CEBU AIR INC. Disclosures...PART I - BUSINESS AND GENERAL INFORMATION Item 1. Business Cebu Air, Inc. (the Parent Company) is an airline that operates under the trade name “Cebu

*SGVFS022041*

C O V E R S H E E T

for

AUDITED FINANCIAL STATEMENTS

SEC Registration Number

1 5 4 6 7 5

C O M P A N Y N A M E

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

PRINCIPAL OFFICE ( No. / Street / Barangay / City / Town / Province )

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

Form Type Department requiring the report Secondary License Type, If Applicable

1 7 - A S E C N / A

C O M P A N Y I N F O R M A T I O N

Company’s Email Address Company’s Telephone Number Mobile Number

N/A (632) 802-7060 N/A

No. of Stockholders Annual Meeting (Month / Day) Fiscal Year (Month / Day)

95 5/19 12/31

CONTACT PERSON INFORMATION

The designated contact person MUST be an Officer of the Corporation

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

Robin C. Dui [email protected] (632) 802-7060 N/A

CONTACT PERSON’s ADDRESS

Cebu Pacific Building, Domestic Road, Barangay 191, Zone 20, Pasay City 1301, Philippines

NOTE 1 : In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated. 2 : All Boxes must be properly and completely filled-up. Failure to do so shall cause the delay in updating the corporation’s records with the Commission and/or non-receipt of Notice of Deficiencies. Further, non-receipt of Notice of Deficiencies shall not excuse the corporation from liability for its deficiencies.

SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-A

ANNUAL REPORT PURSUANT TO SECTION 17

OF THE SECURITIES REGULATION CODE AND SECTION 141

OF THE CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended December 31, 2016

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, Doña Juanita Marquez Lim Building, Osmeña Blvd., Cebu City 6000

7. Address of issuer's principal office Postal Code

(632) 802-7060

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 [ ]

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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 [ ]

13. State the aggregate market value of the voting stock held by non-affiliates of the registrant. The

aggregate market value shall be computed by reference to the price at which the stock was sold, or

the average bid and asked prices of such stock, as of a specified date within 60 days prior to the

date of filing. If a determination as to whether a particular person or entity is an affiliate cannot be

made without involving unreasonable effort and expense, the aggregate market value of the

common stock held by non-affiliates may be calculated on the basis of assumptions reasonable

under the circumstances, provided the assumptions are set forth in this Form.

The aggregate market value of stocks held by non-affiliates is P18,577,509,347.

TABLE OF CONTENTS

Page No.

PART I – BUSINESS AND GENERAL INFORMATION

Item 1 Business...................................................................................................... 1

Item 2 Properties…………………………………………………………………. 15

Item 3 Legal Proceedings………………………………………………………… 16

Item 4 Submission of Matters to a Vote of Security Holders……………………. 16

PART II – OPERATIONAL AND FINANCIAL INFORMATION

Item 5 Market for Registrant’s Common Equity and

Related Stockholder Matters………………………………………………. 16

Item 6 Management’s Discussion and Analysis or

Plan of Operation…………………………………………………………. 18

Item 7 Financial Statements……………………………………………………… 35

Item 8 Changes in and Disagreements with Accountants on

Accounting and Financial Disclosure…………………………………….. 36

PART III – CONTROL AND COMPENSATION INFORMATION

Item 9 Board of Directors and Executive Officers of the Registrant…………….. 36

Item 10 Executive Compensation…………………………………………………. 43

Item 11 Security Ownership of Certain Beneficial Owners and

Management……………………………………………………………… 45

Item 12 Certain Relationships and Related Transactions…………………………. 47

PART IV – CORPORATE GOVERNANCE

Item 13 Corporate Governance……………………….…………………………… 47

PART V – EXHIBITS AND SCHEDULES

Item 14 Exhibits and Reports on SEC Form 17-C………………………………… 48

SIGNATURES................................................................................................................. 49

INDEX TO FINANCIAL STATEMENTS AND

SUPPLEMENTARY SCHEDULES………………………………………………….. 51

PART I - BUSINESS AND GENERAL INFORMATION

Item 1. Business

Cebu Air, Inc. (the Parent 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 Parent Company was incorporated on 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 Parent 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 Parent Company’s common stock was listed with the Philippine Stock Exchange (PSE) on

October 26, 2010, the Group’s initial public offering (IPO).

The Parent Company has twelve special purpose entities (SPE) that it controls, namely: Cebu

Aircraft Leasing Limited, IBON Leasing Limited, Boracay Leasing Limited, Surigao Leasing

Limited, Sharp Aircraft Leasing Limited, Vector Aircraft Leasing Limited, Panatag One Aircraft

Leasing Limited, Panatag Two Aircraft Leasing Limited, Panatag Three Aircraft Leasing Limited,

Summit A Aircraft Leasing Limited, Summit B Aircraft Leasing Limited and Summit C Aircraft

Leasing Limited. On March 20, 2014, the Parent Company acquired 100% ownership of Tiger

Airways Philippines (TAP), including 40% stake in Roar Aviation II Pte. Ltd. (Roar II), a wholly

owned subsidiary of Tiger Airways Holdings Limited (TAH). On April 27, 2015, with the

approval of the Securities and Exchange Commission, TAP was rebranded and now operates as

CEBGO, Inc. The Parent Company, its twelve SPEs and CEBGO, Inc. (collectively known as

“the Group”) are consolidated for financial reporting purposes.

As of December 31, 2016, the Group operates an extensive route network serving 59 domestic

routes and 43 international routes with a total of 2,820 scheduled weekly flights. It operates from

seven hubs, including the Ninoy Aquino International Airport (NAIA) Terminal 3 and Terminal 4

both 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, 2016, the Group operates a fleet of 57 aircraft which comprises of four (4)

Airbus A319, thirty six (36) Airbus A320, eight (8) ATR 72-500, two (2) ATR 72-600 and seven

(7) Airbus A330 aircraft. It operates its Airbus aircraft on both domestic and international routes

and operates the ATR 72-500 and ATR 72-600 aircraft on domestic routes, including destinations

with runway limitations. The average aircraft age of the Group’s fleet is approximately 4.91 years

as of December 31, 2016.

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Aside from passenger service, the Group also provides airport-to-airport cargo services on its

domestic and international routes. In addition, it 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.

The percentage contributions to the Group’s revenues of its principal business activities are as

follows:

For the Years Ended December 31

2016 2015 2014

Passenger Services 75.3% 75.5% 77.3%

Cargo Services 5.8% 6.2% 6.1%

Ancillary Services 18.9% 18.3% 16.6%

100.0% 100.0% 100.0%

On May 16, 2016, the Group and seven other market champions in Asia Pacific, announced the

formation of the world’s first, pan-regional low cost carrier alliance, the Value Alliance. The

Group, together with Jeju Air (Korea), Nok Air (Thailand), NokScoot (Thailand), Scoot

(Singapore), Tigerair Singapore, Tigerair Australia and Vanilla Air (Japan) will deliver greater

value, connectivity and choice for travel throughout Southeast Asia, North Asia and Australia, as

the airlines bring their extensive networks together. The Value Alliance airlines collectively fly to

more than 160 destinations from 17 hubs in the region.

On February 23, 2015 and May 12, 2016, the Group signed a forward sale agreement with a

subsidiary of Allegiant Travel Company (collectively known as “Allegiant”), covering the

Group’s sale of ten (10) Airbus A319 aircraft. The delivery of the aircraft to Allegiant is

scheduled to start on various dates in 2015 until 2018.

Aside from this, there are no material reclassifications, merger, consolidation, or purchase or sale

of a significant amount of assets not in the ordinary course of business that was made in the past

three years. The Group has not been subjected to any bankruptcy, receivership or similar

proceeding in the said period.

Distribution Methods of Products or Services

The Group 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 Parent 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 Parent Company’s flight schedules and fare

options. CEBGO, Inc.’s flights can be booked through the Cebu Pacific website and its other

booking channels starting March 2014.

As part of the strategic alliance between the Parent Company and TAH, the two carriers entered

into an interline agreement with the first interline flights made available for sale in TAH’s website

starting July 2014. Interline services were made available in Cebu Pacific’s website in September

2014. With this, guests of both airlines now have the ability to cross-book flights on a single

itinerary and enjoy seamless connections with an easy one-stop ticketing for connecting flights

http://www.cebupacificair.com/

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and baggage check-in. In December 2014, the Group also launched its official mobile application

which allows guests to book flights on-the-go through their mobile devices.

The Group’s participation in the Value Alliance with other low-cost carriers in the region will

increase its distribution reach by enabling its customers to view, select and book the best-available

airfares on flights from any of the airlines in a single transaction, directly from each partner’s

website. This is made possible through the groundbreaking technology developed by Air Black

Box (ABB). ABB allows guests to enjoy the full suite of ancillary choices they have come to

appreciate from low cost carriers across all partner airline sectors in a single itinerary.

Booking Offices and Call Centers

As of December 31, 2016, the Group has a network of nine booking offices located throughout the

Philippines and two regional booking offices, one in Hong Kong and another in Seoul, South

Korea. It directly operates these booking offices which also handle customer service issues, such

as customer requests for change of itinerary. In addition, the Group operates two in-house call

centers, one in Manila and the other in Cebu. It also uses a third-party call center 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, 2016, the Group 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, 2016, the Group 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 Group also has a network of foreign general sales agents, wholesalers, and

preferred sales agents who market, sell and distribute the Group’s air services in other countries.

Publicly Announced New Product or Service

The Group 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 Group plans to expand its fleet over the course of the next three years by additional 35 aircraft

(before any returns and sale of aircraft) by the end of 2019. The additional aircraft will support

the Group’s plans to increase frequency on current routes and to add new city pairs and

destinations. The Group further boosts its domestic network with the introduction of new routes

in the Eastern and Western Visayas namely Cebu to Ormoc, Roxas and Calbayog in November

2016 and through increasing frequencies on existing routes such as Manila to Zamboanga, Roxas,

Busuanga, Butuan and Cauayan, Cebu to Kalibo, Camiguin and Ozamiz. On December 12, 2016,

the Group announced to further build its presence in Mindoro, Marinduque, Romblon, Palawan

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(MIMAROPA) and Bicol regions by launching daily flights between Manila and Masbate and four

times weekly flights between Manila and Tablas using the newly-acquired ATR 72-600 starting

February 15, 2017. Cargo services will also be made available in these areas, contributing to

growth of more than 2,000 accounts currently held by the Group. New international routes were

also launched like direct flights between Kalibo and Incheon in October 2016 and Manila to

Guam, the airline’s first US destination, last March 2016. Aside from adding frequencies on some

international routes such as Manila to Hong kong and Doha, the Group also upgraded selected

flights between Manila and Taipei, Narita and Hong Kong from Airbus A320 to the larger A330

aircraft to accommodate additional passenger traffic. On November 7, 2016, the Group opened its

regional office in Seoul, Korea as part of its regional promotion and expansion. Ticket sales,

reservations, cargo services and customer support can now be availed through the Korea Organic

Office.

Further, the Group has entered into a purchase agreement with Airbus S.A.S covering the purchase

of 2 A330-300 aircraft. The first one was delivered last December 2016 while the second is due to

arrive in 2017. The Group also has a firm order for 16 ATR 72-600 with options to acquire an

additional ten ATR 72-600. The new ATR 72-600 will be equipped with the high density

Armonia cabin, the widest cabin in the turboprop market. It will be fitted with 78 slim-line seats

and wider overhead bins with 30% more stowage space for greater comfort for passengers. Two

out of the 16 ATR 72-600 aircraft were received in 2016 while the rest are scheduled for delivery

in 2017 to 2020. The Group also has an existing order for 30 Airbus A321 NEO (New Engine

Option) aircraft with options for a further ten Airbus A321 NEO. Airbus A321 NEO will be the

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

Group to serve cities in Australia, India and Northern Japan, places the A320 cannot reach. This

order for A321 NEO aircraft will be delivered between 2017 and 2021.

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 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 Group 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 Group 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 Group’s competitors in the Philippines are Philippine Airlines (“PAL”), a full-service

Philippine flag carrier; PAL Express (formerly Airphil Express) a low-cost domestic operator and

which code shares with PAL on certain domestic routes and leases certain aircraft from PAL; and

Philippines Air Asia (a merger between former Air Asia Philippines and Zest Air). Most of the

Group’s domestic and international destinations are also serviced by these airlines. According to

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latest CAB data as of the second quarter of 2016, the Group is the leading domestic airline in the

Philippines by passengers carried, with a market share of 58.5%.

The Group 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 Group currently competes with the following LCC’s

and full-service airlines in its international operations: AirAsia, Jetstar Airways, PAL, Cathay

Pacific, Singapore Airlines, Thai Airways, among others.

Raw Materials

Fuel is a major cost component for airlines. The Group’s fuel requirements are classified by

location and sourced from various suppliers.

The Group’s fuel suppliers at its international stations include Shell-Singapore, Shell-Hong Kong,

Shell-Dubai, Shell-Narita, SK Corp-Korea, Chevron-Sydney, Kuwait Aviation and World Fuel-

Riyadh among others. It also purchases fuel from local suppliers like Petron, Chevron Manila and

Shell Manila. The Group purchases fuel stocks on a per parcel basis, in such quantities as are

sufficient to meet its monthly operational requirements. Most of the Group’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 Group’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 Group.

Transactions with and/or Dependence on Related Parties

The Group’s significant transactions with related parties are described in detail in Note 27 of the

Notes to consolidated financial statements.

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

Trademarks

Trademark registrations with the Intellectual Property Office of the Philippines (IPOPhil) prior to

the effective date of Republic Act No. 8293, or the current Intellectual Property Code of the

Philippines, are valid for 20 years from the date of issue of the certificate of registration.

Meanwhile, trademark registrations covered by Republic Act No. 8293 are valid for ten years

from the date of the certificate of registration. Regardless of whether the trademark registration is

for 20 years or ten years, the same may be renewed for subsequent ten-year terms.

The Group holds the following valid and subsisting trademark registrations:

CEBU PACIFIC, the Cebu Pacific feather-like device, CEBU PACIFIC AIR, CEBU

PACIFIC AIR.COM;

The CEB Mascot;

Various trademarks for the Parent Company’s branding campaigns such as WHY

EVERYONE FLIES, WHY EVERYJUAN FLIES, and the logos used for such purposes;

CEBGO and the Cebgo logo;

A trademark for the strategic alliance entered into by the Parent Company and TAH; and

GETGO and the GetGo logo for its lifestyle rewards program

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On June 1, 2015, the Parent Company rolled out its new logo which features shades of the

Philippines’ land, sea, sky and sun. This new branding also symbolizes the airline's growth and

evolution from a low-cost pioneer to its larger operations today. The new logo and new branding

have been registered as trademarks of the Group.

Meanwhile, the Group has 26 trademarks registered with the Intellectual Property Office of China

and three (3) trademarks with the Intellectual Property Office of Singapore.

The Parent Company has also incorporated the business names “Cebu Pacific” and “Cebu Pacific

Air” with its Articles of Incorporation, as required by Memorandum Circular No. 21-2013 issued

by the Securities and Exchange Commission (SEC). Registering a business name with the SEC

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

name as one that has been registered.

Licenses / Permits

The Group operates its business in a highly regulated environment. The Group’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 Group 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 Parent Company was granted a franchise to

operate air transportation services, both domestic and international. In accordance with the Parent

Company’s franchise, this extends up to year 2031:

a) The Parent Company is subject to franchise tax of five percent of the gross revenue derived

from air transportation operations. For revenue earned from activities other than air

transportation, the Parent Company is subject to 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 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.

In December 2008, pursuant to Republic Act No. 9517, CEBGO, Inc. (formerly TAP), the Parent

Company’s wholly owned subsidiary, was granted a franchise to establish, operate and maintain

domestic and international air transport services with Clark Field, Pampanga as its base. This

franchise shall be for a term of twenty five (25) years.

Kindly refer to Note 1 of the Notes to consolidated financial statements.

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Government Approval of Principal Products or Services

The Group operates its business in a highly regulated environment. The Group’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 Group 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 Group complies with and adheres to existing government regulations.

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Aviation Safety Ranking and Regulations

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 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, record-keeping 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 was 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.

In February 2013, 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.

On April 10, 2014, the ASC of the European Union lifted its ban on Cebu Air, Inc. after its

evaluation of the airline’s capacity and commitment to comply with relevant aviation safety

regulations. On the same date, the US FAA also announced that the Philippines has complied

with international safety standards set by the ICAO and has been granted a Category 1 rating. The

upgrade to Category 1 status is based on a March 2014 FAA review of the CAAP. With this,

Philippine air carriers can now add flights and services to the U.S.

In September and December 2014, the Group received CAAP’s approval for extended range

operations in the form of a certification for Extended Diversion Time Operations (EDTO) of up to

90 and 120 minutes, respectively. EDTO refers to a set of rules introduced by the ICAO for

airlines operating twin-engine aircraft on routes beyond 60 minutes flying time from the nearest

airport. This certification allows the Group to serve new long haul markets and operate more

direct routes between airports resulting to more fuel savings and reduced flight times.

Although the Group does not currently operate flights to the U.S. and Europe, these developments

open the opportunity for the Group to establish new routes to other countries in these continents.

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.

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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.

ASEAN Open Skies Agreement

In February 2016, the Philippine government ratified the ASEAN Open Skies agreement which

allows designated carriers of ASEAN countries to operate unlimited flights between capitals,

leading to better connectivity and more competitive fares and services. Subject to regulatory

approvals, this liberalized and equitable air services agreement further allows carriers to upgrade

its ASEAN flights to wide-bodied aircraft and increase capacity without the need for air talks thus

allowing airlines to focus on expanding its operations, stimulating passenger traffic, and

improving customer experience rather than spending valuable resources on negotiating for

additional air rights.

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 December 11, 2012 and came into

effect on December 21, 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.

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

- 10 -

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 Group can benefit from the government’s utmost

support for tourism.

Research and Development

The Group 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 Group are subject to various laws enacted for the protection of the

environment. The Group 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 Group has obtained ECCs for the fuel depots it operates and maintains for the storage and

distribution of aviation fuel for its aircraft.

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

Environment Management Bureau (EMB). The Group’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 Group’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 Group also contracted the services of

government-licensed and accredited third parties to transport, handle and dispose its waste

materials.

- 11 -

Compliance with the foregoing laws does not have a material effect to the Group’s capital

expenditures, earnings and competitive position.

On an annual basis, the Group spends approximately P55,000.00 in connection with its

compliance with applicable environmental laws.

Employees

As of December 31, 2016, the Group has 4,123 permanent full time employees, categorized as

follows:

Division: Employees

Operations 3,008

Commercial 651

Support Departments(1) 464

4,123

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 Group anticipates having approximately 4,660 employees by the end of 2017. The increase in

number of employees is related to the Group’s continuous expansion.

The Group’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 Group 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 Group’s

control. Fuel prices have been subject to high volatility, fluctuating substantially over the

past several years. 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 Group’s operations and

profitability.

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

prices including hedging.

(2) Competition

The Group 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 Group’s business. The Group also faces

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

remain competitive.

(3) 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 Group’s

business. The Group could also experience difficulty accessing the financial markets, which

could make it more difficult or expensive to obtain funding in the future.

(4) Availability of Debt Financing

The Group’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 Group’s ability to grow its business and its future profitability.

(5) Foreign Exchange and Interest Rate Fluctuations

The Group’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 Group’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

Group’s result of operations.

The Group may enter into derivative contracts in the future to hedge foreign exchange

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

(6) Airport and Air Traffic Control Infrastructure Constraints

The Group 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 Group’s operational efficiency.

(7) Reliance on Third Party Facilities and Service Providers

The Group’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

- 13 -

material adverse effect on our business, prospects, financial condition and results of

operations. Furthermore, the Group’s reliance on third parties to provide essential services on

its behalf gives the Group less control over the efficiency, timeliness and quality of services.

(8) Safety and Security

The Group 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 Group 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.

(9) 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 Group enters into long term contracts to manage maintenance and overhaul expenses.

(10) Reliance on Automated Systems and the Internet

The Group 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.

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

The Group’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.

(12) Retaining and Attracting Qualified Personnel

The Group’s business model requires it to have highly skilled, dedicated and efficient pilots,

engineers and other personnel. Its growth plans will require the Group 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 Group competes against full-service airlines which offer wage and benefit

packages that exceed those offered by the Group. The inability of the Group to hire, train and

- 14 -

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 Group may find it increasingly

challenging to maintain its corporate culture as it replaces or hires additional personnel.

