges of cargo transported in 2011.

Baggage Fee and Ancillary Revenues

Baggage fee and ancillary revenues went up by P1.398 billion or 127.0% to P2.500 billion for the year

ended December 31, 2011 from P1.101 billion posted last year. As part of its unbundling of fares

strategy, the Company commenced charging for every checked-in luggage with the elimination of free

baggage allowance. Improved online bookings also contributed to the increase. Online bookings

accounted for 48.6% of the total tickets sold during the year compared to 41.7% in 2010.

Expenses

The Company incurred operating expenses of P30.599 billion for the year ended December 31, 2011,

34.2% higher than the P22.809 billion operating expenses recorded for the year ended December 31,

2010. Increase in expenses due to seat growth was partially offset by the strengthening of the Philippine

peso against the U.S. dollar as referenced by the appreciation of the Philippine peso to an average of

P43.31 per U.S. dollar for the year ended December 31, 2011 from an average of P45.12 per U.S. dollar

last year based on the Philippine Dealing and Exchange Corporation (PDEx) weighted average rates.

Operating expenses increased as a result of the following:

Flying Operations

Flying operations expenses moved up by P5.933 billion or 52.0% to P17.350 billion for the year ended

December 31, 2011 from P11.417 billion charged in 2010. Aviation fuel expenses grew by 55.2% to

P15.221 billion from P9.808 billion for the year ended December 31, 2010 consequent to the increase in

the volume of fuel consumed as a result of the increased number of flights year on year. Rise in aviation

fuel expenses was further influenced by the surge in aviation fuel prices as referenced by the increase in

the average published fuel MOPS price of U.S.$125.50 per barrel in the twelve months ended December

31, 2011 from U.S.$90.10 average per barrel in the same period last year. Higher flight deck expenses

owing to higher pilot costs, including training, also contributed to the increase in flying operations

expenses.

20

Aircraft and Traffic Servicing

Aircraft and traffic servicing expenses increased by P529.471 million or 21.5% to P2.991 billion for the

year ended December 31, 2011 from P2.462 billion registered in 2010 as a result of the overall increase in

the number of flights flown in 2011. Higher expenses were particularly attributable to more international

flights operated for which airport and ground handling charges were generally higher compared to

domestic flights. International flights increased by 22.4% year on year.

Depreciation and Amortization

Depreciation and amortization expenses grew by P448.828 million or 24.1% to P2.315 billion for the year

ended December 31, 2011 from P1.866 billion for the year ended December 31, 2010. The acquisition of

three Airbus A320 aircraft, one ATR 72-500 aircraft and one spare Airbus engine in 2011 primarily

resulted to the increase. Moreover, 2011 was first full year in which depreciation was recorded for the

three Airbus A320 aircraft delivered in the last quarter of 2010. Additional „Asset Retirement Obligation‟

(ARO) capitalized in 2011 and the additional ARO provision during the last quarter of 2010 also

contributed to the growth in depreciation and amortization expense.

Repairs and Maintenance

Repairs and maintenance expenses went up by P332.348 million or 12.3% to P3.027 billion for the year

ended December 31, 2011 from P2.695 billion posted last year. Increase was driven by the overall

increase in the number of flights which was offset in part by the appreciation of the Philippine peso

against the U.S. dollar as referenced by the strengthening of the Philippine peso to an average of P43.31

per U.S. dollar for the twelve month ended December 31, 2011 from an average of P45.12 per U.S. dollar

in 2010.

Aircraft and Engine Lease

Aircraft and engine lease expenses moved up by P113.576 million or 7.1% to P1.718 billion for the year

ended December 31, 2011 from P1.605 billion charged for the year ended December 31, 2010. Increase

in aircraft and engine lease expenses was due to the lease of two Airbus A320 aircraft and one

ATR 72-500 engine in 2011, partially offset by the effect of the appreciation of the Philippine peso

against the U.S. dollar during the current year.

Reservation and Sales

Reservation and sales expenses increased by P144.654 million or 10.8% to P1.481 billion for the year

ended December 31, 2011 from P1.336 billion registered last year. Higher spending to build market

presence and establish brand name in its international operations accounted for the increase. Moreover,

increase in commission expenses relative to increased sales also contributed to the growth in reservation

and sales expenses.

General and Administrative

General and administrative expenses grew by P125.565 million or 18.1% to P820.453 million for the year

ended December 31, 2011 from P694.888 million incurred in 2010. Growth in general and administrative

expenses was primarily attributable to the increased flight and passenger activity in 2011.

Passenger Service

Passenger service expenses went up by P117.305 million or 18.3% to P756.786 million for the year ended

December 31, 2011 from P639.481 million posted for the year ended December 31, 2010 consequent to

the additional cabin crew hired for the three Airbus A320 aircraft acquired during the last quarter of 2010

and five Airbus A320 acquired in 2011. Increased passenger liability insurance premiums relative to the

increase in the number of aircraft also contributed to the increase.

21

Operating Income

As a result of the foregoing, the Company finished with an operating income of P3.336 billion for the

year ended December 31, 2011, 46.9% lower than the P6.280 billion operating income earned last year.

Other Income (Expenses)

Interest Income

Interest income moved up by P409.902 million or 172.6% to P647.398 million for the year ended

December 31, 2011 from P237.496 million recorded in 2010. Increased cash from operations were placed

in short-term money markets and investment securities which generated interests thus resulting to a

considerable increase in interest income in 2011. Interest rates on placements and interest earned on debt

securities were also higher this year.

Fuel Hedging Gains

Fuel hedging gains of P477.128 million for the year ended December 31, 2011 resulted from the higher

mark-to-market valuation on fuel hedging positions consequent to the significant increase in fuel prices

from end of 2010.

Foreign Exchange Gains

Net foreign exchange gains of P50.155 million for the year ended December 31, 2011 resulted from the

appreciation of the Philippine peso against the U.S. dollar as referenced by the strengthening of the

Philippine peso to an average of P43.31 per U.S. dollar for the twelve months ended December 31, 2011

from an average of P45.12 per U.S. dollar for the twelve months ended December 31, 2010 based on PDS

weighted average rates. The Company‟s major exposure to foreign exchange rate fluctuations is in

respect of U.S. dollar denominated long-term debt incurred in connection with aircraft acquisitions.

Equity in Net Income of Joint Venture

The Company had equity in net income of joint venture of P42.318 million for the year ended December

31, 2011, P17.070 million or 67.6% higher than the P25.249 million equity in net income of joint venture

earned last year. Increase in this account was due to the increase in net income from the current

operations of Aviation Partnership (Philippines) Corporation (A-plus), partially offset by the net loss

incurred by SIA Engineering (Philippines) Corporation (SIAEP) in 2011.

Fair Value Losses of Financial Assets designated at Fair Value through Profit or Loss (FVPL)

Fair value losses amounted to P143.555 million for the year ended December 31, 2011 resulting from the

decline in the fair values of quoted debt and equity instruments designated at FPVL.

Interest Expense

Interest expense declined by P98.3 million or 13.0% to P662.8 million for the year ended December 31,

2011 from P761.1 million registered in 2010. Decrease was due to the repayment of the Company‟s

obligations in accordance with the loan repayment schedules and lower interest rates on outstanding debts

during the current year. Likewise, the strengthening of the Philippine peso against the U.S. dollar in 2011

complemented the decline.

Income before Income Tax

As a result of the foregoing, the Company recorded income before income tax of P3.747 billion for the

year ended December 31, 2011, 46.0% lower than the P6.940 billion income before income tax posted in

the year ended December 31, 2010

Provision for Income Tax

Provision for income tax for the year ended December 31, 2011 amounted to P122.585 million, of which,

P52.679 million pertains to current income tax recognized as a result of the taxable income in 2011.

22

Provision for deferred income tax amounted to P69.906 million resulting from the recognition of deferred

tax liabilities on future taxable amounts during the year.

Net Income

Net income for the year ended December 31, 2011 amounted to P3.624 billion, a decline of 47.6% from

the P6.922 billion net income earned in 2010.

Year Ended December 31, 2010 Compared with Year Ended December 31, 2009

The Company posted revenues of P29.089 billion for the year ended December 31, 2010 which was

24.8% higher than the P23.311 billion revenues generated last year. Considerable improvement in

revenues is accounted for as follows:

Passenger Revenues

Passenger revenues increased by P5.173 billion or 25.0% to P25.892 billion for the year ended December

31, 2010 from P20.719 billion revenues posted last year. This increase was primarily due to the 19.5%

increase in passenger volume to 10.5 million for the twelve months ended December 31, 2010 from

8.8 million for the twelve months ended December 31, 2009. This was driven by the increase in number

of flights year on year and higher seat load factor in 2010. The Company increased the size of its fleet by

adding two Airbus A320 aircraft and two ATR 72-500 aircraft during the twelve months ended December

31, 2009. These aircraft were in operation for the entire twelve months ended December 31, 2010 thereby

resulting in more flights compared to 2009. Moreover, three Airbus A320 aircraft arrived during the last

quarter of 2010 which further contributed to the increased number of flights. Total number of flights in

2010 was up by 8.2% year on year. The increase in passenger revenues for the twelve months ended

December 31, 2010 compared with the twelve months ended December 31, 2009 was also attributable to

the increase in the average fares which moved up by 5.8% to P2,357 in 2010 from P2,227 in prior year.

Cargo Revenues

Cargo revenues increased by P411.194 million or 24.4% to P2.096 billion for the year ended December

31, 2010 from P1.684 billion for the year ended December 31, 2009, mainly as a result of the increase in

the volume of cargo transported during the period.

Baggage fee and ancillary revenues

Baggage fee and ancillary revenues increased by P193.652 million or 21.3% to P1.101 billion for the year

ended December 31, 2010 from P0.907 billion registered in 2009.

Expenses

The Company incurred expenses of P22.809 billion for the year ended December 31, 2010,

12.6% higher than the P20.254 billion expenses incurred last year. Increase in expenses due to seat

growth was partially offset by the strengthening of the Philippine peso against the U.S. dollar to an

average of P45.12 per U.S. dollar for the twelve months ended December 31, 2010 from an average of

P47.64 per U.S. dollar in 2009 based on the Philippine Dealing System weighted average rates. Expenses

increased as a result of the following:

Flying Operations

Flying operations expenses increased by P2.560 billion or 28.9% to P11.417 billion for the year ended

December 31, 2010 from P8.857 billion for the year ended December 31, 2009. Increase in flying

operations expenses was mainly attributable to the increase in aviation fuel expenses by 33.3% to

P9.808 billion in the twelve months ended December 31, 2010 from P7.360 billion incurred last year as a

result of the overall increase in the number of flights as well as increase in aviation fuel prices. Aviation

fuel prices rose as referenced by the increase in the average published MOPS price of U.S. $90.10 per

barrel in the twelve months ended December 31, 2010 compared to the U.S. $69.97 per barrel in 2009.

23

Aircraft and Traffic Servicing

Aircraft and traffic servicing expenses decreased by P170.026 million or 6.5% to P2.462 billion for the

year ended December 31, 2010 from P2.632 billion posted in 2009. Decline was mainly due to lower

airport charges further reduced by the strengthening of the Philippine peso against the U.S. dollar in 2010.

Repairs and Maintenance

Repairs and maintenance expenses decreased by P124.373 million or 4.4% to P2.695 billion for the year

ended December 31, 2010 from P2.819 billion last year. Decline in repairs and maintenance expenses

resulted from the Company‟s effective cost management. The appreciation of the Philippine peso against

the U.S. dollar in 2010 also contributed to the decrease.

Depreciation and Amortization

Depreciation and amortization expenses increased by P92.072 million or 5.2% to P1.866 billion for the

year ended December 31, 2010 from P1.774 billion for the year ended December 31, 2009 mainly

because of the addition of two ATR 72-500 aircraft during the course of the twelve months ended

December 31, 2009 which were in operation for the entire twelve months ended December 31, 2010 and

the acquisition of three Airbus A320 aircraft during the last quarter of 2010. The acquisition of one spare

engine in fourth quarter 2009 also contributed to the increase.

Aircraft and Engine Lease

Aircraft and engine lease expenses decreased by P119.031 million or 6.9% to P1.605 billion in the year

ended December 31, 2010 from P1.724 billion in prior year consequent to the return of two leased Boeing

757 aircraft in June and October 2009. Decline in aircraft and engine lease expenses was also attributable

to the strengthening of the Philippine peso to an average of P45.12 per U.S. dollar for the twelve months

ended December 31, 2010 compared to an average of P47.64 per U.S. dollar for the twelve months ended

December 31, 2009.

Reservation and Sales

Reservation and sales expenses increased by P341.289 million or 34.3% to P1.336 billion for the year

ended December 31, 2010 from P0.995 billion in 2009. This increase was primarily attributable to the

increased advertising and promotions expenditures incurred to promote the Company‟s services on the

Company‟s international routes during the twelve months ended December 31, 2010. Increase was also

due to higher commission expenses as a result of the overall increase in passenger and cargo volumes,

especially on the international operations.

General and Administrative

General and administrative expenses decreased by P127.622 million or 15.5% to P694.888 million for

year ended December 31, 2010 from P822.510 million last year. This was due to the impairment loss on

other receivables recognized in 2009 which offset the increase in other general and administrative

expenses due to the additional staff and service requirements associated with the increased flight and

passenger activity in the twelve months ended December 31, 2010.

Passenger Service

Passenger service expenses increased by P58.585 million or 10.1% to P639.481 million for the year

ended December 31, 2010 from P580.896 million for the year ended December 31, 2009. This increase

was mainly due to the additional cabin crew requirements for Airbus A319 fleet consequent to the

reconfiguration of said aircraft which increased the seat capacity from 150 passengers to 156 passengers

thereby requiring more cabin crew to attend to passenger needs. The Company also hired additional

cabin crew for the three Airbus A320 aircraft acquired in the last quarter of 2010.

24

Operating Income

As a result of the foregoing, the Company registered operating income of P6.280 billion for the year

ended December 31, 2010, 105.4% higher than the P3.057 billion posted in 2009.

Other Income (Expenses)

Interest Expense

Interest expense decreased by P144.792 million or 16.0% to P761.079 million for the year ended

December 31, 2010 from P905.872 million for the year ended December 31, 2009. Decline was due to

the repayment of the Company‟s outstanding obligations in accordance with the loan repayment

schedules partially offset by the interest incurred on additional loans availed during the last quarter of

2010. Likewise, the strengthening of the Philippine peso against the U.S. dollar in 2010 also contributed

to the decline.

Long-term debt as of December 31, 2010 amounted to P18.433 billion, 7.7% higher than the

P17.110 balance as of December 31, 2009. Additional loans were obtained during the last quarter of

2010.

Foreign Exchange Gains

Foreign exchange gains increased by P158.797 million or 38.0% to P576.979 million for the year ended

December 31, 2010 from P418.182 million in prior year. This was due to the strengthening of the

Philippine peso against the U.S. dollar to an average of P45.12 per U.S. dollar for the twelve months

ended December 31, 2010 from an average of P47.64 per U.S. dollar in 2009. The Company‟s principal

exposure to foreign exchange rate fluctuations is in respect of U.S. dollar denominated long-term debt

incurred in connection with aircraft acquisitions.

Fuel Hedging Gains

Fuel hedging gains of P474.255 million in the year ended December 31, 2010 resulted from the higher

mark-to-market valuation on fuel hedging positions.

Interest Income

Interest income increased by P228.647 million or 2584.0% to P237.496 million for the year ended

December 31, 2010 from P8.849 million in 2009. Increased cash from operations were placed in short-

term money markets and investment securities which earned interests thus resulting to a significant

increase in interest income in the current year.

Fair Value Gains of Financial Assets designated at FVPL

Fair value gains amounted to P107.631 million for the year ended December 31, 2010. This resulted from

the changes in the fair values of quoted debt and equity instruments designated at FVPL acquired during

the current year.

Equity in Net Income (Loss) of Joint Venture

The Company had equity in net income of joint venture of P25.249 million for the year ended December

31, 2010, an improvement from last year‟s net loss of P25.474 million as the losses of SIAEP, a company

which was established in July 2008 and began commercial operations in August 2009, narrowed. Higher

income generated by the current operations of A-plus also accounted for the improvement.

Income before Income Tax

As a result of the foregoing, the Company posted income before income tax of P6.940 billion for the year

ended December 31, 2010, 114.3% higher than the P3.238 billion registered in 2009.

Provision for (Benefit from) Income Tax

25

Provision for income tax for the year ended December 31, 2010 was P17.760 million. Increase in

provision for income tax was mainly due to the deferred tax liabilities recognized in connection with the

net unrealized foreign exchange gains on foreign currency denominated obligations as a result of the

strengthening of the Philippine peso during the year.

Net Income

Audited net income for the year ended December 31, 2010 surged to P6.922 billion, 112.5% higher than

the P3.258 billion net income posted in 2009.

Financial Position

December 31, 2012 versus December 31, 2011

As of December 31, 2012, the Company‟s consolidated balance sheet remains solid, with net debt to

equity of 0.55 [total debt after deducting cash and cash equivalents (including financial assets held-for-

trading at fair value and available-for-sale assets) divided by total equity]. Consolidated assets grew to

P61.336 billion from P54.506 billion as of December 31, 2011 as the Company added aircraft to its fleet.

Equity grew to P=22.135 billion from P=19.166 billion in prior year while book value per share amounted to

P=36.53 as of December 31, 2012 from P=31.63 as of December 31, 2011.

The Company‟s cash requirements have been mainly sourced through cash flow from operations. Net

cash from operating activities amounted to P6.161 billion. As of December 31, 2012, net cash used in

investing activities amounted to P1.014 million which included payments in connection with the purchase

of aircraft and proceeds from the sale of investment securities. Net cash used in financing activities

amounted to P3.114 billion. Net cash used in financing activities mainly comprised the repayments of

certain long-term debt and the payment of cash dividends to the Company‟s stockholders.

As of December 31, 2012, except as otherwise disclosed in the financial statements and to the best of the

Company‟s knowledge and belief, there are no events that will trigger direct or contingent financial

obligation that is material to the Company, including any default or acceleration of an obligation.

Material Changes in the 2012 Financial Statements

(Increase/Decrease of 5% or more versus 2011)

Material changes in the Statements of Consolidated Comprehensive Income were explained in detail in

the management‟s discussion and analysis or plan of operations stated above.

Consolidated Statements of Financial Position - December 31, 2012 versus December 31, 2011

19.8% increase in Cash and Cash Equivalents

Due to collections as a result of the improvement in the Company‟s operations and from the proceeds of

investment securities sold during the period.

96.9% decrease in Financial Assets at FVPL

Due to sale of investments in quoted debt and equity securities.

18.1% increase in Receivables

Due to increased trade receivables relative to the growth in revenues.

216.7% increase in Other Current Assets

Due to advanced payments made to suppliers

26

19.1% increase in Property and Equipment

Due mainly to the acquisition of four Airbus A320 aircraft.

100% decrease in Available-for-Sale Investment

Due to sale of investments in quoted equity security.

25.0% increase in Investment in Joint Ventures

Due to investments in Philippine Academy for Aviation Training, Inc. and share in the net income of A-

plus and SIAEP during the period.

43.6% decrease in Other Noncurrent Assets

Due to reduction of security deposits on leased aircraft.

15.8% increase in Accounts Payable and Other Accrued Liabilities

Due to increase in trade payables and accruals of certain operating expenses as a result of the increased

flight and passenger activity in the twelve months ended December 31, 2012.

13.9% increase in Unearned Transportation Revenue

Due to increase in sale of passenger travel services.

9.8% increase in Long-Term Debt (including Current Portion)

Due to additional loans availed to finance the purchase of the four Airbus A320 aircraft acquired during

the year partially offset by the repayment of certain outstanding long-term debt in accordance with the

repayment schedule.

100% decrease in Financial Liabilities at FVPL

Due to increase in value of certain derivative financial instruments.

121.6 % increase in Deferred Tax Liabilities- net

Due to future taxable amount recognized during the year.

100% decrease in Net Unrealized Losses on Available-for-Sale Investment

Due to sale of investments in quoted equity security.

27.8% increase in Retained Earnings

Due to net income during the year partially offset by the cash dividends distributed to stockholders.

Fuel prices have significantly increased in 2012 and this will have an impact on the Company‟s operating

income.

For 2012, there are no significant element of income that did not arise from the Company‟s continuing

operations.

The Company generally records higher domestic revenue in January, March, April, May and December as

festivals and school holidays in the Philippines increase the Company‟s seat load factors in these periods.

Accordingly, the Company‟s revenue is relatively lower in July to September due to decreased domestic

travel during these months. Any prolonged disruption in the Company‟s operations during such peak

periods could materially affect its financial results.

In addition, the Company has capital expenditure commitments which principally relate to the acquisition

of aircraft. Kindly refer to Note 29 of the Notes to Consolidated Financial Statements for the detailed

discussion on Purchase and Capital Expenditure Commitments.

27

December 31, 2011 versus December 31, 2010

As of December 31, 2011, the Company‟s consolidated balance sheet remains solid, with net debt to

equity of 0.57 [total debt after deducting cash and cash equivalents (including financial assets held-for-

trading at fair value and available-for-sale assets) divided by total equity]. Consolidated assets grew to

P54.506 billion from P48.725 billion as of December 31, 2010 as the Company added aircraft to its fleet.

Equity grew to P 19.166 billion from P 17.907 billion in prior year while book value per share amounted

to P 31.63 as of December 31, 2011 from P 29.20 as of December 31, 2010.

The Company‟s cash requirements have been mainly sourced through cash flow from operations. Net

cash from operating activities amounted to P 7.995 billion. As of December 31, 2011, net cash used in

investing activities amounted to P4.291 billion which included payments in connection with the purchase

of aircraft. Net cash used in financing activities amounted to P4.504 billion. Net cash used in financing

activities mainly comprised the repayments of certain long-term debt and the payment of cash dividends

to the Company‟s stockholders.

As of December 31, 2011, except as otherwise disclosed in the financial statements and to the best of the

Company‟s knowledge and belief, there are no events that will trigger direct or contingent financial

obligation that is material to the Company, including any default or acceleration of an obligation.

Material Changes in the 2011 Financial Statements

(Increase/Decrease of 5% or more versus 2010)

Material changes in the Statements of Consolidated Comprehensive Income were explained in detail in

the management‟s discussion and analysis or plan of operations stated above.

Consolidated Statements of Financial Position - December 31, 2011 versus December 31, 2010

8.3% decrease in Cash and Cash Equivalents

Due to payments made in connection with the acquisition of Airbus A320 and A321Neo aircraft,

repayment of certain long-term debt and distribution of cash dividends to the Company‟s stockholders.

15.9% decrease in Financial Assets at FVPL

Due to decline in the fair value of quoted debt and equity instruments and the settlement of certain

derivative financial instruments relative to its fuel hedges.

7.4% increase in Expendable Parts, Fuel, Materials and Supplies

Due to higher fuel prices during the year.

5.5% increase in Other Current Assets

Due to advance rentals made for the additional leased aircraft.

21.6% increase in Property and Equipment

Due mainly to the acquisition of three Airbus A320 aircraft, one ATR 72-500 aircraft and one spare

Airbus engine.

10.8% increase in Investment in Joint Ventures

Due to investment in PAAT and share in the net income of A-plus during the period.

19.4% increase in Other Noncurrent Assets

Due to deposits made for the delivery of leased Airbus A320 aircraft.

28

19.9% increase in Accounts Payable and Other Accrued Liabilities

Due to increase in trade payables and accruals of certain operating expenses as a result of the increased

flight and passenger activity in the twelve months ended December 31, 2011.

14.0% increase in Unearned Transportation Revenue

Due to increase in sale of passenger travel services.

13.2% increase in Long-Term Debt (including Current Portion)

Due to additional loans availed to finance the purchase of the three Airbus A320 aircraft acquired during

the year partially offset by the repayment of certain outstanding long-term debt in accordance with the

repayment schedule.

100.0% increase in Financial Liabilities at FVPL

Due to decline in value of certain derivative financial instruments.

44.8% increase in Deferred Tax Liabilities- net

Due to future taxable amount recognized during the year.

100.0% increase in Treasury Stocks

Due to purchase of 7,283,220 shares of common stocks.

107.4% increase in Net Unrealized Losses on Available-for-Sale Investment

Due to decrease in fair value of the acquired quoted equity security.

20.1% increase in Retained Earnings

Due to net income during the year partially offset by the cash dividends distributed to stockholders.

Fuel prices have significantly increased in 2012 and this will have an impact on the Company‟s operating

income.

For 2011, there are no significant element of income that did not arise from the Company‟s continuing

operations.

The Company generally records higher domestic revenue in January, March, April, May and December as

festivals and school holidays in the Philippines increase the Company‟s seat load factors in these periods.

Accordingly, the Company‟s revenue is relatively lower in July to September due to decreased domestic

travel during these months. Any prolonged disruption in the Company‟s operations during such peak

periods could materially affect its financial results.

In addition, the Company has capital expenditure commitments which principally relate to the acquisition

of aircraft. Kindly refer to Note 29 of the Notes to Consolidated Financial Statements for the detailed

discussion on Purchase and Capital Expenditure Commitments.

29

Key Performance Indicators

The Company sets certain performance measures to gauge its operating performance periodically and to

assess its overall state of corporate health. Listed below are major performance measures, which the

Company has identified as reliable performance indicators. Analyses are employed by comparisons and

measurements based on the financial data as of December 31, 2012 and 2011 and for the years ended

December 31, 2012 and 2011:

Key Financial Indicators 2012 2011

Total Revenue P37.904 billion P33.935 billion

Pre-tax Core Net Income P2.398 billion P3.363 billion

EBITDAR Margin 21.2% 23.2%

Cost per Available Seat Kilometre (ASK) (Php) 2.49 2.47

Cost per ASK (U.S. cents) 5.89 5.71

Seat Load Factor 83% 86%

The manner by which the Company calculates the above key performance indicators for both year-end

2012 and 2011 is as follows:

Total Revenue The sum of revenue obtained from the sale of air

transportation services for passengers and cargo and

ancillary revenue.

Pre-tax Core Net Income Operating income after deducting net interest

expense and adding equity income/loss of joint

venture

EBITDAR Margin Operating income after adding depreciation and

amortization, accretion and amortization of ARO and

aircraft and engine lease expenses divided by total

revenue

Cost per ASK Operating expenses, including depreciation and

amortization expenses and the costs of operating

leases, but excluding fuel hedging effects, foreign

exchange effects, net financing charges and taxation,

divided by ASK

Seat Load Factor Total number of passengers divided by the total

number of actual seats on actual flights flown

Item 6. Financial Statements

The financial statements are filed as part of this report.

Item 7. Independent Public Accountants and Audit Related Fees

Independent Public Accountants

Sycip Gorres Velayo & Co. (SGV & Co.) has acted as the Company‟s independent public accountant.

The same accounting firm is tabled for reappointment for the current year at the annual meeting of

stockholders. The representatives of the principal accountant have always been present at prior year‟s

meetings and are expected to be present at the current year‟s annual meeting of stockholders. They may

also make a statement and respond to appropriate questions with respect to matters for which their

services were engaged.

30

The current handling partner of SGV & Co. has been engaged by the Company in 2012 and is expected to

be rotated every five years.

A. Audit Fees

The following table sets out the aggregate fees billed for each of the last three years for professional

services rendered by SGV & Co.

2012 2011 2010

Audit and audit-related fees P2,425,500 P2,310,000 P2,100,000

The audit committee‟s approval policies and procedures for the services rendered by the external auditors:

The Corporate Governance Manual of the Company provides that the audit committee shall, among

others:

1. Evaluate all significant issues reported by the external auditors relating to the adequacy,

efficiency, and effectiveness of policies, controls, processes and activities of the Company.

2. Ensure that other non-audit work provided by the external auditors is not in conflict with their

functions as external auditors.

3. Ensure the compliance of the Company with acceptable auditing and accounting standards and

regulations.

B. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

PART III - CONTROL AND COMPENSATION INFORMATION

Item 8. Board of Directors and Executive Officers of the Registrant

Currently, the Board consists of nine members, of which two are independent directors. The table below

sets forth certain information regarding the members of our Board.

Name Age Position Citizenship

Ricardo J. Romulo 79 Chairman Filipino

John L. Gokongwei, Jr. 86 Director Filipino

James L. Go 73 Director Filipino

Lance Y. Gokongwei

46

Director, President and Chief

Executive Officer

Filipino

Jose F. Buenaventura 78 Director Filipino

Robina Y. Gokongwei-Pe 51 Director Filipino

Frederick D. Go 43 Director Filipino

Antonio L. Go* 72 Independent Director Filipino

Oh Wee Khoon 54 Independent Director Singaporean

*He is not related to any of the other directors

31

All of the above directors have served their respective offices since June 28, 2012. There are no other

directors who resigned or declined to stand for re-election to the board of directors since the date of the

last annual meeting of the stockholders for any reason whatsoever.

Messrs. Antonio L. Go and Oh Wee Khoon are the independent directors of the Company.

The table below sets forth certain information regarding our executive officers.

Name Age Position Citizenship

Bach Johann M. Sebastian……. 51 Senior Vice President -

Chief Strategist…….....…… Filipino

Jaime I. Cabangis…... 60 Chief Financial Officer…... Filipino

Victor Emmanuel B. Custodio... 54 Vice President .…………… Filipino

Rosita D. Menchaca…………... 50 Vice President .…………… Filipino

Candice Jennifer A. Iyog……... 40 Vice President .…………… Filipino

Joseph G. Macagga…………… 47 Vice President .…………… Filipino

Antonio Jose L. Rodriguez …... 59 Vice President .…………… Filipino

Robin C. Dui………………….. 66 Vice President…………..… Filipino

Jeanette U. Yu………………… 59 Vice President - Treasurer.... Filipino

Michael S. Shau………………. 49 Vice President .…………… Filipino

Alejandro B. Reyes…………… 45 General Manager .…………… Filipino

Alexander G. Lao……………… 37 Vice President……………... Filipino

Rosalinda F. Rivera………….... 42 Corporate Secretary………. Filipino

William S. Pamintuan………… 50 Assistant Corporate

Secretary…………………... Filipino

The table below sets forth certain information regarding our senior consultants.

Name Age Citizenship

Garry R. Kingshott.............................. 60 Australian

Mark Breen……….............................. 39 Irish

The business experience for the past five years of each of our directors, executive officers and senior

consultants is set forth below:

Ricardo J. Romulo has been the Chairman of our Board since December 1995. He is also a director of JG

Summit Holdings, Inc. and a Senior Partner in Romulo, Mabanta, Buenaventura, Sayoc & De Los

Angeles. Mr. Romulo is also Chairman of Federal Phoenix Assurance Company, Inc. and InterPhil

Laboratories, Inc. He is Vice Chairman of Planters Development Bank and a director of SM

Development Corporation, Philippine American Life and General Insurance Company, and Zuellig

Pharma Corporation. He received his Bachelor of Laws degree from Georgetown University and Doctor

of Laws degree from Harvard Law School.

John L. Gokongwei, Jr. has been a director of our Company since December 1995. He is the Chairman

Emeritus and a member of the Board of Directors of JG Summit Holdings, Inc. and certain of its

subsidiaries. He also continues to be a member of the Executive Committee of JG Summit Holdings, Inc.

He is currently the Chairman of the Gokongwei Brothers Foundation, Inc., Deputy Chairman and Director

of United Industrial Corporation Limited and Singapore Land Limited, and a director of JG Summit

Capital Markets Corporation and Oriental Petroleum and Minerals Corporation. He is also a non-

executive director of A. Soriano Corporation. Mr. John L. Gokongwei, Jr. received a Master‟s degree in

Business Administration from De La Salle University and attended the Advanced Management Program

at Harvard Business School.

32

James L. Go has been a director of our Company since May 2002. He is the Chairman and Chief

Executive Officer of JG Summit Holdings, Inc. and, as such, he heads the Executive Committee of JG

Summit Holdings, Inc. He is currently the Chairman of Universal Robina Corporation, Robinsons Land

Corporation and JG Summit Petrochemical Corporation. He is the Chairman and Chief Executive Officer

of Robinsons, Inc.and Oriental Petroleum and Minerals Corporation. He is also the President and a

Trustee of the Gokongwei Brothers Foundation, Inc. He was elected director of the Philippine Long

Distance Telephone Company (PLDT) on November 3, 2011 and was also appointed a member of

PLDT‟s Technology Strategy Committee. He is also a director of United Industrial Corporation Limited,

Singapore Land Limited, Marina Centre Holdings, Inc., Hotel Marina City Private Limited and JG

Summit Capital Markets Corporation. Mr. James L. Go received a Bachelor of Science degree and a

Master of Science degree in Chemical Engineering from the Massachusetts Institute of Technology.

Lance Y. Gokongwei has been the President and Chief Executive Officer of our Company since 1997. He

is the President and Chief Operating Officer of JG Summit Holdings, Inc. He is the President and Chief

Executive Officer of Universal Robina Corporation and JG Summit Petrochemical Corporation, and the

Vice Chairman and Chief Executive Officer of Robinsons Land Corporation. He is also the Chairman of

Robinsons Bank, Chairman and President of JG Summit Capital Markets Corporation, and a director of

Oriental Petroleum and Minerals Corporation, United Industrial Corporation Limited and Singapore Land

Limited. He is also trustee, secretary and treasurer of the Gokongwei Brothers Foundation, Inc. Mr.

Lance Y. Gokongwei received a Bachelor of Science degree in Finance and a Bachelor of Science degree

in Applied Science from the University of Pennsylvania.

Jose F. Buenaventura has been director of our Company since December 1995. He is a Senior Partner in

Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles. Mr. Buenaventura is a Director and

President of Consolidated Coconut Corporation. He is also a member of the Board of The Country Club,

Inc., Peter Paul Philippine Corporation, GROW, Inc., Grow Holdings, Inc., Total Consolidated Asset

Management, Inc., Philippine First Insurance Co., Inc. and PhilPlans First, Inc. Mr. Buenaventura

received his Bachelor of Laws degree from the Ateneo de Manila University School of Law and his

Master of Laws Degree from Georgetown University Law Centre, Washington D.C. He was admitted to

the Philippine Bar in 1959.

Robina Y. Gokongwei-Pe was elected as a director of our Company effective 1 August 2007. She is

currently a director of JG Summit Holdings, Inc., Robinsons Land Corporation, Robinsons Bank and JG

Summit Capital Markets Corporation. She is currently the President and Chief Operating Officer of the

Robinsons Retail Group, consisting of Robinsons Department Store, Robinsons Supermarket, Handyman,

True Value, Robinsons Specialty Stores, Robinsons Appliances and Toys R Us and Saizen by Daiso

Japan. She obtained her Bachelor of Arts degree in Journalism from the New York University.

Frederick D. Go was elected a director of our Company effective 1 August 2007. He is currently the

President and Chief Operating Officer of Robinsons Land Corporation and Robinsons Recreation

Corporation. He is the Group General Manager of Shanghai Ding Feng Real Estate Development

Company Limited, Xiamen Pacific Estate Investment Company Limited, Chengdu Ding Feng Real Estate

Development Company Limited, and Taicang Ding Feng Real Estate Development Company Limited. He

also serves as a director of Universal Robina Corporation, JG Summit Petrochemical Corporation,

Robinsons Bank, Secret Recipes Corporation, Ho Tsai Dimsum Incorporated, Cebu Light Industrial Park,

and Philippine Hotels Federation. He is also the President of the Philippine Retailers Association. He

received a Bachelor of Science degree in Management Engineering from the Ateneo De Manila

University.

33

Mr. Antonio L. Go was elected as an independent director of the Corporation on 6 December 2007. He

also currently serves as director and President of Equitable Computer Services, Inc. and is Chairman of

Equicom Savings Bank. He is also a director of Medilink Network, Inc., Maxicare Healthcare

Corporation, Equicom Manila Holdings, United Industrial Corporation Limited, Oriental Petroleum and

Minerals Corporation, Pin-An Holdings, Inc., Equicom Information Technology, and ALGO Leasing and

Finance, Inc. He is also a trustee of Go Kim Pah Foundation and Equitable Foundation, Inc. He graduated

from Youngstown University, United States with a Bachelor of Science degree in Business

Administration. He attended the International Advanced Management program at the International

Management Institute, Geneva, Switzerland as well as the Financial Planning/Control program at the

ABA National School of Bankcard Management, Northwestern University, United States.

Mr. Oh Wee Khoon was elected as an independent director of the Corporation effective 3 January 2008.

He is the founder and managing director of Sobono Energy Private Limited. He is also the Vice Chairman

of the Sustainable Energy Association of Singapore. He graduated with honors from the University of

Manchester Institute of Science and Technology with a Bachelor of Science degree in Mechanical

Engineering. He obtained his Master's degree in Business Administration from the National University of

Singapore.

Bach Johann M. Sebastian is the Senior Vice President - Chief Strategist of our Company and is Head of

Corporate Strategy effective 5 May 2007. He is also the Senior Vice President and Director of Corporate

Planning of JG Summit, URC and RLC. Prior to joining our Company in 2002, he was Senior Vice

President and Chief Corporate Strategist at PSI Technologies and RFM Corporation. He was also Chief

Economist and Director of the Policy and Planning Group at the Department of Trade and Industry. He

received a Bachelor of Arts degree in Economics from the University of the Philippines and a Master‟s

degree in Business Management from the Asian Institute of Management. He has nine years experience

in the airline industry, all of which have been with our Company.

Jaime I. Cabangis was appointed as the Chief Financial Officer of our Company since January 1, 2012.

Prior to his appointment, he was the former Chief Financial Officer and Corporate Center Unit Head of

Digitel Telecommunications, Inc, and Digitel Mobile Philippines, Inc. He was also the Chief Financial

Officer of URC International Co. Ltd., URC Asean Brands Co. Ltd, and Hong Kong China Foods, Co.

Ltd from July 2001 to December 2002. He is a certified public accountant and was a partner of SGV and

Co. where he worked for 21 years. Mr. Jaime Cabangis has more thana year of experience in the airline

industry, all of which have been with Cebu Pacific.

Victor Emmanuel B. Custodio has been the Vice President for Flight Operations of our Company since

2004. An instructor pilot in the A320, he was also a Check Airman in both the DC-9 and B-757. Prior to

joining Cebu Pacific, he served as the Presidential Pilot and Aide de Camp of Philippine Presidents

Corazon Aquino and Fidel Ramos. He was formerly the Acting Director of Operations of the 250th

Presidential Airlift Wing, the Squadron Commander of the Headquarters Squadron of the 250th

Presidential Airlift Wing and the Air Operations Officer of the 250th Presidential Airlift Wing. Capt.

Custodio graduated from the Philippine Military Academy in 1983 where he received his Bachelor of

Science degree (cum laude) and the Philippine Air Force Flying School in 1985 where he was awarded

the Minister of National Defence Saber for graduating at the top of his class. Prior to being assigned in

the 250th Presidential Airlift Wing, he was assigned in the 205th Helicopter Wing where he flew as a

combat pilot all over the Philippines and received numerous medals and commendations such as the

Bronze Cross Medal, Military Merit Medal, Military Commendation Medal and the Combat Kagitingan

Badge. He has 31 years of experience in the aviation industry, the last 16 of which have been with Cebu

Pacific.

34

Rosita D. Menchaca is the Vice President for Inflight Services of our Company effective May 2009 and

was previously Vice President for Passenger Service from February 2007 to May 2009. She joined our

Company in 1996 as a Cabin Crew Supervisor and has since been promoted twice, first to Director, Cabin

Services, in November 1999 and in May 2006 to Head of Passenger Services. She previously worked

with Philippine Airlines as a flight attendant for two years and joined Saudi Arabian Airlines in 1985 as a

Senior Flight Attendant for eight years. Ms. Rosita D. Menchaca received her Bachelor of Science degree

in Psychology from Silliman University. She has 28 years experience in the airline industry, the last 15 of

which have been with our Company.

Candice Jennifer A. Iyog has been with our Company since September 2003 and was appointed Vice

President for Marketing and Distribution of our Company in September 2008. Prior to this position, she

was Vice President for Marketing and Product from February 2007 to September 2008. She was formerly

the General Manager of Jobstreet.com and was also the marketing manager of NABISCO. She also

worked at URC as Product Manager and, as such, handled major snack food brands of URC such as

Chippy, Piattos and Nova. Ms. Candice Jennifer A. Iyog received her Bachelor of Science degree in

Management from the Ateneo de Manila University. She has nine years experience in the airline industry,

all of which have been with our Company.

Joseph G. Macagga has been the Vice President for Fuel and Cargo Operations of our Company since

September 2004. He started with Cebu Pacific as Manager for Purchasing and handled Internal Audit for

more than two years. He served as Audit Manager for JG Summit Holdings, Inc. for five years and

worked for the Audit Division of SyCip Gorres Velayo & Co for three years. A Certified Public

Accountant, Mr. Joseph G. Macagga received his Bachelor of Science degree in Commerce, Major in

Accounting from the University of Sto. Tomas. He has 16 years experience in the airline industry, all of

which have been with our Company.

Antonio Jose L. Rodriguez has been the Vice President for Airport Services of our Company since March

2010. He previously worked with various multinational companies including California Manufacturing

Co. from 1993 to 2003, initially as Human Resources Manager and later on as Director and finally as

Vice President in charge of the Human Resources Group. He was also AVP-Human Resources of Allied

Thread Co. Inc. for the period from 1990 to 1992. Prior to this, he was employed with Triumph

International (Phils.) Inc. from 1985 to 1990. He is a graduate of De La Salle University where he

completed Lia-Com a double degree course, majoring in Business Administration and Behavioural

Sciences. He has seven years experience in the airline industry, all of which have been with our

Company.

Robin C. Dui has been the Vice President - Comptroller of our Company since 1998. He was formerly

with the Audit Division of SyCip Gorres Velayo & Co for four years. He previously worked with

Philippine Airlines for 18 years as Manager - General Accounting, Director - Operations Accounting,

Director - Revenue Accounting and Vice President - Comptroller. He also previously held the position of

Director - Finance of GrandAir for one year. A Certified Public Accountant, Mr. Robin C. Dui obtained a

Bachelor of Science degree in Business Administration. He has 32 years experience in the airline

industry, 13 of which have been with our Company.

Jeanette U. Yu has been the Vice President - Treasurer of our Company since 1995. She is also the Chief

Financial Officer of Oriental Petroleum and Minerals Corporation and the Senior Vice President and

Treasurer of JG Summit Capital Markets Corporation and Vice President of URC. Prior to joining URC

in 1980, she worked for AEA Development Corporation and Equitable Banking Corporation. Ms.

Jeanette U. Yu received her Bachelor of Science degree in Business Administration from St. Theresa‟s

College in Quezon City. She has 16 years experience in the airline industry, all of which have been with

our Company.

35

Michael S. Shau joined our Company in May 2007 as VP Airport and Administration Services and was

appointed Vice President for People and Administration Services of our Company effective March 2010.

He has been with the JG Summit Group since January 1999 and has held various senior management

positions with his last assignment as Business Unit General Manager of Universal Robina Corporation –

Packaging Division. He received a degree in Industrial Management Engineering, Minor in Mechanical

Engineering and completed all academic requirements for a Master‟s degree in Business Management,

both from De La Salle University. He has four years experience in the airline industry, all of which have

been with our Company.

Alejandro B. Reyes was appointed as the General Manager for long-haul operations on

February 2012. He was the former Vice President for Commercial Planning of our Company from

January 2008 to January 2012. He previously worked as Senior Vice President of PhilWeb. Prior to this,

he held various positions with The Inquirer Group, the latest of which was Senior Vice President and

Chief Operating Officer of the Inquirer Publications, Inc. Mr. Alejandro B. Reyes graduated Summa Cum

Laude from Georgetown University with a Bachelor of Science degree in International Economics. He

received his Master‟s degree in Business Administration from the University of Virginia. He has five

years of experience in the airline industry, all of which have been with our Company.

Alexander G. Lao was appointed Vice President for Commercial Planning in February 2012. He served

as the Director of Revenue Management from October 8, 2007 to February 2012. Before joining our

Company, he worked as Assistant Vice President of Philamlife from August 2001 to September 2007, as

Business Development Assistant of Ayala Life from 1998 to 1999. Mr. Alexander G. Lao graduated in

Ateneo De Manila University with a Bachelor of Science degree in Legal Management. He received his

Master‟s degree in Business Administration from the Asian Institute of Management. He has five years

of experience in the airline industry, all of which have been with our Company.

Rosalinda F. Rivera was appointed Corporate Secretary of our Company effective 31 October 2006. She

is also the Corporate Secretary of JG Summit, URC, RLC, JG Summit Petrochemical Corporation and

CPAir Holdings, Inc. Prior to joining the JG group, she was a Senior Associate at Puno and Puno Law

Offices. She received a Juris Doctor degree from the Ateneo de Manila University School of Law and a

Master of Law degree in International Banking from Boston University School of Law. She was admitted

to the Philippine Bar in 1995. She has four years experience in the airline industry, all of which have been

with our Company.

William S. Pamintuan is the Assistant Corporate Secretary of our Company since December 1995. He is

currently the First Vice President and Deputy General Counsel, Compliance Officer and also Assistant

Corporate Secretary of Manila Electric Company (MERALCO). He is also the Corporate Secretary of

Meralco PowerGen Corporation, Atimon Land Ventures Development Corporation, Calamba Aero Power

Corporation and RP Energy, Inc. He also serves as a director of Miescorrail, Inc. He was the former

Corporate Secretary and Senior Vice President of Digital Telecommunications Phils., Inc. and Digitel

Mobile Phils., Inc.. He obtained his Bachelor of Laws degree from the University of the Philippines. He

has 16 years experience in the airline industry, all of which have been with our Company.

Garry R. Kingshott is one of our Company‟s senior consultants. He provides advice to the President with

respect to fare structuring, cost management, route development and market entry strategies. Garry was

previously with Jet Lite (India) and Ansett International Limited (Australia) as their Chief Executive

officer. Garry has 22 years combined experience in aviation consultancy and the airline industry, and

joined our Company in 2008.

36

Mark Breen is one of our Company‟s senior consultants. He provides advice to the President on

operations-related functions, including airport services, emergency response procedures, airline service

quality, supplier evaluation, product selection, sourcing of spares, inventory management, crew

management and control centre management. Mark was previously with Sama as their

Chief Operating Officer. Mark was educated at the College of Commerce and is a graduate of Transport

Management. He also has a Masters Degree in Air Transport Management from the College of

Aeronautics, School of Engineering of Cranfield University. He has a vast amount of airline experience

from his time with, among others, Sama, AirAsia, Gulf Air and Ryan Air. He has 17 years experience in

the airline industry, and joined our Company in 2009.

The Company‟s executive officers can be reached at the address of its business office at Airline

Operations Center, Domestic Road, Pasay City.

Involvement in Certain Legal Proceedings of Directors and Executive Officers

Except as otherwise disclosed, to the best of the Company‟s knowledge and belief and after due inquiry,

none of the Company‟s directors, nominees for election as director, or executive officer have in the past

five years: (i) had any petition filed by or against any business of which such person was a general partner

or executive officer either at the time of the bankruptcy or within a two year period of that time; (ii)

convicted by final judgment in a criminal proceeding, domestic or foreign, or have been subjected to a

pending judicial proceeding of a criminal nature, domestic or foreign, excluding traffic violations and

other minor offences; (iii) subjected to any order, judgment, or decree, not subsequently reversed,

suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or

temporarily enjoining, barring, suspending or otherwise limiting their involvement in any type of

business, securities, commodities or banking activities; or (iv) found by a domestic or foreign court of

competent jurisdiction (in a civil action), the Philippine Securities and Exchange Commission (SEC) or

comparable foreign body, or a domestic or foreign exchange or other organized trading market or self

regulatory organization, to have violated a securities or commodities law or regulation and the judgment

has not been reversed, suspended, or vacated.

Family Relationship

Mr. James L. Go is the brother of Mr. John L. Gokongwei, Jr.

Mr. Lance Y. Gokongwei is the son of Mr. John L. Gokongwei, Jr.

Mr. Frederick D. Go is the nephew of Mr. John L. Gokongwei, Jr.

Ms. Robina Y. Gokongwei-Pe is the daughter of Mr. John L. Gokongwei, Jr.

Item 9. Executive Compensation

The following are our Company‟s Chief Executive Officer (“CEO”) and four most highly compensated

executive officers for the years ended 2010, 2011 and 2012 estimates:

Name Position Lance Y. Gokongwei . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President and CEO

Victor Emmanuel B. Custodio . . . . . . . . . . . . . . . . . . . . . . Vice President

Antonio Jose L. Rodriguez . . . . . . . . . . . . . . . . . . . . . . . . . Vice President

Michael S. Shau. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President

Jeanette U. Yu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President

37

The following table identifies and summarizes the aggregate compensation of the Company‟s CEO and

the four most highly compensated executive officers for the years ended 2011, 2012 and 2013 estimates:

Actual – Fiscal Year 2011

Salaries Bonuses Other

Income1

Total

CEO and four (4) most highly compensated executive

officers

1. Lance Y. Gokongwei – President and CEO

2. Victor Emmanuel B. Custodio – Vice President

3. Antonio Jose L. Rodriguez – Vice President

4. Michael S. Shau – Vice President

5. Jeanette U. Yu – Vice President-Treasurer P34,186,380 P3,062,481 P400,000 P37,648,861

Aggregate compensation paid to all officers and

directors as a group unnamed

P76,860,270

P6,516,539

P3,205,000

P86,581,809 1 Includes per diem of directors

Actual – Fiscal Year 2012

Salaries Bonuses Other

Income1

Total

CEO and four (4) most highly compensated executive

officers

1. Lance Y. Gokongwei – President and CEO

2. Victor Emmanuel B. Custodio – Vice President

3. Antonio Jose L. Rodriguez – Vice President

4. Michael S. Shau – Vice President

5. Jeanette U. Yu – Vice President-Treasurer P52,167,107 P4,490,873 P390,000 P57,047,980

Aggregate compensation paid to all officers and

directors as a group unnamed

P91,787,249

P7,751,597

P2,925,000

P102,463,846 1 Includes per diem of directors

Fiscal Year 2013 Estimates

Salaries Bonuses Other

Income1

Total

CEO and four (4) most highly compensated executive

officers

1. Lance Y. Gokongwei – President and CEO

2. Victor Emmanuel B. Custodio – Vice President

3. Antonio Jose L. Rodriguez – Vice President

4. Michael S. Shau – Vice President

5. Jeanette U. Yu – Vice President-Treasurer P55,970,963 P4,737,871 P390,000 P61,098,834

Aggregate compensation paid to all officers and

directors as a group unnamed

P95,160,200

P8,069,316

P3,030,000

P106,259,516 1 Includes per diem of directors

Standard Arrangements

Other than payment of reasonable per diem as may be determined by the Board for every meeting, there

are no standard arrangements pursuant to which directors of the Company are compensated, or are to be

compensated, directly or indirectly, for any services provided as a director for the last completed year and

the ensuing year.

38

Other Arrangements

There are no other arrangements pursuant to which directors of the Company are compensated, or are to

be compensated, directly or indirectly, for any services provided as a director for the last completed year

and the ensuing year.

Employment Contracts and Termination of Employment and Change-in-Control Arrangement

There are no agreements between the Company and its directors and executive officers providing for

benefits upon termination of employment, except for such benefits to which they may be entitled under

the Company‟s pension plans.

Warrants and Options Outstanding

There are no outstanding warrants or options held by the Company‟s CEO, the named executive officers,

and all officers and directors as a group.

Item 10. Security Ownership of Certain Record and Beneficial Owners and

Management

(1) Security Ownership of Certain Record and Beneficial Owners

As of December 31, 2012, the Company knows no one who beneficially owns in excess of 5% of the

Company‟s common stock except as set forth in the table below.

Title of

Class

Names and Addresses of

Record Owners and

Relationship with the

Corporation

Name of

Beneficial Owner

and Relationship

with Record

Owner

Citizenship

No. of

Shares Held

% to Total

Outstanding

Common CPAir Holdings, Inc.

43/F, Robinsons Equitable

Tower, ADB Avenue corner

Poveda Street, Ortigas Center

Pasig City

(stockholder)

Same as record

owner

(See note 1)

Filipino 400,816,841 66.15 %

Common PCD Nominee Corporation

(Non-Filipino)

37/F, Tower 1, The Enterprise

Center, Ayala Ave. cor. Paseo

de Roxas, Makati City

(stockholder)

PDTC Participants

and their clients

(See note 2)

Non-Filipino 136,423,471

(See note 3)

22.51%

Common PCD Nominee Corporation

(Filipino)

37/F, Tower 1, The Enterprise

Center, Ayala Ave. cor. Paseo

de Roxas, Makati City

(stockholder)

PDTC Participants

and their clients

(See note 2)

Filipino 60,817,949

10.04%

Notes:

1. CPAir Holdings, Inc. is a wholly-owned subsidiary of JG Summit Holdings, Inc. Under the By-Laws of CPAir Holdings,

Inc., the President is authorized to represent the corporation at all functions and proceedings. The incumbent President of CPAir

Holdings, Inc. is Mr. Lance Y. Gokongwei.

39

2. PCD Nominee Corporation is the registered owner of the shares in the books of the Corporation‟s transfer agent. PCD

Nominee Corporation is a corporation wholly-owned by Philippine Depository and Trust Corporation, Inc. (formerly the

Philippine Central Depository) (“PDTC”), whose sole purpose is to act as nominee and legal title holder of all shares of stock

lodged in the PDTC. PDTC is a private corporation organized to establish a central depository in the Philippines and introduce

scripless or book-entry trading in the Philippines. Under the current PDTC system, only participants (brokers and custodians) will

be recognized by PDTC as the beneficial owners of the lodged shares. Each beneficial owner of shares through his participant

will be the beneficial owner to the extent of the number of shares held by such participant in the records of the PCD Nominee.

3. Out of the PCD Nominee Corporation (Non-Filipino) account, “The Hongkong and Shanghai Banking Corp. Ltd. -Clients‟

Acct.” holds for various trust accounts the following shares of the Corporation as of December 31, 2012:

No. of shares % to Outstanding

The Hongkong and Shanghai Banking Corp. Ltd. - Clients‟ Acct. 71,275,219 11.76%

The securities are voted by the trustee‟s designated officers who are not known to the Corporation.

(2) Security Ownership of Management as of December 31, 2012

Title of

Class Name of Beneficial Owner Position

Amount and

Nature of

Beneficial

Ownership

(Direct) Citizenship

% to Total

Outstanding

Named Executive Officers 1

Common Lance Y. Gokongwei Director, President and

Chief Executive Officer 1 Filipino *

Victor Emmanuel B.Custodio Vice President – Filipino –

Antonio Jose L. Rodriguez Vice President – Filipino –

Michael S. Shau Vice President – Filipino –

Jeanette U. Yu Vice President -Treasurer – Filipino –

Subtotal 1 *

Other Directors and Executive Officers

Common Ricardo J. Romulo Chairman 1 Filipino *

Common John L. Gokongwei, Jr. Director 1 Filipino *

Common James L. Go Director 1 Filipino *

Common Jose F. Buenaventura Director 1 Filipino *

Common Robina Y. Gokongwei-Pe Director 1 Filipino *

Common Frederick D.Go Director 1 Filipino *

Common Antonio L.Go Independent Director 1 Filipino *

Common Oh Wee Khoon Independent Director 1 Singaporean *

Common Jaime I. Cabangis Chief Financial Officer 10,000 Filipino *

Subtotal 10,008 *

All directors and executive officers as a group unnamed 10,009 *

Notes:

1. As defined under Part IV (B) (1) (b) of SRC Rule 12, the “named executive officers” to be listed refer to the Chief Executive

Officer and those that are the four (4) most highly compensated executive officers as of December 31, 2011.

* less than 0.01%

40

(3) Voting Trust Holders of 5% or More

As of December 31, 2012, there are no persons holding more than 5% of a class under a voting trust or

similar agreement.

(4) Change in Control

As of December 31, 2012, there has been no change in the control of the Company since the beginning of

its last fiscal year.

PART IV - CORPORATE GOVERNANCE

Item 11. Corporate Governance

The Company adheres to the principles and practices of good corporate governance, as embodied in its

Corporate Governance Manual, Code of Business Conduct and related SEC Circulars. On September 24,

2010, the BOD approved the adoption of a revised Corporate Governance Manual in accordance with

SEC Memorandum Circular No. 6 (Series of 2009) dated June 22, 2009. Continuous improvement and

monitoring of governance and management policies have been undertaken to ensure that the Company

observes good governance and management practices. This is to assure the shareholders that the

Company conducts its business with the highest level of integrity, transparency and accountability. On

January 28, 2011, a Certification of Compliance with the Manual on Corporate Governance was

submitted by the Company to the SEC and PSE. The Company likewise submitted a Corporate

Governance Disclosure Report to the PSE on February 11, 2011.

The Company likewise consistently strives to raise its financial reporting standards by adopting and

implementing prescribed PFRS.

- 47 -

CEBU AIR, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND

SUPPLEMENTARY SCHEDULES SEC FORM 17-A

CONSOLIDATED FINANCIAL STATEMENTS

Statement of Management’s Responsibility for Financial Statements Report of Independent Auditors Consolidated Statements of Financial Position as of December 31, 2012 and 2011 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Changes in Equity for the Years Ended December 31, 2012, 2011 and 2010 Consolidated Statements of Cashflows for the Years Ended December 31, 2012, 2011 and 2010

SUPPLEMENTARY SCHEDULES

Reconciliation of Retained Earnings Available for Dividend Declaration Schedule of all Effective Standards and Interpretations as of December 31, 2012 Map of the relationships of companies within the group Schedule of Financial Ratios

Report of Independent Auditors on Supplementary Schedules

A. Financial Assets (Current Marketable Equity and Debt Securities and Other Short-Term

Cash Investments) B. Amounts Receivable from Directors, Officers, Employees,

Related Parties and Principal Stockholders (Other than Related parties) C. Amounts Receivable from Related Parties which are eliminated during the Consolidation

of Financial Statements* D. Intangible Assets - Other Assets* E. Property and Equipment F. Accumulated Depreciation G. Long-Term Debt H. Indebtedness to Related Parties* I. Guarantees of Securities of Other Issuers* J. Capital Stock

* These schedules, which are required by SRC Rule 68, have been omitted because they are either

not required, not applicable or the information required to be presented is included/shown in the related consolidated financial statements or in the notes thereto.

[

*SGVFS001094*

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 its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2012 and 2011, 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, 2012, 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.

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015

A member firm of Ernst & Young Global Limited

[

*SGVFS001094*

- 2 -

Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cebu Air, Inc. and its subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Michael C. Sabado Partner CPA Certificate No. 89336 SEC Accreditation No. 0664-AR-1 (Group A), March 11, 2011, valid until March 10, 2014 Tax Identification No. 160-302-865 BIR Accreditation No. 08-001998-73-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3670019, January 2, 2013, Makati City March 14, 2013

[

*SGVFS001094*

CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION December 31 2012 2011

ASSETS

Current Assets Cash and cash equivalents (Note 7) P=10,728,326,325 P=8,957,783,986 Financial assets at fair value through profit or loss (Note 8) 102,682,762 3,261,077,998 Receivables (Note 9) 988,511,487 836,786,224 Expendable parts, fuel, materials and supplies (Note 10) 417,434,810 397,527,340 Other current assets (Note 11) 882,604,550 278,691,061 Total Current Assets 13,119,559,934 13,731,866,609

Noncurrent Assets Property and equipment (Notes 12, 16, 29 and 30) 47,484,106,152 39,863,194,631 Investment in joint ventures (Notes 13) 511,756,873 409,478,237 Available-for-sale investment (Note 8) – 110,367,200 Other noncurrent assets (Note 14) 220,895,946 391,452,391 Total Noncurrent Assets 48,216,758,971 40,774,492,459 P=61,336,318,905 P=54,506,359,068

LIABILITIES AND EQUITY

Current Liabilities Accounts payable and other accrued liabilities (Note 15) P=7,768,537,046 P=6,710,838,876 Unearned transportation revenue (Note 4 and 5) 5,981,195,913 5,253,433,343 Current portion of long-term debt (Notes 12 and 16) 2,769,442,355 2,467,451,166 Financial liabilities at fair value through profit or loss (Note 8) – 60,857,586 Due to related parties (Note 26) 45,602,315 36,302,174 Total Current Liabilities 16,564,777,629 14,528,883,145

Noncurrent Liabilities Long-term debt - net of current portion (Notes 12 and 16) 20,154,916,843 18,404,442,267 Deferred tax liabilities - net (Note 24) 491,504,377 221,786,183 Other noncurrent liabilities (Notes 17 and 22) 1,990,307,272 2,185,724,183 Total Noncurrent Liabilities 22,636,728,492 20,811,952,633 Total Liabilities 39,201,506,121 35,340,835,778

Equity (Note 18) Common stock 613,236,550 613,236,550 Capital paid in excess of par value 8,405,568,120 8,405,568,120 Treasury stock (529,319,321) (529,319,321) Net unrealized losses on available-for-sale investment (Note 8) – (5,630,261) Retained earnings 13,645,327,435 10,681,668,202 Total Equity 22,134,812,784 19,165,523,290 P=61,336,318,905 P=54,506,359,068 See accompanying Notes to Consolidated Financial Statements.

[

*SGVFS001094*

CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 2012 2011 2010

REVENUES (Notes 4 and 19) P=37,904,453,623 P=33,935,402,775 P=29,088,798,959

EXPENSES Flying operations (Note 20) 20,018,588,742 17,350,168,400 11,417,488,512 Repairs and maintenance (Notes 17 and 20) 3,462,277,900 3,027,499,790 2,695,151,789 Aircraft and traffic servicing (Note 20) 3,433,398,594 2,991,278,104 2,461,807,197 Depreciation and amortization (Note 12) 2,767,863,860 2,314,954,127 1,866,126,225 Aircraft and engine lease (Note 29) 2,033,953,783 1,718,431,374 1,604,855,579 Reservation and sales 1,626,603,317 1,480,637,473 1,335,983,655 General and administrative (Note 21) 953,718,392 820,453,486 694,888,478 Passenger service 825,758,373 756,785,558 639,480,811 Other expenses (Note 23) 122,312,426 138,839,386 93,293,869 35,244,475,387 30,599,047,698 22,809,076,115

OPERATING INCOME 2,659,978,236 3,336,355,077 6,279,722,844

OTHER INCOME (EXPENSE) Foreign exchange gains 1,205,149,590 50,154,940 576,978,771 Interest income (Notes 7 and 8) 415,770,873 647,397,939 237,495,750 Fuel hedging gains (Note 8) 258,543,810 477,128,001 474,255,226 Equity in net income of joint venture (Note 13) 54,384,007 42,318,202 25,248,534 Gain on sale of financial assets designated at fair value

through profit or loss and available for sale financial assets 5,764,090 – –

Fair value gains (losses) of financial assets designated at fair value through profit or loss (Note 8) – (143,554,705) 107,631,255

Interest expense (Note 16) (732,591,508) (662,796,854) (761,079,413) 1,207,020,862 410,647,523 660,530,123

INCOME BEFORE INCOME TAX 3,866,999,098 3,747,002,600 6,940,252,967

PROVISION FOR INCOME TAX (Note 24) 297,386,535 122,584,882 17,759,687

NET INCOME 3,569,612,563 3,624,417,718 6,922,493,280

Net unrealized losses on available-for-sale investment (Note 8) – (4,164,799) (3,878,432)

Benefit from income tax (Notes 8 and 24) – 1,249,440 1,163,530

OTHER COMPREHENSIVE INCOME, NET OF TAX – (2,915,359) (2,714,902)

TOTAL COMPREHENSIVE INCOME P=3,569,612,563 P=3,621,502,359 P=6,919,778,378

Basic/Diluted Earnings Per Share (Note 25) P=5.89 P=5.93 P=11.78 See accompanying Notes to Consolidated Financial Statements.

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CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the Year Ended December 31, 2012

Common Stock

(Note 18)

Capital Paid in Excess of Par

Value (Note 18)

Treasury Stock (Note 18)

Net unrealized losses on

available-for-sale investment

(Note 8)

Appropriated Retained Earnings (Note 18)

Unappropriated Retained Earnings (Note 18)

Total Equity

Balance at January 1, 2012 P=613,236,550 P=8,405,568,120 (P=529,319,321) (P=5,630,261) P=933,500,000 P=9,748,168,202 P=19,165,523,290 Net income – – – – – 3,569,612,563 3,569,612,563 Other comprehensive income – – – 5,630,261 – – 5,630,261 Total comprehensive income – – – 5,630,261 – 3,569,612,563 3,575,242,824 Appropriation of retained earnings – – – – 483,262,000 (483,262,000) – Dividend declaration – – – – – (605,953,330) (605,953,330) Balance at December 31, 2012 P=613,236,550 P=8,405,568,120 (P=529,319,321) P=– P=1,416,762,000 P=12,228,565,435 P=22,134,812,784 For the Year Ended December 31, 2011

Common Stock

(Note 18)

Capital Paid in Excess of Par

Value (Note 18)

Treasury Stock (Note 18)

Net unrealized losses on

available-for-sale investment

(Note 8)

Appropriated Retained Earnings (Note 18)

Unappropriated Retained Earnings (Note 18)

Total Equity

Balance at January 1, 2011 P=613,236,550 P=8,405,568,120 P=– (P=2,714,902) P=– P=8,890,960,134 P=17,907,049,902 Net income – – – – – 3,624,417,718 3,624,417,718 Other comprehensive income – – – (2,915,359) – – (2,915,359) Total comprehensive income – – – (2,915,359) – 3,624,417,718 3,621,502,359 Appropriation of retained earnings – – – – 933,500,000 (933,500,000) – Treasury stock – – (529,319,321) – – – (529,319,321) Dividend declaration – – – – – (1,833,709,650) (1,833,709,650) Balance at December 31, 2011 P=613,236,550 P=8,405,568,120 (P=529,319,321) (P=5,630,261) P=933,500,000 P=9,748,168,202 P=19,165,523,290

[

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- 2 - For the Year Ended December 31, 2010

Common Stock

(Note 18)

Capital Paid in Excess of Par

Value (Note 18)

Net unrealized losses on

available-for-sale investment

(Note 8)

Appropriated Retained Earnings (Note 18)

Unappropriated Retained Earnings (Note 18)

Total Equity

Balance at January 1, 2010 P=582,574,750 P=4,703,920,250 P=– P=– P=1,968,466,854 P=7,254,961,854 Net income – – – 6,922,493,280 6,922,493,280 Other comprehensive income – – (2,714,902) – – (2,714,902) Total comprehensive income – – (2,714,902) – 6,922,493,280 6,919,778,378 Issuance of shares 30,661,800 3,802,063,200 – – – 3,832,725,000 Transaction costs – (100,415,330) – – – (100,415,330) Balance at December 31, 2010 P=613,236,550 P=8,405,568,120 (P=2,714,902) P=– P=8,890,960,134 P=17,907,049,902 See accompanying Notes to Consolidated Financial Statements.