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

(13) 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 Group’s aircraft lenders and lessors or applicable government regulations. Any inability

to obtain insurance, on commercially acceptable terms or at all, for the Group’s general

operations or specific assets would have a material adverse effect on its business, prospects,

financial condition and results of operations.

(14) Regulations

The Group 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.

(15) Catastrophes and Other Factors Beyond the Group’s Control

Like other airlines, the Group 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 Group delays or cancels flights for any of

these reasons, revenues and profits would be reduced and the Group’s reputation would suffer

which could result in a loss of customers.

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

At present, the Group 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 Group’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.

(17) Restrictions under the Philippine Constitution and other Laws

The Group 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 Group’s franchise generally and its rights to fly on certain international

routes.

- 15 -

(18) Relationship with Third Party Sales Outlets

While part of the Group’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 Group will be able to maintain favorable relationships with them nor be able to suitably

replace them. The Group’s revenues could be adversely impacted if third parties who sell its

air services elect to prioritize other airlines.

(19) Outbreaks

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

the Group’s business, prospects, financial condition and results of operations.

(20) Domestic Concentration

Since the Group’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.

(21) Investment Risk

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

prices. Any negative movement in the market price of the Group’s investments could affect

the Group’s results of operations.

(22) Information technology (IT) Risk

The Group’s business processes are widely supported by IT. The use of IT involves risks for

the stability of business processes and for the availability, confidentiality and integrity of data

and information. Such risks may be in the form of cyberattacks, disruptions to the

availability of applications, security breaches and other similar incidents. The Group

implements information security measures and regularly reviews its data protection systems

in order to minimize these risks.

The foregoing risks are not all inclusive. Other risks that may affect the Group’s business

and operations may not be included in the above disclosure.

Item 2. Properties

As of December 31, 2016, the Group does not own any land. However, it owns an office building

which serves as its corporate headquarters and training center located at the Domestic Road,

Barangay 191, Zone 20, Pasay City. The land on which said office building stands is leased from

the Manila International Airport Authority (MIAA). The Group also leases its hangar, aircraft

parking and other operational space from MIAA. Kindly refer to Notes 13, 18 and 30 of the Notes

to consolidated financial statements for the detailed discussions on properties, leases, purchases

and capital expenditure commitments.

- 16 -

Item 3. Legal Proceedings

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

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 Group’s financial position or result of

operations.

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

There were no matters submitted to a vote of security holders during the fourth quarter of the year

covered by this report.

PART II - OPERATIONAL AND FINANCIAL INFORMATION

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

Market Information

The principal market for the Group’s common equity is the Philippine Stock Exchange (PSE).

Sales prices of the common stock follow:

High Low

Year 2016

October to December 2016 P113.50 P89.70

July to September 2016 125.50 97.70

April to June 2016 102.10 85.50

January to March 2016 92.50 74.00

High Low

Year 2015

October to December 2015 P91.00 P79.35

July to September 2015 99.50 81.50

April to June 2015 94.45 79.80

January to March 2015 99.10 79.10

As of March 20, 2017, the latest trading date prior to the completion of this annual report, sales

price of the common stock is at P93.00.

Holders

The number of shareholders of record as of December 31, 2016 was 95. Common shares

outstanding as of December 31, 2016 were 605,953,330.

- 17 -

List of Top 20 Stockholders of Record

As of December 31, 2016

Number of % to Total

Name of Stockholders Shares Held Outstanding

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

2. PCD Nominee Corporation (Filipino) 101,405,818 16.74%

3. PCD Nominee Corporation (Non-Filipino) 96,795,629 15.97%

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

5. Pablo M. Pagtalunan &/or Francisca P. Pagtalunan 50,000 0.08%

6. Elizabeth Yu Gokongwei 40,000 0.07%

7. Amon Trading Corporation 38,200 0.06%

8. Clifford James L. Uy 36,000 0.06%

8. Stephen Earl L. Uy 36,000 0.06%

9. Raul Veloso Del Mar 16,000 0.03%

10. Elizabeth Reyes 13,900 0.02%

11. Acris Corporation 12,500 0.02%

12. Luis Gantioqui Romero 10,300 0.02%

13. Roseller A. Mendoza 6,500 0.01%

14. Eric Macario Bernabe 5,000 0.01%

14. Estevez Villaruz (Esvill), Inc. 5,000 0.01%

14. John T. Lao 5,000 0.01%

15. Brigida T. Guingona 4,800 0.01%

16. Francisco Paulino V. Cayco 4,000 0.01%

16. Sally Chua Co 4,000 0.01%

16. Vicente Lim Co 4,000 0.01%

17. Frederic Francois Favre-Marinet 3,950 0.01%

18. Eric Macario Bernabe 3,000 0.00%

19. Leodigario S.P. Aquino &/or Danah R. Antonio 2,800 0.00%

20. Ofelia R. Blanco 2,000 0.00%

20. Antonio F. Lagarejos 2,000 0.00%

20. Ramon T. Locsin 2,000 0.00%

20. Marita Ann Ong 2,000 0.00%

20. Anthony V. Rosete 2,000 0.00%

20. Mario F. Sales 2,000 0.00%

Other stockholders 26,902 0.00%

Total Outstanding 605,953,330 100.00%

Dividends

On May 20, 2016, the Group’s Board of Directors (BOD) approved the declaration of a regular

cash dividend in the amount of P=1.00 per share and a special cash dividend in the amount of P1.00

per share from the unrestricted retained earnings of the Group to all stockholders of record as of

June 9, 2016 and payable on July 5, 2016.

On June 24, 2015, the Group’s BOD approved the declaration of a regular cash dividend in the

amount of P=1.00 per share and a special cash dividend in the amount of P=0.50 per share from the

unrestricted retained earnings of the Group to all stockholders of record as of July 16, 2015 and

payable on August 11, 2015.

- 18 -

On June 26, 2014, the Group’s BOD approved the declaration of a cash dividend in the amount of

P=1.00 per share from the unrestricted retained earnings of the Group to all stockholders of record

as of July 16, 2014 and payable on August 11, 2014.

Recent Sales of Unregistered Securities

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

Item 6. 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 (PFRSs).

Results of Operations

Year Ended December 31, 2016 Compared with Year Ended December 31, 2015

Revenues

The Group generated revenues of P61.899 billion for the year ended December 31, 2016, 9.6%

higher than the P56.502 billion revenues earned last year. Growth in revenues is accounted for as

follows:

Passenger Revenues

Passenger revenues grew by P3.911 billion or 9.2% to P46.593 billion for the year ended

December 31, 2016 from P42.681billion registered in 2015. This increase was primarily due to

the 4.1% growth in passenger volume to 19.1 million from 18.4 million for the year ended

December 31, 2015. Such steady growth resulted from the increase in the Group’s fleet from 55

aircraft as of December 31, 2015 to 57 aircraft as of December 31, 2016, and the overall

improvement in seat load factor from 82.6% to 86.0%. The increase in average fares by 4.9% to

P=2,436 for the year ended December 31, 2016 from P=2,323 for the same period last year also

contributed to the increase in revenues.

Cargo Revenues

Cargo revenues grew by P102.616 million or 3.0% to P3.564 billion for the year ended

December 31, 2016 from P3.461 billion for the year ended December 31, 2015 following the

increase in the cargo prices in 2016.

Ancillary Revenues

Ancillary revenues went up by P1.384 billion or 13.4% to P11.743 billion for the year ended

December 31, 2016 from P10.359 billion posted last year consequent to the 4.1% increase in

passenger traffic and 8.9% increase in ancillary revenue per passenger. Improved online

bookings, together with a wider range of ancillary revenue products and services, also contributed

to the increase.

Expenses

The Group incurred operating expenses of P49.648 billion for the year ended December 31, 2016,

higher by 6.1% than the P46.801 billion operating expenses recorded for the year ended

December 31, 2015. The increase is attributable to higher aircraft maintenance and advertising

and promotions costs, coupled with the weakening of the Philippine peso against the U.S. dollar as

referenced by the depreciation of the Philippine peso to an average of P47.50 per U.S. dollar for

- 19 -

the year ended December 31, 2016 from an average of P45.51 per U.S. dollar last year based on

the Philippine Dealing and Exchange Corporation (PDEx) weighted average rates. The increase

was however partially offset by the drop in fuel costs compared to the same period last year due to

the decline in global jet fuel prices.

Flying Operations

Flying operations expenses decreased by P1.222 billion or 5.8% to P19.694 billion for the year

ended December 31, 2016 from P20.916 billion incurred in the same period last year. This is

primarily attributable to the 10.4% decline in aviation fuel expenses to P15.821 billion for the year

ended December 31, 2016 from P17.659 billion for the same period last year consequent to the

significant drop in jet fuel prices as referenced by the reduction in the average published fuel

MOPS price of U.S. $52.83 per barrel in the twelve months ended December 31, 2016 from

U.S. $64.79 per barrel in the same period last year. The drop in fuel prices, however, was partially

offset by the weakening of the Philippine peso against the U.S. dollar as referenced by the

depreciation of the Philippine peso to an average of P47.50 per U.S. dollar for the year ended

December 31, 2016 from an average of P45.51 per U.S. dollar last year based on PDEx weighted

average rates.

Aircraft and Traffic Servicing

Aircraft and traffic servicing expenses increased by P730.885 million or 12.5% to P6.578 billion

for the year ended December 31, 2016 from P5.847 billion registered in 2015. This was driven by

the increase in the number of international flights by 6.1% in 2016 for which airport and ground

handling charges were generally higher compared to domestic flights. International flights

increased due to added frequencies on existing routes and the launch of new services to Fukuoka,

Japan in December 2015 and Guam, the airline’s first US destination, last March 2016. The

weakening of the Philippine peso against the U.S. dollar as referenced by the depreciation of the

Philippine peso to an average of P47.50 per U.S. dollar for the year ended December 31, 2016

from an average of P45.51 per U.S. dollar last year also contributed to the increase international

airport charges.

Depreciation and Amortization

Depreciation and amortization expenses grew by P887.152 million or 17.4% to P5.999 billion for

the year ended December 31, 2016 from P5.112 billion for the year ended December 31, 2015.

Depreciation and amortization expenses increased consequent to the arrival of three Airbus A320

aircraft and two ATR 72-600 aircraft during the year.

Repairs and Maintenance

Repairs and maintenance expenses went up by P1.290 billion or 24.6% to P6.531 billion for the

year ended December 31, 2016 from P5.240 billion posted last year. This was driven by the

increase in provisions for return cost by P257.139 million to P1.121 billion for the year ended

December 31, 2016 from P863.961 million for the same period last 2015. Additional repairs and

maintenance were also attributable to the increase in the Group’s fleet from 55 to 57 aircraft as

well as direct costs from repairs incurred for older aircraft, in particular, the remaining A319 fleet,

the ATR fleet, and the early deliveries of A320 aircraft. The weakening of the Philippine peso

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

P47.50 per U.S. dollar for the year ended December 31, 2016 from an average of P45.51 per U.S.

dollar in 2015 also contributed to the increase in repairs and maintenance.

Aircraft and Engine Lease

Aircraft and engine lease expenses moved up by P229.125 million or 5.7% to P4.254 billion for

the year ended December 31, 2016 from P4.025 billion charged for the year ended

- 20 -

December 31, 2015. Increase in aircraft lease was due to the effect of the depreciation of the

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

Reservation and Sales

Reservation and sales expenses increased by P586.240 million or 22.3 % to P3.212 billion for the

year ended December 31, 2016 from P2.625 billion registered last year. This was primarily

attributable to the higher commission expenses for international passengers as well as the overall

growth in passenger volume year on year. Additional expenses were also due to higher

advertising and promotional expenses incurred for the Group’s brand refresh campaign and loyalty

program, among others.

General and Administrative

General and administrative expenses grew by P260.895 million or 16.8% to P1.813 billion for the

year ended December 31, 2016 from P1.552 billion incurred in 2015. Growth in general and

administrative expenses was primarily attributable to the increased passenger activity in 2016.

The Group also incurred additional costs for various information technology projects to improve

efficiency which likewise contributed to the increase in general and administrative expenses.

Passenger Service

Passenger service expenses went up by P83.984 million or 5.7% to P1.568 billion for the year

ended December 31, 2016 from P1.484 billion posted for the year ended December 31, 2015.

This was primarily caused by additional cabin crew hired for the three Airbus A320, two ATR

72-600 and one Airbus A330 aircraft acquired in 2016 and the annual increase in cabin crew salary.

Operating Income

As a result of the foregoing, the Group finished with an operating income of P12.251 billion for

the year ended December 31, 2016, a 26.3% improvement compared to the P9.700 billion

operating income earned last year.

Other Income (Expenses)

Interest Income

Interest income increased by P30.665 million or 36.9% to P113.672 million for the year ended

December 31, 2016 from P83.007 million recorded in 2015 due to the increase in the balance of

cash in bank and short-term placements year on year and to higher interest rates in short term

placements.

Hedging Gains (Losses)

The Group incurred a hedging gain of P1.588 billion for the year ended December 31, 2016, a

154.2% improvement from the hedging loss of P2.931billion incurred in the same period last year

due to the improvement of forward prices of fuel for 2016 and 2017, as compared to forward fuel

prices as of the end of 2015.

Foreign Exchange Losses

Net foreign exchange losses of P2.282 billion for the year ended December 31, 2016 resulted from

the weakening of the Philippine peso against the U.S. dollar as referenced by the depreciation of

the Philippine peso to P49.72 per U.S. dollar for the year ended December 31, 2016 from P47.06

per U.S. dollar for the twelve months ended December 31, 2015 based on PDEx closing rates.

The Group’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.

- 21 -

Equity in Net Income of Joint Venture

The Group had equity in net income of joint ventures of P178.309 million for the twelve months

ended December 31, 2016, P142.890 million or 403.4% higher than the P35.418 million equity in

net income of joint venture earned in the same period last year. The increase was attributable to

the net income from current operations earned by the joint ventures in 2016.

Interest Expense

Interest expense increased by P97.071 million or 9.0% to P1.170 billion for the year ended

December 31, 2016 from P1.073 billion registered in 2015. Higher interest expense incurred

during the year was due to the additional loans availed to finance the acquisition of the additional

aircraft delivered in 2016 and by the effect of the weakening of the Philippine peso against the

U.S. dollar during the current period.

Loss on sale of aircraft

In 2016, the Group sold and delivered four Airbus A319 aircraft to a subsidiary of Allegiant

Travel Company (Allegiant) which resulted to a loss of P962.609 million. In 2015, the Group sold

and delivered two Airbus A319 aircraft to Allegiant and incurred a loss of P80.267 million.

Income before Income Tax

As a result of the foregoing, the Group recorded income before income tax of P9.716 billion for

the year ended December 31, 2016, a growth of 175.3% or P6.187 billion higher than the P3.529

billion income before income tax posted for the year ended December 31, 2015.

Benefit from Income Tax

Benefit from income tax for the year ended December 31, 2016 amounted to P37.971 million, of

which, P162.595 million pertains to current income tax recognized as a result of the taxable

income in 2016. This was offset by the benefit from deferred income tax of P200.566 million

resulting from the recognition of deferred tax assets on future deductible amounts during the

period.

Net Income

Net income for the year ended December 31, 2016 amounted to P9.754 billion, an increase of

122.3% from the P4.387 billion net income earned in 2015.


Revenues


higher than the P52.000 billion revenues earned last year. Growth in revenues is accounted for as

follows:

Passenger Revenues


December 31, 2015 from P40.188 billion registered in 2014. This increase was primarily due to


December 31, 2014 driven by the increased number of flights in 2015. Number of flights went up

by 7.6% year on year as the Group added more aircraft to its fleet, particularly, its acquisition of

wide-body Airbus A330 aircraft with a configuration of more than 400 all-economy class seats.

The number of aircraft increased from 52 aircraft as of December 31, 2014 to 55 aircraft as of

December 31, 2015. The decrease in average fares by 2.5% to P2,323 for the year ended

December 31, 2015 from P2,382 for the same period last year partially offset the increase in

revenues.

- 22 -

Cargo Revenues



increase in the volume of cargo transported in 2015.

Ancillary Revenues



passenger traffic and 9.8% increase in ancillary revenue per passenger. Improved online bookings,

together with a wider range of ancillary revenue products and services, also contributed to the

increase.

Expenses


slightly lower by 2.2% than the P47.843 billion operating expenses recorded for the year ended

December 31, 2014. The decrease is attributable to the substantial reduction in fuel costs incurred

for the year ended December 31, 2015 compared to the same period last year due to the sharp

decline in global jet fuel prices. The drop in fuel costs, however, was offset by the increase in

majority of the Group’s operating expenses driven by its expanded long haul operations, growth in

seat capacity from the acquisition of new aircraft and the weakening of the Philippine peso against

the U.S. dollar as referenced by the depreciation of the Philippine peso to an average of P45.51 per

U.S. dollar for the year ended December 31, 2015 from an average of P44.40 per U.S. dollar last

year based on the PDEx weighted average rates.

Flying Operations

Flying operations expenses decreased by P5.236 billion or 20.0% to P20.916 billion for the year

ended December 31, 2015 from P26.152 billion incurred in the same period last year. This is

primarily attributable to the 23.9% decline in aviation fuel expenses to P17.659 billion for the year

ended December 31, 2015 from P23.210 billion for the same period last year consequent to the

significant drop in jet fuel prices as referenced by the reduction in the average published fuel

MOPS price of U.S. $64.79 per barrel in the twelve months ended December 31, 2015 from

U.S. $112.48 per barrel in the same period last year. The drop in fuel prices, however, was

partially offset by the weakening of the Philippine peso against the U.S. dollar as referenced by

the depreciation of the Philippine peso to an average of P45.51 per U.S. dollar for the year ended

December 31, 2015 from an average of P44.40 per U.S. dollar last year based on the PDEx

weighted average rates.


Aircraft and traffic servicing expenses increased by P1.042 billion or 21.7% to P5.847 billion for

the year ended December 31, 2015 from P4.805 billion registered in 2014 as a result of the overall

increase in the number of flights flown in 2015. 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 6.0% year on year with the

launch of new destinations namely Doha, Qatar and Fukuoka, Japan, introduction of new routes

like Cebu to Taipei and Davao to Singapore and increased frequencies of existing routes. The



from an average of P44.40 per U.S. dollar last year also contributed to the increase international

airport charges.

- 23 -




Depreciation and amortization expenses increased consequent to the arrival of four Airbus A320

aircraft during the year.


Repairs and maintenance expenses went up by P808.041 million or 18.2% to P5.240 billion for the

year ended December 31, 2015 from P4.432 billion posted last year. Increase was driven by the

overall increase in the number of flights coupled with the weakening of the Philippine peso against


U.S. dollar for the year ended December 31, 2015 from an average of P44.40 per U.S. dollar in

2014. The acquisition of four Airbus A320 aircraft and the delivery of one Airbus A330 aircraft

in 2015 also contributed to the increase in repairs and maintenance expenses.


Aircraft and engine lease expenses moved up by P521.115 million or 14.9% to P4.025 billion for

the year ended December 31, 2015 from P3.503 billion charged for the year ended

December 31, 2014. Increase in aircraft lease was due to the delivery of one Airbus A330 aircraft

under operating lease in 2015 coupled with the effect of the depreciation of the Philippine peso

against the U.S. dollar during the current period.


Reservation and sales expenses increased by P471.469 million or 21.9% to P2.625 billion for the

year ended December 31, 2015 from P2.154 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.




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

2015.

Passenger Service


ended December 31, 2015 from P1.217 billion posted for the year ended December 31, 2014.

This was primarily caused by additional cabin crew hired for the Airbus A320 and A330 aircraft

delivered in 2015 and the increase in passenger food and supplies from pre-ordered meals being

offered in international flights.

Operating Income

As a result of the foregoing, the Group finished with an operating income of P9.700 billion for the

year ended December 31, 2015, a 133.3% improvement compared to the P4.157 billion operating

income earned last year.


Interest Income

Interest income increased by P3.080 million or 3.9% to P83.007 million for the year ended

December 31, 2015 from P79.927 million recorded in 2014 due to the increase in the balance of

cash in bank and short-term placements year on year and higher interest rates.

- 24 -


The Group incurred a hedging loss of P2.931 billion for the year ended December 31, 2015, an

increase of 26.7 % from hedging loss of P2.314 billion in the same period last year as a result of

lower mark-to-market valuation on fuel hedging positions consequent to the material decline in

fuel prices in 2015.


Net foreign exchange losses of P2.205 billion for the year ended December 31, 2015 resulted from

the weakening of the Philippine peso against the U.S. dollar as referenced by the depreciation of

the Philippine peso to P47.06 per U.S. dollar for the year ended December 31, 2015 from P44.72

per U.S. dollar for the twelve months ended December 31, 2014 based on PDEx closing rates. The

Group’s major exposure to foreign exchange rate fluctuations is in respect to U.S. dollar



The Group had equity in net income of joint ventures of P35.418 million for the twelve months

ended December 31, 2015, P60.908 million or 63.2% lower than the P96.326 million equity in net

income of joint venture earned in the same period last year. The decrease was primarily due to the

net loss from current operations incurred by Philippine Academy for Aviation Training, Inc.

(PAAT) and SIA Engineering (Philippines) Corporation (SIAEP) in 2015.

Interest Expense


December 31, 2015 from P1.013 billion registered in 2014. Higher interest expense incurred

during the year was due to the additional loans availed to finance the acquisition of four Airbus

A320 aircraft in 2015 and by the effect of the weakening of the Philippine peso against the U.S.

dollar during the current period.

Loss on sale of aircraft

In 2015, the Group sold and delivered two Airbus A319 aircraft to Allegiant and incurred a loss of

P80.267 million.


As a result of the foregoing, the Group recorded income before income tax of P3.529 billion for

the year ended December 31, 2015, a growth of 301.6% or P2.650 billion higher than the

P878.636 million income before income tax posted for the year ended December 31, 2014.

Benefit from Income Tax

Benefit from income tax for the year ended December 31, 2015 amounted to P858.431 million, of

which, P125.929 million pertains to current income tax recognized as a result of the taxable

income in 2015. This was offset by the benefit from deferred income tax of P984.360 million

resulting from the recognition of deferred tax assets on future deductible amounts during the

period.

Net Income

Net income for the year ended December 31, 2015 amounted to P4.387 billion, an increase of

414.0% from the P853.498 million net income earned in 2014.

- 25 -


Revenues


higher than the P=41.004 billion revenues earned last year. Growth in revenues is accounted for as

follows:

Passenger Revenues


December 31, 2014 from P31.663 billion registered in 2013. This increase was primarily due to


December 31, 2013 driven by the increased number of flights in 2014. Number of flights went up

by 6.9% year on year as the Group added more aircraft to its fleet, particularly, its acquisition of

wide-body Airbus A330 aircraft with a configuration of more than 400 all-economy class seats.

The number of aircraft increased from 48 aircraft as of December 31, 2013 to 52 aircraft as of

December 31, 2014, which includes 3 brand new Airbus A330 aircraft delivered this year.

Increase in average fares by 8.0% to P2,382 in 2014 from P2,206 in 2013 also contributed to the

improvement of revenues.

Cargo Revenues



increase in the volume of cargo transported in 2014.

Ancillary Revenues



passenger traffic and 9.5% increase in ancillary revenue per passenger. The Group began

unbundling ancillary products and services in 2011 and significant improvements in ancillary

revenues were noted since then. Improved online bookings, together with a wider range of

ancillary revenue products and services, also contributed to the increase.

Expenses


23.9% higher than the P38.600 billion operating expenses recorded for the year ended

December 31, 2013 as a result of its expanded long haul operations and overall growth in seat

capacity from the acquisition of new aircraft. The weakening of the Philippine peso against the

U.S. dollar as referenced by the depreciation of the Philippine peso to an average of P44.40 per


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

contributed to said increase. Operating expenses also went up as a result of the following:

Flying Operations

Flying operations expenses moved up by P4.432 billion or 20.4% to P26.152 billion for the year

ended December 31, 2014 from P21.721 billion charged in 2013. Aviation fuel expenses grew by

18.9% to P23.210 billion from P19.523 billion for the year ended December 31, 2013 consequent

to the higher volume of fuel consumed as a result of the increased number of flights year on year

and increased block hours from the launch of long haul flights to Dubai in October 2013, to

Kuwait and Sydney in September 2014 and to Riyadh and Dammam in October 2014. The



from an average of P42.46 per U.S. dollar last year based on the Philippine Dealing and Exchange

- 26 -

Corporation (PDEx) weighted average rates also contributed to the increase. 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. $112.48 per barrel in the twelve

months ended December 31, 2014 from U.S. $122.97 average per barrel in the same period last

year.


Aircraft and traffic servicing expenses increased by P1.202 billion or 33.4% to P4.805 billion for

the year ended December 31, 2014 from P3.603 billion registered in 2013 as a result of the overall

increase in the number of flights flown in 2014. 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 7.6% year on year which is

attributable to the expansion of long haul operations to Kuwait, Sydney, Riyadh and Dammam in

2014 as well as new short haul flights to Tokyo (Narita) and Nagoya which commenced in March

2014. The effect of the depreciation of the Philippine peso against the U.S. dollar at P44.40 per


year also contributed to the increase international airport charges.




Depreciation and amortization expenses increased consequent to the arrival of five Airbus A320

aircraft during the year.


Repairs and maintenance expenses went up by P606.455 million or 15.9% to P4.432 billion for the

year ended December 31, 2014 from P3.826 billion posted last year. Increase was driven by the

overall increase in the number of flights coupled with the weakening of the Philippine peso against


U.S. dollar for the year ended December 31, 2014 from an average of P42.46 per U.S. dollar in

2013. The acquisition of five Airbus A320 aircraft and the delivery of three Airbus A330 aircraft

in 2014 also contributed to the increase in repairs and maintenance expenses.


Aircraft and engine lease expenses moved up by P1.189 billion or 51.3% to P3.503 billion for the

year ended December 31, 2014 from P2.315 billion charged for the year ended December 31,

2013. Increase in aircraft lease was due to the delivery of three Airbus A330 aircraft under

operating lease in 2014 coupled with the effect of the depreciation of the Philippine peso against

the U.S. dollar during the current period.


Reservation and sales expenses increased by P491.525 million or 29.6% to P2.154 billion for the

year ended December 31, 2014 from P1.662 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.




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

2014.

- 27 -

Passenger Service


ended December 31, 2014 from P906.058 million posted for the year ended December 31, 2013.

This was primarily caused by additional cabin crew hired for the Airbus A320 and A330 aircraft

delivered in 2014 and the increase in passenger food and supplies from pre-ordered meals being

offered in international flights.

Operating Income

As a result of the foregoing, the Group finished with an operating income of P4.157 billion for the

year ended December 31, 2014, a 72.9% improvement compared to the P2.404 billion operating

income earned last year.


Interest Income

Interest income dropped by P139.692 million or 63.6% to P79.927 million for the year ended

December 31, 2014 from P219.619 million recorded in 2013 due to the decrease in the balance of

cash in bank and short-term placements year on year and lower interest rates.


The Group incurred a hedging loss of P2.314 billion for the year ended December 31, 2014

compared to a hedging gain of P290.325 million in the same period last year mainly due to losses

on fuel hedging positions consequent to the decrease in fuel prices in 2014 partially offset by

foreign exchange hedging gains.


Net foreign exchange losses of P127.471 million for the year ended December 31, 2014 resulted

from the weakening of the Philippine peso against the U.S. dollar as referenced by the slight

depreciation of the Philippine peso to P44.72 per U.S. dollar for the twelve months ended

December 31, 2014 from P44.40 per U.S. dollar for the twelve months ended December 31, 2013.

The Group’s major exposure to foreign exchange rate fluctuations is in respect of U.S. dollar



The Group had equity in net income of joint venture of P96.326 million for the year ended

December 31, 2014, P23.034 million or 19.3% lower than the P119.360 million equity in net

income of joint venture earned last year. The decrease was primarily due to the net loss from

current operations incurred by SIAEP in 2014.

Interest Expense


December 31, 2014 from P865.501 million registered in 2013. Higher interest expense incurred

during the year was due to the additional loans availed to finance the acquisition of five Airbus

A320 aircraft in 2014 and by the effect of the weakening of the Philippine peso against the U.S.

dollar during the current period.


As a result of the foregoing, the Group recorded income before income tax of P878.636 million

for the year ended December 31, 2014, a growth of 735.1% or P773.428 million higher than the

P105.208 million income before income tax posted for the year ended December 31, 2013.

- 28 -

Provision for Income Tax

Provision for income tax for the year ended December 31, 2014 amounted to P25.138 million, of

which, P61.320 million pertains to current income tax recognized as a result of the taxable income

in 2014. This was offset by the benefit from deferred income tax of P36.182 million resulting

from the recognition of deferred tax assets on future deductible amounts during the period.

Net Income

Net income for the year ended December 31, 2014 amounted to P853.498 million, an increase of

66.7% from the P511.946 million net income earned in 2013.

Financial Position

December 31, 2016 versus December 31, 2015

As of December 31, 2016, the Group’s consolidated balance sheet remains solid, with net debt to

equity of 0.97 [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 P100.514 billion from P84.829 billion as of December 31, 2015 as the Group added

aircraft to its fleet. Equity grew to P33.505 billion from P24.955 billion in the prior year while

book value per share amounted to P55.29 as of December 31, 2016 from P41.18 as of

December 31, 2015.

The Group’s cash requirements have been mainly sourced through cash flow from operations and

from borrowings. Net cash from operating activities amounted to P19.322 billion. As of

December 31, 2016, net cash used in investing activities amounted to P17.060 billion which

mainly pertains to payments in connection with the purchase of aircraft. Net cash from financing

activities amounted to P3.066 billion. Net cash from financing activities comprised of proceeds

from long term debt net of repayments and the payment of cash dividends to the Group’s

stockholders.

As of December 31, 2016, except as otherwise disclosed in the financial statements and to the best

of the Group’s knowledge and belief, there are no events that will trigger direct or contingent

financial obligation that is material to the Group, including any default or acceleration of an

obligation.

Material Changes in the 2016 Financial Statements

(Increase/Decrease of 5% or more versus 2015)

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, 2016 versus December 31, 2015

118.8% increase in Cash and Cash Equivalents

Due to collections as a result of the expansion of the Group’s operations as evidenced by 9.6%

growth in revenues and receipt of proceeds from long term debt.

22.4% increase in Receivables

Due to increased trade receivables relative to the growth in revenues.

- 29 -

100.0% increase in Financial Assets at fair value through profit or loss (FVPL)

Due to improved mark-to-market valuation of fuel derivative contracts.

29.5% increase in Expendable Parts, Fuel, Materials and Supplies

Due to a higher level of fuel inventory and increased volume of materials and supplies relative to

the larger fleet size during the period.

54.3% decrease in Other Current Assets

Due to return of collateral deposits from counterparties for fuel hedging transactions and

liquidation of advances to suppliers.

13.6% increase in Property and Equipment

Due to the acquisition of three Airbus A320 aircraft, two ATR72-600 aircraft and one A330

aircraft, net of four Airbus A319 aircraft sold during the period.

53.3% increase in Investment in Joint Ventures

Due to the share in higher net income of joint ventures during the period, additional capital

contribution to SIAEP and investment in Air Black Box.

22.5% increase in Deferred Tax Assets-net

Due mainly to the increase in future deductible amounts on unused net operating loss carryover

(NOLCO), excess minimum corporate income tax (MCIT) over regular corporate income tax

(RCIT) and on unrealized foreign exchange losses.

8.5% 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 passenger activity in the twelve months ended December 31, 2016.

1.1% decrease in Due to Related Parties

Due to payments made during the period.

16.8% increase in Unearned Transportation Revenue

Due to the increase in sale of passenger travel services.

17.0% increase in Long-Term Debt (including Current Portion)

Due to additional loans availed to finance the purchase of the three Airbus A320 aircraft, two ATR

72-600 aircraft and one A330 aircraft acquired during the year partially offset by the repayment of

certain outstanding long-term debt in accordance with the repayment schedule.

100.0% decrease in Financial Liabilities at FVPL

Due to improved mark-to-market valuation of fuel derivative contracts resulting to a net derivative

asset position as of December 31, 2016

20.5% increase in Income Tax Payable

Due to higher taxable income in 2016

4.1% increase in Pension liability

Due to the accrual of pension liability during the period.

71.1% increase in Other Noncurrent Liabilities

Due to the provision for asset retirement obligation and recognition of deferred revenues from

unredeemed customer loyalty points.

- 30 -

4.0% decrease in Other Comprehensive Loss

Due to the recognition of actuarial gain on pension liability during the year.

51.3% increase in Retained Earnings

Due to net income during the period net of dividends declared and paid to stockholders.

Fuel prices have significantly decreased during in 2016 and this will have an impact on the

Group’s operating income.

For 2016, there are no significant element of income that did not arise from the Group’s

continuing operations.

The Group generally records higher domestic revenue in January, March, April, May and

December as festivals and school holidays in the Philippines increase the Group’s seat load factors

in these periods. Accordingly, the Group’s revenue is relatively lower in July to September due to

decreased domestic travel during these months. Any prolonged disruption in the Group’s

operations during such peak periods could materially affect its financial condition and/or results of

operations.

In addition, the Group has capital expenditure commitments which principally relate to the

acquisition of aircraft. Kindly refer to Note 30 of the Notes to Consolidated Financial Statements

for the detailed discussion on Purchase and Capital Expenditure Commitments.






aircraft to its fleet. Equity grew to P24.955 billion from P 21.539 billion in the prior year while


December 31, 2014.


from borrowings. Net cash from operating activities amounted to P12.395 billion. As of

December 31, 2015, net cash used in investing activities amounted to P11.805 billion which

mainly pertains to payments in connection with the purchase of aircraft. Net cash from financing

activities amounted to P39.672 million. Net cash from financing activities comprised of proceeds

from long term debt net of repayments and the payment of cash dividends to the Group’s

stockholders.




obligation.

- 31 -






18.7% increase in Cash and Cash Equivalents

Due to collections as a result of the expansion of the Group’s operations as evidenced by 8.7%

growth in revenues.

6.7% decrease in Receivables

Due to collection of various trade receivables and settlement receivable from Roar II.

35.3% increase in Expendable Parts, Fuel, Materials and Supplies

Due to a higher level of fuel inventory with the opening of a new depot and increased volume of

materials and supplies relative to the larger fleet size during the period.

18.8% increase in Other Current Assets

Due mainly to collateral deposits provided to counterparties for fuel hedging transactions.


Due to the acquisition of four Airbus A320 aircraft during the period.

11.1% decrease in Investment in Joint Ventures

Due to the share in net loss of PAAT and SIAEP incurred during the period.

100.0% increase in Deferred Tax Assets-net

Due mainly to the increase in future deductible amounts on unused net operating loss carryover

(NOLCO) and on unrealized foreign exchange and hedging losses.

11.2% decrease in Other Noncurrent Assets

Due to return of refundable deposits.



increased flight and passenger activity in the twelve months ended December 31, 2015.






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.

8.1% increase in Financial Liabilities at FVPL

Due to lower mark-to-market valuation of fuel derivative contracts.

- 32 -

243.6% increase in Income Tax Payable

Due to higher taxable income in 2015

100% decrease in Deferred Tax Liabilities-net

Net balance for the current year resulted to a deferred tax asset.

84.6% increase in Other Noncurrent Liabilities

Due to the accretion of asset retirement obligation, accrual for pension liability made during the

period and recognition of deferred revenues from unredeemed customer loyalty points.

46.9% increase in Other Comprehensive Income (Loss)

Due to the recognition of actuarial loss on pension liability during the year.



Fuel prices have significantly decreased during in 2015 and this will have an impact on the

Group’s operating income.








operations.









aircraft to its fleet. Equity grew to P21.539 billion from P21.082 billion in the prior year while


December 31, 2013.


from borrowings. Net cash from operating activities amounted to P7.575 billion. As of December

31, 2014, net cash used in investing activities amounted to P13.605 billion which included

payments in connection with the purchase of aircraft. Net cash from financing activities amounted

to P3.695 billion. Net cash from financing activities comprised of proceeds from long term debt

net of repayments and the payment of cash dividends to the Group’s stockholders.



- 33 -


obligation.






34.5% decrease in Cash and Cash Equivalents

Due to payments made in connection with the acquisition of Airbus A320 aircraft, repayment of

certain long-term debt and distribution of cash dividends to the Group’s stockholders.

100.0% decrease in Financial Assets at FVPL

Due to lower mark-to-market valuation of fuel derivative contracts which resulted to a net liability

position in 2014.

2.5% increase in Receivables

Due to increased trade receivables relative to the growth in revenues.

4.5% decrease in Expendable Parts, Fuel, Materials and Supplies

Due to lower cost of fuel inventory.

57.7% increase in Other Current Assets

Due mainly to collateral deposits provided to counterparties for fuel hedging transactions.


Due to the acquisition of five Airbus A320 aircraft during the period.

2.2% increase in Investment in Joint Ventures

Due to the share in the net income of A-plus and PAAT during the period offset by the share in the

net loss of SIAEP and dividends received from A-plus.

100.0% decrease in Deferred Tax Assets-net

Net balance for the current year resulted to a deferred tax liability.

100.0% increase in Goodwill

Due to goodwill arising from the acquisition of TAP.

194.5% increase in Other Noncurrent Assets

Due mainly to other assets representing costs to establish brand and market opportunities under

the strategic alliance with TAH.



increased flight and passenger activity in the twelve months ended December 31, 2014.



- 34 -



100.0% increase in Financial Liabilities at FVPL

Due to decline in value of certain fuel derivative financial instruments consequent to the decrease

in fuel prices in 2014.


Due to additional loans availed to finance the purchase of the five Airbus A320 aircraft acquired

during the year partially offset by the repayment of certain outstanding long-term debt in

accordance with the repayment schedule.

44.9% decrease in Income Tax Payable

Due to income tax payments made from first to third quarters of 2014 and application of creditable

withholding tax on remaining tax due.

100.0% increase in Deferred Tax Liabilities-net

Due mainly to the recognition of future taxable amounts on double depreciation and actuarial

gains on pension liability.

51.3% decrease in Other Noncurrent Liabilities

Due to payments made for aircraft restorations during the year applied against asset retirement

obligation (ARO) liability and decrease in pension liability.

61.4% decrease in Other Comprehensive Income (Loss)

Due to recognition of actuarial gains during the year as other comprehensive income.



Fuel prices have significantly decreased during the last quarter of 2014 and this will have an

impact on the Group’s operating income.








operations.




- 35 -

Key Performance Indicators

The Group 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 Group has identified as reliable performance indicators. Analyses are employed by

comparisons and measurements based on the financial data as of December 31, 2016 and 2015 and

for the years ended December 31, 2016 and 2015:

Key Financial Indicators 2016 2015

Total Revenue P61.899 billion P56.502 billion

Pre-tax Core Net Income P11.373 billion P8.746 billion

EBITDAR Margin 38.2% 34.9%

Cost per Available Seat Kilometer (ASK) (Php) 1.91 1.88

Cost per ASK (U.S. cents) 4.02 4.13

Seat Load Factor 86% 83%

The manner by which the Group calculates the above key performance indicators for both

year-end 2016 and 2015 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, provision for 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


of the Group’s knowledge and belief, there are no known trends, demands, commitments, events

or uncertainties that may have a material impact on the Group’s liquidity.


of the Group’s knowledge and belief, there are no events that would have a material adverse

impact on the Group’s net sales, revenues and income from operations and future operations.

Item 7. Financial Statements

The financial statements and schedules listed in the accompanying Index to Financial Statements

and Supplementary Schedules (page 51) are filed as part of this Form 17-A.

- 36 -

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

Disclosure

None.

Independent Public Accountants and Audit Related Fees

Sycip Gorres Velayo & Co. (SGV & Co.) has acted as the Group’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 Group in 2016 and is expected to be rotated every five years.

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.

2016 2015 2014

Audit and audit-related fees P3,775,000 P3,627,847 P3,449,740

PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Board of Directors and Executive Officers of the Registrant

The tables below set forth certain information regarding the members of the Board of Directors,

member of the advisory board and executive officers of the Group.

A. Board of Directors

Currently, the Board consists of nine members, of which two are independent directors.

Name Age Position Citizenship

Ricardo J. Romulo 83 Chairman Filipino

John L. Gokongwei, Jr. 90 Director Filipino

James L. Go 77 Director Filipino

Lance Y. Gokongwei

50

Director, President and Chief

Executive Officer (CEO)

Filipino

Jose F. Buenaventura 82 Director Filipino

Robina Y. Gokongwei-Pe 55 Director Filipino

Frederick D. Go 47 Director Filipino

Antonio L. Go* 76 Independent Director Filipino

Wee Khoon Oh 58 Independent Director Singaporean *He is not related to any of the other directors

Messrs. Antonio L. Go and Wee Khoon Oh are the independent directors of the Group.