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CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31 2012 2011 2010

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=3,866,999,098 P=3,747,002,600 P=6,940,252,967 Adjustments for:

Depreciation and amortization (Note 12) 2,767,863,860 2,314,954,127 1,866,126,225 Interest expense (Note 16) 732,591,508 662,796,854 761,079,413 Depreciation and accretion of asset retirement obligation

(Note 17) 577,510,459 508,929,530 405,206,405 Fair value gain (loss) of financial assets at

fair value through profit or loss (Note 8) – 143,554,705 (107,631,255) Provision for credit losses on receivables (Note 9) – – 2,127,309 Loss (gain) on disposal of property and equipment

(Note 12) (413,540) (1,168,434) 4,050,103 Gain on sale of financial assets at fair value through

profit or loss and available for sale financial assets (5,764,090) – – Equity in net income of joint ventures (Note 13) (54,384,007) (42,318,202) (25,248,534) Fuel hedging gains (Note 8) (258,543,810) (477,128,001) (474,255,226) Interest income (Notes 7 and 8) (415,770,873) (647,397,939) (237,495,750) Unrealized foreign exchange gains (1,150,415,449) (29,680,099) (574,806,957)

Operating income before working capital changes 6,059,673,156 6,179,545,141 8,559,404,700 Decrease (increase) in:

Receivables (301,781,692) 58,936,320 157,564,532 Other current assets (603,913,488) (15,153,984) 77,065,113 Expendable parts, fuel, materials and supplies (19,907,470) (27,495,305) (21,059,547) Financial assets at fair value through profit or loss

(derivatives) (Note 8) 111,883,670 1,011,022,845 212,132,124 Increase (decrease) in:

Accounts payable and other accrued liabilities 1,200,632,639 516,791,388 561,841,257 Unearned transportation revenue 727,762,570 647,122,327 1,137,155,662 Due to related parties 9,300,141 772,870 (2,400,212) Noncurrent liabilities (843,647,430) (330,535,976) 50,624,954

Net cash generated from operations 6,340,002,096 8,041,005,626 10,732,328,583 Interest paid (729,842,736) (679,203,619) (803,117,030) Interest received 550,377,733 633,365,232 94,496,407 Net cash provided by operating activities 6,160,537,093 7,995,167,239 10,023,707,960

CASH FLOWS FROM INVESTING ACTIVITIES Dividends received from a joint venture (Note 13) 53,229,016 36,234,703 21,959,482 Proceeds from sale of financial assets at FVPL (Note 8) 3,258,002,595 – – Proceeds from sale of available-for sale investments (Note 8) 110,369,718 2,575,551 162,020,516 Investment in joint venture (Notes 13 and 32) (101,123,645) (33,750,000) – Decrease (increase) in other noncurrent assets 170,556,445 (63,605,237) (83,070,335) Acquisition of property and equipment

(Notes 12 and 29) (4,506,101,631) (4,232,090,595) (2,361,432,894) Advances to a related party (Note 26) – – (3,662,583,961) Proceeds from disposal of other noncurrent assets 1,521,751 – – Net cash used in investing activities (1,013,545,751) (4,290,635,578) (5,923,107,192)

(Forward)

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- 2 - Years Ended December 31 2012 2011 2010

CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common shares of stock (Note 18) P=– P=– P=3,832,725,000 Payments of transaction costs (Note 18) – – (100,415,330) Acquisition of treasury shares (Note 18) – (529,319,321) – Dividends paid (605,953,330) (1,833,709,650) – Repayments of long-term debt (2,508,469,536) (2,141,112,305) (1,791,793,102) Payments of borrowings from a related party (Note 28) – – (40,480,463) Net cash provided by (used in) financing activities (3,114,422,866) (4,504,141,276) 1,900,036,105

EFFECTS OF EXCHANGE RATE CHANGES IN CASH AND CASH EQUIVALENTS (262,026,137) (5,895,371) (78,207,356)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,770,542,339 (805,504,986) 5,922,429,517

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,957,783,986 9,763,288,972 3,840,859,455

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 7) P=10,728,326,325 P=8,957,783,986 P=9,763,288,972

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 26, 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 has seven special purpose entities (SPE) that it controls, namely: Cebu Aircraft Leasing Limited (CALL), IBON Leasing Limited (ILL), Boracay Leasing Limited (BLL), Surigao Leasing Limited (SLL), Sharp Aircraft Leasing Limited (SALL), Vector Aircraft Leasing Limited (VALL) and Panatag One Aircraft Leasing Limited (POALL) (collectively known as the “Group”). CALL, ILL, BLL, SLL, SALL, VALL and POALL are SPEs in which the Parent Company does not have equity interest. CALL, ILL, BLL, SLL, SALL, VALL and POALL 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). In accordance with Standards Interpretations Committee (SIC) 12, Consolidation - Special Purpose Entities, the consolidated financial statements include the accounts of these SPEs (Note 2).

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 66.15%-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 pioneer and 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 (4) 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 (8) years (Notes 24 and 31).

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 (5%) 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.

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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.

On May 24, 2005, the Reformed-Value Added Tax (R-VAT) law was signed as RA No. 9337 or the R-VAT Act of 2005. The R-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 R-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.

2. 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 (P=), the Parent Company’s functional and presentation currency. All amounts are rounded to the nearest peso unless otherwise indicated.

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

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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.

3. Changes in Accounting Policies

The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of new and amended PFRS and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) that are discussed below. Except as otherwise indicated, the adoption of the new and amended PFRS and Philippine Interpretations did not have any effect on the consolidated financial statements of the Group.

• PFRS 7, Financial Instruments: Disclosures (Amendment) - Enhanced Derecognition

Disclosure Requirements (effective for annual periods beginning on or after July 1, 2011) The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Group’s financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognized assets to enable the user to evaluate the nature of, and risks associated with, the entity’s continuing involvement in those derecognized assets.

• Amendments to PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets

(effective for annual periods beginning on or after January 1, 2012) The amendment clarified the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in PAS 40, Investment Property, should be determined on the basis that its carrying value amount will be recovered through sale. Furthermore, it introduces the requirement that deferred tax on non-depreciable assets are measured using revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset.

Future Changes in Accounting Policies The Group will adopt the following new and amended PFRS and Philippine Interpretations enumerated below when these become effective. Except as otherwise indicated, the following new and amended PFRS and Philippine Interpretations will not have significant impact on the consolidated financial statements of the Group:

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Effective 2013

• PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2013) These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set-off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period:

a) The gross amounts of those recognized financial assets and recognized financial liabilities; b) The amounts that are set off in accordance with the criteria in PAS 32 when determining

the net amounts presented in the statement of financial position; c) The net amounts presented in the statement of financial position; d) The amounts subject to an enforceable master netting arrangement or similar agreement

that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of

the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and

e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be applied retrospectively. The amendment affects disclosures only and has no impact on the Group’s financial position or performance.

• PFRS 10, Consolidated Financial Statements (effective for annual periods beginning on or

after January 1, 2013) PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27.

• PFRS 11, Joint Arrangements (effective for annual periods beginning on or after

January 1, 2013) PFRS 11 replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities - Non-monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method.

• PFRS 12, Disclosures of Involvement with Other Entities (effective for annual periods

beginning periods on or after January 1, 2013) PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required.

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• PFRS 13, Fair Value Measurement (effective for annual periods beginning on or before January 1, 2013) PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted.

• PAS 1, Financial Statement Presentation - Presentation of Items of Other Comprehensive

Income (effective for annual periods beginning on or after July 1, 2012) The amendments to PAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or “recycled”) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has therefore no impact on the Group’s financial position or performance.

• Amendments to PAS 19, Employee Benefits (effective for annual periods beginning on or after

January 1, 2013) Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. Once effective, the Group has to apply the amendments retroactively to the earliest period presented.

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

As at December 31,

2012

As at January 1,

2012 Increase (decrease) in: Consolidated statements of financial position Net defined benefit liability P=139,529,356 P=73,701,878 Deferred tax asset on unrecognized actuarial losses 20,777,543 16,099,223 Other comprehensive income (69,258,478) (53,664,078) Retained earnings 73,701,878 73,701,878

As at December 31,

2012 Consolidated statement of comprehensive income Net pension expense P=67,289,100 Income tax expense 20,186,730 Statement of comprehensive income Amortization of actuarial gain 3,431,000

• Revised PAS 27, Separate Financial Statements (effective for annual periods beginning on or

after January 1, 2013) As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements.

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• Revised PAS 28, Investments in Associates and Joint Ventures (effective for annual periods beginning on or after January 1, 2013) As a consequence of the new PFRS 11, Joint Arrangements, and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates.

• Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine

(effective for annual periods beginning on or after January 1, 2013) This Philippine Interpretation applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine (“production stripping costs”) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset.

Improvements to PFRS 2012 The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted. Except as otherwise indicated, the following new and amended PFRS and Philippine Interpretations will not have significant impact on the financial statements of the Company:

• PFRS 1, First-time Adoption of PFRS - Borrowing Costs

The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs.

• PAS 1, Presentation of Financial Statements - Clarification of the requirements for

comparative information The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required.

• PAS 16, Property, Plant and Equipment - Classification of servicing equipment

The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise.

• PAS 32, Financial Instruments: Presentation - Tax effect of distribution to holders of equity

instruments The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes.

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• PAS 34, Interim Financial Reporting - Interim financial reporting and segment information for total assets and liabilities The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entity’s previous annual financial statements for that reportable segment.

Effective 2014

• PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial

Liabilities (effective for annual periods beginning on or after January 1, 2014) These amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous.

Effective 2015

• PFRS 9, Financial Instruments: Classification and Measurement (effective for annual periods

beginning on or after January 1, 2015) PFRS 9 as issued reflects the first phase on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. In subsequent phases, hedge accounting and impairment of financial assets will be addressed with the completion of this project expected on the first half of 2012. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Group’s financial assets, but will potentially have no impact on classification and measurements of financial liabilities.

• Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate

The implementation of the Philippine Interpretation is deferred until the final Review Standard is issued by IASB and after an evaluation on the requirements and guidance in the standard vis-à-vis the practices and regulations in the Philippine real estate industry is completed. This Philippine Interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This Philippine Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council (FRSC) have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board (IASB) and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. Adoption of the interpretation when it becomes effective will not have any impact on the financial statements of the Group.

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4. Summary of 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.

Baggage and Ancillary revenue Revenue from not directly related in the transportation of passengers, cargo, mail and merchandise are recognized when transactions are carried out.

Interest income Interest on cash, cash equivalents, short-term cash investments and debt securities classified as financial assets at FVPL 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.

General and Administrative Expenses General and administrative expenses constitute cost of administering the business. These are recognized as expenses when it is probable that a decrease in future economic benefit related to a decrease in an asset or an increase in a liability has occurred and the decrease in economic benefits can be measured reliably.

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 equivalents include short-term investment that can be pre-terminated and readily convertible to known amount of cash 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.

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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.

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, 2012 and 2011.

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 reporting 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.

The Group follows the hierarchy in Philippine Interpretations Committee (PIC) Question and Answer (Q&A) No. 2010-01: PAS 39.AG71-72, Rate used in determining the fair value of government securities in the Philippines, beginning January 1, 2010, for the determination of fair value of government securities in the Philippines, using market data published by the Philippine Dealing and Exchange Corporation or PDEx:

a. Current bid yield, if available, on the reporting date. b. When a current bid yield is not available, the last or close yield on the reporting date. c. When there is no transaction for a security on the reporting date, the PDSI-R2 rate may be

used.

The consensus in the Q&A has been approved by the PIC on March 2, 2010 and approved by the Financial Reporting Standards Committee on June 4, 2010.

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.

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‘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 or liability. In cases where the transaction price used is made of data which is not observable, the difference between the transaction price 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:

• 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

• 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, 2012 and 2011, 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 years ended December 31, 2012 and 2011.

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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, 2012 and 2011, 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.

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.

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.

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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 accounts payable and other accrued liabilities, long-term debt, and other obligations that meet the above definition (Notes 15, 16 and 17).

Impairment of Financial Assets The Group assesses at each reporting 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 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.

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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.

AFS investments The Group assesses at each reporting 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.

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:

• 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 “pass-through” 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

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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.

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.

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The EULs of property and equipment of the Group follows:

Passenger aircraft* 15 years Engines 15 years Rotables 15 years Ground support equipment 5 years EDP Equipment, mainframe and peripherals 3 years Transportation equipment 5 years Furniture, fixtures and office equipment 5 years Communication equipment 5 years Special tools 5 years Maintenance and test equipment 5 years Other equipment 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.

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.

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 contractual obligation includes regular aircraft maintenance, overhaul and restoration of the leased aircraft to its original condition. Regular aircraft maintenance is accounted for as expense when incurred, while overhaul and restoration are accounted on an accrual basis.

The Group recognizes the present value of these costs as ARO asset 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 of the related asset. The Group amortizes ARO liability using the effective interest method and recognizes accretion expense over the lease term. Amortization of ARO asset and accretion expense of ARO liability are recognized under “Repairs and Maintenance” account in the consolidated statements of comprehensive income.

The Group regularly assesses the provision for ARO and adjusts the related liability (Note 5).

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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 50.00%, 49.00% and 35.00% investments in Philippine Academy for Aviation Traning, Inc. (PAAT), Aviation Partnership (Philippines) Corporation (A-plus) and SIA Engineering (Philippines) Corporation (SIAEP), respectively, 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. Dividends received are treated as a revaluation of the carrying value of the investment.

The financial statements of the investee companies used in the preparation of the consolidated financial statement are prepared as of the same date with the Group. The investee companies’ accounting policies conform to those by the Group for like transactions and events in similar circumstances.

Impairment of Nonfinancial Assets This accounting policy applies primarily to the Group’s property and equipment and investments in JV.

At each reporting 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 cash-generating 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. 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 and amortization, 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 and amortization 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.

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Impairment of Investment in JV The Group’s investment in JV is tested for impairment in accordance with PAS 36 as a single asset, by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, whenever application of the requirements in PAS 39 indicates that the investment may be impaired. An impairment loss recognized in those circumstances is not allocated to any asset that forms part of the carrying amount of the investment in a JV. Accordingly, any reversal of that impairment loss is recognized in accordance with PAS 36 to the extent that the recoverable amount of the investment subsequently increases. In determining the value in use of the investment, an entity estimates: (a) its share of the present value of the estimated future cash flows expected to be generated by the JV, including the cash flows from the operations of the JV and the proceeds on the ultimate disposal of the investment; or (b) the present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal.

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.

Treasury Stock Own equity instruments which are acquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in the profit and loss on the purchase, sale, issue or cancellation of the Parent Company’s own equity instruments.

Retained Earnings Retained earnings represent accumulated earnings of the Group less dividends declared.

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.

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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.

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 long term government bond risk-free interest rates that have terms to maturity approximating the terms of the related pension liability for applying a single weighted average discount rate that reflects the estimated timing and amount of benefit payments.

Short-term employee benefits are expensed as incurred.

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 reporting date.

Deferred tax Deferred tax is provided using the 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 income 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

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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 reporting 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.

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.

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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.

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, 2012 and 2011 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 and Exchange Corp. (PDEX) closing rate prevailing at the reporting 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, 2012 and 2011, the Parent Company does not have any dilutive potential ordinary shares.

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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 Date Post-year-end events that provide additional information about the Group’s position at the reporting date (adjusting event) are reflected in the consolidated financial statements. Post-year-end events that are not adjusting events are disclosed in the consolidated financial statements, when material.

5. 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 judgments 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.

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.

c. 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.

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The fair values of the Group’s financial instruments are presented in Note 28.

d. 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.

e. 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 29).

f. 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 associated company. In making this assessment, management considers the underlying economic substance of the transaction and not only the contractual terms.

g. 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.

h. 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

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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 29).

i. Allocation of revenue, costs and expenses

Revenue, costs and expenses are classified as exclusive and common. Exclusive revenue, cost and expenses such as passenger revenue, cargo revenue, excess baggage revenue, fuel and insurance surcharge, fuel and oil expense, hull/war/risk insurance, maintenance expense, depreciation (for aircraft under finance lease), lease expense (for aircraft under operating lease) and interest expense based on the related long-term debt are specifically identified per aircraft based on an actual basis. For revenue, cost and expense accounts that are not identifiable per aircraft, the Group provides allocation based on activity factors that closely relate to the earning process of the revenue.

j. Application of hedge accounting

The Group applies hedge accounting treatment for certain qualifying derivatives after complying with hedge accounting requirements, specifically on hedge documentation designation and effectiveness testing. Judgment is involved in these areas, which include management determining the appropriate data points for evaluating hedge effectiveness, establishing that the hedged forecasted transaction in cash flow hedges are probable of occurring, and assessing the credit standing of hedging counterparties (Note 8).

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 related balances follow (Note 9):

2012 2011 Receivables P=1,206,749,106 P=1,069,370,364 Allowance for credit losses 218,237,619 232,584,140

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 be written-down below cost no longer exist or

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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 related balances follow (Note 10):

2012 2011 Expendable Parts, Fuel, Materials and Supplies At NRV P=241,414,140 P=243,906,026 At cost 176,020,670 153,621,314

As of December 31, 2012 and 2011, allowance for inventory write-down for expendable parts amounted to P=20.5 million. No additional provision for inventory write-down was recognized by the Group in 2012 and 2011.

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 contractual obligation includes regular aircraft maintenance, overhaul and restoration of the leased aircraft to its original condition. Regular aircraft maintenance is accounted for as expense when incurred, while overhaul and restoration are accounted on an accrual basis. 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 2012, the Group recognized additional ARO asset and ARO liability amounting P=459.3 million for the cost of restoration of two (2) new operating lease passenger aircraft. In 2011, the Group recognized additional ARO asset and ARO liability amounting P=279.9 million for the costs of restoration of two (2) new leased passenger aircraft of the Group (Note 17). As of December 31, 2012 and 2011, 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 other noncurrent liabilities and repairs and maintenance.

As of December 31, 2012 and 2011, the Group’s ARO liability net of ARO asset (included under ‘Other noncurrent liabilities’ account in the statements of financial position) has a carrying value of P=1,351.9 million and P=1,263.3 million, respectively (Note 17). The related repairs and maintenance expense for the years ended December 31, 2012, 2011 and 2010 amounted to P=577.5 million, P=508.9 million and P=405.2 million, respectively (Notes 17 and 20).

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

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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.

As of December 31, 2012 and 2011, the carrying values of the Group’s property and equipment amounted to P=47,484.1 million and P=39,863.2 million, respectively (Note 12). The Group’s depreciation and amortization expense amounted to P=2,767.9 million, P=2,315.0 million and P=1,866.1 million for the years ended December 31, 2012, 2011 and 2010, respectively (Note 12).

e. 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.

As of December 31, 2012 and 2011, the carrying values of the Group’s property and equipment amounted to P=47,484.1 million and P=39,863.2 million, respectively (Note 12). Investment in JV amounted to P=511.8 million and P=409.5 million as of December 31, 2012 and 2011, respectively (Note 13). There were no provision for impairment losses on the Group’s property and equipment and investment in JV for the years ended December 31, 2012 and 2011.

f. 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

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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’s pension liability (included in ‘Other noncurrent liabilities’ account in the consolidated statements of financial position) amounted to P=214.1 million and P=251.6 million as of December 31, 2012 and 2011, respectively (Notes 17 and 22).

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.

g. Recognition of deferred tax assets

The Group assesses the carrying amounts of deferred income taxes at each reporting date and reduces deferred tax assets 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. 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.

As of December 31, 2012 and 2011, 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.

As of December 31, 2012 and 2011, the Group has deferred tax assets amounting P=1,469.4 million and P=1,069.3 million, respectively (Note 24). Unrecognized deferred tax as of December 31, 2012 and 2011 amounted to nil and P=4.6 million, respectively.

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, 2012 and 2011, the balances of the Group’s unearned transportation revenue amounted to P=5,981.2 million and P=5,253.4 million, 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.

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6. Segment Information

The Group has one reportable operating segment, which is the airline business (system-wide). This is consistent with how the Group’s management internally monitors and analyzes the financial information for reporting to the 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.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions with third parties.

The amount of segment assets and liabilities are based on the measurement principles that are similar with those used in measuring the assets and liabilities in the consolidated statement of financial position which is in accordance with PFRS.

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

2012 2011 2010 Revenue P=39,844,065,994 P=35,152,401,857 P=30,510,408,495 Net income 3,569,612,563 3,624,417,718 6,922,493,280 Depreciation and amortization 2,767,863,860 2,314,954,127 1,866,126,225 Interest expense 732,591,508 662,796,854 761,079,413 Interest income 415,770,873 647,397,939 237,495,750

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:

2012 2011 2010 Total segment revenue of reportable

operating segment P=37,904,453,623 P=33,935,402,775 P=29,088,798,959 Nontransport revenue and

other income 1,939,612,371 1,216,999,082 1,421,609,536 Total revenue P=39,844,065,994 P=35,152,401,857 P=30,510,408,495

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:

2012 2011 2010 Total segment income of reportable

segment P=2,659,978,236 P=3,336,355,074 P=6,279,722,842 Add (deduct) unallocated items:

Nontransport revenue and other income 1,939,612,371 1,216,999,082 1,421,609,537

Nontransport expenses and other charges (732,591,508) (806,351,559) (761,079,413)

Provision for income tax (297,386,536) (122,584,882) (17,759,687) Net income 3,569,612,563 3,624,417,715 6,922,493,279 Other comprehensive loss, net of tax – (2,915,359) (2,714,902) Total comprehensive income P=3,569,612,563 P=3,621,502,356 P=6,919,778,376

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The Group’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:

2012 2011 Cash on hand P=19,491,988 P=16,641,225 Cash in banks (Note 26) 321,236,059 503,830,598 Short-term placements (Note 26) 10,387,598,278 8,437,312,163 P=10,728,326,325 P=8,957,783,986

Cash in banks earns interest at the respective bank deposit rates. Short-term placements, which represent money market placements, are made for varying periods depending on the immediate cash requirements of the Group. Short-term placements denominated in Philippine peso earn an average interest of 3.60%, 4.57% and 2.20% in 2012, 2011 and 2010, respectively. Moreover, short-term placements in US dollar earn an average of 1.57%, 1.55% and 1.20% in 2012, 2011 and 2010, respectively.

Interest income on cash and cash equivalents, presented in the consolidated statements of comprehensive income, amounted to P=411.4 million, P=394.4 million and P=133.5 million in 2012, 2011 and 2010, respectively.

8. Investment and Trading Securities

Financial Assets at FVPL This account consists of:

2012 2011

Derivative financial instruments not designated as accounting hedges P=102,682,762 P=16,880,208

Designated at FVPL Quoted debt securities: Private – 2,021,911,190 Government – 1,039,254,600

– 3,061,165,790 Quoted equity securities – 183,032,000

– 3,244,197,790 P=102,682,762 P=3,261,077,998

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.

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In 2011, the Group earned interest income of P=222.4 million from debt securities as financial assets designated at FVPL. Also, the Group earned dividend income from equity securities amounting nil and P=21.4 million in 2012 and 2011, respectively.

The financial assets designated at FVPL are shown inclusive of unrealized gain amounting nil and P=1.1 million in 2012 and 2011, respectively.

On January 13, 2012, JGSHI acquired all of the Group’s debt and equity securities classified as financial assets at FVPL in exchange for a settlement amounting P=3,258.4 million, of which P=89.0 million pertains to the settlement of accrued interest from these financial assets. Market value of financial assets at FVPL at date of sale amounted to P=3,258.0 million. Realized gain on the sale of financial assets at FVPL amounted to P=13.8 million (Note 26).

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, 2012 and 2011, the Group has outstanding fuel hedging transactions with notional quantity of 240,000 US barrels and 600,000 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 options can be exercised at various calculation dates with specified quantities on each calculation date. The options have various maturity dates through December 31, 2013 (Note 5).

Fair value changes on derivatives The changes in fair value of all derivative financial instruments not designated as accounting hedges follow:

2012 2011 Balance at beginning of period Derivative assets P=16,880,208 P=489,917,466 Derivative liabilities (60,857,586) – (43,977,378) 489,917,466 Net changes in fair value of derivatives 258,543,810 477,128,001 214,566,432 967,045,467 Fair value of settled instruments (111,883,670) (1,011,022,845) Balance at end of period P=102,682,762 (P=43,977,378) Attributable to: Derivative assets P=102,682,762 P=16,880,208 Derivative liabilities P=– (P=60,857,586)

AFS Investment This account represents investment in a quoted equity security. As of December 31, 2012 and 2011, the carrying value of AFS investment amounted to nil and P=110.4 million, respectively. The Group earned dividend income from equity securities amounting P=4.4 million and P=9.2 million as of December 31, 2012 and 2011, respectively.

On January 13, 2012, JGSHI acquired all of the Group’s AFS financial assets in exchange for a settlement amounting P=110.4 million. Market value of the AFS financial assets at date of sale amounted to P=110.4 million and has an existing unrealized loss on AFS amounting P=5.6 million,

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net of tax amounting P=2.4 million. Realized loss from sale of AFS financial assets amounted to P=8.0 million (Note 26).

9. Receivables

This account consists of:

2012 2011 Trade receivables (Note 26) P=735,938,884 P=546,244,400 Due from related parties (Note 26) 175,709,003 35,174,259 Interest receivable 11,637,492 146,244,351 Others 283,463,727 341,707,354 1,206,749,106 1,069,370,364 Less allowance for credit losses 218,237,619 232,584,140 P=988,511,487 P=836,786,224

Trade receivables are noninterest-bearing and generally have 30 to 90 days terms. The receivables are carried at cost.

Interest receivable pertains to accrual of interest income from FVPL and short-term placements. Accrued interest income from FVPL amounted to nil and P=133.7 million, in 2012 and 2011 respectively. Accrued interest income from short-term placements amounted to P=11.6 million and P=12.5 million in 2012 and 2011, respectively.

Others include receivable under a sublease agreement denominated in US dollar equivalent to P=211.1 million with another airline company. This receivable is fully provided with allowance for credit losses. The account also includes receivables from employees and counterparties.

The changes in the allowance for credit losses on receivables follow:

2012

Trade

Receivables Others Total Balance at beginning of year P=6,330,875 P=226,253,265 P=232,584,140 Unrealized foreign exchange gain on

allowance for credit losses – (14,346,521) (14,346,521) Balance at end of year P=6,330,875 P=211,906,744 P=218,237,619

2011

Trade

Receivables Others Total Balance at beginning of year P=6,330,875 P=226,253,265 P=232,584,140 Unrealized foreign exchange gain on

allowance for credit losses – – – Balance at end of year P=6,330,875 P=226,253,265 P=232,584,140

As of December 31, 2012 and 2011, the specific allowance for credit losses on trade receivables and other receivables amounted to P=6.3 million and P=211.9 million and P=6.3 million and P=226.3 million, respectively.

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10. Expendable Parts, Fuel, Materials and Supplies

This account consists of:

2012 2011 At NRV:

Expendable parts P=241,414,140 P=243,906,026 At cost:

Fuel 142,603,044 128,721,614 Materials and supplies 33,417,626 24,899,700

176,020,670 153,621,314 P=417,434,810 P=397,527,340

The cost of expendable and consumable parts, and materials and supplies recognized as expense (included under ‘Repairs and maintenance’ account in the consolidated statements of comprehensive income) for the years ended December 31, 2012, 2011 and 2010 amounted to P=290.9 million, P=180.2 million and P=172.2 million, respectively. The cost of fuel reported as expense under ‘Flying operations’ amounted to P=17,561.9 million, P=15,220.7 million and P=9,807.8 million in 2012, 2011 and 2010, respectively (Note 20).

The cost of expendable parts amounted to P=239.9 million and P=139.1 million as of December 31, 2012 and 2011, respectively. There are no additional provisions for inventory write down in 2012 and 2011. No expendable parts, fuel, material and supplies are pledged as security for liabilities.

11. Other Current Assets

This account consists of:

2012 2011 Advances to suppliers P=679,944,204 P=55,060,231 Prepaid rent 146,026,694 163,245,902 Prepaid insurance 29,338,807 39,222,963 Others 27,294,845 21,161,965 P=882,604,550 P=278,691,061

Advances to suppliers include advances made for the purchase of various aircraft parts and service maintenance. These are recouped from progress billings which occurs within one year from the date the advances arose. The advances are unsecured and noninterest bearing.

Prepaid rent pertains to advance rental on aircraft under operating lease and on office spaces in airports (Note 29).

Prepaid insurance consist of aviation insurance which represents insurance of hull, war, and risk, passenger and cargo insurance for the aircraft during flights and nonaviation insurance represents insurance payments for all employees’ health and medical benefits, commission, casualty and marine insurance as well as car/motor insurance.

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12. Property and Equipment

The composition and movements in this account follow:

2012

Passenger Aircraft

(Notes 16 and 30) Engines Rotables

Ground Support

Equipment

EDP Equipment,

Mainframe and Peripherals

Leasehold Improvements

Transportation Equipment Sub-total

Cost Balance at January 1, 2012 P=38,776,630,813 P=2,191,776,807 P=1,115,405,930 P=313,326,797 P=543,389,386 P=168,944,591 P=146,808,582 P=43,256,282,906 Additions 5,446,827,008 300,124,520 726,119,381 72,215,253 84,793,509 157,851,524 30,067,857 6,817,999,052 Reclassification 2,068,204,768 (51,927,969) (13,600,345) – (80,357) 7,081,621 (830,357) 2,008,847,361 Disposals/others – – (1,336,816) (517,900) (5,373,376) – (6,450,893) (13,678,985) Balance at December 31, 2012 46,291,662,589 2,439,973,358 1,826,588,150 385,024,150 622,729,162 333,877,736 169,595,189 52,069,450,334 Accumulated Depreciation

and Amortization Balance at January 1, 2012 8,578,599,508 699,397,980 188,735,911 209,674,610 428,171,073 119,346,130 91,671,004 10,315,596,216 Depreciation and amortization 2,337,081,674 144,548,185 107,811,305 44,188,061 72,381,670 19,415,773 22,112,959 2,747,539,627 Reclassification – – (574,805) – – – – (574,805) Disposals/others – – (311,924) (517,900) (5,373,376) – (6,367,574) (12,570,774) Balance at December 31, 2012 10,915,681,182 843,946,165 295,660,487 253,344,771 495,179,367 138,761,903 107,416,389 13,049,990,264 Net Book Value at

December 31, 2012 P=35,375,981,407 P=1,596,027,193 P=1,530,927,663 P=131,679,379 P=127,549,795 P=195,115,833 P=62,178,800 P=39,019,460,070

2012

Furniture, Fixtures and

Office Equipment

Communication Equipment

Special Tools

Maintenance and Test

Equipment Other

Equipment Construction

In-progress Total Cost Balance at January 1, 2012 P=74,032,991 P=8,519,385 P=12,854,536 P=6,416,984 P=70,576,308 P=6,871,436,133 P=50,300,119,243 Additions 7,217,602 879,868 196,561 264,647 5,072,677 3,624,117,408 10,455,747,815 Reclassification – – – – – (2,075,286,389) (66,439,028) Disposals/others – – (543,689) – (190,909) – (14,413,583) Balance at December 31, 2012 81,250,593 9,399,253 12,507,408 6,681,631 75,458,076 8,420,267,152 60,675,014,447 Accumulated Depreciation and Amortization Balance at January 1, 2012 49,810,645 5,445,800 11,605,041 5,884,046 48,582,864 – 10,436,924,612 Depreciation and amortization 9,164,100 1,182,848 451,407 190,027 9,335,851 – 2,767,863,860 Reclassification – – – – – – (574,805) Disposals/others – – (543,689) – (190,909) – (13,305,372) Balance at December 31, 2012 58,974,745 6,628,648 11,512,759 6,074,073 57,727,806 – 13,190,908,295 Net Book Value at December 31, 2012 P=22,275,848 P=2,770,605 P=994,649 P=607,558 P=17,730,270 P=8,420,267,152 P=47,484,106,152

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2011

Passenger Aircraft

(Notes 16 and 30) Engines Rotables

Ground Support

Equipment

EDP Equipment,

Mainframe and Peripherals

Leasehold Improvements

Transportation Equipment Sub-total

Cost Balance at January 1, 2011 P=32,410,390,938 P=1,696,909,369 P=798,821,749 P=287,461,784 P=481,156,585 P=156,829,955 P=133,129,222 P=35,964,699,602 Additions 4,721,966,704 494,867,438 318,949,438 25,865,013 70,782,742 – 19,122,866 5,651,554,201 Reclassification 1,644,273,171 – – – – 12,114,636 1,656,387,807 Disposals/others – – (2,365,257) – (8,549,941) – (5,443,506) (16,358,704) Balance at December 31, 2011 38,776,630,813 2,191,776,807 1,115,405,930 313,326,797 543,389,386 168,944,591 146,808,582 43,256,282,906 Accumulated Depreciation

and Amortization Balance at January 1, 2011 6,606,695,587 586,415,896 131,556,201 168,090,218 367,763,753 99,528,561 74,929,505 8,034,979,721 Depreciation and amortization 1,971,903,921 112,982,084 59,544,967 41,584,392 68,957,261 19,817,569 20,777,889 2,295,568,083 Disposals/others – – (2,365,257) – (8,549,941) – (4,036,390) (14,951,588) Balance at December 31, 2011 8,578,599,508 699,397,980 188,735,911 209,674,610 428,171,073 119,346,130 91,671,004 10,315,596,216 Net Book Value at

December 31, 2011 P=30,198,031,305 P=1,492,378,827 P=926,670,019 P=103,652,187 P=115,218,313 P=49,598,461 P=55,137,578 P=32,940,686,690

2011

Furniture, Fixtures and

Office Equipment

Communication Equipment

Special Tools

Maintenance and Test

Equipment Other

Equipment Construction

In-progress Total Cost Balance at January 1, 2011 P=64,624,424 P=7,237,019 P=12,390,580 P=6,410,377 P=67,213,503 P=4,788,168,627 P=40,910,744,132 Additions 9,408,567 1,282,366 463,956 6,607 3,362,805 3,739,655,313 9,405,733,815 Reclassification – – – – – (1,656,387,807) – Disposals/others – – – – – – (16,358,704) Balance at December 31, 2011 74,032,991 8,519,385 12,854,536 6,416,984 70,576,308 6,871,436,133 50,300,119,243 Accumulated Depreciation and Amortization Balance at January 1, 2011 41,582,453 4,347,658 11,219,202 5,721,144 39,071,895 – 8,136,922,073 Depreciation and amortization 8,228,192 1,098,142 385,839 162,902 9,510,969 – 2,314,954,127 Disposals/others – – – – – – (14,951,588) Balance at December 31, 2011 49,810,645 5,445,800 11,605,041 5,884,046 48,582,864 – 10,436,924,612 Net Book Value at December 31, 2011 P=24,222,346 P=3,073,585 P=1,249,496 P=532,938 P=21,993,444 P=6,871,436,133 P=39,863,194,631

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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. In 2011, the Group entered into ECA loan to finance the purchase of three additional Airbus A320 aircraft. In 2012, the Group entered into ECA loan to finance the purchase of four additional 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, VALL or POALL, 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, 2012 and 2011, the carrying amounts of the securing assets (included under the ‘Property and equipment’ account) amounted to P=35.6 billion and P=30.4 billion, respectively.