- 37 -

B. Member of the Advisory Board


Garry R. Kingshott 63 Member of the Advisory Board Australian

C. Executive Officers


Bach Johann M. Sebastian……. 55 Senior Vice President - Chief

Strategist & Compliance Officer.. Filipino

Andrew L. Huang…................... 60 Chief Finance Officer…................ Filipino/

Canadian

Robin C. Dui………………….. 70 Vice President…………..………. Filipino

Rosita D. Menchaca…………... 54 Vice President .…………………. Filipino

Antonio Jose L. Rodriguez….... 63 Vice President .…………………. Filipino

Joseph G. Macagga…………… 51 Vice President .…………………. Filipino

Jose Alejandro B. Reyes……… 49 Vice President…. .……………… Filipino

Alexander G. Lao……………... 41 Vice President ….............………. Filipino

Candice Jennifer A. Iyog……... 44 Vice President .…………………. Filipino

Rhea M. Villanueva…………... 38 Vice President .…………………. Filipino

Paterno S. Mantaring, Jr………. 46 Vice President…. .……………… Filipino

Ma. Elynore J. Villanueva..…… 54 Treasurer………………………... Filipino

Rosalinda F. Rivera………….... 46 Corporate Secretary…………….. Filipino

William S. Pamintuan……….... 54 Assistant Corporate

Secretary…………………........... Filipino

The table below sets forth certain information regarding our senior consultants.

Name Age Citizenship

Michael B. Szucs………….

51

British

Rick S. Howell…………….

52

Australian

All of the above directors, advisory board member and executive officers have served their

respective offices since May 20, 2016. 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.

A brief description of the business experience and other directorships held in other reporting

companies of our directors, executive officers and senior consultants are provided as follows:

Ricardo J. Romulo has been the Chairman of the Board of the Group since December 1995. He is

also director of JG Summit Holdings, Inc. and a Senior Partner in Romulo Mabanta Buenaventura

Sayoc & De Los Angeles. Mr. Romulo is also Chairman of FPG Insurance Co., Inc., InterPhil

Laboratories, Inc., Sime Darby Pilipinas, Inc. and Towers Watson Philippines, Inc. He is a

director of BASF Philippines, Inc., Honda Philippines, Inc., Johnson & Johnson (Phils.), Inc.,

Maersk-Filipinas, Inc., MCC Transport Philippines, Inc., Mercantile Ocean Maritime Co.

(Filipinas), Inc., Damco Philippines, Inc., and Zuellig Pharma Corporation. He received his

- 38 -

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 the Group 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 a director of

Robinsons Retail Holdings, Inc. and Oriental Petroleum and Minerals Corporation. He was

elected a director of Manila Electric Company on March 31, 2014. He is also a non-executive

director of A. Soriano Corporation. Mr. John L. Gokongwei, Jr. received a Masters degree in

Business Administration from the De La Salle University and attended the Advanced Management

Program at Harvard Business School.

James L. Go has been a director of the Group since May 2002. He is the Chairman and Chief

Executive Officer of JG Summit Holdings, Inc. and Oriental Petroleum and Minerals Corporation.

He is the Chairman of Universal Robina Corporation, Robinsons Land Corporation, JG Summit

Petrochemical Corporation and JG Summit Olefins Corporation. He is the Vice Chairman of

Robinsons Retail Holdings, Inc. and a director of Marina Center Holdings Private Limited, United

Industrial Corporation Limited and Hotel Marina City Private Limited. He is also the President

and Trustee of the Gokongwei Brothers Foundation, Inc. He has been a director of the Philippine

Long Distance Telephone Company (PLDT) since November 3, 2011. He is a member of the

Technology Strategy Committee and Advisor of the Audit Committee of the Board of Directors of

PLDT. He was elected a director of Manila Electric Company on December 16, 2013.

Mr. James L. Go received his Bachelor of Science Degree and Master of Science Degree in

Chemical Engineering from Massachusetts Institute of Technology, USA.

Lance Y. Gokongwei has been the President and Chief Executive Officer of the Group since 1997.

He is the President and Chief Operating Officer of JG Summit Holdings, Inc. He is the Chairman

and Chief Executive Officer of Robinsons Retail Holdings, Inc. and the President and Chief

Executive Officer of Universal Robina Corporation. He is the Vice Chairman and Chief

Executive Officer of Robinsons Land Corporation and is a Director and Vice Chairman of Manila

Electric Company. He is the Chief Executive Officer of JG Summit Petrochemical Corporation

and JG Summit Olefins Corporation and is the Chairman of Robinsons Bank Corporation. He is a

Director of Oriental Petroleum and Minerals Corporation, and United Industrial Corporation

Limited. He is also a trustee and secretary 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 a director of the Group since December 1995. He is a Senior

Partner in Romulo Mabanta Sayoc & de los Angeles. He is President and Director of

Consolidated Coconut Corporation. He is likewise Director and Corporate Secretary of 2B3C

Foundation, Inc. and Peter Paul Philippines Corporation. He is also a member of the Board of

BDO Unibank, BDO Securities Corporation, Capital Managers & Advisors, Inc., GROW, Inc.,

Grow Holdings, Inc., Himap Properties Corporation, Himap Properties Corporation, La Concha

Land Investment Corp., Melco Crown (Philippines) Resorts Corp., Philippine First Insurance Co.,

Inc., Philplans First, Inc., Techzone Philippines, Inc., The Country Club, Inc., Total Consolidated

Asset Management, Inc., and Turner Entertainment Manila, Inc. Mr. Buenaventura received his

Bachelor of Laws degree from the Ateneo de Manila University and his Master of Laws degree

from Georgetown University Law Center, Washington D.C. He was admitted to the Philippine

Bar in 1960.

- 39 -

Robina Y. Gokongwei-Pe has been a director of the Group since August 1, 2007. She is the

President and Chief Operating Officer of Robinsons Retail Holdings, Inc. She is also a director of

JG Summit Holdings, Inc., Robinsons Land Corporation, and Robinsons Bank Corporation. She

is a Trustee of the Gokongwei Brothers Foundation, Inc. and the Immaculate Conception

Academy Scholarship Fund. She was also a member of the University of the Philippines

Centennial Commission and was a former Trustee of the Ramon Magsaysay Awards

Foundation. She attended the University of the Philippines-Diliman from 1978 to 1981 and

obtained a Bachelor of Arts degree (Journalism) from New York University in 1984.

Frederick D. Go has been a director of the Company since August 1, 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

Group Limited. He also serves as a director of Universal Robina Corporation, JG Summit

Petrochemical Corporation, Robinsons Bank Corporation and Cebu Light Industrial Park. He is

also the Vice Chairman of the Philippine Retailers Association. He received a Bachelor of

Science degree in Management Engineering from the Ateneo de Manila University.

Antonio L. Go has been an independent director of the Company since December 6, 2007. He

also currently serves as Director and President of Equitable Computer Services, Inc. and is the

Chairman of Equicom Savings Bank and ALGO Leasing and Finance, Inc. He is also a director of

Medilink Network, Inc., Maxicare Healthcare Corporation, Equicom Manila Holdings, Equicom

Inc., Equitable Development Corporation, United Industrial Corporation Limited, T32 Dental

Centre Singapore, Dental Implant and Maxillofacial Centre Hong Kong, Oriental Petroleum and

Minerals Corporation, Pin-An Holdings, Inc., Equicom Information Technology, Robinsons

Retail Holdings, Inc., and Steel Asia Manufacturing Corporation. He is also a Trustee of Go Kim

Pah Foundation, Equitable Foundation, Inc., and Gokongwei Brothers Foundation, Inc. He

graduated from Youngstown University, United States with a Bachelor Science Degree in

Business Administration. He attended the International Advance 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.

Wee Khoon Oh has been an independent director of the Company since January 3, 2008. He is the

founder and managing director of Sobono Energy Private Limited. He served as the Vice

Chairman of the Sustainable Energy Association of Singapore until 2014. He is a director of

Sobono Resources Pte. Ltd., ATC Asia Pacific Pte. Ltd., and Transcend Infrastructure Holdings

Pte. Ltd. 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

Masters degree in Business Administration from the National University of Singapore.

Garry R. Kingshott now serves as a member of the advisory board of the Group after serving as its

senior consultant since 2008. Before this, he was with Jet Lite (India) and Ansett International

Limited (Australia) as Chief Executive Officer. He has 25 years combined experience in the

aviation consultancy and the airline industry.

Bach Johann M. Sebastian has been the Senior Vice President - Chief Strategist of the Group and

Head of Corporate Strategy since May 5, 2007. He is also the Senior Vice President and Director

of Corporate Planning of JG Summit, URC and RLC. Prior to joining the Group 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

- 40 -

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 13 years of experience in the airline industry, all of which have been with

the Group.

Andrew L. Huang was appointed as the Chief Finance Officer of the Group on October 1, 2015.

He has over 31 years of extensive experience in Finance and Management with organizations such

as Chase Manhattan Bank, BA Finance Corp., Philippine Airlines, San Miguel Corporation and

Filinvest Development Corporation. He has previously served as Board Member and Chief

Operating Officer of Wi-Tribe Telecoms Holding, Inc. and Easter Telecommunications

Philippines, Inc. Since 2013, he has also been an Adjunct Professor of Finance at the Asian

Institute of Management where he also finished his Master’s degree in Business Management after

graduating from De La Salle University with a degree in Business Administration.

Robin C. Dui has been the Vice President - Comptroller of the Group since 1998. He was

formerly with the Audit Division of SGV & 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,

he obtained a Bachelor of Science degree in Business Administration. He has 36 years of

experience in the airline industry, 19 of which have been with the Group.

Rosita D. Menchaca has been the Vice President for Inflight Services of the Group since May

2009 and was previously Vice President for Passenger Service from February 2007 to May 2009.

She joined the Group in 1996 as a Cabin Crew Supervisor and has since been promoted twice, first

to Director, Cabin Services, on November 1999 and on 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. She received her

Bachelor of Science degree in Psychology from Silliman University. She has 32 years of

experience in the airline industry, the last 21 of which have been with the Group.

Antonio Jose L. Rodriguez was appointed as the Vice President for Safety and Quality last

August 2016 after serving as the Group’s Vice President for Airport Services from February 2015.

He was also previously the Vice President for Human Resources of the Group from 2004 to 2010

and Vice President for Airport Services from 2010 to 2013. He was also a consultant for the

Group’s Long Haul project from January 2014 to February 2015. Prior to joining the Group, he

was AVP-Human Resources of Allied Thread Co. Inc. from 1990 to 1992. Before this, he was

employed with Triumph International (Phils.) Inc. from 1985 to1990. 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 20 years of experience in the airline industry,

all of which have been with the Group.

Joseph G. Macagga was appointed as Vice President for Fuel, Procurement and Facilities

Management last May 2016. Before this, he held the position of Vice President for Fuel and

Cargo Operations of the Group since September 2004. He started 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 SGV & Co. for three years. A

Certified Public Accountant, he received his Bachelor of Science degree in Commerce, Major in

Accounting from the University of Sto. Tomas. He has 20 years of experience in the airline

industry, all of which have been with the Group.

- 41 -

Jose Alejandro B. Reyes was appointed as the Vice President for Cargo last May 2016. Prior to

that, he served as the General Manager for long-haul operations starting February 2012. He was

also the former Vice President for Commercial Planning of the Group 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. He 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

9 years of experience in the airline industry, all of which have been with the Group.

Alexander G. Lao was appointed as the Vice President for Commercial Planning in February

2012. Prior to this, he served as the Director of Revenue Management from October 8, 2007 to

February 2012. Before joining the Group, he worked as Assistant Vice President of Philamlife

from August 2001 to September 2007 and as Business Development Assistant of Ayala Life from

1998 to 1999. He graduated from Ateneo De Manila University with a Bachelor of Science

degree in Legal Management. He also received his Master’s degree in Business Administration

from the Asian Institute of Management. He has 10 years of experience in the airline industry, all

of which have been with the Group.

Candice Jennifer A. Iyog has been with the Group since September 2003 and was appointed Vice

President for Marketing and Distribution on 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. She received her Bachelor of Science degree in Management

from the Ateneo de Manila University. She has 13 years of experience in the airline industry, all

of which have been with the Group.

Rhea M. Villanueva was appointed as Vice President for Human Resources in June 2014. She

started with the Group as a Training Clerk on 2002, and then became an HR Assistant the year

after before she was promoted as a Supervisor in 2004 and a Manager in 2007 where she handled

Learning & Development and Training & Organizational Development. In July 2013, she took on

a higher role becoming the Director for Human Resources. Aside from these, she also worked as a

Project Manager of Double Graphics & Printers and the Marketing Officer of KMC Precision &

Trading. A graduate of Dela Salle University- College of St. Benilde, with a Bachelor of Science

degree in Business Administration, Major in Human Resources Management, she has 15 years of

experience in the airline industry, all of which have been with the Group.

Paterno S. Mantaring, Jr. was appointed as Vice President for Corporate Affairs on

December 7, 2015. He joined the Group in May 2008 as Legal Counsel and was appointed as

Director - Legal Affairs in 2011. He also concurrently assumed the role of OIC - Corporate

Affairs since January 2014. Prior to joining the Group, he held various positions with different

companies, the latest of which was a Senior Associate with Quasha Ancheta Peña & Nolasco Law

Office. He also served in some government offices such as the Department of Finance as Legal

Consultant and the Senate of the Philippines as Legislative Staff Officer. He graduated from the

University of the Philippines with a Bachelor of Arts degree in Political Science and Bachelor of

Laws.

Ma. Elynore J. Villanueva was appointed as the Treasurer of the Group on November 2, 2015.

She started her career in the JG Summit Group in 1996 as Senior Treasury Manager for Manila

Galleria Suites. In 2003, she transferred to Big R Stores as Assistant Treasurer and was later on

moved to Universal Robina Corporation and handled Cebu Pacific. In 2010, her group was

- 42 -

formally transferred from URC to Cebu Pacific with her being appointed as Director - Treasury

for Cebu Pacific. Since March 2014, she also assumed a concurrent role as Director - Treasury for

CEBGo.

Rosalinda F. Rivera was appointed Corporate Secretary of the Group effective October 31, 2006.

She is also the Corporate Secretary of JG Summit Holdings, Inc., Universal Robina Corporation.

Robinsons Land Corporation, Robinsons Retail Holdings, Inc., JG Summit Petrochemical

Corporation, JG Summit Olefins 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 Masters of Law degree in

International Banking from the Boston University School of Law. She was admitted to the

Philippine Bar in 1995. She has eight years of experience in the airline industry, all of which have

been with the Group.

William S. Pamintuan has been the Assistant Corporate Secretary of the Group since December

1995. He is currently the First Vice President and Deputy General Counsel, Assistant Corporate

Secretary, Compliance Officer, and Head, Legal and Corporate Governance and Compliance

Office of Manila Electric Company. He is also the Corporate Secretary of Meralco PowerGen

Corporation, Atimonan Land Ventures, Inc., Calamba Aero Power Corporation, Atimonan One

Energy, Inc., Kalilayan Power, Inc., MPG Holdings Phils., Inc., MPG Mauban LP Corporation,

MPG Asia Ltd., Redondo Peninsula Energy, Inc., MRAIL, Inc., Meralco Industrial Engineering

Services Corporation (MIESCOR), St. Raphael Power Generation Corporation and First Pacific

Leadership Academy, Inc. He is a one of the trustees of Meralco Power Foundation, Inc. He also

serves as Director of Radius Telecoms, Inc., MSpecrum, Inc., Pure Meridian Hydropower

Corporation, Comstech Integration Alliance, Inc., Meridian Atlantic Light Company Ltd. He was

a former Director of Miescorrail, Inc. He was the former Corporate Secretary and Senior Vice

President of Digital Telecommunications Phils., Inc. and Digitel Mobile Phils., Inc. and, General

Manager of Digitel Crossing, Inc. He holds a Bachelor of Arts degree in Political Science and

Bachelor of Laws degree from the University of the Philippines. He has 22 years of experience in

the airline industry, all of which have been with the Group.

Michael B. Szucs is the Group’s Chief Executive Adviser. He provides advice to the President

with respect to fare structuring, cost management, route development and market entry strategies.

He has previously worked with British Airways and EasyJet in the UK and has also been the Chief

Executive Officer of Viva Aerobus in Mexico, Spanair in Spain, VivaColumbia in Columbia and

Al Maha in Saudi Arabia. He holds a first class honors degree in Aeronautical Engineering from

Manchester University, UK.

Rick S. Howell is the Group’s Chief Operations Adviser. Prior to that, he was the Operations

Adviser for Long Haul Operations from August 2012 to May 2013. He received a Bachelor’s

degree in Pure Mathematics & Aerodynamics at the University of Melbourne. He also graduated

with credit from Royal Australian Air force Academy in 1985, where he served as a Flying

Instructor, Maritime Patrol Commander and a Low-level aerobic display pilot until 1992. Then,

he became a Boeing 737 First Officer at QANTAS Airways and an Airbus 330 & 340 Captain for

Emirates Airline. Moreover, he was also appointed as the Chief Operating Officer for

SkyAirWorld and the General Manager for Flight Operations and Commercial Planning for Virgin

Australia. Before returning to the Group, he was the Chief Operating Officer of Air North.

Combining his experience, he has 35 years of expertise in the airline industry.

The Group’s executive officers can be reached at its business office at the Cebu Pacific Building,

Domestic Road, Barangay 191, Zone 20, Pasay City.

- 43 -

Involvement in Certain Legal Proceedings of Directors and Executive Officers

Except as otherwise disclosed, to the best of the Group’s knowledge and belief and after due

inquiry, none of the Group’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 10. Executive Compensation

The following are the Group’s Chief Executive Officer (“CEO”) and four most highly

compensated executive officers for the year ended 2016:

Name Position

Lance Y. Gokongwei . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . President and CEO

Andrew L. Huang. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Finance Officer

Alexander G. Lao. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President

Candice Jennifer A. Iyog . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President

Jose Alejandro B. Reyes. . . . . . . . . . . . . . . . . . . . . . . . . . .. Vice President

- 44 -

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

the four most highly compensated executive officers for the years ended 2015, 2016 and 2017

estimates:

Actual - Fiscal Year 2015

Salaries Bonuses

Other

Income1 Total

CEO and four (4) most highly compensated

executive officers

1. Lance Y. Gokongwei - President and CEO

2. Jim C. Sydiongco - Vice President

3. Jeanette U. Yu - Vice President - Treasurer

(up to November 2015)

4. Jaime I. Cabangis - Chief Finance Officer

(up to June 2015)

5. Jose Alejandro B. Reyes - General Manager

P62,236,655 P5,522,520 P135,000 P67,894,175

Aggregate compensation paid to all officers and

directors as a group unnamed P110,939,616 P13,212,725 P637,500 P124,789,841 1Includes per diem of directors

Actual - Fiscal Year 2016

Salaries Bonuses

Other

Income1 Total


executive officers


2. Andrew L. Huang - Chief Finance Officer

3. Alexander G. Lao- Vice President

4. Candice Jennifer A. Iyog - Vice President

5. Jose Alejandro B. Reyes - Vice President

P75,657,884 P7,100,490 P105,000 P82,863,374



Fiscal Year 2017 Estimates

Salaries Bonuses

Other

Income1 Total


executive officers


2. Andrew L. Huang - Chief Finance Officer

3. Alexander G. Lao - Vice President

4. Jose Alejandro B. Reyes - Vice President

5. Michael Ivan S. Shau - Vice President

P86,856,649 P7,852,727 P105,000 P94,814,376



- 45 -

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 Group 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.

Other Arrangements

There are no other arrangements pursuant to which directors of the Group 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 Group 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 Group’s pension plans.

Warrants and Options Outstanding

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

officers, and all officers and directors as a group.

Item 11. Security Ownership of Certain Record and Beneficial Owners and Management

(1) Security Ownership of Certain Record and Beneficial Owners

As of December 31, 2016, the Group knows no one who beneficially owns in excess of 5% of the

Group’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

(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 101,405,818

(See note 3)

16.74%

- 46 -

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 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 96,795,629

15.97%

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.