Operating Fleet As of December 31, 2012 and 2011, the Group’s operating fleet follows:

2012 2011 Owned (Note 16): Airbus A319 10 10 Airbus A320 12 8 ATR 72-500 8 8 Under operating lease (Note 29): Airbus A320 11 11 41 37

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, 2012 and 2011, the Group’s capitalized pre-delivery payments as construction-in-progress amounted to P=8.4 billion and P=6.9 billion, respectively (Note 29).

As of December 31, 2012 and 2011, the gross amount of fully depreciated property and equipment which are still in use by the Group amounted to P=664.5 million and P=556.2 million, respectively.

As of December 31, 2012 and 2011, there are no temporary idle property and equipment.

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13. Investment in Joint Ventures

The investment in joint ventures represents the Parent Company’s 50.00%, 49.00% and 35.00% interest in PAAT, A-plus and SIAEP, respectively. The joint ventures are accounted for as jointly controlled entities.

Investment in PAAT pertains to the Parent Company's 60.00% investment in shares of the joint venture. However, the joint venture agreement between the Parent Company and CAE International Holdings Limited (CAE) states that the Parent Company is entitled to 50% share on the net income/loss of PAAT. As such, the Parent Company recognizes equivalent 50% share in net income and net assets of the joint venture.

The Parent Company entered into a joint venture agreement with CAE on December 13, 2011. PAAT was created to provide training for pilots, cabin crews, aviation management services and guest services for purposes of addressing the Group’s training requirements and to pursue business opportunities for training third parties in the commercial fixed wing aviation industry, including other local and international airline companies. On December 19, 2011, the Parent Company paid P=33.8 million representing 25% payment for the 135,000,000 Class A subscribed shares at P=1.00 par value. PAAT was formally incorporated on January 27, 2012.

As of December 31, 2012 and 2011, the Parent Company’s investment in PAAT amounted to P=124.2 million and P=33.8 million, net of subscription payable of P=101.3 million, respectively.

A-plus and SIAEP 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. PAAT was incorporated on January 27, 2012.

The movements in the carrying values of the Group’s investments in joint ventures in A-plus, SIAEP and PAAT follow:

2012 A-plus SIAEP PAAT* Total Cost Balance at beginning of the year P=87,012,572 P=304,763,900 P=33,750,000 P=425,526,472 Investment during the year – – 101,123,645 101,123,645 87,012,572 304,763,900 134,873,645 526,650,117 Accumulated Equity in

Net Income (Loss) Balance at beginning of the year 44,732,164 (60,780,399) – (16,048,235) Equity in net income (loss) during the year 50,543,615 14,506,902 (10,666,510) 54,384,007 Dividends received (53,229,016) – – (53,229,016) Balance at end of the year 42,046,763 (46,273,497) (10,666,510) (14,893,244) Net Carrying Value P=129,059,335 P=258,490,403 P=124,207,135 P=511,756,873

*Beginning balance is net of subscription payable amounting P=101,250,000

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2011 A-plus SIAEP PAAT* Total Cost Balance at beginning of the year P=87,012,572 P=304,763,900 P=– P=391,776,472 Investment during the year* – – 33,750,000 33,750,000 Balance at end of period 87,012,572 304,763,900 33,750,000 425,526,472 Accumulated Equity in

Net Income (Loss) Balance at beginning of the year 30,116,847 (52,248,581) – (22,131,734) Equity in net income (loss) during the year 50,850,020 (8,531,818) – 42,318,202 Dividends received (36,234,703) – – (36,234,703) Balance at end of the year 44,732,164 (60,780,399) – (16,048,235) Net Carrying Value P=131,744,736 P=243,983,501 P=33,750,000 P=409,478,237

*Net of subscription payable amounting P=101,250,000

Selected financial information of A-plus, SIAEP and PAAT follow:

2012 2011 A-plus SIAEP PAAT A-plus SIAEP PAAT Total current assets P=411,578,768 P=416,322,433 P=62,520,432 P=396,481,683 P=267,039,671 P=– Total assets 482,283,412 1,020,266173 495,453,301 449,545,110 871,670,211 – Total current liabilities 217,093,296 377,439,493 249,999,035 178,874,540 228,070,700 – Total liabilities 217,093,296 377,439,493 249,999,035 178,874,540 228,070,700 – Net income (loss) 82,639,006 17,767,060 (21,333,018) 84,118,310 (21,902,640) –

The fiscal year-end of A-plus and SIAEP is every March 31 while the year-end of PAAT is every December 31.

The undistributed earnings of A-plus included in the consolidated retained earnings amounted to P=42.0 million and P=44.7 million as of December 31, 2012 and 2011, 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, 2012 and 2011.

14. Other Noncurrent Assets

This account consists of:

2012 2011 Refundable deposits P=33,438,542 P=166,175,680 Creditable withholding tax 28,382,890 57,492,013 Others 159,074,514 167,784,698 P=220,895,946 P=391,452,391

Refundable deposits pertain to security deposits provided to lessor for aircraft under operating lease.

Others include option and commitment fees. The option and commitment fees shall be applied against payments for future aircraft delivery.

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15. Accounts Payable and Other Accrued Liabilities

This account consists of:

2012 2011 Accrued expenses P=3,750,064,107 P=3,312,566,151 Trade payables (Note 26) 2,478,769,275 2,639,714,690 Airport and other related fees payable 534,436,035 330,044,660 Deposit from foreign carrier 410,500,000 – Advances from agents and others 251,878,844 191,017,007 Accrued interest payable (Note 16) 105,008,615 102,259,843 Other payables 237,880,170 135,236,525 P=7,768,537,046 P=6,710,838,876

Accrued Expenses The Group’s accrued expenses include accruals for:

2012 2011 Maintenance (Note 29) P=872,776,722 P=861,990,342 Compensation and benefits 546,839,542 505,238,321 Training costs 486,040,399 359,401,193 Advertising and promotion 398,690,076 408,910,866 Navigational charges 323,628,299 231,723,393 Landing and take-off fees 244,198,125 226,106,789 Repairs and services 216,918,668 165,768,719 Fuel 199,083,829 153,277,223 Ground handling charges 113,424,579 108,131,398 Rent (Note 29) 127,609,933 91,959,267 Aircraft insurance 45,776,243 41,924,552 Catering supplies 32,277,324 38,980,896 Reservation costs 8,375,590 13,658,115 Others 134,424,778 105,495,077 P=3,750,064,107 P=3,312,566,151

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 noninterest-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.

Deposit from foreign carrier Deposit from foreign carrier represents advances received in 2012 which was subsequently returned in January 2013.

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Advances from Agents and Others Advances from agents and others represent cash bonds required from major sales and ticket offices or agents.

Interest Payable Interest payable is related to long-term debt and normally settled quarterly throughout the year.

Other Payables Other payables are noninterest-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:

2012

Interest Rates Maturities US Dollar Philippine Peso

Equivalent ECA loans 3.37% to 5.83%

Various dates through 2023

US$334,364,127 P=13,725,647,412

0.85% to 2.05% (US Dollar LIBOR 6 months + margin

or 3 months + margin)

180,762,668 7,420,307,510 515,126,795 21,145,954,922

Commercial loans from foreign banks

4.11% to 5.67%

Various dates through 2017

40,325,975 1,655,381,256

1.65% to 1.71% (US Dollar LIBOR

6 months + margin) 2,996,907 123,023,020 43,322,882 1,778,404,276 558,449,677 22,924,359,198 Less current portion 67,465,100 2,769,442,355 US$490,984,577 P=20,154,916,843

2011

Interest Rates Maturities US Dollar Philippine Peso

Equivalent ECA loans 3.37% to 5.83%

Various dates through 2023

US$248,553,773 P=10,896,597,403

0.85% to 2.05% (US Dollar LIBOR 6 months + margin

or 3 months + margin)

175,556,066 7,696,377,955 424,109,839 18,592,975,358

Commercial loans from foreign banks

4.11% to 5.67%

Various dates through 2017

47,428,768 2,079,277,203

1.65% to 1.71% (US Dollar LIBOR

6 months + margin) 4,553,852 199,640,872 51,982,620 2,278,918,075 476,092,459 20,871,893,433 Less current portion 56,283,101 2,467,451,166 US$419,809,358 P=18,404,442,267

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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 semi-annual 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. On November 30, 2010, the Parent Company pre-terminated the lease agreement with BLL related to the disposal of one ATR 72-500 turboprop aircraft. The outstanding balance of the related loans and accrued interests amounting 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.

In 2009, the Group entered into ECA-backed loan facilities to partially 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 semi-annual 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 partially finance the purchase of four Airbus A320 aircraft, delivered between 2010 to January 2011. 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.

In 2011, the Group entered into ECA-backed loan facilities to fully finance the purchase of three Airbus A320 aircraft, delivered between 2011 to January 2012. The security trustee of the ECA loans established VALL, 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 VALL corresponds to the principal and interest payments made by VALL to the ECA-backed lenders. The quarterly lease rentals to VALL 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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In 2012, the Group entered into ECA-backed loan facilities to partially finance the purchase of three Airbus A320 aircraft. The security trustee of the ECA loans established POALL, 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 POALL corresponds to the principal and interest payments made by POALL to the ECA-backed lenders. The quarterly lease rentals to POALL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases.

The terms of the ECA-backed facilities, which are the same for each of the ten Airbus A319 aircraft, seven ATR 72-500 turboprop aircraft and ten 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 seven Airbus A320 aircraft, and equal principal repayments for the last six Airbus A319 aircraft and last three Airbus A320 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, BLL and SALL is at fixed rates, which range from 3.78% to 5.83%. Interest on loans from ECA lenders related to SLL is 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 VALL is fixed at 2.56% for one Airbus A320 aircraft and US dollar LIBOR 3 months plus margin for two Airbus A320 aircraft. Interest on loans from ECA lenders related to POALL for the three A320 aircraft is US dollar LIBOR 3 months plus margin.

• As provided under the ECA-backed facility, CALL, BLL, SLL, SALL, VALL and POALL 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, SALL, VALL and POALL 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 VALL or POALL becomes insolvent, (e) failure to discharge any attachment or sequestration order against CALL’s, BLL’s, SLL’s, SALL’s VALL’s and POALL’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 or VALL or POALL, 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.

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As of December 31, 2012 and 2011, the total outstanding balance of the ECA loans amounted to P=21,146.0 million (US$515.1 million) and P=18,593.0 million (US$424.1 million), respectively. Interest expense amounted to P=632.6 million, P=549.8 million and P=623.4 million in 2012, 2011 and 2010, respectively.

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, 2012 and 2011, the total outstanding balance of the commercial loans from foreign banks amounted to P=1,778.4 million (US$43.3 million) and P=2,278.9 million (US$52.0 million), respectively. Interest expense amounted to P=100.0 million, P=113.0 million and P=137.7 million in 2012, 2011 and 2010, respectively.

The Group is not in breach of any loan covenants as of December 31, 2012 and 2011.

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17. Other Noncurrent Liabilities

This account consists of:

2012 2011 ARO P=1,351,931,051 P=1,263,319,344 Accrued maintenance 424,276,778 670,810,817 Pension liability (Note 22) 214,099,443 251,594,022 P=1,990,307,272 P=2,185,724,183

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 2010, which includes estimates of certain redelivery costs at the end of the operating aircraft lease (see Note 5).

The rollforward analysis of the Group’s ARO follows:

2012 2011 ARO Asset Balance at beginning of year P=1,174,348,991 P=1,211,879,019 Capitalized during the year** 459,298,467 279,926,767 Amortization* (369,113,893) (317,456,796) Balance at end of year 1,264,533,565 1,174,348,990 ARO Liability Balance at beginning of year 2,437,668,334 2,070,145,159 Accretion expense* 208,396,566 191,472,734 Capitalized during the year** 459,298,467 279,926,767 Payment of restorations during the year (488,898,751) (103,876,326) Balance at end of year 2,616,464,616 2,437,668,334 Net ARO Liability P=1,351,931,051 P=1,263,319,344

*Included under repairs and maintenance (Note 20) account in the consolidated statements of comprehensive income. **In 2012, capitalized ARO liability pertains to two additional Airbus A320 aircraft under operating lease entered in

March 2012. In 2011, capitalized ARO liability refers to two additional Airbus A320 aircraft under operating lease agreements entered in October 2011.

Expenses included as part of repairs and maintenance (Note 20) follow:

2012 2011 2010 Amortization P=369,113,893 P=317,456,796 P=234,803,539 Accretion expense 208,396,566 191,472,734 170,402,866 P=577,510,459 P=508,929,530 P=405,206,405

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.

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18. Equity

The details of the number of common shares and the movements thereon follow:

2012 2011 2010 Authorized - at P=1 par value 1,340,000,000 1,340,000,000 1,340,000,000 Beginning of year 605,953,330 613,236,550 582,574,750 Treasury shares – (7,283,220) – Issuance of shares during the year – – 30,661,800 Issued and outstanding 605,953,330 605,953,330 613,236,550

Issuance of Common Shares of Stock On October 26, 2010, the Parent Company listed with the PSE its common stock, by way of primary and secondary share offerings, 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 P=3,800.0 million. The Parent Company’s share in the total transaction costs incurred incidental to the IPO amounting P=100.4 million, which is charged against ‘Capital paid in excess of par value’ in the parent statement of financial position. The registration statement was approved on October 11, 2010. The Group has 76 and 56 existing certified shareholders as of December 31, 2012 and 2011, respectively.

Treasury Shares On February 28, 2011, the BOD of the Parent Company approved the creation and implementation of a share buyback program (SBP) up to P=2,000.0 million 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.

The Parent Company has outstanding treasury shares of 7,283,220 shares amounting to P=529.3 million as of December 31, 2012 and 2011, restricting the Parent Company from declaring an equivalent amount from unappropriated retained earnings as dividends.

Appropriation of Retained Earnings On April 19, 2012, the Parent Company’s Executive Committee appropriated P=483.3 million from its unrestricted retained earnings as of December 31, 2011 for purposes of the Group’s re-fleeting program. The appropriated amount will be used for settlement of pre-delivery payments and aircraft lease commitments in 2013.

On December 9, 2011, the Parent Company’s BOD appropriated P=933.5 million from its unrestricted retained earnings as of December 31, 2010 for purposes of the Parent Company’s re-fleeting program. The appropriated amount will be used for settlement of pre-delivery payments and aircraft lease commitments in 2013.

Unappropriated Retained Earnings The income of the subsidiaries and JV that are recognized in the statements of comprehensive income are not available for dividend declaration unless these are declred by the subsidiaries and JV. Likewise, retained earnings are restricted for the payment of dividends to the extent of the cost of common shares held in treasury.

On June 28, 2012, the Parent Company’s BOD approved the declaration of a regular cash dividend in the amount of P=606.0 million or P=1.00 per common share to all stockholders of record as of July 18, 2012 and was paid on August 13, 2012.

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On March 17, 2011, the BOD of the Parent Company approved the declaration of a regular cash dividend in the amount of P=1,222.4 million or P=2.00 per share and a special cash dividend in the amount of P=611.2 million or P=1.00 per share from the unrestricted retained earnings of the Parent Company to all stockholders of record as of April 14, 2011 and was paid on May 12, 2011.

After reconciling items which include fair value adjustments on financial instruments, foreign exchange gain and cost of common stocks held in treasury, the amount of retained earnings that is available for dividend declaration as of December 31, 2012 amounted to P=7,426.9 million.

Under the Tax Code, publicly-held Corporations are allowed to accumulate retained earnings in excess of capital stock and are exempt from improperly accumulated earnings tax.

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 ultimate parent monitors the use of capital structure using a debt-to-equity capital ratio which is gross debt divided by total capital. The ultimate parent includes within gross debt all interest-bearing loans and borrowings, while capital represent total equity.

The Group’s debt-to-capital ratios follow:

2012 2011 (a) Long term debt (Note 16) P=22,924,359,198 P=20,871,893,433 (b) Capital 22,134,812,784 19,165,523,290 (c) Debt-to-capital ratio (a/b) 1.0:1 1.1:1

The JGSHI Group’s policy is to keep the debt to capital ratio at the 2:1 level as of December 31, 2012 and 2011. Such ratio is currently being managed on a group level by the Group’s ultimate parent.

19. Revenues

Revenues consist of:

2012 2011 2010 Passenger P=32,251,670,072 P=29,242,324,163 P=25,891,755,088 Cargo 2,380,938,624 2,193,283,974 2,095,612,224 Baggage fee 2,837,630,241 2,173,466,124 778,395,571 Ancillary revenues 434,214,686 326,328,514 323,036,076 P=37,904,453,623 P=33,935,402,775 P=29,088,798,959

Passenger revenues pertain to fare revenues and other revenues related in the transportation of passengers such as charter flights, refund charges rebooking and cancellation fees, seat selection and in-flight sales.

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Cargo revenues pertain to revenues and other revenues related to transportation of cargo, mail and merchandise.

Baggage fees pertain to other revenue on passenger luggage.

Ancillary revenues pertain to revenues not directly related in the transportation of passengers, cargo, mail and merchandise. This includes commissions, simulator revenue share, building sub-lease, homepage advertising revenue share, sale of scrap and others.

20. Operating Expenses

Flying Operations This account consists of:

2012 2011 2010 Aviation fuel expense P=17,561,860,875 P=15,220,724,678 P=9,807,825,079 Flight deck 2,156,797,336 1,815,106,843 1,365,724,876 Aviation insurance 182,842,911 176,697,232 152,573,085 Others 117,087,620 137,639,647 91,365,472 P=20,018,588,742 P=17,350,168,400 P=11,417,488,512

Aircraft and Traffic Servicing This account consists of:

2012 2011 2010 Airport charges P=1,982,460,047 P=1,715,448,209 P=1,405,341,791 Ground handling 1,079,658,319 941,465,556 758,912,700 Others 371,280,228 334,364,339 297,552,706 P=3,433,398,594 P=2,991,278,104 P=2,461,807,197

Others pertain to staff expenses incurred by the Group such as basic pay, employee training cost and allowances.

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. The account includes the related amortization of ARO asset and cost of other contractual obligation under the aircraft operating lease agreements (Note 29). These amounted to P=577.5 million, P=508.9 million and P=405.2 million in 2012, 2011 and 2010, respectively (Note 17).

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21. General and Administrative Expenses

This account consists of:

2012 2011 2010 Staff cost P=333,600,755 P=286,615,189 P=296,635,837 Utilities 211,140,793 175,088,622 98,751,158 Security and professional fees 173,254,532 155,449,402 140,012,498 Others 235,722,312 203,300,273 159,488,985 P=953,718,392 P=820,453,486 P=694,888,478

Others include membership dues, annual listing maintenance fees, supplies, rent and others.

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, 2012, 2011 and 2010, the assumptions used to determine pension benefits of the Parent Company follow:

2012 2011 2010 Average remaining working life 12 years 12 years 10 years Discount rate 5.79% 6.54% 9.93% Salary rate increase 5.50% 5.50% 5.50%

As of December 31, 2012, 2011 and 2010, the discount rate used in determining the pension liability is 5.79%, 6.54% and 9.93%, which is determined by reference to market yields at the reporting date on Philippine government bonds.

The amounts recognized as pension liability (included under ‘Other noncurrent liabilities’ account in the consolidated statements of financial position) follow (Note 17):

2012 2011 Present value of defined benefit obligation (PVO) P=434,471,123 P=325,295,900 Fair value of plan assets (80,842,324) – Unrecognized actuarial loss (139,529,356) (73,701,878) Pension liability at end of year P=214,099,443 P=251,594,022

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Movements in unrecognized actuarial gain (loss) follow:

2012 2011 Balance at beginning of year (P=73,701,878) (P=20,037,800) Amortization of actuarial gain 3,431,000 – Actuarial gain due to PVO 263,793 – Actuarial loss due to PVO (69,522,271) (53,664,078) Balance at end of year (P=139,529,356) (P=73,701,878)

Movements in the fair value of plan asset follow:

2012 2011 Actual contribution during the year P=80,578,531 P=– Actuarial gain 263,793 – Balance at end of year P=80,842,324 P=–

The plan assets consist of:

Amount % Cash P=80,849,281 100%Liabilities (6,957) – P=80,842,324 100%

The Group expects to contribute about P=80.0 million into the pension fund for the year ending 2013.

Movements in the defined benefit liability follow:

2012 2011 Balance at beginning of year P=251,594,022 P=210,156,100 Pension expense during year 70,720,100 52,987,000 Actual contributions (80,578,531) – Benefits paid during year (27,636,148) (11,549,078) Balance at end of year P=214,099,443 P=251,594,022

Components of pension expense included in the consolidated statements of comprehensive income follow:

2012 2011 2010 Current service cost P=46,014,700 P=33,075,200 P=24,318,200 Interest cost 21,274,400 19,911,800 15,911,600 Amortization of actuarial gain 3,431,000 – – Total pension expense P=70,720,100 P=52,987,000 P=40,229,800

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Changes in the present value of the defined benefit obligation follow:

2012 2011 Balance at beginning of year P=325,295,900 P=230,193,900 Current service cost 46,014,700 33,075,200 Interest cost 21,274,400 19,911,800 Benefits paid (27,636,148) (11,549,078) Actuarial loss 69,522,271 53,664,078 Balance at end of year P=434,471,123 P=325,295,900

Amounts for the current and previous periods follow:

2012 2011 2010 2009 2008 Present value of retirement

obligation P=434,471,123 P=325,295,900 P=230,193,900 P=160,237,500 P=91,413,300 Experience adjustments - loss (gain) 263,793 – (1,435,700) 1,445,500 1,199,000

23. Other Expenses

This account consists mainly of bank charges. 24. Income Taxes

Provision for income tax consists of:

2012 2011 2010 Current MCIT P=30,081,311 P=52,679,330 P=1,595,963 Deferred 267,305,224 69,905,552 16,163,724 P=297,386,535 P=122,584,882 P=17,759,687

Provision for income tax pertains to RCIT or 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 short-term placements and cash in banks, respectively, which are final withholding taxes on gross interest income.

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.

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Details of the Parent Company’s NOLCO and MCIT are as follows:

NOLCO

Year Incurred Amount Expired/Applied Balance Expiry Year 2008 P=81,434,888 (P=81,434,888) P=– 2011 2009 79,186,012 (79,186,012) – 2012 2010 533,255,953 (267,084,527) 266,171,426 2013 2012 1,301,721,876 – 1,301,721,876 2015 P=1,995,598,729 (P=427,705,427) P=1,567,893,302

In 2011, the Parent Company has applied NOLCO amounting P=427.7 million.

MCIT

Year Incurred Amount Expired/Applied Balance Expiry Year 2009 P=4,585,763 (P=4,585,763) P=– 2012 2010 1,595,963 – 1,595,963 2013 2011 52,679,330 – 52,679,330 2014 2012 30,081,311 – 30,081,311 2015 P=88,942,367 (P=4,585,763) P=84,356,604

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 Date of Registration Registration Number ITH Period

Number of Aircraft

First December 14, 2005 2005-213 Jan 2007 - Dec 2010 20 Second June 4, 2008 2008-119 Mar 2009 - Feb 2013 8 Third November 3,2010 2010-180 Jan 2011 - Dec 2016 5 Fourth November 16, 2011 2011-240 Nov 2011 - Nov 2015 1 Fifth November 16, 2011 2011-241 Nov 2011 - Nov 2017 1 Sixth November 16, 2011 2011-242 Nov 2011 - Nov 2015 1 Seventh November 16, 2011 2011-243 Dec 2011 - Dec 2017 1 Eight January 17, 2012 2012-012 Jan 2017 - Jan 2018 1 Ninth January 17, 2012 2012-013 Mar 2012 - Feb 2016 1 Tenth January 17, 2012 2012-014 Mar 2012 - Feb 2016 1 Eleventh October 4, 2012 2012-208 Oct 2012 - Oct 2018 1 Twelfth December 6, 2012 2012-261 Dec 2012 - Dec 2018 1 Thirteenth December 6, 2012 2012-262 Dec 2012 - Dec 2018 1 43

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 (8) years.

As of December 31, 2012 and 2011, 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 31).

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The components of the Group’s deferred tax assets and liabilities follow:

2012 2011 Deferred tax assets on: ARO - liability P=784,939,385 P=731,300,500 NOLCO 470,324,758 79,851,428 Accrued retirement costs 64,229,845 75,478,207 Allowance for credit losses 65,471,285 69,775,242 MCIT 84,356,605 58,861,056 Unrealized loss on financial assets designated

at FVPL – 43,066,411 Unrealized loss on net derivative liability – 8,559,355 Unrealized loss on AFS investment* – 2,412,970 1,469,321,878 1,069,305,169 Deferred tax liabilities on: Unrealized foreign exchange gain - net 807,881,245 504,354,224 ARO - asset 194,497,361 220,320,170 Double depreciation 944,198,871 566,416,958 Unrealized gain on derivative asset 14,248,778 – Unrealized gain on financial assets designated

at FVPL – – 1,960,826,255 1,291,091,352 Net deferred tax liabilities P=491,504,377 P=221,786,183

* Movement under other comprehensive income

The Group’s recognized deferred tax assets and deferred tax liabilities are expected to be reversed more than twelve months after the reporting 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.

2012 2011 Deductible temporary differences: Unrealized loss on net derivative liability P=– P=15,446,196 Taxable temporary differences: ARO - asset P=489,720,314 P=362,655,952 Unrealized gain on derivative asset 55,186,836 – P=544,907,150 P=362,655,952

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A reconciliation of the statutory income tax rate to the effective income tax rate follows:

2012 2011 2010 Statutory income tax rate 30.00% 30.00% 30.00% Adjustments resulting from: Income subject to ITH (18.07) (23.85) (29.71) Interest income subjected to final tax (3.17) (3.13) (0.49) Gain on sale of financial assets (0.04) – – Unrecognized deferred tax assets and liabilities (1.65) (0.49) 0.41 Equity in net (income) loss of JV (0.42) (0.29) (0.11) Nondeductible items 1.05 1.03 0.16 Effective income tax rate 7.69% 3.27% 0.26%

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 P=10.9 million, P=3.0 million and P=4.8 million in 2012, 2011 and 2010, respectively.

25. Earnings Per Share

The following reflects the income and share data used in the basic/dilutive EPS computations:

2012 2011 2010 (a) Net income attributable to common

shareholders P=3,569,612,563 P=3,624,417,718 P=6,922,493,280 (b) Weighted average number of common

shares for basic EPS 605,953,330 610,851,702 587,685,050 (c) Basic/diluted earnings per share P=5.89 P=5.93 P=11.78

The Group has no dilutive potential common shares in 2012, 2011 and 2010.

26. Related Party Transaction

Transactions between related parties are based on terms similar to those offered to nonrelated parties. Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions or the parties are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

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.

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The significant transactions and outstanding balances of the Group with the related parties follow:

Consolidated Statement of Financial Position Cash and

Cash Equivalents (Note 7)

Due from Related Parties (Note 9)

Due to Related Parties (Note 15) Trade Receivables (Note 9) Trade Payables (Note 15)

Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance

Ultimate parent company JGSHI 31-Dec-12 P=– P=– P=– P=– P=924,541 P=2,473,561 P=– P=– P=– P=–

31-Dec-11 – – – – 1,199,020 1,549,020 – – – – 31-Dec-10 – – – – (42,007,610) 350,000 – – – –

Parent company CPAHI 31-Dec-12 – – (10,854,945) 56,203 – – – – – –

31-Dec-11 – – (47,903,126) 10,911,148 – – – – – – 31-Dec-10 – – 57,913,604 58,814,274 – – – – – –

JV in which the Company is a venturer A-plus 31-Dec-12 – – 2,994,440 18,330,539 – – – – (12,696,455) –

31-Dec-11 – – (11,593,694) 15,336,099 – – – – (58,456,712) 12,696,455 31-Dec-10 – – (8,486,542) 26,929,793 – – – – 59,505,413 71,153,167

SIAEP 31-Dec-12 – – 3,034,066 9,773,472 – – 39,742 46,242 (18,644,261) 6,865,985 31-Dec-11 – – 5,906,999 6,739,406 – – 6,500 6,500 (63,380,052) 25,510,246 31-Dec-10 – – (3,240,189) 832,407 – – (13,708) – – –

PAAT, Inc. 31-Dec-12 – – 145,361,183 147,548,788 – – – – – – 31-Dec-11 – – 2,187,605 2,187,605 – – – – – – 31-Dec-10 – – – – – – – – – –

(Forward)

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Consolidated Statement of Financial Position Cash and

Cash Equivalents (Note 7)

Due from Related Parties (Note 9)

Due to Related Parties (Note 15) Trade Receivables (Note 9) Trade Payables (Note 15)

Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance

Entities under common control Robinsons Savings 31-Dec-12 P=922,831,166 P=6,810,956,591 P=– P=– (P=420,178) P=529,985 P=54,957 P=54,957 P=100,200 P=1,471,859

Bank (RSB) 31-Dec-11 1,335,447,233 5,888,125,425 – – 91,795 950,163 (5,631) – 1,220,800 1,371,659 31-Dec-10 4,327,376,700 4,552,678,192 – – 294,858 858,368 (42,912) 5,631 (329,172) 150,859

Universal Robina 31-Dec-12 – – – 9,945,024 42,598,769 (257,682) 2,657,183 2,392,203 3,191,028 Corporation (URC) 31-Dec-11 – – – (1,055,987) 32,653,745 730,928 2,914,865 (2,102,032) 798,825

31-Dec-10 – – – 3,043,237 33,709,732 374,185 2,183,937 746,021 2,900,857

Digitel Telecommunication* (DIGITEL)

31-Dec-12 – – – – – (1,494,734) 183,526 (210,082) 211,565 31-Dec-11 – – – – – 6,999 1,678,260 421,647 421,647 31-Dec-10 – – – – – 374,185 1,671,261 (241,740) –

Robinsons Land 31-Dec-12 – – – – – – 321,938 971,241 (132,593) 1,330,597 Corporation (RLC) 31-Dec-11 – – – – – 367,462 649,303 1,442,077 1,463,190

31-Dec-10 – – – – – (32,498) 281,841 (181,374) 21,113

Robinsons Handyman, Inc. 31-Dec-12 – – – – – – – – 236,109 297,980 31-Dec-11 – – – – – – – – – – 31-Dec-10 – – – – – – – – – –

Summit Publishing, 31-Dec-12 – – – – – – (150,614) 639,908 – – Inc. (SPI) 31-Dec-11 – – – – – – (65,408) 790,521 – –

31-Dec-10 – – – – – – 225,751 855,930 – –

(Forward)

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Consolidated Statement of Financial Position Cash and

Cash Equivalents (Note 7)

Due from Related Parties (Note 9)

Due to Related Related (Note 15) Trade Receivables (Note 9) Trade Payables (Note 15)

Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance Amount Outstanding

Balance

JG Petrochemical 31-Dec-12 P=– P=– P=– P=– P=– P=– P=995,954 P=1,052,002 P=– P=– Corporation (JGPC) 31-Dec-11 – – – – – – (207,435) 56,048 – –

31-Dec-10 – – – – – – 260,088 263,484 – –

Robinsons Inc. 31-Dec-12 – – – – (1,149,247) – (158,653) 342,615 (2,569,040) – 31-Dec-11 – – – – 538,044 1,149,247 (630,330) 501,268 2,280,579 2,569,040 31-Dec-10 – – – – 482,063 611,203 630,684 1,131,598 256,747 288,461

Jobstreet.com Phils., Inc. 31-Dec-12 – – – – – – 51,261 51,261 – –

31-Dec-11 – – – – – – – – – – 31-Dec-10 – – – – – – – – – –

Unicon Insurance Brokers 31-Dec-12 – – – – – – – – 5,062 56,984 31-Dec-11 – – – – – – – – 48,410 51,922 31-Dec-10 – – – – – – – – 3,512 3,512

Total 31-Dec-12 P=922,831,166 P=6,810,956,591 P=140,534,744 P=175,709,003 P=9,300,140 P=45,602,315 (P=597,830) P=5,998,935 (P=31,518,857) P=13,425,998 31-Dec-11 1,335,447,233 5,888,125,425 (51,402,216) 35,174,259 772,871 36,302,174 203,085 6,596,765 (118,525,283) 44,882,984

31-Dec-10 4,327,376,700 4,552,678,192 46,186,873 86,576,474 (38,187,452) 35,529,304 1,775,775 6,393,682 59,759,407 74,517,969 *As of December 31, 2011, Digitel Telecommunication is no longer a related party of Cebu Air, Inc.