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 (Filipino) account, “Citibank N.A.” holds for various trust accounts the

following shares of the Corporation as of December 31, 2016:

No. of shares % to Outstanding

Citibank N.A. 42,246,477 6.97%

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, 2016

Title of

Class

Name of beneficial

Owner Position

Amount &

nature of

beneficial

ownership

(Direct)

Citizenship % to Total

Outstanding

Named Executive Officers1

Common 1. Lance Y. Gokongwei Director, President

and CEO

1 Filipino *

- 2. Andrew L. Huang Chief Finance

Officer

- Filipino/

Canadian

-

- 3. Alexander G. Lao Vice President - Filipino -

- 4. Candice Jennifer A. Iyog Vice President - Filipino -

- 5. Jose Alejandro B. Reyes Vice President - Filipino -

Subtotal 1 *

Other Directors and Executive Officers

Common 6. Ricardo J. Romulo Chairman 1 Filipino *

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

Common 8. James L. Go Director 1 Filipino *

Common 9. Jose F. Buenaventura Director 1 Filipino *

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

Common 11. Frederick D. Go Director 1 Filipino *

- 47 -

Title of

Class

Name of beneficial

Owner Position

Amount &

nature of

beneficial

ownership

(Direct)

Citizenship % to Total

Outstanding

Common 12. Antonio L. Go Director

(Independent)

1 Filipino *

Common 13. Wee Khoon Oh Director

(Independent)

1 Singaporean *

14. Ma. Elynore J. Villanueva Treasurer 500 Filipino *

Subtotal 508 *

All directors and executive officers as a group unnamed 509 *

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, 2016.

* less than 0.01%

(3) Voting Trust Holders of 5% or More

As of December 31, 2016, 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, 2016, there has been no change in the control of the Group since the

beginning of its last fiscal year.

Item 12. Certain Relationships and Related Transactions

The Group, in its regular conduct of business, had engaged in transactions with its ultimate parent

company, its joint venture and affiliates. See Note 27 (Related Party Transactions) of the Notes to

the Consolidated Financial Statements in the accompanying Audited Financial Statements filed as

part of this Form 17-A.

PART IV - CORPORATE GOVERNANCE

Item 13. Corporate Governance

The Group adheres to the principles and practices of good corporate governance, as embodied in

its Corporate Governance Manual, Code of Ethics and related SEC Circulars. Continuous

improvement and monitoring of governance and management policies have been undertaken to

ensure that the Group observes good governance and management practices. This is to assure the

shareholders that the Group conducts its business with the highest level of integrity, transparency

and accountability.

The Group likewise consistently strives to raise its financial reporting standards by adopting and

implementing prescribed Philippine Financial Reporting Standards (PFRSs).

- 48 -

PART V - EXHIBITS AND SCHEDULES

Item 14. Exhibits and Reports on SEC Form 17-C

Exhibits

See accompanying Index to Exhibits (page 51)

Reports on SEC Form 17-C

List of Corporate Disclosures/Replies to SEC Letters

Under SEC Form 17-C

July 1, 2016 to December 31, 2016

Date of Disclosure Description

July 28, 2016 Press release entitled “CEB breaks 10M mark in passenger volume for 1H

2016”

July 29, 2016 Material information/transaction regarding “Cebu Air Inc. signed a Purchase

Agreement with Airbus SAS for the order of two (2) A330-300 aircraft.

November 22, 2016 Press release entitled “Cebu Pacific and ANA Holdings Invest in Air Black

Box Asia Pacific Pte Ltd”

December 1, 2016 Clarification of a news report entitled “ Gokongwei expects record passenger

volume for Cebu Pacific this year”

December 9, 2016 Clarification of a news report entitled “CebuPac to acquire planes for US

flights”

CEBU AIR, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED COMPANY FINANCIAL STATEMENTS AND

SUPPLEMENTARY SCHEDULES

SEC FORM 17-A

CONSOLIDATED COMPANY FINANCIAL STATEMENTS

Statement of Management’s Responsibility for Financial Statements

Report of Independent Auditors

Consolidated Company Statements of Financial Position as of December 31, 2016 and 2015

Consolidated Company Statements of Comprehensive Income for the Years Ended

December 31, 2016, 2015 and 2014

Consolidated Company Statements of Changes in Equity for the Years Ended December 31, 2016,

2015 and 2014

Consolidated Company Statements of Cash flows for the Years Ended December 31, 2016, 2015 and

2014

SUPPLEMENTARY SCHEDULES

Report of Independent Auditors on Supplementary Schedules

I. Supplementary schedules required by Annex 68-E

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. Noncurrent Marketable Equity Securities, Other Long-Term

Investments in Stocks and Other Investments*

D. Indebtedness of Unconsolidated Subsidiaries and Affiliates*

E. Property, Plant and Equipment

F. Accumulated Depreciation

G. Intangible Assets and Other Assets*

H. Long-Term Debt

I. Indebtedness to Affiliates and Related Parties*

J. Guarantees of Securities of Other Issuers*

K. 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 parent company financial

statements or in the notes thereto.

- 2 -

II. Schedule of all of the effective standards and interpretations (Part 1, 4J)

III. Reconciliation of Retained Earnings Available for Dividend Declaration

(Part 1, 4C; Annex 68-C)

IV. Map of the relationships of the companies within the group (Part 1, 4H)

V. Schedule of Financial Ratios

*SGVFS022041*

INDEPENDENT AUDITOR’S REPORT

The Stockholders and the Board of Directors

Cebu Air, Inc.

2nd Floor, Doña Juanita Marquez Lim Building

Osmeña Boulevard, Cebu City

Opinion

We have audited the consolidated financial statements of Cebu Air, Inc. and its Subsidiaries

(the Group), which comprise the consolidated statements of financial position as at December 31, 2016

and 2015, and the consolidated statements of comprehensive income, consolidated statements of changes

in equity and consolidated statements of cash flows for each of the three years in the period ended

December 31, 2016, and notes to the consolidated financial statements, including a summary of

significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,

the financial position of the Group as at December 31, 2016 and 2015, and their financial performance

and their cash flows for each of the three years in the period ended December 31, 2016 in accordance with

Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our

responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit

of the Consolidated Financial Statements section of our report. We are independent of the Group in

accordance with the Code of Ethics for Professional Accountants in the Philippines (the Code of Ethics)

together with the ethical requirements that are relevant to our audit of the consolidated financial

statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with

these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is

sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our

audit of the consolidated financial statements of the current period. These matters were addressed in the

context of our audit of the consolidated financial statements as a whole, and in forming our opinion

thereon, and we do not provide a separate opinion on these matters. For each matter below, our

description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the

Consolidated Financial Statements section of our report, including in relation to these matters.

Accordingly, our audit included the performance of procedures designed to respond to our assessment of

the risks of material misstatement of the consolidated financial statements. The results of our audit

procedures, including the procedures performed to address the matters below, provide the basis for our

audit opinion on the accompanying consolidated financial statements.

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines

Tel: (632) 891 0307 Fax: (632) 819 0872 ey.com/ph

BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018 SEC Accreditation No. 0012-FR-4 (Group A), November 10, 2015, valid until November 9, 2018

A member firm of Ernst & Young Global Limited

*SGVFS022041*

- 2 -

Recognition of Passenger Service Revenue, Baggage Fees and Other Ancillary Fees

Passenger service revenue is earned when the service has been rendered to the passengers according to

flight schedule. The amount of passenger tickets for which the related transportation service has not yet

been rendered at the end of the reporting period, is recorded as unearned passenger service revenue in the

consolidated statement of financial position. Baggage fees are non-refundable fees which are recognized

upon receipt. Other ancillary fees are recognized when transactions are carried out. Refer to Notes 5 and

21 of the consolidated financial statements.

We considered the recognition of passenger service revenue, baggage fees and other ancillary fees as a

key audit matter because of the materiality of these accounts to the consolidated financial statements and

the high volume of transactions being processed and captured from various distribution channels and

locations. In addition, the determination of the earned and unearned passenger service revenue is highly

dependent on the Group’s information technology (IT) systems.

Audit response

We included internal specialist in our team to assist us in understanding and testing the controls over the

Group’s IT systems and passenger revenue recognition process. This includes testing the controls over

the capture and recording of revenue transactions, authorization of rate changes and the input of these

information to the revenue system, and mapping of bookings from unearned to earned passenger service

revenue when passengers are lifted. We assessed the information produced by the Group’s IT systems

and tested the reports generated by these systems that are used to defer or recognize passenger service

revenue. On a sample basis, we tested the timing of the recording of the transactions near the statement

of financial position date. Also, on a sample basis, we tested journal entries related to these accounts

through inspection of underlying source documentation.

Estimation of Asset Retirement Obligation

As of December 31, 2016, the Group operated thirteen (13) aircraft under operating leases. Under the

terms of the operating lease arrangements, the Group is contractually required to restore leased aircraft to

its original condition and to bear the cost of restoration at the end of the contract period. Refer to Notes

19 and 30 of the consolidated financial statements.

Management estimates the overhaul, restoration and redelivery costs and accrues such costs over the lease

term. The calculation of such costs includes management assumptions and estimates in respect of the

anticipated rate of aircraft utilization. This affects the extent of the restoration work that will be required

and the expected costs of such overhaul, restoration and redelivery at the end of the lease term. Given the

significant amounts of these provisions and the level of management judgment and estimates required, we

considered this area as a key audit matter.

Audit response

We obtained an understanding of the management’s process over estimating asset retirement obligation

for aircraft held under operating leases and tested the relevant controls. We recalculated the asset

retirement obligation and evaluated the key assumptions adopted by the management in estimating the

asset retirement obligation for each aircraft by discussing with the Group’s relevant fleet maintenance

engineers the aircraft utilization statistics. In addition, we obtained an understanding of the redelivery

terms of operating leases comparing the estimated costs and comparable actual costs incurred by the

Group from previous similar restorations.


*SGVFS022041*

- 3 -

Recoverability of Goodwill and Intangible Assets

Under PFRSs, the Group is required to annually test the amount of goodwill and intangible assets with

indefinite useful lives for impairment. The recoverability of goodwill and intangible assets, which arose

from the acquisition of a subsidiary in 2014, is considered as a key audit matter as the balances of these

assets are considered material to the consolidated financial statements. In addition, the management’s

assessment process requires significant judgment and is based on assumptions, specifically future

revenues, profit margins, revenue growth and discount rates. The Group’s disclosures about goodwill and

intangible assets are included in Notes 15 and 16 of the consolidated financial statements, respectively.

Audit response

We obtained an understanding of the Group’s impairment assessment process and the related controls.

We involved our internal specialist in evaluating the methodologies and the assumptions used and

performed recalculation of the value-in-use provided. These assumptions include future revenue, profit

margins, revenue growth and discount rates. We compared the key assumptions used against the

historical performance of the subsidiary, industry or market outlook and other relevant external data. We

tested the parameters used in determining the discount rate against market data. We also reviewed the

Group’s disclosures about the assumptions that have the most significant effect in determining the

recoverable amounts of goodwill and intangible assets.

Reasonableness of Estimated Useful Lives of Aircraft

The Group annually estimates the useful lives of its aircraft based on the period over which the assets are

expected to be available for use. The Group considers external changes to economic conditions, demand,

competition and technology advancement when reassessing the estimate useful lives of its aircraft. We

considered this area as a key audit matter given the material balances of these assets and the significant

judgment required in estimating these assets’ useful lives. This impacts the carrying values as at

statement of financial position date and the depreciation charges for the year. The Group’s disclosures

about estimated useful lives are included in Note 5 of the consolidated financial statements.

Audit response

We obtained an understanding of the Group’s process and controls over estimation of the useful lives of

aircraft. Also, we considered the developments in the airline industry and compared the estimated useful

lives used by the Group with other comparable airline companies.

Other Information

Management is responsible for the other information. The other information comprises the

SEC Form 17-A for the year ended December 31, 2016 but does not include the consolidated financial

statements and our auditor’s report thereon, which we obtained prior to the date of this auditor’s report,

and the SEC Form 20-IS (Definitive Information Statement) and Annual Report for the year ended

December 31, 2016, which is expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not

and will not express any form of assurance conclusion thereon.

In connection with our audits of the consolidated financial statements, our responsibility is to read the

other information identified above and, in doing so, consider whether the other information is materially

inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or

otherwise appears to be materially misstated.


*SGVFS022041*

- 4 -

If, based on the work we have performed on the other information that we obtained prior to the date of

this auditor’s report, we conclude that there is a material misstatement of this other information, we are

required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Consolidated

Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial

statements in accordance with PFRS, 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.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s

ability to continue as a going concern, disclosing, as applicable, matters related to going concern and

using the going concern basis of accounting unless management either intends to liquidate the Group or to

cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a

whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report

that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an

audit conducted in accordance with PSAs will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the

aggregate, they could reasonably be expected to influence the economic decisions of users taken on the

basis of these consolidated financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintain

professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial statements, whether

due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit

evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting

a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may

involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal

control.

Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting

estimates and related disclosures made by management.


*SGVFS022041*

- 5 -

Conclude on the appropriateness of management’s use of the going concern basis of accounting and,

based on the audit evidence obtained, whether a material uncertainty exists related to events or

conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we

conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to

the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to

modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our

auditor’s report. However, future events or conditions may cause the Group to cease to continue as a

going concern.

Evaluate the overall presentation, structure and content of the consolidated financial statements,

including the disclosures, and whether the consolidated financial statements represent the underlying

transactions and events in a manner that achieves fair presentation.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or

business activities within the Group to express an opinion on the consolidated financial statements.

We are responsible for the direction, supervision and performance of the audit. We remain solely

responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope

and timing of the audit and significant audit findings, including any significant deficiencies in internal

control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant

ethical requirements regarding independence, and to communicate with them all relationships and other

matters that may reasonably be thought to bear on our independence, and where applicable, related

safeguards.

From the matters communicated with those charged with governance, we determine those matters that

were of most significance in the audit of the consolidated financial statements of the current period and

are therefore the key audit matters. We describe these matters in our auditor’s report unless law or

regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we

determine that a matter should not be communicated in our report because the adverse consequences of

doing so would reasonably be expected to outweigh the public interest benefits of such communication.


*SGVFS022041*

- 6 -

The engagement partner on the audit resulting in this independent auditor’s report is Narciso T. Torres, Jr.

SYCIP GORRES VELAYO & CO.

Narciso T. Torres, Jr.

Partner

CPA Certificate No. 84208

SEC Accreditation No. 1511-A (Group A),

October 1, 2015, valid until September 30, 2018

Tax Identification No. 102-099-147

BIR Accreditation No. 08-001998-111-2015,

March 4, 2015, valid until March 3, 2018

PTR No. 5908769, January 3, 2017, Makati City

March 21, 2017


*SGVFS022041*


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31

2016 2015

ASSETS

Current Assets

Cash and cash equivalents (Note 8) P=10,296,242,304 P=4,706,090,063

Receivables (Note 10) 2,126,793,862 1,737,444,884

Financial assets at fair value through profit or loss (Note 9) 441,773,905 –

Expendable parts, fuel, materials and supplies (Note 11) 1,190,056,987 919,118,043

Other current assets (Note 12) 1,096,270,685 2,400,119,148

Total Current Assets 15,151,137,743 9,762,772,138

Noncurrent Assets

Property and equipment (Notes 13, 18, 30 and 32) 81,890,303,497 72,075,821,013

Investments in joint ventures and in an associate (Notes 14) 805,801,372 525,623,987

Goodwill (Notes 7 and 15) 566,781,533 566,781,533

Deferred tax assets - net (Note 25) 1,073,499,679 876,296,996

Other noncurrent assets (Notes 7 and 16) 1,026,818,459 1,021,286,522

Total Noncurrent Assets 85,363,204,540 75,065,810,051

P=100,514,342,283 P=84,828,582,189

LIABILITIES AND EQUITY

Current Liabilities

Accounts payable and other accrued liabilities (Note 17) P=12,583,636,942 P=11,602,989,706

Unearned transportation revenue 8,141,752,728 6,971,754,698

Current portion of long-term debt (Notes 13 and 18) 7,040,253,460 5,423,699,184

Financial liabilities at fair value through profit or loss (Note 9) – 2,443,495,138

Due to related parties (Note 27) 37,689,554 38,115,803

Income tax payable 24,152,004 20,038,200

Total Current Liabilities 27,827,484,688 26,500,092,729

Noncurrent Liabilities

Long-term debt - net of current portion (Notes 13 and 18) 35,770,184,170 31,165,286,307

Pension liability (Note 24) 568,769,315 546,480,714

Other noncurrent liabilities (Note 19) 2,842,631,591 1,661,527,283

Total Noncurrent Liabilities 39,181,585,076 33,373,294,304

Total Liabilities 67,009,069,764 59,873,387,033

Equity

Common stock (Note 20) 613,236,550 613,236,550

Capital paid in excess of par value (Note 20) 8,405,568,120 8,405,568,120

Treasury stock (Note 20) (529,319,321) (529,319,321)

Remeasurement loss on pension liability (Note 24) (186,025,376) (193,873,203)

Retained earnings (Note 20) 25,201,812,546 16,659,583,010

Total Equity 33,505,272,519 24,955,195,156

P=100,514,342,283 P=84,828,582,189

See accompanying Notes to Consolidated Financial Statements.

*SGVFS022041*


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31

2016 2015 2014

REVENUE

Sale of air transportation services

Passenger P=46,592,511,272 P=42,681,069,939 P=40,188,445,623

Cargo 3,563,752,865 3,461,136,749 3,146,083,310

Ancillary revenues (Note 21) 11,743,014,755 10,359,447,828 8,665,489,377

61,899,278,892 56,501,654,516 52,000,018,310

EXPENSES

Flying operations (Notes 11 and 22) 19,694,348,716 20,916,360,534 26,152,476,007

Aircraft and traffic servicing (Note 22) 6,577,984,803 5,847,099,305 4,805,212,489

Repairs and maintenance (Notes 11 and 22) 6,530,857,486 5,240,478,648 4,432,437,982

Depreciation and amortization (Notes 6 and 13) 5,998,695,417 5,111,543,724 4,281,525,018

Aircraft and engine lease (Note 30) 4,253,724,294 4,024,599,732 3,503,484,521

Reservation and sales (Note 22) 3,211,696,086 2,625,456,497 2,153,987,158

General and administrative (Note 23) 1,813,043,477 1,552,148,933 1,296,817,694

Passenger service 1,567,730,427 1,483,746,337 1,216,740,451

49,648,080,706 46,801,433,710 47,842,681,320

12,251,198,186 9,700,220,806 4,157,336,990

OTHER INCOME (EXPENSES)

Hedging gains (losses) - net (Note 9) 1,587,708,081 (2,931,215,906) (2,314,241,984)

Equity in net income of joint ventures (Note 14) 178,308,842 35,418,498 96,326,091

Interest income (Note 8) 113,672,171 83,006,926 79,927,272

Loss on sale of aircraft (Note 13) (962,608,741) (80,267,191) –

Interest expense (Note 18) (1,170,181,141) (1,073,109,693) (1,013,241,353)

Foreign exchange losses - net (2,281,932,689) (2,205,258,151) (127,471,032)

(2,535,033,477) (6,171,425,517) (3,278,701,006)

INCOME BEFORE INCOME TAX 9,716,164,709 3,528,795,289 878,635,984

PROVISION FOR (BENEFIT FROM)

INCOME TAX (Note 25) (37,971,487) (858,430,586) 25,137,768

NET INCOME 9,754,136,196 4,387,225,875 853,498,216

OTHER COMPREHENSIVE INCOME (LOSS),

NET OF TAX

Other comprehensive income (loss) not to be reclassified

to profit or loss in subsequent periods:

Actuarial gains (losses) on pension liability (Note 24) 11,211,184 (83,002,333) 301,535,342

Provision for (benefit from) income tax (Note 25) 3,363,357 (21,097,422) 91,853,356

7,847,827 (61,904,911) 209,681,986

TOTAL COMPREHENSIVE INCOME P=9,761,984,023 P=4,325,320,964 P=1,063,180,202

Basic/Diluted Earnings Per Share (Note 26) P=16.10 P=7.24 P=1.41


*SGVFS022041*


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Year Ended December 31, 2016

Common Stock

(Note 20)

Capital Paid in

Excess of Par

Value (Note 20)

Treasury Stock (Note 20)

Remeasurement

Gain (Loss) on

Pension Liability (Note 24)

Retained Earnings

Total

Equity

Appropriated

(Note 20) Unappropriated

(Note 20)

Balance at January 1, 2016 P=613,236,550 P=8,405,568,120 (P=529,319,321) (P=193,873,203) P=7,916,762,000 P=8,742,821,010 P=24,955,195,156

Net income – – – – – 9,754,136,196 9,754,136,196

Other comprehensive income – – – 7,847,827 – – 7,847,827

Total comprehensive income – – – 7,847,827 – 9,754,136,196 9,761,984,023

Appropriation of retained earnings (Note 20) – – – – 6,600,000,000 (6,600,000,000) –

Dividend declaration (Note 20) – – – – – (1,211,906,660) (1,211,906,660)

Balance at December 31, 2016 P=613,236,550 P=8,405,568,120 (P=529,319,321) (P=186,025,376) P=14,516,762,000 P=10,685,050,546 P=33,505,272,519


Common Stock

(Note 20)

Capital Paid in

Excess of Par

Value

(Note 20)