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Consolidated Statement of Comprehensive Income Sale of Air Transportation

Service Interest Income Repairs and

Maintenance

Year Amount/

Outstanding Balance Amount/

Outstanding Balance Amount/

Outstanding Balance

JV in which the Company is a venture A-plus 2012 P=– P=– P=290,371,627

2011 – – 277,178,544 2010 – – 259,226,381

SIAEP 2012 233,666 – –

2011 93,776 – – 2010 263,606 – –

Entities under common control RSB 2012 1,615,318 359,337,295 –

2011 723,696 288,358,555 – 2010 715,413 28,960,516 –

URC 2012 25,619,354 – –

2011 25,660,486 – – 2010 23,185,728 – –

DIGITEL* 2012 18,430,121 – –

2011 20,521,872 – – 2010 15,921,059 – –

RLC 2012 11,186,607 – –

2011 10,321,822 – – 2010 6,035,538 – –

SPI 2012 2,207,662 – –

2011 5,525,371 – – 2010 2,484,213 – –

JGPC 2012 3,137,969 – – 2011 1,222,177 – – 2010 830,006 – –

Robinsons Inc. 2012 18,060,662 – –

2011 15,700,314 – – 2010 11,592,290 – –

Jobstreet.com Phils., Inc. 2012 451,232 – –

2011 – – – 2010 – – –

Total 2012 P=80,942,591 P=359,337,295 P=290,371,627 2011 79,769,514 288,358,555 277,178,544

2010 61,727,854 28,960,516 259,226,381

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Terms and conditions of transactions with related parties Outstanding balances at year-end are unsecured, interest-free and settlement occurs in cash. Also, these transactions are short-term in nature. There have been no guarantees provided or received for any related party receivables or payables. The Group has not recognized any impairment losses on amounts due from related parties for the years ended December 31, 2012 and 2011. This assessment is undertaken each financial year through a review of the financial position of the related party and the market in which the related party operates.

The Group’s significant transactions with related parties follow:

1. 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.

2. 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.

3. 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’.

4. 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’.

5. The Group provides air transportation services to certain related parties, for which unpaid

amounts are recorded as trade receivables under ‘Receivables’ in the consolidated statement 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. Total amount of purchases in 2012, 2011 and 2010 amounted to P=5.2 million, P=1.8 million and P=6.4 million, respectively.

6. On January 13, 2012, JGSHI acquired all of the Group’s debt and equity securities classified

as financial assets at FVPL and AFS financial assets in exchange for a settlement amounting P=3,368.4 million, of which P=89.0 million pertains to the settlement of accrued interest from these financial assets. Market value of financial assets at FVPL and AFS financial assets at date of sale amounted to P=3,368.4 million. Realized gain (loss) on the sale of financial assets at FVPL and AFS financial assets amounted to P=13.8 million and (P=8.0) million, respectively in 2012 (Note 8).

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The compensation of the Group’s key management personnel by benefit type follows:

2012 2011 2010 Short-term employee benefits P=131,590,618 P=119,792,501 P=118,221,095 Post-employment benefits 1,565,035 14,136,670 1,528,853 P=133,155,653 P=133,929,171 P=119,749,948

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.

27. 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 interest-bearing 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.

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.

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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.

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.

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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.

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.

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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 to credit risk (including derivative assets) of the Group as of December 31, 2012 and 2011, without considering the effects of collaterals and other credit risk mitigation techniques.

2012 2011 Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private P=– P=2,021,911,190 Government – 1,039,254,600 – 3,061,165,790 Quoted equity securities – 183,032,000 – 3,244,197,790 Derivative financial instruments not designated as accounting hedges 102,682,762 16,880,208 102,682,762 3,261,077,998 AFS investments (Note 8) Quoted equity securities – 110,367,200 Loans and receivables Cash and cash equivalents* (Note 7) 10,708,834,337 8,941,142,761 Receivables (Note 9) Trade receivables 735,938,884 546,244,400 Interest receivable 11,637,492 146,244,351 Due from related parties 175,709,003 35,174,259 Others** 283,463,727 341,707,354 1,206,749,106 1,069,370,364 Refundable deposits*** (Note 14) 33,438,542 166,175,680 P=12,051,704,747 P=13,548,134,003 *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

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

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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:

2012

Philippines

Asia (excluding

Philippines) Europe Others Total Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private P=– P=– P=– P=– P=– Government – – – – – – – – – – Quoted equity securities – – – – – – – – – – Derivative financial instruments not designated as accounting hedges – – 102,682,762 – 102,682,762 – – 102,682,762 – 102,682,762 AFS investments (Note 8) Quoted equity securities – – – – – Loans and receivables Cash and cash equivalents* (Note 7) 9,717,006,892 991,827,445 – – 10,708,834,337 Receivables (Note 9) Trade receivables 547,077,162 188,049,068 – 812,654 735,938,884 Interest receivable 11,637,492 – – – 11,637,492 Due from related parties 175,709,003 – – – 175,709,003 Others** 137,223,912 14,593,950 – 131,645,865 283,463,727

871,647,569 202,643,018 – 132,458,519 1,206,749,106 Refundable deposits*** (Note 14) – – 33,438,542 – 33,438,542 P=10,588,654,461 P=1,194,470,463 P=136,121,304 P=132,458,519 P=12,051,704,747 *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.

2011

Philippines

Asia (excluding

Philippines) Europe Others Total Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private P=2,021,911,190 P=– P=– P=– P=2,021,911,190 Government 966,672,000 72,582,600 – – 1,039,254,600 2,988,583,190 72,582,600 – – 3,061,165,790 Quoted equity securities 183,032,000 – – – 183,032,000 3,171,615,190 72,582,600 – – 3,244,197,790 Derivative financial instruments – not designated as accounting hedges – – 16,880,208 – 16,880,208 3,171,615,190 72,582,600 16,880,208 – 3,261,077,998 AFS investments (Note 8) Quoted equity securities – 110,367,200 – – 110,367,200 Loans and receivables Cash and cash equivalents* (Note 7) 8,284,718,611 656,424,150 – – 8,941,142,761 Receivables (Note 9) Trade receivables 431,367,661 112,455,082 2,421,657 – 546,244,400 Interest receivable 142,991,628 3,252,723 – – 146,244,351

(Forward)

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2011

Philippines

Asia (excluding

Philippines) Europe Others Total Due from related parties P=35,174,259 P=– P=– P=– P=35,174,259 Others** 58,424,350 33,125,717 250,157,287 – 341,707,354

667,957,898 148,833,522 252,578,944 – 1,069,370,364 Refundable deposits*** (Note 14) – – 166,175,680 – 166,175,680 P=12,124,291,699 P=988,207,472 P=435,634,832 P=– P=13,548,134,003 *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, 2012 and 2011.

2012 Neither Past Due Nor Specifically Impaired Past Due

High

Grade Standard

Grade Substandard

Grade or Individually

Impaired Total Financial assets at FVPL (Note 8) Derivative financial instruments

not designated as accounting hedges P=102,682,762 P=– P=– P=– P=102,682,762

Loans and receivables: Cash and cash equivalents*

(Note 7) 10,708,834,337 – – – 10,708,834,337 Receivables (Note 9) Trade receivables 660,538,509 – – 75,400,375 735,938,884 Interest receivable 11,637,492 – – – 11,637,492 Due from related parties 175,709,003 – – – 175,709,003 Others** 283,463,727 – – – 283,463,727 Refundable deposits*** (Note 14) 33,438,542 – – – 33,438,542 P=11,976,304,372 P=– P=– P=75,400,375 P=12,051,704,747

*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.

2011 Neither Past Due Nor Specifically Impaired Past Due

High

Grade Standard

Grade Substandard

Grade or Individually

Impaired Total Financial assets at FVPL (Note 8) Derivative financial instruments

not designated as accounting hedges P=16,880,208 P=– P=– P=– P=16,880,208

Loans and receivables: Cash and cash equivalents*

(Note 7) 8,941,142,761 – – – 8,941,142,761 Receivables (Note 9) Trade receivables 335,930,556 114,814,154 – 95,499,690 546,244,400 Interest receivable 146,244,351 – – – 146,244,351 Due from related parties 35,174,259 – – – 35,174,259 Others** 115,454,089 – – 226,253,265 341,707,354 Refundable deposits*** (Note 14) 166,175,680 – – – 166,175,680 P=9,757,001,904 P=114,814,154 P=– P=321,752,955 P=10,193,569,013

*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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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=69.0 million and P=92.4 million as December 31, 2012 and 2011, respectively, and past due and impaired receivables amounting P=218.2 and P=232.6 million as of December 31, 2012 and 2011, 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=218.2 and P=232.6 million as of December 31, 2012 and 2011, 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.

As of December 31, 2012, the Group has no existing FVPL and AFS investments.

Below is a summary of the Group’s FVPL and AFS external credit rating classification for the year ended December 31, 2011:

2011 Neither Past Due Nor Specifically Impaired Past Due

High

Grade Standard

Grade Not Rated or Individually

Impaired Total Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private

BBB+ P=– P=47,540,096 P=– P=– P=47,540,096 BB+ – 232,352,000 – – 232,352,000 BB – 228,968,100 – – 228,968,100 NR – – 1,513,050,994 – 1,513,050,994

P=– P=508,860,196 P=1,513,050,994 P=– P=2,021,911,190 Government

BB+ – 72,582,600 – – 72,582,600 BB – 966,672,000 – – 966,672,000

– 1,548,114,796 1,513,050,994 – 3,061,165,790 Quoted equity securities

A- 183,032,000 – – – 183,032,000 183,032,000 1,548,114,796 1,513,050,994 – 3,244,197,790

AFS investments (Note 8) Quoted equity securities

BBB- – 110,367,200 – – 110,367,200 P=183,032,000 P=1,658,481,996 P=1,513,050,994 P=– P=3,354,564,990

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The following tables show the aging analysis of the Group’s receivables:

2012 Neither Past Past Due But Not Impaired Past

Due Nor

Impaired 31-60 days 61-90 days 91-180 daysOver

180 daysDue and

Impaired Total Trade receivables P=660,538,513 P=45,991,793 P=23,077,703 P=– P=– P=6,330,875 P=735,938,884 Interest receivable 11,637,492 – – – – – 11,637,492 Due from related parties 175,709,003 – – – – – 175,709,003 Others* 71,556,983 – – – – 211,906,744 283,463,727 P=919,441,991 P=45,991,793 P=23,077,707 P=– P=– P=218,237,619 P=1,206,749,106

*Include nontrade receivables from derivative counterparties and employees

2011 Neither Past Past Due But Not Impaired Past

Due Nor Impaired 31-60 days 61-90 days 91-180 days

Over 180 days

Due and Impaired Total

Trade receivables P=450,744,710 P=43,594,752 P=40,712,136 P=1,591,235 P=3,270,692 P=6,330,875 P=546,244,400 Interest receivable 146,244,351 – – – – – 146,244,351 Due from related parties 31,977,638 – – – 3,196,621 – 35,174,259 Others* 115,454,089 – – – – 226,253,265 341,707,354 P=744,420,788 P=43,594,752 P=40,712,136 P=1,591,235 P=6,467,313 P=232,584,140 P=1,069,370,364

*Include nontrade receivables from derivative counterparties and employees.

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 P=2.1 million depending on the Group’s assessment of sales ticket offices and agents’ credit standing and volume of transactions. As of December 31, 2012 and 2011, outstanding cash bonds (included under ‘Accounts payable and other accrued liabilities’ account in the consolidated statement of financial position) amounted to P=177.1 million and P=161.4 million, respectively (Note 15). There are no collaterals for impaired receivables.

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.

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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 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, 2012 and 2011:

2012

Less than one

month 1 to 3

months 3 to 12

months 1 to 5 years

More than 5 years Total

Financial Assets Financial assets at FVPL Designated at FVPL Quoted debt securities Private P=– P=– P=– P=– P=– P=– Government – – – – – – – – – – – – Quoted equity securities – – – – – – – – – – – – Derivative financial

instruments not designated as accounting hedges – – 102,682,762 – – 102,682,762

– – 102,682,762 – – 102,682,762 AFS investments Quoted equity securities – – – – – – Loans and receivables Cash and cash equivalents 10,708,834,337 – – – – 10,708,834,337

(Forward)

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2012

Less than one

month 1 to 3

months 3 to 12

months 1 to 5 years

More than 5 years Total

Receivables: Trade receivables P=581,902,889 P=69,069,500 P=78,635,620 P=6,330,875 P=– P=735,938,884 Interest receivable 11,637,492 – – – – 11,637,492 Due from related parties* 175,709,003 – – – – 175,709,003 Others ** 83,158,,032 47,594,482 17,935,399 134,775,814 – 283,463,727 Refundable deposits – – – 33,438,542 – 33,438,542 P=11,561,241,753 P=116,663,982 P=199,253,781 P=174,545,231 P=– P=12,051,704,747 Financial Liabilities On-balance sheet

Accounts payable and other accrued

liabilities*** P=– P=– P=– P=– P=– P=– Due to related parties* 45,602,315 – – – – 45,602,315 Long-term debt – – – – – – Derivative financial instruments not designated as accounting hedges – – – – – – Others**** – – – – – – 45,602,315 – – – – 45,602,315

Off-balance sheet Contingent liability***** – – – – – –

P=45,602,315 P= P= P= P= P=45,602,315 *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 29)

2011

Less than one

month 1 to 3

months 3 to 12 months

1 to 5 years

More than 5 years Total

Financial Assets Financial assets at FVPL Designated at FVPL Quoted debt securities Private P=– P=– P=– P=1,726,543,574 P=295,367,616 P=2,021,911,190 Government 1,039,254,600 1,039,254,600 1,726,543,574 1,334,622,216 3,061,165,790 Quoted equity securities – – – – 183,032,000 183,032,000 – – – 1,726,543,574 1,517,654,216 3,244,197,790 Derivative financial

instruments not designated as accounting hedges – 4,212,529 12,667,679 – – 16,880,208

– 4,212,529 12,667,679 1,726,543,574 1,517,654,216 3,261,077,998 AFS investments Quoted equity securities – – – – 110,367,200 110,367,200 Loans and receivables Cash and cash equivalents 8,941,142,761 – – – – 8,941,142,761 Receivables: Trade receivables 450,744,710 84,306,888 1,591,235 9,135,744 465,823 546,244,400 Interest receivable 146,244,351 – – – – 146,244,351 Due from related parties* 31,977,638 – 3,196,621 – – 35,174,259 Others ** 115,454,089 – – – 226,253,265 341,707,354 Refundable deposits – – – – 166,175,680 166,175,680 P=9,685,563,549 P=88,519,417 P=17,455,535 P=1,735,679,318 P=2,020,916,184 P=13,548,134,003 Financial Liabilities On-balance sheet

Accounts payable and other accrued

liabilities*** P=2,037,478,569 P=1,598,466,188 P=2,543,947,944 P=137,383,870 P=23,124,550 P=6,340,401,121 Due to related parties* 36,302,174 – – – – 36,302,174 Long-term debt 230,707,985 615,196,217 2,371,584,782 12,372,862,317 8,727,988,097 24,318,339,398

(Forward)

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2011

Less than one

month 1 to 3

months 3 to 12 months

1 to 5 years

More than 5 years Total

Derivative financial instruments not designated as accounting hedges P=– P=– P=60,857,586 P=– P=– P=60,857,586 Others**** – – – 670,810,817 – 670,810,817 2,304,488,728 2,213,662,405 4,976,390,312 13,181,057,004 8,751,112,647 31,426,711,096

Off-balance sheet Contingent liability***** – – 9,737,276,141 56,840,205,217 – 66,557,481,358

P=2,304,488,728 P=2,213,662,405 P=14,713,666,453 P=70,021,262,221 P=8,751,112,647 P=97,984,192,454 *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 29)

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.

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, 2012, 2011 and 2010, approximately 27.15%, 25.0% and 24.40%, 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, 2012, 2011 and 2010, 66.1%, 71.93% and 68.32%, respectively, of the Group’s financial liabilities were denominated in US Dollar.

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.

2012

US Dollar Hong Kong

Dollar Singaporean

Dollar Other

Currencies* Total Financial Assets Financial Assets at FVPL Designated at FVPL Quoted debt securities Private P=– P=– P=– P=– P=– Government – – – – – – – – – – Quoted equity securities – – – – – – – – – – Derivative financial

instruments not designated as accounting hedges 102,682,762 – – – 102,682,762

102,682,762 – – – –

(Forward)

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2012

US Dollar Hong Kong

Dollar Singaporean

Dollar Other

Currencies* Total AFS investments: Quoted equity securities P=– P=– P=– P=– P=– Cash and cash equivalents 4,603,849,230 48,014,282 16,800,256 56,801,552 4,752,465,320 Receivables 326,429,524 26,374,554 35,600,044 136,543,329 524,947,451 Refundable deposits** 33,438,542 – – – 33,438,542 P=5,093,400,058 P=74,388,836 P=52,400,300 P=193,344,881 P=5,413,534,075 Financial Liabilities Accounts payable and other accrued liabilities*** P=3,550,719,971 P=36,875,301 P=16,848,227 P=163,003,710 P=3,767,447,209 Long-term debt 22,924,359,198 – – – 22,924,359,198 Derivative financial instruments not designated as accounting hedges – – – – – Others**** 670,810,775 670,810,775 P=27,145,889,944 P=36,875,301 P=16,848,227 P=163,003,710 P=27,632,617,182

* 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

2011

US Dollar Hong Kong

Dollar Singaporean

Dollar Other

Currencies* Total Financial Assets Financial Assets at FVPL Designated at FVPL Quoted debt securities Private P=2,021,911,190 P=– P=– P=– P=2,021,911,190 Government 1,039,254,600 – – – 1,039,254,600 3,061,165,790 – – – 3,061,165,790 Quoted equity securities 183,032,000 – – – 183,032,000 3,244,197,790 – – – 3,244,197,790 Derivative financial

instruments not designated as accounting hedges 16,880,208 – – – 16,880,208

3,261,077,998 3,261,077,998 AFS investments: Quoted equity securities 110,367,200 – – – 110,367,200 Cash and cash equivalents 712,920,906 287,899,905 33,375,457 328,292,828 1,362,489,096 Receivables 445,489,378 22,922,687 26,657,135 121,927,679 616,996,879 Refundable deposits** 166,175,680 – – – 166,175,680 P=4,696,031,162 P=310,822,592 P=60,032,592 P=450,220,507 P=5,517,106,853

2011

US Dollar Hong Kong

Dollar Singaporean

Dollar Other

Currencies* Total Fina ncial Liabilities Accounts payable and other accrued liabilities*** P=3,335,028,805 P=39,759,803 P=33,404,496 P=131,471,536 P=3,539,664,640 Long-term debt 20,871,893,433 – – – 20,871,893,433 Derivative financial instruments not designated as accounting hedges 60,857,586 – – –

60,857,586 Others**** 670,810,817 – – – 670,810,817 P=24,938,590,641 P=39,759,803 P=33,404,496 P=131,471,536 P=25,143,226,476

* 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

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The exchange rates used to restate the Group’s foreign currency-denominated assets and liabilities as of December 31, 2012 and 2011 follow:

2012 2011 US dollar P=41.05 to US$1.00 P=43.84 to US$1.00 Singapore dollar P=33.70 to SGD1.00 P=33.85 to SGD1.00 Hong Kong dollar P=5.31 to HKD1.00 P=5.65 to HKD1.00

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, 2011, 2010 and 2009 (in thousands).

2012 2011 2010 Changes in foreign exchange value P=5 (P=5) P=5 (P=5) P=5 (P=5)

Change in pre-tax income (P=2,686,052) P=2,686,052 (P=2,308,680) P=2,308,680 (P=1,833,907) P=1,833,907 Change in equity P=– P=– P=12,588 (P=12,588) 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 P=1,258.9 million, P=1,121.0 million and P=989.8 million as of December 31, 2012, 2011 and 2010, 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).

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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 (Note 16):

December 31, 2012

<1 year >1-2 years >2-3 years >3-4 years >4-5 years >5 years Total

(In US Dollar)

Total (in Philippine

Peso) Fair Value ECA-backed loans from foreign banks

(Note 16) Floating rate US Dollar London Interbank Offering Rate (LIBOR) 6 months + margin US$1,353,113 US$1,310,023 US$1,365,588 US$1,422,834 US$1,483,860 US$3,672,103 US$10,607,521 P=435,438,765 P=438,962,935

US Dollar LIBOR 3 months+ margin 13,962,272 14,106,395 14,253,122 14,398,563 14,554,502 98,880,293 170,155,147 6,984,868,745 6,909,607640 15,315,385 15,416,418 15,618,710 15,821,397 16,038,362 102,552,396 180,762,668 7,420,307,510 7,348,570,575 Commercial loans from foreign banks

(Note 16) Floating rate US Dollar LIBOR 6 months + margin 1,635,080 1,361,827 – – – – 2,996,907 123,023,020 123,491,661 US$16,950,465 US$16,778,245 US$15,618,710 US$15,821,397 US$16,038,362 US$102,552,396 US$183,759,575 P=7,543,330,530 P=7,472,062,236

December 31, 2011

<1 year >1-2 years >2-3 years >3-4 years >4-5 years >5 years Total

(In US Dollar)

Total (in Philippine

Peso) Fair Value ECA-backed loans from foreign banks

(Note 16) Floating rate US Dollar London Interbank Offering Rate (LIBOR) 6 months + margin US$1,256,891 US$1,174,361 US$1,224,172 US$1,276,096 US$1,329,485 US$5,737,756 US$11,998,761 P=526,025,684 P=348,420,966

US Dollar LIBOR 3 months+ margin 12,810,096 13,153,759 13,477,803 13,819,378 14,163,694 96,132,575 163,557,305 7,170,352,271 8,122,569,745 14,066,987 14,328,120 14,701,975 15,095,474 15,493,179 101,870,331 175,556,066 7,696,377,955 8,470,990,711 Commercial loans from foreign banks

(Note 16) Floating rate US Dollar LIBOR 6 months + margin 1,557,084 1,635,163 1,361,605 – – – 4,553,852 199,640,873 176,618,066 US$15,624,071 US$15,963,283 US$16,063,580 US$15,095,474 US$15,493,179 US$101,870,331 US$180,109,918 P=7,896,018,828 P=8,647,608,777

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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, 2012, 2011 and 2010.

2012 2011 2010 Changes in interest rates 1.50% (1.50%) 1.50% (1.50%) 1.50% (1.50%)Changes in pre-tax income (P=91,088,144) P=91,088,144 (P=104,185,842) P=104,185,842 (P=20,179,681) P=20,179,681

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.

2012 Changes in market interest rates 1.50% (1.50%) Changes in pre-tax income (P=–) P=–

2011 Changes in market interest rates 1.50% (1.50%) Changes in pre-tax income (P=263,355,208) P=263,355,208

Other than the potential impact on the Group’s pre-tax income, there is no other effect on equity.

28. 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 5.03% in 2011 and 6.93% in 2010.

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 3.67% to 4.44% as of December 31, 2012 and 2011.

The following table summarizes the carrying amounts and fair values of all the Group’s financial instruments.

2012 2011 Carrying Value Fair Value Carrying Value Fair Value Financial Assets Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private P=– P=– P=2,021,911,190 P=2,021,911,190 Government – – 1,039,254,600 1,039,254,600 – – 3,061,165,790 3,061,165,790 Quoted equity securities – – 183,032,000 183,032,000 – – 3,244,197,790 3,244,197,790

Derivative financial instruments not designated as accounting hedges 102,682,762 102,682,762 16,880,208 16,880,208

102,682,762 102,682,762 3,261,077,998 3,261,077,998 AFS investments (Note 8) Quoted equity securities – – 110,367,200 110,367,200 Loans and receivables Cash and cash equivalents

(Note 7) 10,728,326,325 10,728,326,325 8,957,783,986 8,957,783,986 Receivables (Note 9)

Trade receivables 735,938,884 735,938,884 546,244,400 546,244,400 Interest receivable 11,637,492 11,637,492 146,244,351 146,244,351 Due from related parties 175,709,003 175,709,003 35,174,259 35,174,259 Others* 283,463,727 283,463,727 341,707,354 341,707,354

Refundable deposits** (Note 14) 33,438,542 33,428,542 166,175,680 126,709,251 11,968,513,973 11,968,503,973 10,303,697,230 10,264,230,801 Total financial assets P=12,071,196,735 P=12,071,196,735 P=13,564,775,228 P=13,525,308,799 Financial Liabilities Accounts payable and other accrued liabilities*** (Note 15) P=– P=– P=6,340,401,121 P=6,340,401,121 Long-term debt**** (Note 16) 22,924,359,198 22,924,359,198 20,871,893,433 18,461,269,306 Derivative financial instruments not designated as accounting hedges – – 60,857,586 60,857,586 Due to related parties 45,602,315 45,602,315 36,302,174 36,302,174 Others***** 424,276,778 424,276,778 670,810,817 670,810,817 Total financial liabilities P=23,394,238,291 P=23,394,238,291 P=27,980,265,131 P=25,569,641,004 * 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.

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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:

2012 2011 Level 1 Level 2 Level 1 Level 2 Financial Assets Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private P=– P=– P=2,021,911,190 P=– Government – – 1,039,254,600 – – – 3,061,165,790 – Quoted equity securities – – 183,032,000 – – – 3,244,197,790 – Derivative financial instruments not designated as accounting hedges 102,682,762 102,682,762 – 16,880,208 102,682,762 102,682,762 3,244,197,790 16,880,208 AFS investments (Note 8) Quoted equity securities – – 110,367,200 – P=102,682,762 P=102,682,762 P=3,354,564,990 P=16,880,208 Financial Liabilities Derivative financial instruments not designated as accounting hedges P=– P=– P=– P=60,857,586

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, 2012 and 2011, respectively.

29. Commitments and Contingencies

Operating Aircraft Lease Commitments The Group entered into operating lease agreements with certain leasing companies which cover the following aircraft:

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A320 aircraft The following table summarizes the specific lease agreements on the Group’s Airbus A320 aircraft:

Date of Lease

Agreement Original Lessors New Lessors No. of Units Lease Term December 23, 2004 CIT Aerospace International

(CITAI) Wilmington Trust SP Services (Dublin) Limited*

2 May 2005 - May 2012 June 2005 - June 2012

April 23, 2007 Celestial Aviation Trading 17 Limited (CAT 17)

Inishcrean Leasing 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 19 Limited (CAT 19)

GY Aviation Lease 0905 Co. Limited***

2 January 2009 - January 2017

March 14, 2008 Celestial Aviation Trading 23 Limited (CAT 23)

– 2 October 2011 - October 2019

July 13, 2011 RBS Aerospace Limited – 2 March 2012 - February 2018 * 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 to 2011 from 2012.

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.

On July 13, 2011, the Group entered into an operating lease agreement with RBS Aerospace Ltd. for the lease of two Airbus A320 aircraft, which were delivered in March 2012. These aircrafts replaced the two aircrafts under Wilmington Trust SP Services (Dublin) Ltd. which contract expired on May 2012 and June 2012.

Lease expenses relating to aircraft leases (included in ‘Aircraft and engine lease’ account in the consolidated statements of comprehensive income) amounted to P=2,034.0 million, P=1,718.4 million and P=1,604.9 million in 2012, 2011 and 2010, respectively.

A330 aircraft On December 6, 2011, the Group entered into an aircraft operating lease Memorandum of Understanding (MOU) with CIT Aerospace International for the lease of four Airbus A330-300 aircrafts, which are scheduled to be delivered from June 2013 to 2014. These aircrafts shall be used for the long-haul network expansion programs of the Group.

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Future minimum lease payments under the above-indicated operating aircraft leases follow:

2012 2011 2010

US dollar Philippine peso

equivalent US dollar Philippine peso

equivalent US dollar Philippine peso

equivalent Within one year US$54,171,098 P=2,223,723,588 US$46,796,685 P=2,051,566,670 US$37,805,531 P=1,657,394,460 After one year but not more

than five years 258,475,371 10,610,413,991 303,869,815 13,321,652,690 113,948,252 4,995,491,378 Over five years 333,453,833 13,688,279,865 312,695,865 13,708,586,722 8,408,350 368,622,089 US$646,100,302 P=26,522,417,444 US$663,362,365 P=29,081,806,082 US$160,162,133 P=7,021,507,927

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:

2012 2011 2010 Within one year P=108,795,795 P=104,835,557 P=101,622,518 After one year but not more than

five years 487,021,206 466,379,370 443,485,392 Over five years 266,875,198 394,888,300 124,367,033 P=862,692,199 P=966,103,227 P=669,474,943

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=263.7 million, P=240.3 million and P=231.2 million in 2012, 2011 and 2010, respectively.

Service Maintenance Commitments On June 21, 2012, the Company has entered into an agreement with Messier-Bugatti-Dowty (Safran group) to purchase wheels and brakes for its fleet of Airbus A319 and A320 aircraft. The contract covers the current fleet, as well as future aircraft to be acquired.

On June 22, 2012, the Group has entered into service contract with Rolls-Royce Total Care Services Limited (Rolls-Royce) for service support for the engines of the A330 aircraft. Rolls-Royce will provide long-term TotalCare service support for the Trent 700 engines on up to eight A330 aircraft.

On July 12, 2012, the Company has entered into a maintenance service contract with SIA Engineering Co. Ltd. for the maintenance, repair and overhaul services of its A319 and A320 aircraft.

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. The Group has taken delivery of the initial six aircrafts as scheduled in 2010, 2011 and 2012. In 2011, the spare engine was delivered as scheduled.

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.

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Four of the five additional A320 aircraft were delivered between September 2011 and November 2012.

On May 2011, the Group turned into firm orders its existing options for the seven Airbus A320 aircraft which are scheduled to be delivered in 2015 to 2016.

As of December 31, 2011, the Group has existing commitments to purchase 25 new Airbus A320 aircraft, four of which were delivered on January 30, August 9, October 16 and November 29, 2012, respectively. As of December 31, 2012, the Group has existing commitments to purchase 21 new Airbus A320 aircraft, which are scheduled to be delivered between 2013 and 2016, two of which were delivered on January 18, 2013 and March 7, 2013.

On August 2011, the Group entered in a new commitment to purchase firm orders of thirty new A321 NEO Aircraft and ten addition option orders. These aircraft are scheduled to be delivered from 2017 to 2021. These aircraft shall be used for a longer range network expansion programs. The above-indicated commitments relate to the Group’s re-fleeting and expansion programs.

On June 28, 2012, the Group has entered into an agreement with United Technologies International Corporation Pratt & Whitney Division to purchase new PurePower® PW1100G-JM engines for its thirty (30) firm and ten (1) option A321 NEO aircraft to be delivered beginning 2017. The agreement also includes an engine maintenance services program for a period of ten (10) years from the date of entry into service of each engine.

Capital Expenditure Commitments The Group’s capital expenditure commitments relate principally to the acquisition of aircraft fleet, aggregating to P=53.22 billion and P=53.85 billion as of December 31, 2012 and 2011, respectively.

2012

US dollar Philippine peso

equivalent Within one year US$350,323,073 P=14,380,762,158 After one year but not more than

five years 999,124,578 41,014,063,944 US$1,349,447,651 P=55,394,826,102

2011

US dollar Philippine peso

equivalent Within one year US$245,151,805 P=10,747,455,131 After one year but not more than

five years 1,039,815,241 45,585,500,185 US$1,284,967,046 P=56,332,955,316

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

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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.

30. 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 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 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

P=72.2 million to a third party maintenance service provider (buyer). The transaction was settled through direct offset against the Group’s US-dollar denominated liability to the buyer amounting to P=88.3 million.

c. On December 31, 2011, the Group recognized a liability based on the schedule of pre-delivery

payments amounting P=564.2 million with a corresponding debit to ‘Construction-in progress’ account. The liability was paid on January 3, 2012.

d. In 2012, 2011 and 2010, the Group acquired a total of ten (10) passenger aircraft by assuming

direct liabilities (Notes 12 and 16). This transaction is considered as a non-cash financing activity.

31. Registration with the BOI

The Parent Company is registered with the BOI as a new operator of air transport on a pioneer status on one (1) ATR72-500 and ten (10) A320 and non-pioneer status for five (5) ATR72-500 and seven (7) Airbus A320 aircraft. Under the terms of the registration and subject to certain requirements, the Parent Company is entitled to the following fiscal and non-fiscal incentives:

a. ITH for

• Registration no. 2008-119: four (4) years from March 2009 to February 2013; • Registration no. 2010-180: six (6) years from January 1, 2011 to December 31, 2016; • Registration no. 2011-240: four (4) years from November 16, 2011 to November 16, 2015 • Registration no. 2011-241: six (6) years from November 16, 2011 to November 16, 2017; • Registration no. 2011-242: four (4) years from November 16, 2011 to

November 16, 2015; • Registration no. 2011-243: six (6) years from December 14, 2011 to December 13, 2017; • Registration no. 2012-012: six (6) years from January 17, 2012 to January 16, 2018; • Registration no. 2012-013: four (4) years from March 1, 2012 to February 29, 2016; • Registration no. 2012-014: four (4) years from March 1, 2012 to February 29, 2016;

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• Registration no. 2012-208: six (6) years from October 4, 2012 to October 3, 2018; • Registration no. 2012-261: six (6) years from December 6, 2012 to December 5, 2018; • Registration no. 2012-262: six (6) years from December 6, 2012 to December 5, 2018;

a.i. Only income directly attributed to the revenue generated from the registered project shall

be qualified for ITH. For this purpose, the Parent Company shall submit audited segregated income statements for this project. Net income from operation of registered activity shall be certified under oath by Chief Executive Officer or Chief Financial Officer.

a.ii. The Parent Company shall submit the list of cost items common to all its

projects/activities (whether BOI or non-BOI registered) and its methodology adopted in allocating common cost. The methodology to be adopted in accounting fixed assets particularly the plant, property and equipment account shall be the straight line depreciation method.

a.iii. Furthermore, the interest expense on the firm’s liabilities shall proportionately be

allocated for this project.

b. Employment of foreign nationals. This may be allowed in supervisory, technical or advisory positions for five (5) years from date of registration. The president, general manager and treasurer of foreign-owned registered firms or their equivalent shall be subject to the foregoing limitations.

c. Importation of capital equipment, spare parts and accessories at zero (0%) duty from date of

registration to June 16, 2011 pursuant to E.O. 528 and its Implementing Rules and Regulations.

d. Avail of a bonus year in each of the following cases but the aggregated ITH availment (regular

and bonus years) shall not exceed eight (8) years. • The ratio of total of imported and domestic capital equipment to the number of workers

for the project does not exceed US$10,000 to one (1) worker; or • The net foreign exchange savings or earnings amount to at least US$500,000 annually

during the first three (3) years of operation. • The indigenous raw materials used in the manufacture of the registered product must at

least be fifty percent (50%) of the total cost of raw materials for the preceding years prior to the extension unless the BOI prescribes a higher percentage.

e. For the first five (5) years from date of registration, the Parent Company shall be allowed an

additional deduction from taxable income of fifty percent (50%) of the wages corresponding to the increment in number of direct labor for skilled and unskilled workers in the year of availment as against the previous year if the project meets the prescribed ration of capital equipment to the number of workers set by the BOI of US$10,000 to one worker and provided that this incentive shall not be availed of simultaneously with the ITH.

f. Tax credit equivalent to the national internal revenue taxes and duties paid on raw materials

and supplies and semi-manufactured products used in producing its export product and forming part thereof for a ten (10) years from start of commercial operations. Request for amendment of the date of start of commercial operation for purposes of determining the reckoning date of the 10-year period, shall be files within one (1) year from date of committed start of commercial operation.