Treasury Stock

(Note 20)

Remeasurement

Loss on Pension

Liability

(Note 24)

Retained Earnings

Total

Equity

Appropriated

(Note 20)

Unappropriated

(Note 20)


Net income – – – – – 4,387,225,875 4,387,225,875

Other comprehensive income – – – (61,904,911) – – (61,904,911)

Total comprehensive income – – – (61,904,911) – 4,387,225,875 4,325,320,964


Dividend declaration (Note 20) – – – – – (908,929,995) (908,929,995)


*SGVFS022041*

- 2 -


Common Stock

(Note 20)

Capital Paid in

Excess of Par

Value

(Note 20)

Treasury Stock

(Note 20)

Remeasurement

Gain (Loss) on

Pension Liability

(Note 24)

Retained Earnings

Total

Equity

Appropriated

(Note 20)

Unappropriated

(Note 20)


Net income – – – – – 853,498,216 853,498,216

Other comprehensive loss – – – 209,681,986 – – 209,681,986

Total comprehensive income – – – 209,681,986 – 853,498,216 1,063,180,202


Dividend declaration (Note 20) – – – – – (605,953,330) (605,953,330)


*SGVFS022041*


CONSOLIDATED STATEMENTS OF CASH FLOWS


2016 2015 2014

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P=9,716,164,709 P=3,528,795,289 P=878,635,984

Adjustments for:

Depreciation and amortization (Note 13) 5,998,695,417 5,111,543,724 4,281,525,018

Unrealized foreign exchange losses - net 1,672,077,988 1,709,750,714 164,383,293

Hedging losses (gains) - net (Note 9) (1,587,708,081) 2,931,215,906 2,314,241,984

Interest expense (Note 18) 1,170,181,141 1,073,109,693 1,013,241,353

Provision for asset retirement obligation (Note 19) 1,121,100,139 863,960,835 476,017,529

Loss on sale of aircraft (Note 13) 962,608,741 80,267,191 –

Equity in net income of joint ventures (Note 14) (178,308,842) (35,418,498) (96,326,091)

Interest income (Note 8) (113,672,171) (83,006,926) (79,927,272)

Loss on disposal of property and equipment (Note 13) 54,239,864 9,122,533 27,734,209

Operating income before working capital changes 18,815,378,905 15,189,340,461 8,979,526,007

Decrease (increase) in:

Receivables (342,022,523) 143,435,357 405,357,069

Financial assets at fair value through profit or

loss (derivatives) – – 112,774,809

Expendable parts, fuel, materials and supplies (270,938,944) (239,802,973) 31,860,790

Other current assets 1,257,913,940 (430,603,370) (729,957,322)

Increase (decrease) in:

Accounts payable and other accrued liabilities 1,163,682,731 932,068,099 325,208,227

Unearned transportation revenue 1,169,998,030 598,009,959 873,405,279

Pension liability 22,288,601 116,841,632 157,005,125

Amounts of due to related parties (426,249) (1,793,699) (4,743,714)

Other noncurrent liabilities (10,320,610) (108,048,329) (1,609,080,414)

Financial liabilities at fair value through profit or

loss (derivatives) (1,297,560,962) (2,748,280,664) –

Net cash generated from operations 20,507,992,919 13,451,166,473 8,541,355,856

Interest paid (1,184,693,893) (1,078,011,092) (1,004,857,514)

Income tax paid (Note 31) (112,546,224) (60,766,659) (45,043,718)

Interest received 111,505,087 82,638,335 83,919,430

Net cash provided by operating activities 19,322,257,889 12,395,027,057 7,575,374,054

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of:

Property and equipment (Notes 13 and 31) (19,126,054,236) (13,047,934,091) (13,316,719,856)

Subsidiary (Notes 7 and 31) – – (488,559,147)

Proceeds from sale of property and equipment 2,235,195,623 1,012,448,386 338,060

Investment in shares of stocks in joint ventures and an associate (225,118,923) – –

Dividends received from a joint venture (Note 14) 61,625,190 101,133,997 83,811,058

Decrease (increase) in other noncurrent assets (5,531,937) 129,307,803 115,781,781

Net cash used in investing activities (17,059,884,283) (11,805,043,905) (13,605,348,104)

(Forward)

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2016 2015 2014

CASH FLOWS FROM FINANCING ACTIVITIES

Long-term debt:

Availments (Notes 18 and 31) P=9,534,981,637 P=6,466,895,200 P=8,478,040,015

Payments of long-term debt (Note 18) (5,256,889,910) (5,518,293,249) (4,176,677,721)

Dividends paid (1,211,906,660) (908,929,995) (605,953,330)

Net cash provided by financing activities 3,066,185,067 39,671,956 3,695,408,964

EFFECTS OF EXCHANGE RATE CHANGES

IN CASH AND CASH EQUIVALENTS 261,593,568 112,522,272 (14,356,033)

NET INCREASE (DECREASE) IN CASH

AND CASH EQUIVALENTS 5,590,152,241 742,177,380 (2,348,921,119)

CASH AND CASH EQUIVALENTS ATTRIBUTABLE TO

BUSINESS COMBINATION (Notes 7 and 31) – – 256,721,999

CASH AND CASH EQUIVALENTS

AT BEGINNING OF YEAR 4,706,090,063 3,963,912,683 6,056,111,803

CASH AND CASH EQUIVALENTS

AT END OF YEAR (Note 8) P=10,296,242,304 P=4,706,090,063 P=3,963,912,683


*SGVFS022041*


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 twelve 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), Panatag Two Aircraft Leasing

Limited (PTALL), Panatag Three Aircraft Leasing Limited (PTHALL), Summit A Aircraft

Leasing Limited (SAALL), Summit B Aircraft Leasing Limited (SBALL) and Summit C Aircraft

Leasing Limited (SCALL). CALL, ILL, BLL, SLL, SALL, VALL, POALL, PTALL and

PTHALL are SPEs in which the Parent Company does not have equity interest. CALL, ILL, BLL,

SLL, SALL, VALL, POALL, PTALL, PTHALL, SAALL, SBALL and SCALL acquired the

passenger aircraft for lease to the Parent Company under finance lease arrangements (Notes 13

and 30) and funded the acquisitions through long-term debt (Note 18).

On March 20, 2014, the Parent Company acquired 100% ownership of CEBGO, Inc. (CEBGO)

(Note 7). The Parent Company, its twelve (12) SPEs and CEBGO (collectively known as

the Group) are consolidated for financial reporting purposes (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) which extends for a period of four (4) to

six (6) years for each batch of aircraft registered to BOI (Notes 25 and 32).

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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 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 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 Regulations (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 corporate income tax;

c. The Parent Company shall remain exempt from any taxes, duties, royalties, registration

license, and other fees and charges;

d. Change in corporate income tax 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 (BIR) 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 domestic and international air transportation services for

passengers and cargos at the Diosdado Macapagal International Airport.

2. Basis of Preparation

The consolidated financial statements of the Group have been prepared on a historical cost basis,

except for financial assets and financial liabilities at fair value through profit or loss (FVPL) that

have been measured at fair value.

The consolidated financial statements of the Group are presented in Philippine Peso (P= or Peso),

the Parent Company’s functional and presentation currency. All amounts are rounded to the

nearest Peso, unless otherwise indicated.

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Statement of Compliance

The consolidated financial statements of the Group have been prepared in compliance with

Philippine Financial Reporting Standards (PFRSs).

Basis of Consolidation

The consolidated financial statements as of December 31, 2016 and 2015 represent the

consolidated financial statements of the Parent Company, the SPEs that it controls and its wholly

owned subsidiary CEBGO. Consolidation of CEBGO started on March 20, 2014 when the Group

gained control (Note 7).

The Parent Company controls an investee if, and only if, the Parent Company has:

Power over the investee (that is, existing rights that give it the current ability to direct the

relevant activities of the investee);

Exposure, or rights, to variable returns from its involvement with the investee; and

The ability to use its power over the investee to affect the amount of the investor’s returns.

When the Parent Company has less than a majority of the voting or similar rights of an investee,

the Parent Company considers all relevant facts and circumstances in assessing whether it has

power over an investee, including:

The contractual arrangement with the other vote holders of the investee;

Rights arising from other contractual arrangements; and

The Parent Company’s voting rights and potential voting rights.

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

indicate that there are changes to one or more of the three elements of control. Consolidation of a

subsidiary begins when the Parent Company obtains control over the subsidiary and ceases when

the Parent Company loses control of the subsidiary. Assets, liabilities, income and expenses of the

subsidiary acquired or disposed of during the year are included in the consolidated financial

statements from the date the Parent Company gains control until the date the Parent Company

ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income (OCI) are attributed to the

equity holders of the Parent Company of the Group and to the non-controlling interests, even if

this results in the non-controlling interests having a deficit balance. The financial statements of

the subsidiaries are prepared for the same reporting date as the Parent Company, using consistent

accounting policies. All intragroup assets, liabilities, equity, income and expenses and cash flows

relating to transactions between members of the Group are eliminated on consolidation.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an

equity transaction. If the Parent Company loses control over a subsidiary, it derecognizes the

related assets (including goodwill), liabilities, non-controlling interest and other components of

equity, while any resulting gain or loss is recognized in profit or loss. Any investment retained is

recognized at fair value.

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3. Changes in Accounting Policies and Disclosures

The Group applied for the first time certain pronouncements which are effective beginning on or

after January 1, 2016. Except as otherwise indicated, the adoption of these pronouncements did

not have any significant impact on the Group’s financial position or performance.

Amendments to PFRS 10, Consolidated Financial Statements, PFRS 12, Disclosure of

Interests in Other Entities, and Philippine Accounting Standard (PAS) 28, Investments in

Associates and Joint Ventures, Investment Entities: Applying the Consolidation Exception

These amendments clarify that the exemption in PFRS 10 from presenting consolidated

financial statements applies to a parent entity that is a subsidiary of an investment entity that

measures all of its subsidiaries at fair value. These amendments also clarify that only a

subsidiary of an investment entity that is not an investment entity itself and that provides

support services to the investment entity parent is consolidated. These amendments also allow

an investor (that is not an investment entity and has an investment entity associate or joint

venture) to retain the fair value measurement applied by the investment entity associate or

joint venture to its interests in subsidiaries when applying the equity method.

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

Joint Operations

The amendments to PFRS 11 require a joint operator that is accounting for the acquisition of

an interest in a joint operation, in which the activity of the joint operation constitutes a

business (as defined by PFRS 3), to apply the relevant PFRS 3 principles for business

combinations accounting. These amendments also clarify that a previously held interest in a

joint operation is not remeasured on the acquisition of an additional interest in the same joint

operation while joint control is retained. In addition, a scope exclusion has been added to

PFRS 11 to specify that these amendments do not apply when the parties sharing joint control,

including the reporting entity, are under common control of the same ultimate controlling

party.

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

the acquisition of any additional interests in the same joint operation.

PFRS 14, Regulatory Deferral Accounts

PFRS 14 is an optional standard that allows an entity, whose activities are subject to rate-

regulation, to continue applying most of its existing accounting policies for regulatory deferral

account balances upon its first-time adoption of PFRSs. Entities that adopt PFRS 14 must

present the regulatory deferral accounts as separate line items on the statement of financial

position and present movements in these account balances as separate line items in the profit

or loss and OCI. The standard requires disclosures on the nature of, and risks associated with,

the entity’s rate-regulation and the effects of that rate-regulation on its financial statements.

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Amendments to PAS 1, Presentation of Financial Statements, Disclosure Initiative

The amendments are intended to assist entities in applying judgment when meeting the

presentation and disclosure requirements in PFRSs. These amendments clarify the following:

That entities shall not reduce the understandability of their financial statements by either

obscuring material information with immaterial information; or aggregating material items

that have different natures or functions;

That specific line items in the profit or loss and OCI and the statement of financial

position may be disaggregated;

That entities have flexibility as to the order in which they present the notes to financial

statements; and

That the share of OCI of associates and joint ventures accounted for using the equity

method must be presented in aggregate as a single line item, and classified between those

items that will or will not be subsequently reclassified to profit or loss.

Amendments to PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets,

Clarification of Acceptable Methods of Depreciation and Amortization

The amendments clarify the principle in PAS 16 and PAS 38 that revenue reflects a pattern of

economic benefits that are generated from operating a business (of which the asset is part)

rather than the economic benefits that are consumed through use of the asset. As a result, a

revenue-based method cannot be used to depreciate property, plant and equipment and may

only be used in very limited circumstances to amortize intangible assets.

Amendments to PAS 16 and PAS 41, Agriculture: Bearer Plants

The amendments change the accounting requirements for biological assets that meet the

definition of bearer plants. Under these amendments, biological assets that meet the definition

of bearer plants will no longer be within the scope of PAS 41. Instead, PAS 16 will apply.

After initial recognition, bearer plants will be measured under PAS 16 at accumulated cost

(before maturity) and using either the cost model or revaluation model (after maturity). These

amendments also require that produce that grows on bearer plants will remain in the scope of

PAS 41 measured at fair value less costs to sell. For government grants related to bearer

plants, PAS 20, Accounting for Government Grants and Disclosure of Government Assistance,

will apply.

Amendments to PAS 27, Separate Financial Statements, Equity Method in Separate Financial

Statements

The amendments allow entities to use the equity method to account for investments in

subsidiaries, joint ventures and associates in their separate financial statements. An entity

already applying PFRSs and electing to change to the equity method in its separate financial

statements will have to apply that change retrospectively.

Annual Improvements to PFRSs 2012 - 2014 Cycle

Amendment to PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations,

Changes in Methods of Disposal

The amendment is applied prospectively and clarifies that changing from a disposal

through sale to a disposal through distribution to owners and vice-versa should not be

considered to be a new plan of disposal, rather it is a continuation of the original plan.

There is, therefore, no interruption of the application of the requirements in PFRS 5. This

amendment also clarifies that changing the disposal method does not change the date of

classification.

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Amendment to PFRS 7, Financial Instruments: Disclosures, Servicing Contracts

PFRS 7 requires an entity to provide disclosures for any continuing involvement in a

transferred asset that is derecognized in its entirety. The amendment clarifies that a

servicing contract that includes a fee can constitute continuing involvement in a financial

asset. An entity must assess the nature of the fee and arrangement against the guidance

for continuing involvement in PFRS 7 to determine whether the disclosures are required.

This amendment is to be applied such that the assessment of which servicing contracts

constitute continuing involvement will need to be done retrospectively. However,

comparative disclosures are not required to be provided for any period beginning before

the annual period in which the entity first applies this amendment.

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


This amendment is applied retrospectively and clarifies that the disclosures on offsetting

of financial assets and financial liabilities are not required in the condensed interim

financial report, unless they provide a significant update to the information reported in the

most recent annual report.

Amendment to PAS 19, Employee Benefits, Discount Rate: Regional Market Issue

This amendment is applied prospectively and clarifies that market depth of high quality

corporate bonds is assessed based on the currency in which the obligation is denominated,

rather than the country where the obligation is located. When there is no deep market for

high quality corporate bonds in that currency, government bond rates must be used. .

Amendment to PAS 34, Interim Financial Reporting, Disclosure of Information

‘Elsewhere in the Interim Financial Report’

The amendment is applied retrospectively and clarifies that the required interim

disclosures must either be in the interim financial statements or incorporated by cross-

reference between the interim financial statements and wherever they are included within

the greater interim financial report (e.g., in the management commentary or risk report).

4. Summary of Significant Accounting Policies

Current versus Noncurrent Classification

The Group presents assets and liabilities in the consolidated statement of financial position based

on current or noncurrent classification.

An asset is current when it is:

a. Expected to be realized or intended to be sold or consumed in normal operating cycle;

b. Held primarily for the purpose of trading;

c. Expected to be realized within twelve months after the reporting period; or

d. Cash or cash equivalent, unless restricted from being exchanged or used to settle a liability for

at least twelve months after the reporting period.

All other assets are classified as noncurrent.

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A liability is current when:

a. It is expected to be settled in normal operating cycle;

b. It is held primarily for the purpose of trading;

c. It is due to be settled within twelve months after the reporting period; or

d. There is no unconditional right to defer the settlement of the liability for at least twelve

months after the reporting period.

The Group classifies all other liabilities as noncurrent.

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 investments 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.

Financial Instruments - Initial Recognition and Subsequent Measurement

Classification of financial instruments

Financial instruments within the scope of PAS 39 are classified as:

a. Financial assets and financial liabilities at FVPL;

b. Loans and receivables;

c. Held-to-maturity investments;

d. Available-for-sale financial assets; and

e. Other financial liabilities.

The classification depends on the purpose for which the investments were acquired and whether

they are quoted in an active market. The Group determines the classification of its financial

instruments at initial recognition and, where allowed and appropriate, re-evaluates at every

reporting period. The financial instruments of the Group as of December 31, 2016 and 2015

consists of loans and receivables, financial assets and liabilities at FVPL and other financial

liabilities.

Date of recognition of financial instruments

Financial instruments are recognized in the consolidated statement of financial position when the

Group becomes a party to the contractual provision of the instrument. 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 the trade date basis.

In case where fair value is determined using data which is not observable, the difference between

the transaction price and model value is only recognized in profit or loss when the inputs become

observable or when the instrument is derecognized. For each transaction, the Group determines

the appropriate method of recognizing the Day 1 difference amount.

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*SGVFS022041*

Fair Value Measurement

The Group measures derivatives at fair value at each reporting period. Also, for assets and

liabilities which are not measured at fair value in the consolidated statement of financial position

but for which the fair value is disclosed, are included in Note 29.

The fair value is the price that would be received to sell an asset in an ordinary transaction

between market participants at the measurement date. The fair value measurement is based on the

presumption that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability; or

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

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

an asset or liability is measured using the assumptions that market participants would use when

pricing the asset or liability assuming that market participants act in their economic best interest.

The Group uses valuation techniques that are appropriate in the circumstances and for which

sufficient data are available to measure fair value, maximizing the use of relevant observable

inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial

statements are categorized within the fair value hierarchy, described as follows, based on the

lowest level input that is significant to the fair value measurement as a whole:

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

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

measurement is directly or indirectly observable.

Level 3: Valuation techniques for the lowest level input that is significant to the fair value

measurement is unobservable.

For assets and liabilities that are recognized in the consolidated financial statements at fair value

on a recurring basis, the Group determines whether transfers have occurred between levels in the

hierarchy by re-assessing categorization (based on the lowest level input that is significant to the

fair value measurement as a whole) at the end of each reporting period.

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.

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*SGVFS022041*

Financial assets and financial liabilities at FVPL are subsequently measured at fair value.

Changes in fair value of such assets or liabilities are accounted for in profit or loss. The Group

uses commodity swaps and foreign currency forwards to hedge its exposure to fuel price

fluctuations and foreign currency fluctuations, respectively. Such are accounted for as non-hedge

derivatives.

An embedded derivative is separated from the host contract and accounted for as a derivative if all

of the following conditions are met:

The economic characteristics and risks of the embedded derivative are not closely related to

the economic characteristics of the host contract;

A separate instrument with the same terms as the embedded derivative would meet the

definition of a derivative; and

The hybrid or combined instrument is not recognized at FVPL.

The Group assess whether an embedded derivative is required to be separated from the host

contract when the Group first becomes a party to the contract. Reassessment of embedded

derivatives is only done when there are changes in the contract that significantly modifies the

contractual cash flows.

The Group’s financial assets and liabilities at FVPL consist of derivative assets and derivative

liabilities as of December 31, 2016 and 2015, respectively.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments and

fixed maturities that are not quoted in an active market. Loans and receivables are recognized

initially at fair value, plus transaction costs that are attributable to the acquisition of loans and

receivables.

After initial measurement, loans and receivables are subsequently carried at amortized cost using

the effective interest rate (EIR) method, less allowance for impairment credit losses. Amortized

cost is calculated by taking into account any discount or premium on the acquisition, and fees or

costs that are an integral part of the EIR and transaction costs. Gains and losses are recognized in

profit or loss, when loans and receivables are derecognized or impaired, as well as through the

amortization process.

This accounting policy applies primarily to the Group’s cash and cash equivalents (excluding cash

on hand), receivables and certain refundable deposits.

Other financial liabilities

This category pertains to financial liabilities that are not held for trading or not designated as at

FVPL upon the inception of the liability. These include liabilities arising from operations and

borrowings.

Other financial liabilities are initially recognized at the fair value of the consideration received,

less directly attributable transaction costs.

After initial measurement, other financial liabilities are measured at amortized cost using the EIR

method. Amortized cost is calculated by taking into account any discount or premium on the

acquisition and fees or costs that are an integral part of the EIR.