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g. Simplification of customs procedures for the importation of equipment, spare parts, raw materials and suppliers.

h. Access to Customs Bonded Manufacturing Warehouse (CBMW) subject to the customs rules

and regulations provided the Parent Company exports at least 70% of production output.

i. Exemption from wharfage dues, any export tax, duties, imports and fees for a ten (10) year period.

j. Importation of consigned equipment for a period of ten (10) years from date of registration

subject to posting of re-export bond.

k. Exemption from taxes and duties on imported spare parts and consumable supplies for export producers with CBMW exporting at least 100% of production.

The Parent Company shall submit to the BOI a quarterly report on the actual investments, employment and sales pertaining to the registered project. The report shall be due 15 days after the end of each quarter.

32. Events After the Statement of Financial Position Date

In February 2013, the Group has pre-terminated its existing fuel derivative contracts with its counterparties. The Group recognized realized mark-to-market gain amounting P=163.8 million from the transaction. However, as of December 31, 2012, the Group recognized unrealized gain of P=102.7 million from the positive fair value change from its fuel derivatives (Note 8). As such, the Group will realize P=61.1million as net realized gain from the transaction.

On March 8, 2013, the Parent Company’s BOD appropriated P=2.5 billion from its unrestricted retained earnings as of December 31, 2012 for purposes of the Group’s re-fleeting program. The appropriated amount will be used for settlement of pre delivery payments and aircraft lease commitments in 2013.

33. Approval of the Consolidated Financial Statements

The accompanying consolidated financial statements were approved and authorized for issue by the BOD on March 14, 2013.

*SGVFS001094*

CEBU AIR, INC. AND SUBSIDIARIES SCHEDULE OF ALL THE EFFECTIVE STANDARDS AND INTERPRETATIONS List of Philippine Financial Reporting Standards (PFRSs) [which consist of PFRSs, Philippine Accounting Standards (PASs) and Philippine Interpretations] and Philippine Interpretations Committee (PIC) Q&As effective as of December 31, 2012

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted Not Adopted

Not Applicable

Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics

4

PFRSs Practice Statement Management Commentary 4 Philippine Financial Reporting Standards

PFRS 1 (Revised)

First-time Adoption of Philippine Financial Reporting Standards 4

Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate

4

Amendments to PFRS 1: Additional Exemptions for First-time Adopters 4

Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters 4

Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters 4

Amendments to PFRS 1: Government Loans 4

PFRS 2 Share-based Payment 4

Amendments to PFRS 2: Vesting Conditions and Cancellations 4

Amendments to PFRS 2: Group Cash-settled Share-based Payment Transactions 4

PFRS 3 (Revised)

Business Combinations 4

PFRS 4 Insurance Contracts 4

Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts

4

PFRS 5 Non-current Assets Held for Sale and Discontinued Operations

4

PFRS 6 Exploration for and Evaluation of Mineral Resources 4

PFRS 7 Financial Instruments: Disclosures 4

Amendments to PFRS 7: Transition 4

Amendments to PAS 39 and PFRS 7: Reclassification of 4

- 2 -

*SGVFS001094*

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted Not Adopted

Not Applicable

Financial Assets

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition 4

Amendments to PFRS 7: Improving Disclosures about Financial Instruments

4

Amendments to PFRS 7: Disclosures - Transfers of Financial Assets

4

Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and Financial Liabilities

4

Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and Transition Disclosures

4

PFRS 8 Operating Segments 4

PFRS 9 Financial Instruments 4

Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures

4

PFRS 10 Consolidated Financial Statements 4

PFRS 11 Joint Arrangements 4

PFRS 12 Disclosure of Interests in Other Entities 4

PFRS 13 Fair Value Measurement 4

Philippine Accounting Standards

PAS 1 (Revised)

Presentation of Financial Statements 4

Amendment to PAS 1: Capital Disclosures 4

Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Amendments to PAS 1: Presentation of Items of Other Comprehensive Income

4 4

PAS 2 Inventories 4

PAS 7 Statement of Cash Flows 4

PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

4

PAS 10 Events after the Balance Sheet Date 4

PAS 11 Construction Contracts 4

PAS 12 Income Taxes 4

Amendment to PAS 12 - Deferred Tax: Recovery of Underlying Assets

4

PAS 16 Property, Plant and Equipment 4

PAS 17 Leases 4

- 3 -

*SGVFS001094*

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted Not Adopted

Not Applicable

PAS 18 Revenue 4

PAS 19 Employee Benefits 4

Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures

4

PAS 19 (Amended)

Employee Benefits 4

PAS 20 Accounting for Government Grants and Disclosure of Government Assistance 4

PAS 21 The Effects of Changes in Foreign Exchange Rates 4

Amendment: Net Investment in a Foreign Operation 4

PAS 23 (Revised)

Borrowing Costs 4

PAS 24 (Revised)

Related Party Disclosures 4

PAS 26 Accounting and Reporting by Retirement Benefit Plans 4

PAS 27 (Amended)

Separate Financial Statements 4

PAS 28 (Amended)

Investments in Associates and Joint Ventures 4

PAS 29 Financial Reporting in Hyperinflationary Economies 4

PAS 31 Interests in Joint Ventures 4

PAS 32 Financial Instruments: Disclosure and Presentation 4

Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation

4

Amendment to PAS 32: Classification of Rights Issues 4

Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities

4

PAS 33 Earnings per Share 4

PAS 34 Interim Financial Reporting 4

PAS 36 Impairment of Assets 4

PAS 37 Provisions, Contingent Liabilities and Contingent Assets 4

PAS 38 Intangible Assets 4

PAS 39 Financial Instruments: Recognition and Measurement 4

Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities 4

Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions 4

Amendments to PAS 39: The Fair Value Option 4

- 4 -

*SGVFS001094*

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted Not Adopted

Not Applicable

Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts 4

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets

4

Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition

4

Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives

4

Amendment to PAS 39: Eligible Hedged Items 4

PAS 40 Investment Property 4

PAS 41 Agriculture 4

Philippine Interpretations

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities 4

IFRIC 2 Members' Share in Co-operative Entities and Similar Instruments

4

IFRIC 4 Determining Whether an Arrangement Contains a Lease 4

IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

4

IFRIC 6 Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment

4

IFRIC 7 Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationary Economies

4

IFRIC 8 Scope of PFRS 2 4

IFRIC 9 Reassessment of Embedded Derivatives 4

Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives

4

IFRIC 10 Interim Financial Reporting and Impairment 4

IFRIC 11 PFRS 2- Group and Treasury Share Transactions 4

IFRIC 12 Service Concession Arrangements 4

IFRIC 13 Customer Loyalty Programmes 4

IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

4

Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement

4

IFRIC 16 Hedges of a Net Investment in a Foreign Operation 4

IFRIC 17 Distributions of Non-cash Assets to Owners 4

IFRIC 18 Transfers of Assets from Customers 4

- 5 -

*SGVFS001094*

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS Effective as of December 31, 2012

Adopted Not Adopted

Not Applicable

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

4

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

4

SIC-7 Introduction of the Euro 4

SIC-10 Government Assistance - No Specific Relation to Operating Activities 4

SIC-12 Consolidation - Special Purpose Entities 4

Amendment to SIC - 12: Scope of SIC 12 4

SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by Venturers

4

SIC-15 Operating Leases - Incentives 4

SIC-21 Income Taxes - Recovery of Revalued Non-Depreciable Assets

4

SIC-25 Income Taxes - Changes in the Tax Status of an Entity or its Shareholders

4

SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

4

SIC-29 Service Concession Arrangements: Disclosures. 4

SIC-31 Revenue - Barter Transactions Involving Advertising Services

4

SIC-32 Intangible Assets - Web Site Costs 4 Not applicable standards have been adopted but the Group has no significant covered transactions as of and

for the years ended December 31, 2012, 2011 and 2010.

*SGVFS001094*

CEBU AIR, INC. AND SUBSIDIARIES MAP OF THE RELATIONSHIPS OF THE COMPANIES WITHIN THE GROUP FOR THE YEAR ENDED DECEMBER 31, 2012

*SGVFS001094*

CEBU AIR, INC. AND SUBSIDIARIES SCHEDULE OF FINANCIAL RATIOS FOR THE YEARS ENDED DECEMBER 31, 2012 and 2011 The following are the financial ratios that the Group monitors in measuring and analyzing its financial soundness:

Financial Ratios 2012 2011 Liquidity Ratios Current Ratio 79% 95% Quick Ratio 71% 90% Capital Structure Ratios Debt-to-Equity Ratio (x) 1.04 1.22 Net Debt-to Equity Ratio (x) 0.55 0.57 Adjusted Net Debt-to Equity Ratio (x) 1.31 1.20 Asset to Equity Ratio (x) 2.77 2.84 Interest Coverage Ratio (x) 3.11 3.39 Profitability Ratios EBITDAR Margin 21% 23% EBIT Margin 7% 10% Pre-tax core net income margin 6% 10% Return on asset 6% 7% Return on equity 17% 20%

1 5 4 6 7 5

SEC Registration Number

C e b u A i r , I n c . a n d S u b s i d i a r i e s

(Company’s Full Name)

2 n d F l o o r , D o ñ a J u a n i t a M a r q u e z L

i m B u i l d i n g , O s m e ñ a B o u l e v a r d , C e b

u C i t y

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

Robin C. Dui 852-2461 (Contact Person) (Company Telephone Number)

1 2 3 1 1 7 - Q

Month Day (Form Type) Month Day (Fiscal Year) (Annual Meeting)

(Secondary License Type, If Applicable)

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

S T A M P S

Remarks: Please use BLACK ink for scanning purposes.

COVER SHEET

- 1 -

SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-Q

QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES

REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER

1. For the quarterly period ended March 31, 2013

2. SEC Identification No.154675

3. BIR Tax Identification No.000-948-229-000

Cebu Air, Inc.

4. Exact name of issuer as specified in its charter

Cebu City, Philippines

5. Province, country or other jurisdiction of incorporation or organization

6. Industry Classification Code: (SEC Use Only)

2nd

Floor, Dona Juanita Marquez Lim Building, Osmena Blvd., Cebu City 6000

7. Address of issuer's principal office Postal Code

(032) 255-4552

8. Issuer's telephone number, including area code

Not Applicable

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

10. Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the RSA

Number of Shares of Common

Stock Outstanding and Amount

Title of Each Class of Debt Outstanding

Common Stock, P1.00 Par Value 605,953,330 shares

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

Yes [x] No [ ]

12. Indicate by check mark whether the registrant:

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

thereunder or Sections 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and

141 of the Corporation Code of the Philippines, during the preceding twelve (12) months (or

for such shorter period the registrant was required to file such reports)

Yes [x] No [ ]

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

Yes [x] No [ ]

- 2 -

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements

The unaudited consolidated financial statements are filed as part of this Form 17-Q.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of

Operations

Cebu Air, Inc. (the Company) is an airline that operates under the trade name “Cebu Pacific Air”

and is the leading low-cost carrier in the Philippines. It pioneered the “low fare, great value”

strategy in the local aviation industry by providing scheduled air travel services targeted to

passengers who are willing to forego extras for fares that are typically lower than those offered by

traditional full-service airlines while offering reliable services and providing passengers with a

fun travel experience.

The Company was incorporated in August 26, 1988 and was granted a 40-year legislative

franchise to operate international and domestic air transport services in 1991. It commenced its

scheduled passenger operations in 1996 with its first domestic flight from Manila to Cebu. In

1997, it was granted the status as an official Philippine carrier to operate international services by

the Office of the President of the Philippines pursuant to Executive Order (EO) No. 219.

International operations began in 2001 with flights from Manila to Hong Kong.

In 2005, the Company adopted the low-cost carrier (LCC) business model. The core element of

the LCC strategy is to offer affordable air services to passengers. This is achieved by having:

high-load, high-frequency flights; high aircraft utilization; a young and simple fleet composition;

and low distribution costs.

The Company’s common stock was listed with the Philippine Stock Exchange (PSE) on

October 26, 2010, the Company’s initial public offering (IPO).

As of March 31, 2013, the Company operates an extensive route network serving 60 domestic

routes and 32 international routes with a total of 2,278 scheduled weekly flights. It operates from

six hubs, including the Ninoy Aquino International Airport (NAIA) Terminal 3 located in Pasay

City, Metro Manila; Mactan-Cebu International Airport located in Lapu-Lapu City, part of

Metropolitan Cebu; Diosdado Macapagal International Airport (DMIA) located in Clark,

Pampanga; Davao International Airport located in Davao City, Davao del Sur;Ilo-ilo International

Airport located in Ilo-ilo City, regional center of the western Visayas region; and Kalibo

International Airport in Kalibo, Aklan.

As of March 31, 2013, the Company operates a fleet of 43 aircraft which comprises of ten Airbus

A319, 25 Airbus A320 and eight ATR 72-500 aircraft. It operates its Airbus aircraft on both

domestic and international routes and operates the ATR 72-500 aircraft on domestic routes,

including destinations with runway limitations. The average aircraft age of the Company’s fleet

is approximately 3.93 years as of March 31, 2013.

The Company has three principal distribution channels: the internet; direct sales through booking

sales offices, call centers and government/corporate client accounts; and third-party sales outlets.

Aside from passenger service, it also provides airport-to-airport cargo services on its domestic and

international routes. In addition, the Company offers ancillary services such as cancellation and

rebooking options, in-flight merchandising such as sale of duty-free products on international

flights, baggage and travel-related products and services.

- 3 -

Results of Operations

Three Months Ended March 31, 2013 Versus March 31, 2012

Revenues

The Company generated revenues of P=10.542 billion for the three months ended March 31, 2013,

12.9% higher than the P=9.341 billion revenues earned in the same period last year. Growth in

revenues is accounted for as follows:

Passenger

Passenger revenues grew by P=976.448 million or 13.6% to P=8.169 billion in the three months

ended March 31, 2013 from P=7.192 billion posted in the three months ended March 30, 2012.

The growth was primarily due to the increase in average fares by 8.3% to P2,312 from P2,134 in

2012. Increase in passenger volume by 4.9% to 3.5 million from 3.4 million in 2012 driven by

the increased number of flights in 2013 also contributed to the growth in passenger revenues.

Number of flights went up by 4.8% year on year primarily as a result of the increase in the

number of aircraft operated to 43 aircraft as of March 31, 2013 from 40 aircraft as of

March 31, 2012.

Cargo

Cargo revenues grew by P19.498 million or 3.5% to P570.648 million for the quarter ended

March 31, 2013 from P551.151 million for the quarter ended March 31, 2012 following the

increase in the volume and average freight charges of cargo transported in 2013.

Ancillary

Ancillary revenues went up by P=205.333 million or 12.9% to P=1.803 billion in the three months

ended March 31, 2013 from P=1.598 billion registered in the same period last year. The Company

began unbundling ancillary products and services in 2011 and significant improvements in

ancillary revenues were noted since then. Increased online bookings also contributed to the

increase. Online bookings accounted for 52.8% of the total tickets sold in the first quarter of 2013

compared to the 51.7% in the three months ended March 31, 2012.

Expenses

The Company incurred operating expenses of P9.223 billion for the quarter ended

March 31, 2013, 3.4% higher than the P8.921 billion operating expenses recorded for the quarter

ended March 31, 2012. Increase in expenses due to seat growth was partially offset by the

strengthening of the Philippine peso against the U.S. dollar as referenced by the appreciation of

the Philippine peso to an average of P40.70 per U.S. dollar for the three months ended

March 31, 2013 from an average of P43.03 per U.S. dollar last year based on the Philippine

Dealing and Exchange Corporation (PDEx) weighted average rates. Operating expenses

increased as a result of the following:

Flying Operations

Flying operations expenses moved up by P104.727 million or 2.0% to P5.237 billion for the

quarter ended March 31, 2013 from P5.132 billion incurred in the same period last year. Aviation

fuel expenses grew by 3.4% to P4.638 billion from P4.485 billion for the three months ended

March 31, 2012 consequent to the increase in the volume of fuel consumed as a result of the

increased number of flights year on year. Rise in aviation fuel expenses, however, was partially

offset by the reduction in aviation fuel prices as referenced by the decrease in the average

published fuel MOPS price of U.S. $128.5 per barrel in the three months ended March 31, 2013

from U.S.$131.8 average per barrel in the same period last year. Increase in flying operation

expenses was also offset by the decrease in pilot costs due to the reduction in the number of expat

pilots year on year.

- 4 -

Aircraft and Traffic Servicing

Aircraft and traffic servicing expenses increased by P42.081 million or 5.0% to P884.777 million

for the quarter ended March 31, 2013 from P842.696 million registered in the same period in

2012 as a result of the overall increase in the number of flights flown in 2013. Higher expenses

were particularly attributable to more international flights operated for which airport and ground

handling charges were generally higher compared to domestic flights. International flights

increased by 13.7% year on year.

Depreciation and Amortization

Depreciation and amortization expenses grew by P133.416 million or 20.3% to P792.126 million

for the three months ended March 31, 2013 from P658.710 million for the three months ended

March 31, 2012. Depreciation and amortization expenses increased consequent to the arrival of

three Airbus A320 aircraft during the last quarter of 2012 and two Airbus A320 aircraft in 2013.

Repairs and Maintenance

Repairs and maintenance expenses slightly went up by 0.04% to P916.203 million for the quarter

ended March 31, 2013 from P915.855 million posted in the three months ended March 31, 2012.

Increase was driven by the overall increase in the number of flights which was offset in part by

the appreciation of the Philippine peso against the U.S. dollar as referenced by the strengthening

of the Philippine peso to an average of P40.70 per U.S. dollar for the three months ended

March 31, 2013 from an average of P43.03 per U.S. dollar for the same period in 2012.

Aircraft and Engine Lease

Aircraft and engine lease expenses went down by P45.037 million or 8.8% to P466.039 million in

the three months ended March 31, 2013 from P511.076 million charged for the three months

ended March 31, 2012. Decrease in aircraft and engine lease expenses was due to the effect of the

appreciation of the Philippine peso against the U.S. dollar during the current period and the timing

of the return of two leased Airbus A320 aircraft in 2012.

Reservation and Sales

Reservation and sales expenses increased by P46.478 million or 11.5% to P449.297 million for

the three months ended March 31, 2013 from P402.818 million in the three months ended

March 31, 2012 . This was primarily attributable to the increase in commission expenses and

online bookings relative to the overall growth in passenger volume year on year.

General and Administrative

General and administrative expenses grew by P21.664 million or 10.0% to P238.658 million for

the three months ended March 31, 2013 from P216.994 million incurred in the three months

ended March 31, 2012. Growth in general and administrative expenses was primarily attributable

to the increased flight and passenger activity in 2013.

Passenger Service

Passenger service expenses went up by P8.496 million or 4.2% to P210.260 million for the

quarter ended March 31, 2013 from P201.764 million posted for the quarter ended

March 31, 2012. Additional cabin crew hired for the additional Airbus A320 aircraft acquired

during the last quarter of 2012 and in 2013 mainly caused the increase. Increase in expenses was

partially offset by lower premiums for passenger liability insurance and the strengthening of the

Philippine peso against the U.S. dollar in 2013.

Operating Income

As a result of the foregoing, the Company finished with an operating income of P1.319 billion for

the quarter ended March 31, 2013, 214.0% higher than the P420.122 million operating income

earned last year.

- 5 -

Other Income (Expenses)

Interest Income

Interest income dropped by P41.313 million or 31.6% to P89.487 million for the quarter ended

March 31, 2013 from P130.800 million earned in the same period last year due to decrease in the

balance of cash in bank and short-term placements year on year and lower interest rates.

Fuel Hedging Gains

Fuel hedging gains of P59.970 million for the quarter ended March 31, 2013 resulted from the

unwinding of hedge transactions.

Foreign Exchange Gains

Net foreign exchange gains of P85.718 million for the quarter ended March 31, 2013 resulted

from the appreciation of the Philippine peso against the U.S. dollar as referenced by the

strengthening of the Philippine peso to P40.80 per U.S. dollar for the three months ended

March 31, 2013 from P41.05 per U.S. dollar for the twelve months ended December 31, 2012.

The Company’s major exposure to foreign exchange rate fluctuations is in respect to U.S. dollar

denominated long-term debt incurred in connection with aircraft acquisitions.

Equity in Net Income of Joint Venture

The Company had equity in net income of joint venture of P19.116 million for the quarter ended

March 31, 2013, P0.696 million or 3.8% higher than the P18.420 million equity in net income of

joint venture earned last year. Increase in this account was due to the increase in net income from

the current operations of Aviation Partnership (Philippines) Corporation (A-plus) and SIA

Engineering (Philippines) Corporation (SIAEP) in 2013.

Fair Value Losses of Financial Assets designated at Fair Value through Profit or Loss (FVPL)

No fair value losses on FVPL was recognized for the quarter ended March 31, 2013 as a result of

the sale of the related quoted debt and equity investment securities in 2012.

Interest Expense

Interest expense increased by P13.731 million or 7.8% to P188.926 million for the quarter ended

March 31, 2013 from P175.194 million in the three months ended March 31, 2012. Increase was

due to higher interest expense incurred brought by the additional loans availed to finance the

acquisition of three Airbus A320 aircraft in the last quarter of 2012 and two Airbus A320 aircraft

in 2013 partially reduced by the effect of the strengthening of the Philippine peso against the U.S.

dollar during the current period.

Income before Income Tax

As a result of the foregoing, the Company recorded income before income tax of P1.385 billion

for the quarter ended March 31, 2013, higher by 20.2% or P232.703 million than the

P1.152 billion income before income tax posted for the quarter ended March 31, 2012.

Provision for Income Tax

Provision for income tax for the quarter ended March 31, 2013 amounted to P227.859 million, of

which, P15.923 million pertains to current income tax recognized as a result of the taxable income

in 2013. Provision for deferred income tax amounted to P211.936 million resulting from the

recognition of deferred tax liabilities on future taxable amounts during the quarter.

Net Income

Net income for the quarter ended March 31, 2013 amounted to P1.157 billion, a growth of 20.2%

from the P962.396 million net income earned in the same period last year.

- 6 -

Financial Position

March 31, 2013 versus December 31, 2012

As of March 31, 2013, the Company’s consolidated balance sheet remains solid, with net debt to

equity of 0.54 [total debt after deducting cash and cash equivalents (including financial assets

held-for-trading at fair value and available-for-sale assets) divided by total equity]. Consolidated

assets grew to P65.757 billion from P61.336 billion as of December 31, 2012 as the Company

added aircraft to its fleet. Equity grew to P=23.292 billion from P=22.135 billion in 2012, while

book value per share amounted to P=38.44 as of March 31, 2013 from P=36.53 as of

December 31, 2012.

The Company’s cash requirements have been mainly sourced through cash flow from operations

and from borrowings. Net cash from operating activities amounted to P2.574 billion. As of

March 31, 2013, net cash used in investing activities amounted to P3.063 billion which included

payments in connection with the purchase of aircraft. Net cash provided by financing activities

amounted to P2.101 billion which comprised of proceeds from long-term debt of P2.844 billion

and repayments of long-term debt amounting to P743.6 million.

As of March 31, 2013, except as otherwise disclosed in the financial statements and to the best of

the Company’s knowledge and belief, there are no events that will trigger direct or contingent

financial obligation that is material to the Company, including any default or acceleration of an

obligation.

Financial Ratios

The following are the major financial ratios that the Company monitors in measuring and

analyzing its financial performance:

Liquidity and Capital Structure Ratios

March 31, 2013 December 31, 2012

Current Ratio 0.84:1 0.79:1

Debt-to-Equity Ratio 1.07:1 1.04:1

Asset-to-Equity Ratio 2.82:1 2.77:1

Interest Coverage Ratio 5.98:1 2.63:1

Profitability Ratios

March 31, 2013 March 31, 2012

Return on Asset 2% 2%

Return on Equity 5% 5%

Return on Sales 11% 10%

- 7 -

Material Changes in the 2013 Financial Statements

(Increase/Decrease of 5% or more versus 2012)

Material changes in the Statements of Consolidated Comprehensive Income were explained in

detail in the management’s discussion and analysis of financial condition and results of operations

stated above.

Consolidated Statements of Financial Position –March 31, 2013 versus December 31, 2012

14.66% increase in Cash and Cash Equivalents

Due to collections as a result of the improvement in the Company’s operations as evidenced by

the 12.9% growth in revenues and in EBITDA.

100.00% decrease in Financial Assets at FVPL

Due to pre-termination of existing fuel derivative contracts with counterparties in 2013.

41.73% increase in Receivables

Due to increased trade receivables relative to the growth in revenues.

8.95% increase in Expendable Parts, Fuel, Materials and Supplies

Due to increased volume of materials and supplies inventory relative to the increased number of

flights and larger fleet size during the period.

5.21% increase in Property and Equipment

Due mainly to the acquisition of two Airbus A320 aircraft during the period.

5.37% decrease in Other Noncurrent Assets

Due to the application of creditable withholding tax on income tax due for the first quarter.

11.20% increase in Unearned Transportation Revenue

Due to the increase in sale of passenger travel services.

8.60% increase in Long-Term Debt (including Current Portion)

Due to additional loans availed to finance the purchase of the two Airbus A320 aircraft acquired

during the period partially offset by the repayment of certain outstanding long-term debt in

accordance with the repayment schedule.

43.12% increase in Deferred Tax Liabilities- net

Due to future taxable amount recognized during the period.

8.48% increase in Retained Earnings

Due to net income during the period.

As of March 31, 2013, there are no significant elements of income that did not arise from the

Company’s continuing operations.

- 8 -

The Company generally records higher domestic revenue in January, March, April, May and

December as festivals and school holidays in the Philippines increase the Company’s seat load

factors in these periods. Accordingly, the Company’s revenue is relatively lower in July to

September due to decreased domestic travel during these months. Any prolonged disruption in the

Company’s operations during such peak periods could materially affect its financial condition

and/or results of operations.

KEY PERFORMANCE INDICATORS

The Company sets certain performance measures to gauge its operating performance periodically

and to assess its overall state of corporate health. Listed below are major performance measures,

which the Company has identified as reliable performance indicators. Analyses are employed by

comparisons and measurements based on the financial data as of March 31, 2013 and

December 31, 2012 and for three months ended March 31, 2013 and 2012:

Key Financial Indicators 2013 2012

Total Revenue P10.542 billion P9.341 billion

Pre-tax Core Net Income P1.239 billion P0.394 billion

EBITDAR Margin 25.9% 18.4%

Cost per Available Seat Kilometre (ASK) (Php) 2.42 2.54

Cost per ASK (U.S. cents) 5.95 5.90

Seat Load Factor 83.9% 83.9%

The manner by which the Company calculates the above key performance indicators for both

2013 and 2012 is as follows:

Total Revenue The sum of revenue obtained from the sale of air

transportation services for passengers and cargo and

ancillary revenue

Pre-tax Core Net Income Operating income after deducting net interest

expense and adding equity income/loss of joint

venture

EBITDAR Margin Operating income after adding depreciation and

amortization, accretion and amortization of ARO and

aircraft and engine lease expenses divided by total

revenue

Cost per ASK Operating expenses, including depreciation and

amortization expenses and the costs of operating

leases, but excluding fuel hedging effects, foreign

exchange effects, net financing charges and taxation,

divided by ASK

Seat Load Factor Total number of passengers divided by the total

number of actual seats on actual flights flown

- 9 -

As of March 31, 2013, except as otherwise disclosed in the financial statements and to the best of the

Company’s knowledge and belief, there are no known trends, demands, commitments, events or

uncertainties that may have a material impact on the Company’s liquidity.

As of March 31, 2013, except as otherwise disclosed in the financial statements and to the best of the

Company’s knowledge and belief, there are no events that would have a material adverse impact on

the Company’s net sales, revenues and income from operations and future operations.

- 11 -

CEBU AIR, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF MARCH 31, 2013

(With Comparative Audited Figures as of December 31, 2012)

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

ASSETS

Current Assets

Cash and cash equivalents (Note 7) P=12,301,294,550 P=10,728,326,325

Financial assets at fair value through profit or loss (Note 8) – 102,682,762

Receivables (Note 9) 1,401,042,364 988,511,487

Expendable parts, fuel, materials and supplies (Note 10) 454,815,205 417,434,810

Other current assets (Note 11) 901,493,676 882,604,550

Total Current Assets 15,058,645,795 13,119,559,934

Noncurrent Assets

Property and equipment (Notes 12, 16, 27 and 28) 49,958,571,093 47,484,106,152

Investment in joint ventures (Note 13) 530,872,560 511,756,873

Other noncurrent assets (Note 14) 209,038,736 220,895,946

Total Noncurrent Assets 50,698,482,389 48,216,758,971

P=65,757,128,184 P=61,336,318,905

LIABILITIES AND EQUITY

Current Liabilities

Accounts payable and other accrued liabilities (Note 15) P=8,114,151,712 P=7,768,537,046

Unearned transportation revenue (Note 4 and 5) 6,650,998,130 5,981,195,913

Current portion of long-term debt (Notes 12 and 16) 3,038,823,883 2,769,442,355

Due to related parties (Note 25) 43,424,474 45,602,315

Total Current Liabilities 17,847,398,199 16,564,777,629

Noncurrent Liabilities

Long-term debt - net of current portion (Notes 12 and 16) 21,857,784,160 20,154,916,843

Deferred tax liabilities - net 703,440,828 491,504,377

Other noncurrent liabilities (Notes 17 and 22) 2,056,828,216 1,990,307,272

Total Noncurrent Liabilities 24,618,053,204 22,636,728,492

Total Liabilities 42,465,451,403 39,201,506,121

Equity (Note 18)

Common stock 613,236,550 613,236,550

Capital paid in excess of par value 8,405,568,120 8,405,568,120

Treasury stock (529,319,321) (529,319,321)

Retained earnings 14,802,191,432 13,645,327,435

Total Equity 23,291,676,781 22,134,812,784

P=65,757,128,184 P=61,336,318,905

See accompanying Notes to Unaudited Consolidated Financial Statements.

- 12 -

CEBU AIR, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

Quarters Ended

2013 2012

REVENUES (Notes 4 and 19) P=10,542,218,022 P=9,340,939,033

EXPENSES

Flying operations (Note 20) 5,236,581,396 5,131,854,516

Repairs and maintenance (Notes 17 and 20) 916,202,631 915,855,497

Aircraft and traffic servicing (Note 20) 884,776,861 842,696,278

Depreciation and amortization (Note 12) 792,125,898 658,710,155

Aircraft and engine lease (Note 28) 466,039,045 511,076,421

Reservation and sales 449,296,747 402,818,430

General and administrative (Note 21) 238,657,654 216,994,083

Passenger service 210,259,641 201,763,731

Other expenses (Note 23) 28,919,692 39,048,049

9,222,859,565 8,920,817,160

OPERATING INCOME 1,319,358,457 420,121,873

OTHER INCOME (EXPENSE)

Interest income (Notes 7 and 8) 89,486,533 130,800,006

Foreign exchange gains 85,718,434 401,443,521

Fuel hedging gains (Note 8) 59,970,007 350,665,093

Equity in net income of joint venture (Note 13) 19,115,688 18,420,027

Gain on sale of financial assets designated at fair value

through profit or loss and available for sale

financial assets – 5,764,090

Interest expense (Note 16) (188,925,751) (175,194,373)

65,364,911 731,898,364

INCOME BEFORE INCOME TAX 1,384,723,368 1,152,020,237

PROVISION FOR INCOME TAX 227,859,371 189,623,846

NET INCOME 1,156,863,997 962,396,391

OTHER COMPREHENSIVE INCOME,

NET OF TAX – –

TOTAL COMPREHENSIVE INCOME P=1,156,863,997 P=962,396,391

Basic/Diluted Earnings Per Share (Note 24) P=1.91 P=1.59

See accompanying Notes to Unaudited Consolidated Financial Statements.