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*SGVFS022041*

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.

Offsetting of Financial Instruments

Financial assets and liabilities are offset and the net amount is reported in the consolidated

statement of financial position 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. The Group assesses that it has a currently enforceable right to

offset if the right is not contingent on a future event, and is legally enforceable in the normal

course of business, event of default, and event of insolvency or bankruptcy of the Group and all of

the counterparties.

Derecognition of Financial Instruments

Financial assets

A financial asset (or, when applicable, a part of a financial asset or part of a group of financial

assets) is derecognized (that is, removed from the Group’s consolidated statement of financial

position) when:

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

The Group has transferred its rights to receive cash flows from the asset or has assumed an

obligation to pay the received cash flows in full without material delay to a third party under a

‘pass-through’ arrangements; and either:

The Group has transferred substantially all the risks and rewards of the asset; or

The Group has neither transferred nor retained substantially all the risks and rewards of

the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a

pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards

of ownership. When it has neither transferred nor retained substantially all of the risks and

rewards of the asset, nor transferred control of the asset, the Group continues to recognize the

transferred asset to the extent of its continuing involvement. In that case, the Group also

recognizes an associated liability. The transferred asset and the associated liability are measured

on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured

at the lowest level of the original carrying amount of the asset and the maximum amount of

consideration the Group could be required pay.

Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged,

cancelled or expires. 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.

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. An impairment exists if one or more events that has

occurred since the initial recognition of the asset (an incurred ‘loss event’), has an impact on the

estimated future cash flows of the financial asset or the group of financial assets that can be

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*SGVFS022041*

reliably estimated. Evidence of impairment may include indications that the debtors or a group of

debtors 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 observable data indicating that there is a measurable decrease in the estimated

future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For financial assets carried at amortized cost, the Group first assesses whether impairment exists

individually for financial assets that are individually significant, or collectively for financial assets

that are not individually significant. If the Group determines that no objective evidence of

impairment exists for an individually assessed financial asset, whether significant or not, it

includes the asset in a group of financial assets with similar credit risk characteristics and

collectively assesses them for impairment. Assets that are individually assessed for impairment

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

assessment of impairment.

The amount of any impairment loss identified is measured as the difference between the asset’s

carrying amount and the present value of estimated future cash flows that is discounted at the

asset’s original EIR.

The carrying amount of the asset is reduced through the use of an allowance account and the loss

is recognized in the profit or loss. Receivables, together with the associated allowance are written

off when there is no realistic prospect of future recovery. If, in a subsequent year, the amount of

the estimated impairment loss increases or decreases because of an event occurring after the

impairment is recognized, the previously recognized impairment loss is increased or reduced by

adjusting the allowance account. If a write-off is later recovered, the recovery is credited in profit

or loss.

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.

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 and amortization and

accumulated 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.

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*SGVFS022041*

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 airframe and engine 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

expenses are charged to profit or loss as incurred.

Pre-delivery payments for the construction of aircraft are initially recorded as Construction

in-progress when paid to the counterparty. 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 follow:

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 asset) is recognized in profit or loss, when the asset is derecognized.

The methods of depreciation and amortization, EUL and residual values of property and

equipment are reviewed annually and adjusted prospectively.

Fully depreciated property and equipment are returned in the account until they are no longer in

use and no further depreciation or amortization is charged to profit or loss in the consolidated

statement of comprehensive income.

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*SGVFS022041*

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, 2016 and

2015 as all borrowing costs from outstanding long-term debt relate to assets that are ready for

intended use.

Business Combination and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition

is measured as the aggregate of the consideration transferred measured at acquisition date fair

value and the amount of any non-controlling interests in the acquiree. For each business

combination, the Group elects whether to measure the non-controlling interests in the acquiree at

fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related

costs are expensed as incurred and included under ‘General and administrative’ account in the

consolidated statement of comprehensive income.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for

appropriate classification and designation in accordance with the contractual terms, economic

circumstances and pertinent conditions as at the acquisition date. This includes the separation of

embedded derivatives in host contracts by the acquiree.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at

the acquisition date. Contingent consideration classified as an asset or liability that is a financial

instrument and within the scope of PAS 39, Financial Instruments: Recognition and

Measurement, is measured at fair value with changes in fair value recognized either in profit or

loss or as a change to OCI. If the contingent consideration is not within the scope of PAS 39, it is

measured in accordance with the appropriate PFRS. Contingent consideration that is classified as

equity is not remeasured and subsequent settlement is accounted for within equity.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration

transferred and the amount recognized for non-controlling interests, and any previous interest

held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net

assets acquired is in excess of the aggregate consideration transferred, the Group reassesses

whether it has correctly identified all of the assets acquired and all of the liabilities assumed and

reviews the procedures used to measure the amounts to be recognized at the acquisition date. If

the reassessment still results in an excess of the fair value of net assets acquired over the aggregate

consideration transferred, then the gain is recognized in profit or loss.

After initial recognition, goodwill is measured at cost, less any accumulated impairment losses.

Investments in Joint Ventures and an Associate

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. An associate is an

entity in which the Parent Company has significant influence and which is neither a subsidiary nor

a joint venture.

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The Parent Company’s 60.00%, 49.00% and 35.00% investments in Philippine Academy for

Aviation Training, Inc. (PAAT), Aviation Partnership (Philippines) Corporation (A-plus) and SIA

Engineering (Philippines) Corporation (SIAEP), respectively, are classified as investments in joint

ventures. The Parent Company’s 15.00% investment in Air Block Box Asia Pacific Pte. Ltd.

(ABB) is classified as an investment in associate. These investments in JV and an associate are

accounted for under the equity method. Under the equity method, the investments in JV and an

associate 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 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 statements are prepared as of ht same date with the Group. The investee companies’

accounting policies conform to those by the Group for like transactions and events in similar

circumstances.

Intangible Assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of

intangible assets acquired in a business combination is their fair value at the date of acquisition.

Following initial recognition, intangible assets are carried at cost, less any accumulated

impairment loss.

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment

annually, either individually or at the cash-generating unit (CGU) level. The assessment of

indefinite life is reviewed annually to determine whether the indefinite life continues to be

supportable. If not, the change in useful life from indefinite to finite is made on a prospective

basis.

Gains or losses arising from derecognition of an intangible asset are measured as the difference

between the net disposal proceeds and the carrying amount of the asset and are recognized in the

profit or loss when the asset is derecognized.

The intangible asset of the Group has indefinite useful lives.

Impairment of Nonfinancial Assets

The Group assess, at each reporting date, whether there is an indication that an asset may be

impaired. If any indication exists, or when annual impairment testing for an asset is required, the

Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of

the asset’s or CGU’s fair value less costs of disposal (FVLCD) and its value-in-use (VIU). The

recoverable amount 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. When the

carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered

impaired and is written down to its recoverable amount.

In determining FVLCD, recent market transactions are taken into account. If no such transactions

can be identified, an appropriate valuation model is used. These calculations are corroborated by

valuation multiples, quoted share prices for publicly traded companies or other available fair value

indicates. In assuming VIU, 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.

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*SGVFS022041*

The Group bases its impairment calculation on detailed budgets and forecast calculations, which

are prepared separately for each of the Group’s CGUs to which the individual assets are allocated.

These budgets and forecast calculations generally cover a period of five years. A long-term

growth rate is calculated and applied to project future cash flows after the fifth year.

For assets excluding goodwill, an assessment is made at each reporting date to determine whether

there is an indication that previously recognized impairment losses no longer exist or have

decreased. If such indication exist, the Group estimate the asset’s or CGU’s recoverable amount.

A previously recognized impairment loss is reversed only if there has been a change in the

assumptions used to determine that asset’s recoverable amount since the last impairment loss was

recognized. The reversal is limited so that the carrying amount of the asset that does not exceed

its recoverable amount, nor 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.

Goodwill is tested for impairment annually as at December 31 and when circumstances indicate

that the carrying value is impaired.

Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or

group of CGU) to which the goodwill relates. When the recoverable amount of the CGU is less

than its carrying amount, an impairment loss is recognized. Impairment loss relating to goodwill

cannot be reversed in future periods.

Intangible assets with indefinite useful lives are tested for impairment annually as at December 31

at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be

impaired.

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 contracts under TMB and

PBH, the Group recognizes expenses on an accrual basis.

Asset Retirement Obligation (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. The event that gives rise to the obligation is the actual flying

hours of the asset as used, as the usage determines the timing and nature of the entity completes

the overhaul and restoration. Regular aircraft maintenance is accounted for as expense when

incurred, while overhaul and restoration are accounted on an accrual basis.

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*SGVFS022041*

If there is a commitment related to maintenance of aircraft held under operating lease

arrangements, a provision is made during the lease term for the lease return obligations specified

within those lease agreements. The provision is made based on historical experience,

manufacturers’ advice and if relevant, contractual obligations, to determine the present value of

the estimated future major airframe inspections cost and engine overhauls.

Advance payment for materials for the restoration of the aircraft is initially recorded under

‘Advances to supplier’ account in the consolidated statement of financial position. This is

recouped when the expenses for restoration of aircraft have been incurred.

The Group regularly assesses the provision for ARO and adjusts the related liability.

Liability Under Lifestyle Rewards Program

The Group operates a lifestyle rewards program called ‘Getgo.’ A portion of passenger revenue

attributable to the award of Getgo points, which is estimated based on expected utilization of these

benefits, is deferred until utilized. The fair value of the consideration received in respect of the

initial sale is allocated to the award credits based on its fair value. The fair value of the points

expected to be redeemed is estimated using the applicable fare based on the estimated redemption.

The deferred revenue is included under ‘Other noncurrent liabilities’ in the consolidated statement

of financial position. Any remaining unutilized benefits are recognized as revenue upon

redemption or expiry.

Common Stock

Common stocks are classified as equity and recorded at par. Proceeds in excess of par value are

recorded under ‘Capital paid in excess of par value’ account in the consolidated statement of

financial position. Incremental costs directly attributable to the issuance of new shares are shown

in equity as a deduction from the proceeds.

Treasury Stock

Own equity instruments which are acquired (treasury stocks) are recognized at cost and deducted

from equity. No gain or loss is recognized in profit and loss on the purchase, sale, issuance or

cancellation of the Parent Company’s own equity instruments.

Retained Earnings

Retained earnings represent accumulated earnings of the Group, less dividends declared.

Appropriated retained earnings are set aside for purposes of the Parent Company’s re-fleeting

program. Dividends on common shares are recognized as a liability and deducted from equity

when approved and declared by the Parent Company’s Board of Directors (BOD), in the case of

cash dividends; or by the Parent Company’s BOD and shareholders, in the case of stock dividends.

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, excluding portion relating to awards under Lifestyle

Rewards Program, are initially recorded under ‘Unearned transportation revenue’ account in the

consolidated statement of financial position until earned and recognized under ‘Revenue’ account

in the consolidated statement of comprehensive income when carriage is provided or when the

passenger is lifted.

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*SGVFS022041*

Ancillary revenue

Revenue from services incidental to the transportation of passengers, cargo, mail and merchandise

are recognized when transactions are carried out.

Interest income

Interest on cash in banks, short-term cash placements and debt securities classified as financial

assets at FVPL is recognized as the interest accrues using the EIR method.

Expense Recognition

Expenses are recognized when it is probable that decrease in future economic benefits 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.

The commission related to the sale of air transportation services is recognized as outright expense

upon receipt of the payment from customers, and is included under ‘Reservation and sales’

account in the consolidated statement of comprehensive income.

Foreign Currency Transactions

Transactions in foreign currencies are initially recorded in the Parent Company and subsidiaries’

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. closing rate prevailing at the reporting date. All

differences are taken to the profit or loss. 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.

Pension Costs

The Group maintains defined benefit plans covering substantially all of its employees. The cost of

providing benefits under the defined benefit plans is actuarially determined using the projected

unit credit method. The 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 the option to accelerate when significant

changes to underlying assumptions occur.

Pension expense comprises the following:

a. Service cost; and

b. Net interest on pension liability.

Service costs, which include current service costs, past service costs and gains or losses on non-

routine settlements, are recognized as expense in profit or loss. Past service costs are recognized

when plan amendment or curtailment occurs.

Net interest on pension liability is the change during the period in the pension liability that arises

from the passage of time, which is determined by applying the discount rate based on high quality

corporate bonds to the pension liability. Net interest on pension liability is recognized as expense

or income in profit or loss.

Remeasurements comprising actuarial gains and losses, excess of actual return on plan assets over

interest income and any change in the effect of the asset ceiling (excluding net interest on pension

liability) are recognized immediately in OCI in the period in which they arise. Remeasurements

are not reclassified to profit or loss in subsequent periods.

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*SGVFS022041*

The pension liability is the aggregate of the present value of defined benefit obligation at the end

of the reporting period reduced by the fair value of plan assets, adjusted for any effect of limiting a

net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any

economic benefits available in the form of refunds from the plan or reductions in future

contributions to the plan.

Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not

available to the creditors of the Group, nor can they be paid directly to the Group. The fair value

of plan assets is based on market price information. When no market price is available, the fair

value of plan assets is estimated by discounting expected future cash flows using a discount rate

that reflects both the risk associated with the plan assets and the maturity or expected disposal date

of those assets (or, if they have no maturity, the expected period until the settlement of the related

obligations).

The Group’s right to be reimbursed of some or all of the expenditure required to settle a defined

benefit obligation is recognized as a separate asset at fair value when and only when

reimbursement is virtually certain.

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 tax authority. The tax rates and tax laws used to

compute the amount are those that are enacted or substantively enacted as of the reporting date.

Management periodically evaluates positions taken in the tax returns with respect to situations in

which applicable tax regulations are subject to interpretations and establishes provisions, when

appropriate.

Deferred tax

Deferred tax is provided using the liability method on all temporary differences, with certain

exceptions, between the tax bases of assets and liabilities and their carrying amounts for financial

reporting purposes at the reporting date.

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 over

RCIT 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.

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 future 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.

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*SGVFS022041*

Deferred tax liabilities are recognized for all taxable temporary differences, with certain

exceptions. Deferred tax liabilities associated with investments in subsidiaries, branches and

associates, and interests in joint arrangements are not recognized if the Group is able to control the

timing of the reversal of the temporary difference and it is probable that the temporary difference

will not reverse in the foreseeable future.

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 reporting date.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss.

Deferred tax items are recognized in correlation to the underlying transaction either in profit or

loss or OCI.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to

offset current tax assets against current tax liabilities and the deferred taxes relate to the same

taxable entity and the same tax 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.

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*SGVFS022041*

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.

Provisions and Contingencies

Provisions are recognized when the Group has a present obligation (legal or constructive) as a

result of a past event, it is probable (i.e., more likely than not) that an outflow of resources

embodying economic benefits will be required to settle the obligation and 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, when

appropriate, the risks specific to the liability. When 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 in the notes to consolidated financial statements, unless the possibility of an outflow of

resources embodying economic benefits is remote. Contingent assets are not recognized but

disclosed in the notes to consolidated financial statements when an inflow of economic benefits is

probable. If it is virtually certain that an inflow of economic benefits will arise, the asset and the

related income are recognized in the consolidated financial statements.

Earnings (Loss) Per Share (EPS)

Basic EPS is computed by dividing net income applicable to common equity holders 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 common equity

holders of the Group by the weighted average number of common shares outstanding during the

year plus the weighted average number of common shares that would be issued on the conversion

of all the dilutive potential common shares into common shares.

For the years ended December 31, 2016 and 2015, 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 and Chief Executive Officer (CEO). The nature of the operating segment is set out in

Note 6.

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*SGVFS022041*

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. Passenger revenue recognition

Passenger sales are recognized as revenue when the obligation of the Parent Company to

provide transportation service ceases when the service has been provided to the passengers

according to flight schedule. The amount of passenger ticket for which the related

transportation service has not yet been rendered at the end of the reporting period, is recorded

under ‘Unearned transportation revenue’ account in the consolidated statement of financial

position.

As of December 31, 2016 and 2015, the balances of the Group’s unearned transportation

revenue amounted to P=8,141.8 million and P=6,971.8 million, respectively.

b. Fair values of financial instruments

Where the fair values of certain financial assets and liabilities recorded in the consolidated

statement of financial position cannot be derived from active markets, they are determined

using valuation techniques, including the discounted cash flow model. The inputs to these

models are taken from observable market data where possible, but where this is not feasible,

estimates are used in establishing fair values. The judgments include considerations of

liquidity risk, credit risk and volatility. Changes in assumptions about these factors could

affect the reported fair value of financial instruments. For derivatives, the Group generally

relies on the agent’s valuation.

The fair values of the Group’s financial instruments are presented in Note 29.

c. 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.

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 (e.g., no bargain purchase option and

transfer of ownership at the end of the lease term). The Group determined that it has no risks

relating to changing economic conditions since the Group does not own the leased aircraft.

Where the lease agreement does not transfer substantially all the risks and rewards incidental

to ownership, such leases are accounted for as operating leases (Note 30).

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d. Consolidation of SPEs

The Group periodically undertakes transactions that may involve obtaining the rights to

variable returns from its involvement with the SPEs. These transactions include the purchase

of aircraft and assumption of certain liabilities. In all such cases, management makes an

assessment as to whether the Group has: (a) power over the SPEs; (b) the right over the

returns of its SPEs; and (c) the ability to use power over the SPEs to affect the amount of the

Parent Company’s return, and based on these assessments, the SPEs are consolidated as a

subsidiary or associated company. In making these assessments, management considers the

underlying economic substance of the transaction and not only the contractual terms. The

Group has assessed that it will benefit from the economic benefits of the SPEs’ activities and

it will affect the returns for the Group. The Group is directly exposed to the risks and returns

from its involvement with the SPEs. Such rights and risks associated with the benefits and

returns are indicators of control. Accordingly, the SPEs are consolidated.

e. Determination of functional currency

PAS 21 requires management to use its judgment in determining 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:

1. 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);

2. The currency in which funds from financing activities are generated; and

3. The currency in which receipts from operating activities are usually retained.

Management determined that Philippine peso (P=) is the functional currency for each entity in

the Group, after considering the criteria stated in PAS 21.

f. 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 will have a material adverse effect on

the Group’s financial position and financial performance. It is possible, however, that future

financial performance could be materially affected by changes in the estimates or in the

effectiveness of the strategies relating to these proceedings (Note 30).

g. Allocation of revenue, costs and expenses for registered and non-registered activities

Revenue, costs and expenses are classified as exclusive and common. Exclusive revenue, cost

and expenses such as passenger revenue, cargo revenue, baggage revenue, 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.

h. Classification of joint arrangements

The Group’s investments in JVs (Note 14) are structured in separate incorporated entities.

Even though the Group holds various percentage of ownership interest on these arrangements,

their respective joint arrangement agreements requires unanimous consent from all parties to

- 23 -

*SGVFS022041*

the agreement for the relevant activities identified. The Group and the parties to the

agreement only have rights to the net assets of the JV through the terms of the contractual

arrangements.

i. Assessment of intangible assets with indefinite useful lives

The Group has intangible assets representing costs to establish brand and market opportunities

under the strategic alliance with CEBGO (Note 7). Management assessed that these assets

have indefinite useful lives because there is no foreseeable limit to the period over which these

assets are expected to generate net cash inflows to the Group.

Estimates and Assumptions

The key assumptions concerning the future and other sources of estimation uncertainty at the

reporting 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 Asset Retirement Obligation (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.

Assumptions used to compute ARO are reviewed and updated annually by the Group. As of

December 31, 2016 and 2015, the cost of restoration is computed based on the Group’s

assessment on expected future aircraft utilization.

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 expense.

As of December 31, 2016 and 2015, the Group’s ARO liability (included under ‘Other

noncurrent liabilities’ account in the consolidated statement of financial position) has a

carrying value of P=2,465.7 million and P=1,344.6 million, respectively (Note 19). The related

repairs and maintenance expense for the years ended December 31, 2016, 2015 and 2014

amounted to P=1,121.1 million, P=864.0 million and P=476.0 million, respectively (Notes 19

and 22).

b. Impairment of goodwill and intangible assets

The Group determines whether goodwill and intangibles with indefinite useful lives are

impaired at least on an annual basis. The impairment testing is performed annually as at

December 31 and when circumstances indicate that the carrying amount is impaired. The

impairment testing also requires an estimation of the recoverable amounts, which is the

FVLCD or VIU of the CGU whichever is higher, to which the goodwill and intangibles with

indefinite useful lives are located.

In determining the recoverable amount of these assets, the management estimates the VIU of

the CGU to which goodwill and intangible assets are allocated. Estimating the VIU requires

management to make an estimate of the expected future cash flows from the asset or CGUs

and choose a suitable discount rate in order to calculate the present value of those cash flows.