- 13 -

CEBU AIR, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013

(With Comparative Unaudited Figures as of March 31, 2012)

For the Three Months Ended March 31, 2013

Common Stock

(Note 18)

Capital Paid in

Excess of Par

Value

(Note 18) Treasury Stock

(Note 18)

Net unrealized

losses on

available-for-sale

investment

(Note 8)

Appropriated

Retained

Earnings

(Note 18)

Unappropriated

Retained

Earnings

(Note 18) Total

Equity

Balance at January 1, 2013 P=613,236,550 P=8,405,568,120 (P=529,319,321) P=– P=1,416,762,000 P=12,228,565,435 P=22,134,812,784

Net income – – – – – 1,156,863,997 1,156,863,997

Other comprehensive income – – – – – – –

Total comprehensive income – – – – – 1,156,863,997 1,156,863,997

Appropriation of retained earnings – – – – 2,500,000,000 (2,500,000,000) –

Balance at March 31, 2013 P=613,236,550 P=8,405,568,120 (P=529,319,321) P=– P=3,916,762,000 P=10,885,429,432 P=23,291,676,781

For the Three Months Ended March 31, 2012

Common Stock

(Note 18)

Capital Paid in

Excess of Par

Value

(Note 18)

Treasury Stock

(Note 18)

Net unrealized

losses on

available-for-sale

investment

(Note 8)

Appropriated

Retained

Earnings

(Note 18)

Unappropriated

Retained

Earnings

(Note 18)

Total

Equity

Balance at January 1, 2012 P=613,236,550 P=8,405,568,120 (P=529,319,321) (P=5,630,261) P=933,500,000 P=9,748,168,202 P=19,165,523,290

Net income – – – – – 962,396,391 962,396,391

Other comprehensive income – – – – – – –

Total comprehensive income – – – – – 962,396,391 962,396,391

Reclassification adjustment – – – 5,630,261 – – 5,630,261

Balance at March 31, 2012 P=613,236,550 P=8,405,568,120 (P=529,319,321) P=– P=933,500,000 P=10,710,564,593 P=20,133,549,942

See accompanying Notes to Unaudited Consolidated Financial Statements.

- 14 -

CEBU AIR, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

2013 2012

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P=1,384,723,368 P=1,152,020,237

Adjustments for:

Depreciation and amortization (Note 12) 792,125,898 658,710,155

Interest expense (Note 16) 188,925,751 175,194,373

Depreciation and accretion of asset retirement obligation

(Note 17) 154,551,261 128,971,048

Gain on sale of financial assets at fair value through

profit or loss and available for sale financial assets – (5,764,090)

Equity in net income of joint ventures (Note 13) (19,115,688) (18,420,027)

Fuel hedging gains (Note 8) (59,970,007) (350,665,093)

Interest income (Notes 7 and 8) (89,486,533) (130,800,006)

Unrealized foreign exchange gains (94,204,488) (418,278,200)

Operating income before working capital changes 2,257,549,562 1,190,968,397

Decrease (increase) in:

Receivables (434,901,962) (26,256,608)

Other current assets (18,889,127) (48,864,297)

Expendable parts, fuel, materials and supplies (37,380,395) 21,964,432

Financial assets at fair value through profit or loss

(derivatives) (Note 8) 162,652,769 68,889,921

Increase (decrease) in:

Accounts payable and other accrued liabilities 171,672,103 246,908,019

Unearned transportation revenue 669,802,216 1,078,018,726

Due to related parties (2,177,842) (1,514,489)

Noncurrent liabilities (88,030,359) (55,138,199)

Net cash generated from operations 2,680,296,965 2,474,975,902

Interest paid (193,238,926) (181,746,827)

Interest received 86,488,751 206,551,894

Net cash provided by operating activities 2,573,546,790 2,499,780,969

CASH FLOWS FROM INVESTING ACTIVITIES

Dividends received from a joint venture (Note 13)

Proceeds from sale of financial assets at FVPL (Note 8) – 3,258,002,595

Proceeds from sale of available-for sale investments (Note 8) – 110,369,718

Investment in joint venture (Note 13) – (29,913,800)

Decrease in other noncurrent assets 11,857,210 92,688,611

Acquisition of property and equipment

(Notes 12 and 27) (3,074,897,486) (1,848,044,811)

Net cash used in investing activities (3,063,040,276) 1,583,102,313

(Forward)

- 15 -

2013 2012

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from long-term debt P=2,844,205,000 P=1,535,200,237

Repayments of long-term debt (743,564,518) (651,204,380)

Net cash provided by financing activities 2,100,640,482 883,995,857

EFFECTS OF EXCHANGE RATE CHANGES IN CASH

AND CASH EQUIVALENTS (38,178,771) (60,606,795)

NET INCREASE IN CASH

AND CASH EQUIVALENTS 1,572,968,225 4,906,272,344

CASH AND CASH EQUIVALENTS

AT BEGINNING OF YEAR 10,728,326,325 8,957,783,986

CASH AND CASH EQUIVALENTS

AT END OF YEAR (Note 7) P=12,301,294,550 P=13,864,056,330

See accompanying Notes to Unaudited Consolidated Financial Statements.

- 16 -

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 26, 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 has eight special purpose entities (SPE) that it controls, namely: Cebu

Aircraft Leasing Limited (CALL), IBON Leasing Limited (ILL), Boracay Leasing Limited (BLL),

Surigao Leasing Limited (SLL), Sharp Aircraft Leasing Limited (SALL), Vector Aircraft Leasing

Limited (VALL), Panatag One Aircraft Leasing Limited (POALL) and Panatag Two Aircraft

Leasing Limited (PTALL) (collectively known as the “Group”). CALL, ILL, BLL, SLL, SALL,

VALL, POALL and PTALL are SPEs in which the Parent Company does not have equity interest.

CALL, ILL, BLL, SLL, SALL, VALL, POALL and PTALL 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). In accordance with Standards Interpretations

Committee (SIC) 12, Consolidation - Special Purpose Entities, the consolidated financial

statements include the accounts of these SPEs (Note 2).

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 66.15%-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 pioneer and 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 (4) 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 (8) years.

- 17 -

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 (5%) 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.

On May 24, 2005, the Reformed-Value Added Tax (R-VAT) law was signed as RA No. 9337 or

the R-VAT Act of 2005. The R-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 R-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.

2. 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 (P=), the Parent Company’s

functional and presentation currency. All amounts are rounded to the nearest peso unless

otherwise indicated.

- 18 -

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.

3. Changes in Accounting Policies

The accounting policies adopted are consistent with those of the previous financial year, except for

the adoption of new and amended PFRS and Philippine Interpretations from International

Financial Reporting Interpretations Committee (IFRIC) that are discussed below. Except as

otherwise indicated, the adoption of the new and amended PFRS and Philippine Interpretations did

not have any effect on the consolidated financial statements of the Group.

PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Government Loans

(effective for annual periods beginning on or after January 1, 2013)

These amendments add an exception to the retrospective application of PFRSs. First-time

adopters are required to apply the requirements in PFRS 9, Financial Instruments and PAS 20,

Accounting for Government Grants and Disclosure of Government Assistance prospectively

to government loans existing at the date of transition to PFRSs. However, a first-time adopter

may apply the requirements of PFRS 9 and PAS 20 to government loans retrospectively if it

has obtained the necessary information to do so.

The amendment is not applicable as the Group has no outstanding government loans.

PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial

Liabilities (effective for annual periods beginning on or after January 1, 2013)

These amendments require an entity to disclose information about rights of set-off and related

arrangements (such as collateral agreements). The new disclosures are required for all

recognized financial instruments that are set-off in accordance with PAS 32. These

disclosures also apply to recognized financial instruments that are subject to an enforceable

master netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in

accordance with PAS 32. The amendments require entities to disclose, in a tabular format

unless another format is more appropriate, the following minimum quantitative information.

- 19 -

This is presented separately for financial assets and financial liabilities recognized at the end

of the reporting period:

a) The gross amounts of those recognized financial assets and recognized financial liabilities;

b) The amounts that are set off in accordance with the criteria in PAS 32 when determining

the net amounts presented in the statement of financial position;

c) The net amounts presented in the statement of financial position;

d) The amounts subject to an enforceable master netting arrangement or similar agreement

that are not otherwise included in (b) above, including:

i. Amounts related to recognized financial instruments that do not meet some or all of

the offsetting criteria in PAS 32; and

ii. Amounts related to financial collateral (including cash collateral); and

e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be applied retrospectively. The amendment affects

disclosures only and has no impact on the Group’s financial position or performance.

PFRS 10, Consolidated Financial Statements (effective for annual periods beginning on or

after January 1, 2013) PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements,

that addresses the accounting for consolidated financial statements. It also includes the issues

raised in SIC-12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single

control model that applies to all entities including special purpose entities. The changes

introduced by PFRS 10 will require management to exercise significant judgment to determine

which entities are controlled, and therefore, are required to be consolidated by a parent,

compared with the requirements that were in PAS 27.

The Group’s management has assessed that it has control over its existing SPEs. The

consolidated financial statements include the financial statements of the Parent Company and

the SPEs that it controls.

PFRS 11, Joint Arrangements (effective for annual periods beginning on or after January 1, 2013) PFRS 11 replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities - Non-monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method.

The Group currently accounts for its investments in joint venture using the equity method.

PFRS 12, Disclosures of Involvement with Other Entities (effective for annual periods

beginning periods on or after January 1, 2013)

PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated

financial statements, as well as all of the disclosures that were previously included in PAS 31

and PAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint

arrangements, associates and structured entities. A number of new disclosures are also

required.

The amendment affects disclosures only and has no impact on the Group’s financial position

or performance.

- 20 -

PFRS 13, Fair Value Measurement (effective for annual periods beginning on or before

January 1, 2013)

PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements.

PFRS 13 does not change when an entity is required to use fair value, but rather provides

guidance on how to measure fair value under PFRS when fair value is required or permitted.

As of December 31, 2012, the Group has adopted the standard in reporting its consolidated

financial statements.

PAS 1, Financial Statement Presentation - Presentation of Items of Other Comprehensive

Income (effective for annual periods beginning on or after July 1, 2012)

The amendments to PAS 1 change the grouping of items presented in OCI. Items that could

be reclassified (or “recycled”) to profit or loss at a future point in time (for example, upon

derecognition or settlement) would be presented separately from items that will never be

reclassified.

The amendment affects presentation only and has therefore no impact on the Group’s financial

position or performance.

Amendments to PAS 19, Employee Benefits (effective for annual periods beginning on or after

January 1, 2013)

Amendments to PAS 19 range from fundamental changes such as removing the corridor

mechanism and the concept of expected returns on plan assets to simple clarifications and re-

wording.

As of December 31, 2012, the Group reviewed its existing employee benefits and determined

that the amended standard has significant impact on its accounting for retirement benefits.

The Group obtained the services of an external actuary to compute the impact to the financial

statements upon adoption of the standard. The effects are detailed below:

As at

December 31,

2012

Increase (decrease) in:

Consolidated statements of financial position

Net defined benefit liability P=139,529,356

Deferred tax asset on unrecognized actuarial losses 20,777,543

Other comprehensive income (69,258,478)

Retained earnings 73,701,878

As at

December 31,

2012

Consolidated statement of comprehensive income

Net pension expense P=67,289,100

Income tax expense 20,186,730

Statement of comprehensive income

Amortization of actuarial gain 3,431,000

- 21 -

Revised PAS 27, Separate Financial Statements (effective for annual periods beginning on or

after January 1, 2013)

As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12,

Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for

subsidiaries, jointly controlled entities, and associates in separate financial statements.

The Group’s management has assessed that it has control over its existing SPE’s. The

consolidated financial statements include the financial statements of the Parent Company and

the SPEs that it controls.

Revised PAS 28, Investments in Associates and Joint Ventures (effective for annual periods

beginning on or after January 1, 2013)

As a consequence of the new PFRS 11, Joint Arrangements, and PFRS 12, PAS 28 has been

renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application

of the equity method to investments in joint ventures in addition to associates.

The Group currently accounts for its investments in joint venture using the equity method.

Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine

(effective for annual periods beginning on or after January 1, 2013)

This Philippine Interpretation applies to waste removal costs that are incurred in surface

mining activity during the production phase of the mine (“production stripping costs”) and

provides guidance on the recognition of production stripping costs as an asset and

measurement of the stripping activity asset.

Future Changes in Accounting Policies

The Group will adopt the following new and amended PFRS and Philippine Interpretations

enumerated below when these become effective. Except as otherwise indicated, the following

new and amended PFRS and Philippine Interpretations will not have significant impact on the

consolidated financial statements of the Group:

Improvements to PFRS 2012

The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary

amendments to PFRSs. The amendments are effective for annual periods beginning on or after

January 1, 2013 and are applied retrospectively. Earlier application is permitted. Except as

otherwise indicated, the following new and amended PFRS and Philippine Interpretations will not

have significant impact on the financial statements of the Company:

PFRS 1, First-time Adoption of PFRS - Borrowing Costs

The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing

costs in accordance with its previous generally accepted accounting principles, may carry

forward, without any adjustment, the amount previously capitalized in its opening statement of

financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing

costs are recognized in accordance with PAS 23, Borrowing Costs.

PAS 1, Presentation of Financial Statements - Clarification of the requirements for

comparative information

The amendments clarify the requirements for comparative information that are disclosed

voluntarily and those that are mandatory due to retrospective application of an accounting

policy, or retrospective restatement or reclassification of items in the financial statements. An

entity must include comparative information in the related notes to the financial statements

- 22 -

when it voluntarily provides comparative information beyond the minimum required

comparative period. The additional comparative period does not need to contain a complete

set of financial statements. On the other hand, supporting notes for the third balance sheet

(mandatory when there is a retrospective application of an accounting policy, or retrospective

restatement or reclassification of items in the financial statements) are not required.

PAS 16, Property, Plant and Equipment - Classification of servicing equipment

The amendment clarifies that spare parts, stand-by equipment and servicing equipment should

be recognized as property, plant and equipment when they meet the definition of property,

plant and equipment and should be recognized as inventory if otherwise.

PAS 32, Financial Instruments: Presentation - Tax effect of distribution to holders of equity

instruments

The amendment clarifies that income taxes relating to distributions to equity holders and to

transaction costs of an equity transaction are accounted for in accordance with PAS 12,

Income Taxes.

PAS 34, Interim Financial Reporting - Interim financial reporting and segment information

for total assets and liabilities

The amendment clarifies that the total assets and liabilities for a particular reportable segment

need to be disclosed only when the amounts are regularly provided to the chief operating

decision maker and there has been a material change from the amount disclosed in the entity’s

previous annual financial statements for that reportable segment.

Effective 2014

PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial

Liabilities (effective for annual periods beginning on or after January 1, 2014)

These amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right

to set-off” and also clarify the application of the PAS 32 offsetting criteria to settlement

systems (such as central clearing house systems) which apply gross settlement mechanisms

that are not simultaneous.

Effective 2015

PFRS 9, Financial Instruments: Classification and Measurement (effective for annual periods

beginning on or after January 1, 2015)

PFRS 9 as issued reflects the first phase on the replacement of PAS 39 and applies to

classification and measurement of financial assets and financial liabilities as defined in

PAS 39. In subsequent phases, hedge accounting and impairment of financial assets will be

addressed with the completion of this project expected on the first half of 2012. The adoption

of the first phase of PFRS 9 will have an effect on the classification and measurement of the

Group’s financial assets, but will potentially have no impact on classification and

measurements of financial liabilities.

Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate

The implementation of the Philippine Interpretation is deferred until the final Review Standard

is issued by IASB and after an evaluation on the requirements and guidance in the standard

vis-à-vis the practices and regulations in the Philippine real estate industry is completed. This

Philippine Interpretation covers accounting for revenue and associated expenses by entities

that undertake the construction of real estate directly or through subcontractors. This

- 23 -

Philippine Interpretation requires that revenue on construction of real estate be recognized

only upon completion, except when such contract qualifies as construction contract to be

accounted for under PAS 11, Construction Contracts, or involves rendering of services in

which case revenue is recognized based on stage of completion. Contracts involving provision

of services with the construction materials and where the risks and reward of ownership are

transferred to the buyer on a continuous basis will also be accounted for based on stage of

completion. The SEC and the Financial Reporting Standards Council (FRSC) have deferred

the effectivity of this interpretation until the final Revenue standard is issued by the

International Accounting Standards Board (IASB) and an evaluation of the requirements of the

final Revenue standard against the practices of the Philippine real estate industry is completed.

Adoption of the interpretation when it becomes effective will not have any impact on the

financial statements of the Group.

4. Summary of 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, short-term cash investments and debt securities classified as

financial assets at FVPL 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.

General and Administrative Expenses

General and administrative expenses constitute cost of administering the business. These are

recognized as expenses when it is probable that a decrease in future economic benefit related to a

decrease in an asset or an increase in a liability has occurred and the decrease in economic benefits

can be measured reliably.

- 24 -

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 equivalents include short-term investment that can be pre-terminated and

readily convertible to known amount of cash 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.

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. As of March 31, 2013 and December 31, 2012, the Group has no

HTM investments.

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

reporting 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.

The Group follows the hierarchy in Philippine Interpretations Committee (PIC) Question and

Answer (Q&A) No. 2010-01: PAS 39.AG71-72, Rate used in determining the fair value of

government securities in the Philippines, beginning January 1, 2010, for the determination of fair

value of government securities in the Philippines, using market data published by the Philippine

Dealing and Exchange Corporation or PDEx:

a. Current bid yield, if available, on the reporting date.

b. When a current bid yield is not available, the last or close yield on the reporting date.

c. When there is no transaction for a security on the reporting date, the PDSI-R2 rate may be

used.

The consensus in the Q&A has been approved by the PIC on March 2, 2010 and approved by the

Financial Reporting Standards Committee on June 4, 2010.

- 25 -

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 or liability. In cases where the transaction

price used is made of data which is not observable, the difference between the transaction price

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:

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

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 March 31, 2013, the Group has no financial assets at FVPL. As of December 31, 2012, the

Group’s financial assets at FVPL consist of derivative assets (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.

- 26 -

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

three months ended March 31, 2013 and 2012.

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 March 31, 2013 and December 31, 2012, 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.

As of March 31, 2013 and December 31, 2012, the Group has no AFS investments.

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.

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

- 27 -

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 accounts payable and other accrued

liabilities, long-term debt, and other obligations that meet the above definition (Notes 15, 16

and 17).

Impairment of Financial Assets

The Group assesses at each reporting 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 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.

- 28 -

AFS investments

The Group assesses at each reporting 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.

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:

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 “pass-through” 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

- 29 -

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.

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* 15 years

Engines 15 years

Rotables 15 years

Ground support equipment 5 years

EDP Equipment, mainframe and peripherals 3 years

Transportation equipment 5 years

Furniture, fixtures and office equipment 5 years

Communication equipment 5 years

Special tools 5 years

Maintenance and test equipment 5 years

Other equipment 5 years * With residual value of 15.00%

- 30 -

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.

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.

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

contractual obligation includes regular aircraft maintenance, overhaul and restoration of the leased

aircraft to its original condition. Regular aircraft maintenance is accounted for as expense when

incurred, while overhaul and restoration are accounted on an accrual basis.

The Group recognizes the present value of these costs as ARO asset 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 of the related asset. The Group amortizes ARO liability using the effective interest

method and recognizes accretion expense over the lease term. Amortization of ARO asset and

accretion expense of ARO liability are recognized under “Repairs and Maintenance” account in

the consolidated statements of comprehensive income.

The Group regularly assesses the provision for ARO and adjusts the related liability (Note 5).

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 50.00%, 49.00% and 35.00% investments in Philippine Academy for Aviation

Traning, Inc. (PAAT), Aviation Partnership (Philippines) Corporation (A-plus) and SIA

Engineering (Philippines) Corporation (SIAEP), respectively, 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. Dividends

received are treated as a revaluation of the carrying value of the investment.

- 31 -

The financial statements of the investee companies used in the preparation of the consolidated

financial statement are prepared as of the same date with the Group. The investee companies’

accounting policies conform to those by the Group for like transactions and events in similar

circumstances.

Impairment of Nonfinancial Assets

This accounting policy applies primarily to the Group’s property and equipment and investments

in JV.

At each reporting 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 cash-generating 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. 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

and amortization, 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 and amortization

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.

The Group’s investment in JV is tested for impairment in accordance with PAS 36 as a single

asset, by comparing its recoverable amount (higher of value in use and fair value less costs to sell)

with its carrying amount, whenever application of the requirements in PAS 39 indicates that the

investment may be impaired. An impairment loss recognized in those circumstances is not

allocated to any asset that forms part of the carrying amount of the investment in a JV.

Accordingly, any reversal of that impairment loss is recognized in accordance with PAS 36 to the

extent that the recoverable amount of the investment subsequently increases. In determining the

value in use of the investment, an entity estimates: (a) its share of the present value of the

estimated future cash flows expected to be generated by the JV, including the cash flows from the

operations of the JV and the proceeds on the ultimate disposal of the investment; or (b) the present

value of the estimated future cash flows expected to arise from dividends to be received from the

investment and from its ultimate disposal.

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.

- 32 -

Treasury Stock

Own equity instruments which are acquired (treasury shares) are recognized at cost and deducted

from equity. No gain or loss is recognized in the profit and loss on the purchase, sale, issue or

cancellation of the Parent Company’s own equity instruments.

Retained Earnings

Retained earnings represent accumulated earnings of the Group less dividends declared.

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.

- 33 -

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 long term government bond risk-free interest rates that have terms to maturity

approximating the terms of the related pension liability for applying a single weighted average

discount rate that reflects the estimated timing and amount of benefit payments.

Short-term employee benefits are expensed as incurred.

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 reporting date.

Deferred tax

Deferred tax is provided using the 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 carry forward 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 income will be available against which the

deductible temporary differences and carry forward 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 reporting 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.

- 34 -

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.

- 35 -

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 has not capitalized any borrowing costs for the quarters ended March 31, 2013 and

2012 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 and Exchange Corp. (PDEX) closing rate prevailing at the reporting 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 quarters ended March 31, 2013 and 2012, 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 Date

Post-year-end events that provide additional information about the Group’s position at the

reporting date (adjusting event) are reflected in the consolidated financial statements. Post-year-

end events that are not adjusting events are disclosed in the consolidated financial statements,

when material.

- 36 -

5. 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 judgments 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.

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.

c. 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.

d. 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.

- 37 -

e. 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 28).

f. 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 associated company. In making

this assessment, management considers the underlying economic substance of the transaction

and not only the contractual terms.

g. 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.

h. 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 28).

i. Allocation of revenue, costs and expenses

Revenue, costs and expenses are classified as exclusive and common. Exclusive revenue, cost

and expenses such as passenger revenue, cargo revenue, excess baggage revenue, fuel and

insurance surcharge, fuel and oil expense, hull/war/risk insurance, maintenance expense,

depreciation (for aircraft under finance lease), lease expense (for aircraft under operating

lease) and interest expense based on the related long-term debt are specifically identified per

aircraft based on an actual basis. For revenue, cost and expense accounts that are not

identifiable per aircraft, the Group provides allocation based on activity factors that closely

relate to the earning process of the revenue.

- 38 -

j. Application of hedge accounting

The Group applies hedge accounting treatment for certain qualifying derivatives after

complying with hedge accounting requirements, specifically on hedge documentation

designation and effectiveness testing. Judgment is involved in these areas, which include

management determining the appropriate data points for evaluating hedge effectiveness,

establishing that the hedged forecasted transaction in cash flow hedges are probable of

occurring, and assessing the credit standing of hedging counterparties (Note 8).

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,

othercounterparties 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 related balances follow (Note 9):

2013 2012

Receivables P=1,617,994,453 P=1,206,749,106

Allowance for credit losses (216,952,089) (218,237,619)

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 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 related balances follow (Note 10):

2013 2012

Expendable Parts, Fuel, Materials and Supplies

At NRV P=255,484,287 P=241,414,140

At cost 199,330,918 176,020,670

As of March 31, 2013 and December 31, 2012, allowance for inventory write-down for

expendable parts amounted to P=20.5 million. No additional provision for inventory write-

down was recognized by the Group in 2013 and 2012.

- 39 -

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 contractual obligation includes regular

aircraft maintenance, overhaul and restoration of the leased aircraft to its original condition.

Regular aircraft maintenance is accounted for as expense when incurred, while overhaul and

restoration are accounted on an accrual basis. The Group recognizes the present value of these

costs as ARO asset and ARO liability.

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 other noncurrent liabilities and repairs and maintenance.

As of March 31, 2013 and December 31, 2012, the Group’s ARO liability net of ARO asset

(included under ‘Other noncurrent liabilities’ account in the statements of financial position)

has a carrying value of P=1,492.2 million and P=1,352.0 million, respectively (Note 17). The

related repairs and maintenance expense for the three months ended March 31, 2013 and 2012

amounted to P=154.6 million and P=129.0 million, respectively (Notes 17 and 20).

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.

As of March 31, 2013 and December 31, 2012, the carrying values of the Group’s property

and equipment amounted to P=49,958.6 million and P=47,484.1 million, respectively (Note 12).

The Group’s depreciation and amortization expense amounted to P=792.1 million and

P= 658.7 million for the three months ended March 31, 2013 and 2012, respectively (Note 12).

e. 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.

- 40 -

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.

As of March 31, 2013 and December 31, 2012, the carrying values of the Group’s property

and equipment amounted to P=49,958.6 million and P=47,484.1 million, respectively (Note 12).

Investment in JV amounted to P=530.9 million and P=511.8 million as of March 31, 2013 and

December 31, 2012, respectively (Note 13). There were no provision for impairment losses

on the Group’s property and equipment and investment in JV for the three months ended

March 31, 2013 and 2012.

f. 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’s pension liability (included in ‘Other noncurrent liabilities’ account in the

consolidated statements of financial position) amounted to P=140.4 million and P=214.1 million

as of March 31, 2013 and December 31, 2012, respectively (Notes 17 and 22).

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.

g. Recognition of deferred tax assets

The Group assesses the carrying amounts of deferred income taxes at each reporting date and

reduces deferred tax assets 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.

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.

- 41 -

As of March 31, 2013 and December 31, 2012, 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.

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 March 31, 2013 and December 31, 2012, the balances of the Group’s unearned

transportation revenue amounted to P=6,651.0 million and P=5,981.2 million, 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.

6. Segment Information

The Group has one reportable operating segment, which is the airline business (system-wide).

This is consistent with how the Group’s management internally monitors and analyzes the

financial information for reporting to the 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. The Company generally records higher domestic

revenue in January, March, April, May and December as festivals and school holidays in the

Philippines increase the Company’s seat load factor in these periods. Accordingly, the Company’s

revenue is relatively lower in July to September due to decreased domestic travel during these

months.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to

transactions with third parties.

The amount of segment assets and liabilities are based on the measurement principles that are

similar with those used in measuring the assets and liabilities in the consolidated statement of

financial position which is in accordance with PFRS.

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

2013 2012

Revenue P=10,796,508,684 P=10,248,031,770

Net income 1,156,863,997 962,396,391

Depreciation and amortization 792,125,898 658,710,155

Interest expense 188,925,751 175,194,373

Interest income 89,486,533 130,800,006

- 42 -

The reconciliation of total revenue reported by reportable operating segment to revenue in the

consolidated statements of comprehensive income is presented in the following table:

2013 2012

Total segment revenue of reportable

operating segment P=10,542,218,022 P=9,340,939,033

Nontransport revenue and

other income 254,290,662 907,092,737

Total revenue P=10,796,508,684 P=10,248,031,770

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:

2013 2012

Total segment income of reportable

segment P=1,319,358,457 P=420,121,873

Add (deduct) unallocated items:

Nontransport revenue and other

income 254,290,662 907,092,737

Nontransport expenses and other

charges (188,925,751) (175,194,373)

Provision for income tax (227,859,371) (189,623,846)

Net income 1,156,863,997 962,396,391

Other comprehensive income – –

Total comprehensive income P=1,156,863,997 P=962,396,391

The Group’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:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Cash on hand P=19,610,417 P=19,491,988

Cash in banks (Note 25) 339,833,844 321,236,059

Short-term placements (Note 25) 11,941,850,289 10,387,598,278

P=12,301,294,550 P=10,728,326,325

Cash in banks earns interest at the respective bank deposit rates. Short-term placements, which

represent money market placements, are made for varying periods depending on the immediate

cash requirements of the Group. Short-term placements denominated in Philippine peso earn an

average interest of 2.62% and 4.08% for three months ended March 31, 2013 and 2012,

respectively. Moreover, short-term placements in US dollar earn an average of 1.71% and 1.62%

in 2013 and 2012, respectively.

- 43 -

Interest income on cash and cash equivalents, presented in the consolidated statements of

comprehensive income, amounted to P=89.5 million and P=130.8 million for the three months ended

March 31, 2013 and 2012, respectively.

8. Investment and Trading Securities

Financial Assets at FVPL

This account consists of:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Derivative financial instruments

not designated as accounting hedges P=– P=102,682,762

Designated at FVPL

Quoted debt securities:

Private – –

Government – –

– –

Quoted equity securities – –

– –

P=– P=102,682,762

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.

On January 13, 2012, JGSHI acquired all of the Parent Company’s debt and equity securities

classified as financial assets at FVPL in exchange for a settlement amounting P=3,258.0 million.

Carrying value of financial assets at FVPL at date of sale amounted to P=3,244.2 million. Realized

gain on the sale of financial assets at FVPL amounted to P=13.8 million (Note 25).

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 March 31, 2013, the

Group has no outstanding fuel hedging transactions. As of March 31, 2012, the Group has

outstanding fuel hedging transactions with notional quantity of 450,000 US barrels. 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 options can be

exercised at various calculation dates with specified quantities on each calculation date.

- 44 -

In January 2013, the Group settled its fuel hedge transaction with notional quantity of 20,000 US

barrels and realized mark-to-market gain. In February 2013, the Group has pre-terminated its

existing fuel derivative contracts with its counterparties. The Group recognized an aggregate

realized mark-to-market gain amounting to P=162.7 million from these transactions. However, as

of December 31, 2012, the Group recognized unrealized gain of P=102.7 million from the positive

fair value change from its fuel derivatives (Note 8). As such, the Group will realized P=60.0

million as net realized gain from the transactions.

Fair value changes on derivatives

The changes in fair value of all derivative financial instruments not designated as accounting

hedges follow:

2013 2012

Balance at beginning of period

Derivative assets P=102,682,762 P=16,880,208

Derivative liabilities – (60,857,586)

102,682,762 (43,977,378)

Net changes in fair value of derivatives 59,970,007 258,543,810

162,652,769 214,566,432

Fair value of settled instruments (162,652,769) (111,883,670)

Balance at end of period P=– P=102,682,762

Attributable to:

Derivative assets P=– P=102,682,762

Derivative liabilities P=– P=–

AFS Investment

On January 13, 2012, JGSHI acquired all of the Group’s AFS financial assets in exchange for a

settlement amounting P=110.4 million. Market value of the AFS financial assets at date of sale

amounted to P=110.4 million and has an existing unrealized loss on AFS amounting P=5.6 million,

net of tax amounting P=2.4 million. Realized loss from sale of AFS financial assets amounted to

P=8.0 million (Note 25).

9. Receivables

This account consists of:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Trade receivables (Note 25) P=803,490,724 P=735,938,884

Due from related parties (Note 25) 551,766,469 175,709,003

Interest receivable 14,635,274 11,637,492

Others 248,101,986 283,463,727

1,617,994,453 1,206,749,106

Less allowance for credit losses 216,952,089 218,237,619

P=1,401,042,364 P=988,511,487

Trade receivables are noninterest-bearing and generally have 30 to 90 days terms. The receivables

are carried at cost.

- 45 -

Interest receivable pertains to accrual of interest income from short-term placements. Accrued

interest income from short-term placements amounted to P=14.6 million and P=11.6 million as of

March 31, 2013 and December 31, 2012, respectively.

Others include receivable under a sublease agreement denominated in US dollar equivalent to

P=209.8 million with another airline company. This receivable is fully provided with allowance for

credit losses. The account also includes receivables from employees and counterparties.

The following tables show the aging analysis of the Group’s receivables:

2013

Neither Past Past Due But Not Impaired Past

Due Nor

Impaired 31-60 days 61-90 days 91-180 days

Over

180 days

Due and

Impaired Total

Trade receivables P=724,880,193 P=30,130,101 P=42,149,555 P=– P=– P=6,330,875 P=803,490,724

Interest receivable 14,635,274 – – – – – 14,635,274

Due from related parties 551,766,469 – – – – – 551,766,469

Others* 37,480,772 – – – – 210,621,214 248,101,986

P=1,328,762,708 P=30,130,101 P=42,149,555 P=– P=– P=216,952,089 P=1,617,994,453

*Include nontrade receivables from derivative counterparties and employees

2012

Neither Past Past Due But Not Impaired Past

Due Nor

Impaired 31-60 days 61-90 days 91-180 days

Over

180 days

Due and

Impaired Total

Trade receivables P=660,538,513 P=45,991,793 P=23,077,703 P=– P=– P=6,330,875 P=735,938,884

Interest receivable 11,637,492 – – – – – 11,637,492

Due from related parties 175,709,003 – – – – – 175,709,003

Others* 71,556,983 – – – – 211,906,744 283,463,727

P=919,441,991 P=45,991,793 P=23,077,703 P=– P=– P=218,237,619 P=1,206,749,106

*Include nontrade receivables from derivative counterparties and employees.

The changes in the allowance for credit losses on receivables follow:

March 31, 2013 Unaudited

Trade

Receivables Others Total

Balance at beginning of year P=6,330,875 P=211,906,744 P=218,237,619

Unrealized foreign exchange gain on

allowance for credit losses – (1,285,530) (1,285,530)

Balance at end of year P=6,330,875 P=210,621,214 P=216,952,089

December 31, 2012 Audited

Trade

Receivables Others Total

Balance at beginning of year P=6,330,875 P=226,253,265 P=232,584,140

Unrealized foreign exchange gain on

allowance for credit losses – (14,346,521) (14,346,521)

Balance at end of year P=6,330,875 P=211,906,744 P=218,237,619

As of March 31, 2013 and December 31, 2012, the specific allowance for credit losses on trade

receivables and other receivables amounted to P=6.3 million and P=210.6 million and P=6.3 million

and P=212.0 million, respectively.

- 46 -

10. Expendable Parts, Fuel, Materials and Supplies

This account consists of:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

At NRV:

Expendable parts P=255,484,287 P=241,414,140

At cost:

Fuel 164,247,829 142,603,044

Materials and supplies 35,083,089 33,417,626

199,330,918 176,020,670

P=454,815,205 P=417,434,810

The cost of expendable and consumable parts, and materials and supplies recognized as expense

(included under ‘Repairs and maintenance’ account in the consolidated statements of

comprehensive income) for the three months ended March 31, 2013 and 2012 amounted to

P=67.4 million and P=72.5 million, respectively. The cost of fuel reported as expense under ‘Flying

operations’ amounted to P=4.6 billion and P=4.5 million for the three months ended

March 31, 2013 and 2012, respectively (Note 20).

The cost of expendable parts amounted to P=265.8 million and P=243.6 million as of

March 31, 2013 and December 31, 2012, respectively. There are no additional provisions for

inventory write down in 2013 and 2012. No expendable parts, fuel, material and supplies are

pledged as security for liabilities.

11. Other Current Assets

This account consists of:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Advances to suppliers P=659,594,378 P=679,944,204

Prepaid rent 151,496,769 146,026,694

Prepaid insurance 76,522,832 29,338,807

Others 13,879,697 27,294,845

P=901,493,676 P=882,604,550

Advances to suppliers include advances made for the purchase of various aircraft parts and service

maintenance. These are recouped from progress billings which occurs within one year from the

date the advances arose. The advances are unsecured and noninterest bearing.

Prepaid rent pertains to advance rental on aircraft under operating lease and on office spaces in

airports.

Prepaid insurance consist of aviation insurance which represents insurance of hull, war, and risk,

passenger and cargo insurance for the aircraft during flights and non-aviation insurance represents

insurance payments for all employees’ health and medical benefits, commission, casualty and

marine insurance as well as car/motor insurance.

- 47 -

12. Property and Equipment

This account consists of:

March, 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Acquisition Costs

Passenger aircraft P=49,735,534,909 P=46,594,710,884

Pre-delivery payments 7,600,016,679 8,356,055,126

Engines 2,920,001,072 2,439,973,358

Rotables 1,677,098,747 1,523,539,852

EDP equipment, mainframe and peripherals 633,446,792 622,729,161

Ground support equipment 387,017,040 385,024,151

Leasehold improvements 334,203,628 333,877,735

Transportation equipment 172,112,153 169,595,188

Furniture, fixtures and office equipment 84,478,598 81,250,593

Construction in-progress 91,260,826 64,212,027

Special tools 12,507,408 12,507,408

Communication equipment 10,791,919 9,399,252

Maintenance and test equipment 6,681,631 6,681,631

Other equipment 73,799,177 75,458,076

Total 63,738,950,579 60,675,014,442

Accumulated depreciation (13,780,379,486) (13,190,908,290)

Net book value P=49,958,571,093 P=47,484,106,152

The Group’s depreciation and amortization expense amounted to P=792.1 million and

P=658.7 million for the three months ended March 31, 2013 and 2012, respectively.

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. In

2011, the Group entered into ECA loan to finance the purchase of three additional Airbus A320

aircraft. In 2012, the Group entered into ECA loan to finance the purchase of four additional

Airbus A320 aircraft.

In December 2012, the Group entered into a commercial loan facility with a local bank to partially

finance the purchase of four additional Airbus A320 aircraft with scheduled delivery in January,

March and July 2013.

Under the terms of the ECA loan and 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, VALL, POALL, or PTALL, or by the guarantors which are CPAHI

and JGSHI. Failure to pay the obligation will allow the respective lenders to foreclose the securing

assets.

- 48 -

As of March 31, 2013 and December 31, 2012, the carrying amounts of the securing assets

(included under the ‘Property and equipment’ account) amounted to P=38.5 billion and

P=35.6 billion, respectively.

Operating Fleet

As of March 31, 2013 and December 31, 2012, the Group’s operating fleet follows:

2013 2012

Owned (Note 16):

Airbus A319 10 10

Airbus A320 14 12

ATR 72-500 8 8

Under operating lease (Note 28):

Airbus A320 11 11

43 41

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 March 31, 2013 and December 31, 2012, the Group’s capitalized pre-delivery

payments as construction-in-progress amounted to P=7.6 billion and P=8.4 billion, respectively

(Note 28).

As of March 31, 2013 and December 31, 2012, the gross amount of fully depreciated property and

equipment which are still in use by the Group amounted to P=710.1 million and P=664.5 million,

respectively.

As of March 31, 2013 and December 31, 2012, there are no temporary idle property and

equipment.

13. Investment in Joint Ventures

The investment in joint ventures represents the Parent Company’s 50.00%, 49.00% and 35.00%

interest in PAAT, A-plus and SIAEP, respectively. The joint ventures are accounted for as jointly

controlled entities.

Investment in PAAT pertains to the Parent Company's 60.00% investment in shares of the joint

venture. However, the joint venture agreement between the Parent Company and CAE

International Holdings Limited (CAE) states that the Parent Company is entitled to 50% share on

the net income/loss of PAAT. As such, the Parent Company recognizes equivalent 50% share in

net income and net assets of the joint venture.

The Parent Company entered into a joint venture agreement with CAE on December 13, 2011.

PAAT was created to provide training for pilots, cabin crews, aviation management services and

guest services for purposes of addressing the Group’s training requirements and to pursue business

opportunities for training third parties in the commercial fixed wing aviation industry, including

other local and international airline companies. On December 19, 2011, the Parent Company paid

P=33.8 million representing 25% payment for the 135,000,000 Class A subscribed shares at P=1.00

par value. PAAT was formally incorporated on January 27, 2012.

- 49 -

As of March 31, 2013 and December 31, 2012, the Parent Company’s investment in PAAT

amounted to P=124.23 million and P=124.21 million, net of subscription payable of

P=101.3 million, respectively.

A-plus and SIAEP 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 joint ventures in A-plus,

SIAEP and PAAT follow:

2013

A-plus SIAEP PAAT* Total

Cost

Balance at beginning of the year P=87,012,572 P=304,763,900 P=134,873,645 P=526,650,117

Investment during the year – – – –

87,012,572 304,763,900 134,873,645 526,650,117

Accumulated Equity in

Net Income (Loss)

Balance at beginning of the year 42,046,763 (46,273,497) (10,666,510) (14,893,244)

Equity in net income (loss)

during the year 14,461,357 4,630,399 23,931 19,115,687

Balance at end of the year 56,508,120 (41,643,098) (10,642,579) 4,222,443

Net Carrying Value P=143,520,692 P=263,120,802 P=124,231,066 P=530,872,560

*Beginning balance is net of subscription payable amounting P=101,250,000

2012

A-plus SIAEP PAAT* Total

Cost

Balance at beginning of the year P=87,012,572 P=304,763,900 P=33,750,000 P=425,526,472

Investment during the year* – – 101,123,645 101,123,645

Balance at end of period 87,012,572 304,763,900 134,873,645 526,650,117

Accumulated Equity in

Net Income (Loss)

Balance at beginning of the year 44,732,164 (60,780,399) – (16,048,235)

Equity in net income (loss)

during the year 50,543,615 14,506,902 (10,666,510) 54,384,007

Dividends received (53,229,016) – – (53,229,016)

Balance at end of the year 42,046,763 (46,273,497) (10,666,510) (14,893,244)

Net Carrying Value P=129,059,335 P=258,490,403 P=124,207,135 P=511,756,873

*Net of subscription payable amounting P=101,250,000

Selected financial information of A-plus, SIAEP and PAAT follow:

2013 2012

A-plus SIAEP PAAT A-plus SIAEP PAAT Total current assets P=455,864,134 P=404,816,848 P=45,301,694 P=411,578,768 P=416,322,433 P=62,520,432

Total assets 533,294,050 1,038,771,077 724,402,322 482,283,412 1,020,266173 495,453,301 Total current liabilities 238,590,957 386,600,705 478,900,192 217,093,296 377,439,493 249,999,035

Total liabilities 238,590,957 386,600,705 478,900,192 217,093,296 377,439,493 249,999,035

Net income (loss) 112,151,981 30,357,099 47,863 82,639,006 17,767,060 (21,333,018)

- 50 -

The fiscal year-end of A-plus and SIAEP is every March 31 while the year-end of PAAT is every

December 31.

The undistributed earnings of A-plus included in the consolidated retained earnings amounted to

P=56.5 million and P=54.8 million as of March 31, 2013 and 2012, 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

March 31, 2013 and December 31, 2012.

14. Other Noncurrent Assets

This account consists of:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Refundable deposits P=33,438,542 P=33,438,542

Creditable withholding tax 12,141,608 28,382,890

Others 163,458,586 159,074,514

P=209,038,736 P=220,895,946

Refundable deposits pertain to security deposits provided to lessor for aircraft under operating

lease.

Others include option and commitment fees. The option and commitment fees shall be applied

against payments for future aircraft delivery.

15. Accounts Payable and Other Accrued Liabilities

This account consists of:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Accrued expenses P=3,746,442,641 P=3,750,064,107

Trade payables (Note 25) 3,059,026,137 2,478,769,275

Airport and other related fees payable 603,058,690 534,436,035

Advances from agents and others 251,814,816 251,878,844

Accrued interest payable (Note 16) 100,695,440 105,008,615

Other payables 353,113,988 237,880,170

Deposit from foreign carrier – 410,500,000

P=8,114,151,712 P=7,768,537,046

- 51 -

Accrued Expenses

The Group’s accrued expenses include accruals for:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

Maintenance (Note 28) P=930,089,598 P=872,776,722

Compensation and benefits 554,008,242 546,839,542

Training costs 507,101,179 486,040,399

Advertising and promotion 427,561,575 398,690,076

Navigational charges 357,122,906 323,628,299

Repairs and services 255,594,674 216,918,668

Landing and take-off fees 167,039,692 244,198,125

Ground handling charges 144,686,244 113,424,579

Rent (Note 28) 114,007,598 127,609,933

Aircraft insurance 53,527,309 45,776,243

Fuel 42,684,539 199,083,829

Catering supplies 25,328,593 32,277,324

Reservation costs 7,415,163 8,375,590

Others 160,275,329 134,424,778

P=3,746,442,641 P=3,750,064,107

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

noninterest-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.

Deposit from foreign carrier

Deposit from foreign carrier represents advances received in 2012 which was subsequently

returned in January 2013.

Advances from Agents and Others

Advances from agents and others represent cash bonds required from major sales and ticket

offices or agents.

Accrued Interest Payable

Accrued interest payable is related to long-term debt and normally settled quarterly throughout the

year.

Other Payables

Other payables are noninterest-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.

- 52 -

16. Long-term Debt

This account consists of:

2013

Interest Rates Maturities US Dollar

Philippine Peso

Equivalent

ECA loans 2.51% to 5.83%

Various dates

through 2023 US$322,606,000 P=13,162,324,800

0.91% to 2.32%

(US Dollar LIBOR

6 months + margin

or 3 months + margin)

176,570,324 7,204,069,230

499,176,324 20,366,394,030

Commercial loans

from foreign banks

4.11% to 5.67%

Various dates

through 2017 38,525,930 1,571,857,959

1.91% to 1.99%

(US Dollar LIBOR

6 months + margin) 2,508,727 102,356,054

41,034,657 1,674,214,013

Commercial loans from

a local bank

3.75% January 2023;

March 2023 70,000,000 2,856,000,000

610,210,981 24,896,608,043

Less current portion 74,480,978 3,038,823,883

US$535,730,003 P=21,857,784,160

2012

Interest Rates Maturities US Dollar

Philippine Peso

Equivalent

ECA loans 2.51% to 5.83%

Various dates

through 2023

US$334,364,127 P=13,725,647,412

0.95% to 2.32%

(US Dollar LIBOR

6 months + margin or 3 months + margin)

180,762,668 7,420,307,510

515,126,795 21,145,954,922

Commercial loans

from foreign banks

4.11% to 5.67%

Various dates

through 2017

40,325,975 1,655,381,256

1.98% to 2.01%

(US Dollar LIBOR

6 months + margin) 2,996,907 123,023,020

43,322,882 1,778,404,276

558,449,677 22,924,359,198

Less current portion 67,465,100 2,769,442,355

US$490,984,577 P=20,154,916,843

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.

- 53 -

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 semi-annual 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. On November 30, 2010, the Parent Company pre-terminated the lease agreement with

BLL related to the disposal of one ATR 72-500 turboprop aircraft. The outstanding balance of the

related loans and accrued interests amounting 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.

In 2009, the Group entered into ECA-backed loan facilities to partially 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 semi-annual 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 partially finance the purchase of

four Airbus A320 aircraft, delivered between 2010 to January 2011. 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.

In 2011, the Group entered into ECA-backed loan facilities to fully finance the purchase of three

Airbus A320 aircraft, delivered between 2011 to January 2012. The security trustee of the ECA

loans established VALL, 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 VALL corresponds to the principal

and interest payments made by VALL to the ECA-backed lenders. The quarterly lease rentals to

VALL 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 2012, the Group entered into ECA-backed loan facilities to partially finance the purchase of

three Airbus A320 aircraft. The security trustee of the ECA loans established POALL, 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 POALL corresponds to the principal and interest payments made

by POALL to the ECA-backed lenders. The quarterly lease rentals to POALL are guaranteed by

JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the

end of such leases.

- 54 -

The terms of the ECA-backed facilities, which are the same for each of the ten Airbus A319

aircraft, seven ATR 72-500 turboprop aircraft and ten 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, eightATR 72-500

turboprop aircraft and seven Airbus A320 aircraft, and equal principal repayments for the last

six Airbus A319 aircraft and last three Airbus A320 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, BLL and SALL is at fixed rates,

which range from 3.78% to 5.83%. Interest on loans from ECA lenders related to SLL is

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 VALL is fixed at 2.56%for one

Airbus A320 aircraft and US dollar LIBOR 3 months plus margin for two Airbus A320

aircraft. Interest on loans from ECA lenders related to POALL for the three A320 aircraft is

US dollar LIBOR 3 months plus margin.

As provided under the ECA-backed facility, CALL, BLL, SLL, SALL, VALL and POALL

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, SALL, VALL

and POALL 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

VALL or POALL becomes insolvent, (e) failure to discharge any attachment or sequestration

order against CALL’s, BLL’s, SLL’s, SALL’s VALL’s and POALL’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 or VALL or POALL, 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.

As of March 31, 2013 and December 31, 2012, the total outstanding balance of the ECA loans

amounted to P=20,366.4 million (US$499.2 million) and P=21,146.0 million (US$515.1million),

respectively. Interest expense amounted to P=158.2 million and P=148.0 million for the three

months ended March 31, 2013 and 2012, respectively.

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.

- 55 -

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 LIBOR6 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 March 31, 2013 and December 31, 2012, the total outstanding balance of the commercial

loans from foreign banks amounted to P=1,674.2 million (US$41.0 million) and P=1,778.4 million

(US$43.3 million), respectively. Interest expense amounted to P=21.8 million and P=27.2 million

for the three months ended March 31, 2013 and 2012, respectively.

Commercial Loans from a Local Bank

In December 2012, the Group entered into a commercial loan facility to partially finance the

purchase of four Airbus A320 aircraft. The security trustee of the commercial loan facility

established PTALL, 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 arrangement for

the aircraft. The semiannual rental payments of the Parent Company correspond to the principal

and interest payments made by PTALL to the commercial lenders and are guaranteed by JGSHI.

The Parent Company has the option to purchase the aircraft for a nominal amount at the end of

such leases.

- 56 -

The terms of the commercial loans from a local bank follow:

Term of ten years starting from the delivery date of each Airbus A320 aircraft.

Equal principal repayments for the four Airbus A320 aircraft. Principal repayments shall be

made on a semi-annual basis.

Interest on the commercial loan facility for the four Airbus A320 aircraft shall be a fixed rate

of 3.75% per annum. Interest will be paid semi-annually in arrears on the last day of each

interest period or the interest payment date.

If the Group fails to pay the amount due, the principal and interest due will be payable,

including default interest on such past due and unpaid amount from and including the due date

up to and excluding the date of payment in full, at default rate of 2% per annum.

The following are some of the events of default provided in the commercial loan facility:

(a) nonpayment of the loan principal or interest or any other amount payable on the due date,

(b) misrepresentation, (c) breach of any provisions of the finance documents and such breach

have not been waived by the lender, or is not remedied for a period of 30 calendar days from

written notice by the lender, (d) insolvency or bankruptcy, (e) cessation of business,

(f) commence negotiations, or has already commenced negotiations, with any one or more of

its creditors with a view to a general adjustment or rescheduling of its financial indebtedness,

(g) revocation or cancellation of any of the concessions, permits, rights, franchises, or

privileges required for the conduct of the business and operations, (h) an attachment or

garnishment of or levy upon the aircraft is made which will result in a material adverse

change, (i) repudiates a finance document or evidences an intention to repudiate a finance

document, (j) the guarantee is not in full force or effect, and (i) any event occurs or any

circumstances arises which constitutes an event of default.

Upon default, the outstanding amount of loan will be payable, including interest accrued.

The lender will foreclose on secured assets, namely the aircraft.

As of March 31, 2013, the total outstanding balance of the commercial loans from a local bank

amounted to P=2,856.0 million (US$70.0 million). As of December 31, 2012, the balance was nil.

Interest expense amounted to P=9.0 million for the three months ended March 31, 2013.

The Group is not in breach of any loan covenants as of March 31, 2013 and December 31, 2012.

17. Other Noncurrent Liabilities

This account consists of:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

ARO P=1,492,156,157 P=1,351,931,051

Accrued maintenance 424,276,778 424,276,778

Pension liability (Note 22) 140,395,281 214,099,443

P=2,056,828,216 P=1,990,307,272

- 57 -

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 the Group’s

engineers, which includes estimates of certain redelivery costs at the end of the operating aircraft

leases (see Note 5).

The roll forward analysis of the Group’s ARO follows:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

ARO Asset

Balance at beginning of the period P=1,264,533,565 P=1,174,348,991

Capitalized during the period** – 459,298,467

Amortization* (96,550,372) (369,113,893)

Balance at end of the period 1,167,983,193 1,264,533,565

ARO Liability

Balance at beginning of the period 2,616,464,616 2,437,668,334

Accretion expense* 58,000,889 208,396,566

Capitalized during the period** – 459,298,467

Payment of restorations during the period (14,326,155) (488,898,751)

Balance at end of the period 2,660,139,350 2,616,464,616

Net ARO Liability P=1,492,156,157 P=1,351,931,051

*Included under repairs and maintenance (Note 20) account in the consolidated statements of comprehensive income.

**In 2012, capitalized ARO liability pertains to two additional Airbus A320 aircraft under operating lease entered in

March 2012.

Expenses included as part of repairs and maintenance (Note 20) follow:

2013 2012

Amortization P=96,550,372 P=369,113,893

Accretion expense 58,000,889 208,396,566

P=154,551,261 P=577,510,459

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 number of common shares and the movements thereon follow:

March 31,

2013

December 31,

2012

Authorized - at P=1 par value 1,340,000,000 1,340,000,000

Beginning of year 605,953,330 605,953,330

Treasury shares – –

Issuance of shares during the year – –

Issued and outstanding 605,953,330 605,953,330

- 58 -

Issuance of Common Shares of Stock

On October 26, 2010, the Parent Company listed with the PSE its common stock, by way of

primary and secondary share offerings, 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 P=3,800.0 million. The Parent Company’s share in the total transaction costs

incurred incidental to the IPO amounting P=100.4 million, which is charged against ‘Capital paid in

excess of par value’ in the parent statement of financial position. The registration statement was

approved on October 11, 2010. The Group has 83 and 76 existing certified shareholders as of

March 31, 2013 and December 31, 2012, respectively.

Treasury Shares

On February 28, 2011, the BOD of the Parent Company approved the creation and implementation

of a share buyback program (SBP) up to P=2,000.0 million 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.

The Parent Company has outstanding treasury shares of 7,283,220 shares amounting to

P=529.3 million as of March 31, 2013 and December 31, 2012, restricting the Parent Company

from declaring an equivalent amount from unappropriated retained earnings as dividends.

Appropriation of Retained Earnings

On March 8, 2013, the Parent Company’s BOD appropriated P=2.5 billion from its unrestricted

retained earnings as of December 31, 2012 for purposes of the Group’s re-fleeting program. The

appropriated amount will be used for settlement of pre delivery payments and aircraft lease

commitments in 2013.

On April 19, 2012, the Parent Company’s Executive Committee appropriated P=483.3 million from

its unrestricted retained earnings as of December 31, 2011 for purposes of the Group’s re-fleeting

program. The appropriated amount will be used for settlement of pre-delivery payments and

aircraft lease commitments in 2013.

On December 9, 2011, the Parent Company’s BOD appropriated P=933.5 million from its

unrestricted retained earnings as of December 31, 2010 for purposes of the Parent Company’s

re-fleeting program. The appropriated amount will be used for settlement of pre-delivery

payments and aircraft lease commitments in 2013.

Unappropriated Retained Earnings

The income of the subsidiaries and JV that are recognized in the statements of comprehensive

income are not available for dividend declaration unless these are declared by the subsidiaries and

JV. Likewise, retained earnings are restricted for the payment of dividends to the extent of the

cost of common shares held in treasury.

On June 28, 2012, the Parent Company’s BOD approved the declaration of a regular cash dividend

in the amount of P=606.0 million or P=1.00 per common share to all stockholders of record as of

July 18, 2012 and was paid on August 13, 2012.

- 59 -

On March 17, 2011, the BOD of the Parent Company approved the declaration of a regular cash

dividend in the amount of P=1,222.4 million or P=2.00 per share and a special cash dividend in the

amount of P=611.2 million or P=1.00 per share from the unrestricted retained earnings of the Parent

Company to all stockholders of record as of April 14, 2011 and was paid on May 12, 2011.

After reconciling items which include fair value adjustments on financial instruments, foreign

exchange gain and cost of common stocks held in treasury, the amount of retained earnings that is

available for dividend declaration amounted to P=5,712.9 million and P=7,426.9 million as of

March 31, 2013 and December 31, 2012, respectively.

Under the Tax Code, publicly-held Corporations are allowed to accumulate retained earnings in

excess of capital stock and are exempt from improperly accumulated earnings tax.

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 ultimate parent monitors the use of capital structure using a debt-to-equity capital

ratio which is gross debt divided by total capital. The ultimate parent includes within gross debt

all interest-bearing loans and borrowings, while capital represent total equity.

The Group’s debt-to-capital ratios follow:

March 31,

2013

(Unaudited)

December 31,

2012

(Audited)

(a) Long term debt (Note 16) P=24,896,608,043 P=22,924,359,198

(b) Capital 23,291,676,781 22,134,812,784

(c) Debt-to-capital ratio (a/b) 1.1:1 1.0:1

The JGSHI Group’s policy is to keep the debt to capital ratio at the 2:1 level as of

March 31, 2013 and December 31, 2012. Such ratio is currently being managed on a group level

by the Group’s ultimate parent.

- 60 -

19. Revenues

Revenues consist of:

2013 2012

Passenger P=8,168,512,848 P=7,192,064,371

Cargo 570,648,490 551,150,737

Ancillary revenues 1,803,056,684 1,597,723,925

P=10,542,218,022 P=9,340,939,033

Ancillary revenues include baggage fees, rebooking and cancellation fees, inflight sales and

services provided through reservation system such as advance seat selection and website

administration fees.

20. Operating Expenses

Flying Operations

This account consists of:

2013 2012

Aviation fuel expense P=4,638,195,919 P=4,485,147,595

Flight deck 525,304,662 569,740,837

Aviation insurance 38,427,511 45,518,013

Others 34,653,304 31,448,071

P=5,236,581,396 P=5,131,854,516

Aircraft and Traffic Servicing

This account consists of:

2013 2012

Airport charges P=509,563,854 P=495,799,787

Ground handling 271,493,184 256,688,165

Others 103,719,823 90,208,326

P=884,776,861 P=842,696,278

Others pertain to staff expenses incurred by the Group such as basic pay, employee training cost

and allowances.

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. The account includes the related amortization of ARO asset

and cost of other contractual obligation under the aircraft operating lease agreements (Note 28).

These amounted to P=154.6 million and P=129.0 million for the quarters ended March 31, 2013 and

2012, respectively (Note 17).

- 61 -

21. General and Administrative Expenses

This account consists of:

2013 2012

Staff cost P=85,452,963 P=77,601,024

Utilities 32,100,579 22,942,347

Security and professional fees 72,452,278 62,683,198

Others 48,651,834 53,767,514

P=238,657,654 P=216,994,083

Others include membership dues, annual listing maintenance fees, supplies, rent and others.

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.

23. Other Expenses

This account consists mainly of bank charges.

24. Earnings Per Share

The following reflects the income and share data used in the basic/dilutive EPS computations:

2013 2012

(a) Net income attributable to common

shareholders P=1,156,863,997 P=962,396,391

(b) Weighted average number of common

shares for basic EPS 605,953,330 605,953,330

(c) Basic/diluted earnings per share P=1.91 P=1.59

The Group has no dilutive potential common shares in 2013 and 2012.

- 62 -

25. Related Party Transaction

Transactions between related parties are based on terms similar to those offered to nonrelated

parties. Parties are considered to be related if one party has the ability, directly or indirectly, to

control the other party or exercise significant influence over the other party in making financial

and operating decisions or the parties are subject to common control or common significant

influence. Related parties may be individuals or corporate entities.

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.

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.

26. 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 interest-bearing

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.

- 63 -

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.

- 64 -

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.

- 65 -

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.

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 P=2.1 million depending

on the Group’s assessment of sales ticket offices and agents’ credit standing and volume of

transactions. As of March 31, 2013 and December 31, 2012, outstanding cash bonds (included

under ‘Accounts payable and other accrued liabilities’ account in the consolidated statement of

financial position) amounted to P=185.7 million and P=177.1 million, respectively (Note 15). There

are no collaterals for impaired receivables.

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

- 66 -

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 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.

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.

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 does not have any foreign currency hedging arrangements.

The exchange rates used to restate the Group’s foreign currency-denominated assets and liabilities

as of March 31, 2013 and December 31, 2012 follow:

March 31, 2013 December 31, 2012

US dollar P=40.80 to US$1.00 P=41.05 to US$1.00

Singapore dollar P=32.98to SGD1.00 P=33.70 to SGD1.00

Hong Kong dollar P=5.27 to HKD1.00 P=5.31 to HKD1.00

- 67 -

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 three months

ended March 31, 2013 and for the year ended December 31, 2012 (in thousands).

March 31, 2013 (Unaudited) December 31, 2012 (Audited)

Changes in foreign exchange value P=5 (P=5) P=5 (P=5)

Change in pre-tax income (P=3,136,409) P=3,136,409 (P=2,686,052) P=2,686,052

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

P=323.7 million and P=1,258.9 million as of March 31, 2013 and December 31, 2012, 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).

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 three months ended March 31, 2013 and for the year

ended December 31, 2012.

March 31, 2013 (Unaudited) December 31, 2012 (Audited)

Changes in interest rates 1.50% (1.50%) 1.50% (1.50%)

Changes in pre-tax income (P=27,751,686) P=27,751,686 (P=91,088,144) P=91,088,144

Other than the potential impact on the Group’s pre-tax income, there is no other effect on equity.

27. 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.

- 68 -

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 a discount rate of 6.93% in 2013 and 2012.

Derivative instruments

The fair values of fuel derivatives are based on quotes obtained from an independent counterparty.

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 3.67% to 4.44% as of March 31, 2013 and December 31, 2012.

28. 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 the Group’s Airbus A320

aircraft:

Date of Lease

Agreement Original Lessors New Lessors No. of Units Lease Term

December 23, 2004 CIT Aerospace International

(CITAI)

Wilmington Trust SP

Services (Dublin)

Limited*

2 May 2005 - May 2012

June 2005 - June 2012

April 23, 2007 Celestial Aviation Trading 17

Limited (CAT 17)

Inishcrean Leasing

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 19

Limited (CAT 19)

GY Aviation Lease

0905 Co. Limited***

2 January 2009 - January 2017

March 14, 2008 Celestial Aviation Trading 23

Limited (CAT 23)

– 2 October 2011 - October 2019

July 13, 2011 RBS Aerospace Limited – 2 March 2012 - February 2018

* Effective November 21, 2008 for the first aircraft and December 9, 2008 for the second aircraft.

** Effective June 24, 2009

*** Effective March 25, 2010

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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 to 2011 from 2012.

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.

On July 13, 2011, the Group entered into an operating lease agreement with RBS Aerospace Ltd.

for the lease of two Airbus A320 aircraft, which were delivered in March 2012. These aircrafts

replaced the two aircrafts under Wilmington Trust SP Services (Dublin) Ltd. which contract

expired on May 2012 and June 2012.

Lease expenses relating to aircraft leases (included in ‘Aircraft and engine lease’ account in

the consolidated statements of comprehensive income) amounted to P=459.3 million and

P=508.0 million for the three months ended March 31, 2013 and 2012, respectively.

A330 aircraft

On December 6, 2011, the Group entered into an aircraft operating lease Memorandum of

Understanding (MOU) with CIT Aerospace International for the lease of four Airbus A330-300

aircrafts, which are scheduled to be delivered from June 2013 to 2014. These aircrafts shall be

used for the long-haul network expansion programs of the Group.

Future minimum lease payments under the above-indicated operating aircraft leases follow:

March 31, 2013 March 31, 2012

In USD In Php In USD In Php

Within one year $61,294,132 P=2,500,800,601 $44,678,252 P=1,917,590,592

After one year but not more than

five years 253,880,436 10,358,321,800 260,086,842 11,162,927,257

Over five years 315,945,478 12,890,575,497 369,966,901 15,878,979,397

$631,120,046 P=25,749,697,898 $674,731,995 P=28,959,497,246

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:

March 31,

2013

March 31,

2012

Within one year P=109,992,268 P=105,711,690

After one year but not more than five years 491,499,177 472,173,094

Over five years 234,227,379 363,545,730

P=835,718,824 P=941,430,514

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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=69.3 million and P=66.9 million for the three months ended March 31, 2013 and

2012, respectively.

Service Maintenance Commitments

On June 21, 2012, the Company has entered into an agreement with Messier-Bugatti-Dowty

(Safran group) to purchase wheels and brakes for its fleet of Airbus A319 and A320 aircraft. The

contract covers the current fleet, as well as future aircraft to be acquired.

On June 22, 2012, the Group has entered into service contract with Rolls-Royce Total Care

Services Limited (Rolls-Royce) for service support for the engines of the A330 aircraft. Rolls-

Royce will provide long-term TotalCare service support for the Trent 700 engines on up to eight

A330 aircraft.

On July 12, 2012, the Company has entered into a maintenance service contract with SIA

Engineering Co. Ltd. for the maintenance, repair and overhaul services of its A319 and A320

aircraft.

Aircraft and Spare Engine Purchase Commitments

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.

Four of the five additional A320 aircraft were delivered between September 2011 and

November 2012.

On May 2011, the Group turned into firm orders its existing options for the seven Airbus A320

aircraft which are scheduled to be delivered in 2015 to 2016.

As of December 31, 2011, the Group has existing commitments to purchase 25 new Airbus

A320 aircraft, four of which were delivered on January 30, August 9, October 16 and

November 29, 2012, respectively. As of December 31, 2012, the Group has existing commitments

to purchase 21 new Airbus A320 aircraft, which are scheduled to be delivered between 2013 and

2016, two of which were delivered on January 18, 2013 and March 7, 2013.

On August 2011, the Group entered in a new commitment to purchase firm orders of thirty new

A321 NEO Aircraft and ten addition option orders. These aircraft are scheduled to be delivered

from 2017 to 2021. These aircraft shall be used for a longer range network expansion programs.

The above-indicated commitments relate to the Group’s re-fleeting and expansion programs.

On June 28, 2012, the Group has entered into an agreement with United Technologies

International Corporation Pratt & Whitney Division to purchase new PurePower® PW1100G-JM

engines for its thirty (30) firm and ten (1) option A321 NEO aircraft to be delivered beginning

2017. The agreement also includes an engine maintenance services program for a period of ten

(10) years from the date of entry into service of each engine.

As of March 31, 2013, the Group has existing commitments to purchase 17 new Airbus A320

aircraft, which are scheduled to be delivered between July 2013 and 2017; and 30 A321 NEO

aircraft for delivery between 2017 to 2021.

- 71 -

Capital Expenditure Commitments

The Group’s capital expenditure commitments relate principally to the acquisition of aircraft fleet,

aggregating to P=56.72 billion and P=50.76 billion as of March 31, 2013 and 2012, respectively.

March 31, 2013 March 31, 2012

In USD In Php In USD In Php

Within one year $254,518,507 P=10,384,355,067 $261,538,453 P=11,225,230,417

After one year but not more than

five years $1,188,518,694 48,491,562,730 $977,785,767 41,966,565,102

$1,443,037,201 P=58,875,917,797 $1,239,324,220 P=53,191,795,519

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 Group has a pending tax pre-assessment, the outcome of which is not presently determinable.

29. Supplemental Disclosures to the Consolidated Statements of Cash Flows

The principal noncash activities of the Group were as follows:

a. On March 31, 2012, the Group recognized a liability based on the schedule of pre-delivery

payments amounting to P=100.4 million with a corresponding debit to ‘Construction-in

progress’ account. The liability was paid on April 2012.

b. On March 31, 2013, the Group recognized a liability based on the schedule of pre-delivery

payments amounting to P=191.7 million with a corresponding debit to ‘Construction-in

progress’ account. The liability was paid on April 2013.

30. Events After the Statement of Financial Position Date

No material subsequent events to the end of the interim period have occurred that would require

recognition disclosure in the consolidated financial statements for the interim period.