- 24 -

*SGVFS022041*

As of December 31, 2016 and 2015, the Group has determined that goodwill and intangibles with

indefinite useful lives are recoverable based on VIU. Goodwill amounted to

P=566.8 million as of December 31, 2016 and 2015 (Notes 7 and 15). Brand and market opportunities,

which are recorded under ‘Other noncurrent assets’ account amounted to

P=852.2 million as of December 31, 2016 and 2015 (Note 7 and 16).

c. Estimation of useful lives 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 reviews annually the EULs

and 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 of property and

equipment would increase the recorded depreciation and amortization expense and decrease

noncurrent assets.

As of December 31, 2016 and 2015, the carrying values of the Group’s property and

equipment amounted to P=81,890.3 million and P=72,075.8 million, respectively (Note 13).

The Group’s depreciation and amortization expense amounted to P=5,998.7 million,

P=5,111.5 million and P=4,281.5 million for the years ended December 31, 2016, 2015 and

2014, respectively (Note 13).

d. Estimation of allowance for credit losses on receivables

The Group maintains allowance for credit 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 collectability 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 balances of receivables and allowance for credit losses as of December 31, 2016 and 2015

are disclosed in Note 10.

e. 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 as of December 31, 2016 and 2015 are discussed in Note 11.

- 25 -

*SGVFS022041*

f. Estimation of liability under the Lifestyle Rewards Program

A portion of passenger revenue attributable to the award of lifestyle reward program points,

estimated based on expected utilization on these benefits, is deferred until utilized. The points

expected to be redeemed are measured at fair value which is estimated using the Peso value of

the points. Deferred revenue included as part of ‘Other noncurrent liabilities’ account

amounted to P=377.0 million and P=92.5 million as of December 31, 2016 and 2015,

respectively (Note 19). The rewards program started in 2015. Any remaining unredeemed

points are recognized as revenue upon expiration.

g. Estimation of pension and other employee benefit costs

The determination of the obligation and cost of pension and other employee benefits is

dependent on the selection of certain assumptions used in calculating such amounts. Those

assumptions include, among others, discount rates and salary increase rates (Note 24).

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 amounted to P=568.8 million and P=546.5 million as of

December 31, 2016 and 2015, respectively (Note 24).

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.

h. Recognition of deferred tax assets

The Group assesses the carrying amounts of deferred income taxes at each reporting period

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, 2016 and 2015, the Group had certain gross deductible and taxable

temporary differences which are expected to expire or reverse within the Income Tax Holiday

(ITH) period, and for which deferred tax assets and deferred tax liabilities were not set up on

account of the Group’s ITH.

As of December 31, 2016 and 2015, the Group has deferred tax assets amounting to

P=4,015.7 million and P=3,574.4 million, respectively. Unrecognized deferred tax assets as of

December 31, 2016 and 2015 amounted to nil and P=1,033.8 million, respectively

(Note 25).

- 26 -

*SGVFS022041*

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 CODM is the President and CEO of

the Parent Company.

The revenue of the operating segment was mainly derived from rendering transportation services.

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 statements of

financial position, which is in accordance with PFRSs.

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

2016 2015 2014

Revenue P=63,778,967,986 P=56,620,079,940 P=52,176,271,673

Earnings before interest, taxes,

depreciation, amortization, and

rent (EBITDAR) 23,624,718,036 19,700,325,097 12,418,364,058

Depreciation and amortization 5,998,695,417 5,111,543,724 4,281,525,018

Interest expense 1,170,181,141 1,073,109,693 1,013,241,353

Interest income 113,672,171 83,006,926 79,927,272

Earnings before interest and taxes

(EBIT) 12,251,198,186 9,700,220,806 4,157,336,990

Pre-tax core net income 11,372,998,058 8,745,536,537 3,320,349,000

Net income 9,754,136,196 4,387,225,875 853,498,216

Capital expenditures 19,126,054,236 13,047,934,091 13,316,719,856

Hedging gains (losses) – net 1,587,708,081 (2,931,215,906) (2,314,241,984)

Share in net income of JV 178,308,842 35,418,498 96,326,091

Income tax expense (benefit) (37,971,487) (858,430,586) 25,137,768

Pre-tax core net income and EBITDAR are considered as non-PFRS measures.

Pre-tax core net income is the operating income after deducting net interest expense and adding

equity income/loss of joint venture.

EBITDAR is the operating income after adding depreciation and amortization, provision for ARO

and aircraft and engine lease expenses.

Capital expenditure is the total paid acquisition of property and equipment for the period.

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*SGVFS022041*

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:

2016 2015 2014

Total segment revenue of reportable

operating segment P=61,899,278,892 P=56,501,654,516 P=52,000,018,310

Nontransport revenue and

other income 1,879,689,094 118,425,424 176,253,363

Total revenue P=63,778,967,986 P=56,620,079,940 P=52,176,271,673

Nontransport revenue and other income include interest income, share in net income of JV and

fuel hedging gains.

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:

2016 2015 2014

Total segment income of

reportable segment P=12,251,198,186 P=9,700,220,806 P=4,157,336,990

Add (deduct) unallocated items:

Nontransport revenue and

other income 1,879,689,094 118,425,424 176,253,363

Nontransport expenses and

other charges (4,414,722,571) (6,289,850,941) (3,454,954,369)

Benefit from (provision for)

income tax 37,971,487 858,430,586 (25,137,768)

Net income 9,754,136,196 4,387,225,875 853,498,216

Other comprehensive gain (loss), net

of tax 7,847,827 (61,904,911) 209,681,986

Total comprehensive income P=9,761,984,023 P=4,325,320,964 P=1,063,180,202

The Group’s major revenue-producing assets are the aircraft owned by the Group, which are

employed across its route network (Note 13).

The Group has no significant customer which contributes 10.00% or more to the revenues of the

Group.

7. Business Combination

On February 10, 2014, the Parent Company signed a Sale and Purchase Agreement (SPA) to

acquire 100% shares of CEBGO, as part of the strategic alliance between the Parent Company and

Tiger Airways Holding Limited (TAH). Under the terms of the SPA, the closing of the

transaction is subject to the satisfaction or waiver of each of the conditions contained in the SPA.

On March 20, 2014, all the conditions precedent have been satisfactorily completed. The Parent

Company has paid the purchase price covering the transfer of shares from TAH. Consequently,

the Parent Company gained control of CEBGO on the same date. The total consideration for the

transaction, at post-closing settlement date, amounted to P=265.1 million.

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*SGVFS022041*

The fair values of the identifiable assets and liabilities of CEBGO at the date of acquisition follow:

Amount

Total cash, receivables and other assets P=1,234,084,305

Total accounts payable, accrued expenses and unearned income 1,535,756,691

Net liabilities (301,672,386)

Goodwill 566,781,533

Acquisition cost at post-closing settlement date P=265,109,147

The goodwill arising from this business combination amounted to P=566.8 million (Note 15). The

Parent Company also identified intangible assets representing costs to establish brand and market

opportunities under the strategic alliance with TAH (Note 16). The related deferred tax liability

on this business combination amounted to P=185.6 million (Note 25). The total purchase price after

closing settlement date amounted to P=488.6 million.

8. Cash and Cash Equivalents

This account consists of:

2016 2015

Cash on hand P=32,366,174 P=30,790,719

Cash in banks 2,582,114,836 1,078,023,124

Short-term placements 7,681,761,294 3,597,276,220

P=10,296,242,304 P=4,706,090,063

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 Peso earn an average

annual interest of 2.35%, 2.35% and 3.07% in 2016, 2015 and 2014, respectively. Moreover,

short-term placements in US dollar (USD) earn interest on an average annual interest rate of

1.31%, 0.77% and 0.92% in 2016, 2015 and 2014, respectively.

Interest income earned on cash in banks and short-term placements, presented in the consolidated

statements of comprehensive income, amounted to P=113.7 million, P=83.0 million and

P=79.9 million in 2016, 2015 and 2014, respectively.

9. Investment and Trading Securities

This account consists of derivative financial assets and liabilities in 2016 and 2015 that are not

designated as accounting hedges. Derivative assets amounted to P=441.8 million as of

December 31, 2016 and derivative liabilities amounted to P=2,443.5 million as of December 31,

2015.

As of December 31, 2016 and 2015, this account consists of commodity swaps.

- 29 -

*SGVFS022041*

Commodity Swaps

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, 2016 and

2015, the Group has outstanding fuel hedging transactions. 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 swaps can be exercised at various

calculation dates with specified quantities on each calculation date. The swaps have various

maturity dates through December 31, 2018.

As of December 31, 2016 and 2015, the Group recognized net changes in fair value of derivatives

amounting to P=1,581.0 million gain and P=2,945.8 million loss, respectively. These are recognized

in ‘Hedging gains (losses) - net’ account under the consolidated statements of comprehensive

income.

Foreign Currency Forwards

In 2014, the Group entered into foreign currency hedging arrangements with various

counterparties to manage its exposure to foreign currency fluctuations. Such 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. In 2015, the Group pre-terminated all

foreign currency derivative contracts, where the Group recognized realized gain of P=14.6 million.

For the year ended December 31, 2015, such realized gain is recognized in ‘Hedging gains (losses)

- net’ account under the consolidated statements of comprehensive income. In 2016, the Parent

Company entered into foreign currency forward contracts which were pre-terminated in the same

year, where the Parent Company recognized realized gain of P=6.7 million.

Fair value changes on derivatives

The changes in fair value of all derivative financial instruments not designated as accounting

hedges follow:

2016 2015

Balance at beginning of year

Derivative assets P=– P=–

Derivative liabilities 2,443,495,138 2,260,559,896

(2,443,495,138) (2,260,559,896)

Net changes in fair value of derivatives 1,587,708,081 (2,931,215,906)

(855,787,057) (5,191,775,802)

Fair value of settled instruments 1,297,560,962 2,748,280,664

Balance at end of year P=441,773,905 (P=2,443,495,138)

Attributable to:

Derivative assets P=758,876,862 P=–

Derivative liabilities P=317,102,957 P=2,443,495,138

The net changes in fair value of derivatives is inclusive of the realized gains on foreign currency

forwards amounting to P=6.7 million, P=14.6 million and P=109.8 million in 2016, 2015 and 2014,

respectively.

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*SGVFS022041*

10. Receivables


2016 2015

Trade receivables P=1,667,078,389 P=1,398,342,106

Due from related parties 124,270,740 125,623,460

Interest receivable 3,544,120 1,377,036

Others 663,230,536 528,512,366

2,458,123,785 2,053,854,968

Less allowance for credit losses 331,329,923 316,410,084

P=2,126,793,862 P=1,737,444,884

Trade receivables are noninterest-bearing and generally have 30 to 90 days terms.

Interest receivable pertains to accrual of interest income from short-term placements.

Others include receivable from insurance, employees, fuel hedge counterparties.

The changes in the allowance for credit losses on receivables follow:

2016

Trade

Receivables Others Total

Balance at beginning of year P=8,438,558 P=307,971,526 P=316,410,084

Unrealized foreign exchange gain on

allowance for credit losses 72,636 14,847,203 14,919,839

Balance at end of year P=8,511,194 P=322,818,729 P=331,329,923

2015

Trade

Receivables Others Total

Balance at beginning of year P=8,372,701 P=298,458,862 P=306,831,563

Unrealized foreign exchange gain on

allowance for credit losses 65,857 9,512,664 9,578,521

Balance at end of year P=8,438,558 P=307,971,526 P=316,410,084

11. Expendable Parts, Fuel, Materials and Supplies


2016 2015

At NRV:

Expendable parts P=823,992,795 P=670,424,438

At cost:

Fuel 299,341,207 171,346,803

Materials and supplies 66,722,985 77,346,802

366,064,192 248,693,605

P=1,190,056,987 P=919,118,043

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*SGVFS022041*

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, 2016, 2015 and 2014 amounted to

P=419.9 million, P=374.4 million and P=365.2 million, respectively. The cost of fuel reported as

expense under ‘Flying operations’ account amounted to P=15,821.3 million, P=17,659.1 million and

P=23,210.3 million in 2016, 2015 and 2014, respectively (Note 22).

The cost of expendable parts amounted to P=844.5 million and P=690.9 million as of December 31,

2016 and 2015, respectively. The allowance for inventory write down amounted to P=20.5 million

as of December 31, 2016 and 2015. There are no additional provisions for inventory write down

in 2016 and 2015. No expendable parts, fuel, material and supplies are pledged as security for

liabilities.

12. Other Current Assets


2016 2015

Advances to suppliers P=651,602,385 P=829,605,886

Prepaid rent 343,971,042 324,260,018

Prepaid insurance 7,092,843 45,784,015

Deposit to counterparties 5,516,247 1,124,551,325

Others 88,088,168 75,917,904

P=1,096,270,685 P=2,400,119,148

Advances to suppliers include advances made for the purchase of various aircraft parts, service

maintenance for regular maintenance and restoration costs of the aircraft. Advances for regular

maintenance are recouped from progress billings, which occurs within one year from the date the

advances arose, whereas, advance payment for restoration costs is recouped when the expenses for

restoration of aircraft have been incurred. These advances are unsecured and noninterest-bearing

(Note 30).

Prepaid rent pertains to advance rental on aircraft under operating lease and on office spaces in

airports (Note 30).

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.

Deposit to counterparties pertains to collateral deposits provided to counterparties for fuel hedging

transactions.

Others include housing allowance and prepayments to other suppliers.

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*SGVFS022041*

13. Property and Equipment

The composition and movements in this account follow:

2016

Passenger

Aircraft

(Notes 18 and 32) Engines Rotables

Ground

Support

Equipment

EDP

Equipment,

Mainframe and

Peripherals

Leasehold

Improvements

Transportation

Equipment Sub-total

Cost

Balance at beginning of year P=70,180,391,031 P=8,800,954,427 P=3,224,302,949 P=515,338,948 P=865,940,227 P=1,030,008,118 P=231,795,064 P=84,848,730,764

Additions 8,093,523,876 1,574,616,146 553,091,249 137,361,635 52,875,536 – 39,686,360 10,451,154,802

Reclassification 4,351,607,461 – – – (1,240,000) 295,997,691 – 4,646,365,152

Disposals/others (6,731,514,648) (905,884,607) (126,834,671) (3,435,189) (43,800,751) – – (7,811,469,866)

Balance at end of year 75,894,007,720 9,469,685,966 3,650,559,527 649,265,394 873,775,012 1,326,005,809 271,481,424 92,134,780,852

Accumulated Depreciation

and Amortization

Balance at beginning of year 18,918,279,072 2,271,191,035 668,272,255 391,633,417 688,136,458 327,657,757 168,712,193 23,433,882,187

Depreciation and amortization 4,197,295,780 1,108,933,677 284,567,783 60,885,023 94,619,501 196,797,075 23,812,004 5,966,910,843

Reclassification – – – – (1,240,000) – – (1,240,000)

Disposals/others (3,919,771,057) (440,884,843) (90,855,604) (3,384,416) (43,768,739) – – (4,498,664,659)

Balance at end of year 19,195,803,795 2,939,239,869 861,984,434 449,134,024 737,747,220 524,454,832 192,524,197 24,900,888,371

Net Book Value P=56,698,203,925 P=6,530,446,097 P=2,788,575,093 P=200,131,370 P=136,027,792 P=801,550,977 P=78,957,227 P=67,233,892,481

2016

Furniture,

Fixtures and

Office

Equipment

Communication

Equipment

Special

Tools

Maintenance

and Test

Equipment

Other

Equipment

Construction

In-progress Total

Cost

Balance at beginning of year P=158,892,556 P=15,023,503 P=14,213,796 P=6,681,631 P=99,147,611 P=10,576,116,375 P=95,718,806,236

Additions 34,976,928 11,303,157 594,216 32,589 6,966,369 8,621,026,175 19,126,054,236

Reclassification – – – – 1,240,000 (4,647,605,152) –

Disposals/others (1,126,698) – – (176,103) (2,467,460) – (7,815,240,127)

Balance at end of year 192,742,786 26,326,660 14,808,012 6,538,117 104,886,520 14,549,537,398 107,029,620,345

(Forward)

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*SGVFS022041*

Furniture,

Fixtures and

Office

Equipment

Communication

Equipment

Special

Tools

Maintenance

and Test

Equipment

Other

Equipment

Construction

In-progress Total

Accumulated Depreciation and Amortization

Balance at beginning of year P=100,290,381 P=10,686,314 P=12,645,419 P=6,590,325 P=78,890,597 P=– P=23,642,985,223

Depreciation and amortization 21,635,398 2,674,955 429,938 57,720 6,986,563 – 5,998,695,417

Reclassification – – – – 1,240,000 – –

Disposals/others (1,151,040) 79,224 – (176,103) (2,451,214) – (4,502,363,792)

Balance at end of year 120,774,739 13,440,493 13,075,357 6,471,942 84,665,946 – 25,139,316,848

Net Book Value P=71,968,047 P=12,886,167 P=1,732,655 P=66,175 P=20,220,574 P=14,549,537,398 P=81,890,303,497

2015

Passenger

Aircraft

(Notes 18 and 32) Engines Rotables

Ground

Support

Equipment

EDP

Equipment,

Mainframe and

Peripherals

Leasehold

Improvements

Transportation

Equipment Sub-total

Cost

Balance at beginning of year P=65,630,899,798 P=6,155,955,141 P=2,662,189,267 P=475,209,294 P=766,702,015 P=963,115,054 P=209,909,946 P=76,863,980,515

Additions 5,981,525,274 2,644,999,286 574,778,528 40,689,115 113,054,208 104,300 23,385,118 9,378,535,829

Reclassification 2,118,681,561 – – – – 66,788,764 – 2,185,470,325

Disposals/others (3,550,715,602) – (12,664,846) (559,461) (13,815,996) – (1,500,000) (3,579,255,905)

Balance at end of year 70,180,391,031 8,800,954,427 3,224,302,949 515,338,948 865,940,227 1,030,008,118 231,795,064 84,848,730,764

Accumulated Depreciation

and Amortization

Balance at beginning of year 16,984,521,548 1,560,099,494 473,914,125 343,494,842 618,926,054 230,738,057 150,300,178 20,361,994,298

Depreciation and amortization 3,916,430,206 711,091,541 205,371,623 48,698,036 83,020,533 96,919,700 19,912,015 5,081,443,654

Reclassification – – (28,506) – – – – (28,506)

Disposals/others (1,982,672,682) – (10,984,987) (559,461) (13,810,129) – (1,500,000) (2,009,527,259)

Balance at end of year 18,918,279,072 2,271,191,035 668,272,255 391,633,417 688,136,458 327,657,757 168,712,193 23,433,882,187

Net Book Value P=51,262,111,959 P=6,529,763,392 P=2,556,030,694 P=123,705,531 P=177,803,769 P=702,350,361 P=63,082,871 P=61,414,848,577

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2015

Furniture,

Fixtures and

Office

Equipment

Communication

Equipment

Special

Tools

Maintenance

and Test

Equipment

Other

Equipment

Construction

In-progress Total

Cost

Balance at beginning of year P=152,616,549 P=12,736,501 P=14,105,321 P=6,681,631 P=90,524,829 P=8,629,008,939 P=85,769,654,285

Additions 7,645,062 2,297,716 108,475 – 8,803,172 4,132,577,761 13,529,968,015

Reclassification – – – – – (2,185,470,325) – Disposals/others (1,369,055) (10,714) – – (180,390) – (3,580,816,064)

Balance at end of year 158,892,556 15,023,503 14,213,796 6,681,631 99,147,611 10,576,116,375 95,718,806,236

Accumulated Depreciation and Amortization

Balance at beginning of year 81,009,265 9,257,432 12,219,370 6,498,213 71,550,339 – 20,542,528,917

Depreciation and amortization 20,650,716 1,411,090 426,049 92,112 7,520,103 – 5,111,543,724

Reclassification (545) 28,506 – – 545 – –

Disposals/others (1,369,055) (10,714) – – (180,390) – (2,011,087,418)

Balance at end of year 100,290,381 10,686,314 12,645,419 6,590,325 78,890,597 – 23,642,985,223

Net Book Value P=58,602,175 P=4,337,189 P=1,568,377 P=91,306 P=20,257,014 P=10,576,116,375 P=72,075,821,013

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Passenger Aircraft and Engines Held as Securing Assets Under Various Loans

The Group entered into various Export Credit Agency (ECA) and commercial loan facilities to

finance the purchase of its aircraft and engines. As of December 31, 2016, the Group’s passenger

aircraft and engines held as securing assets under various loans are as follows:

ECA Loans Commercial Loans

Airbus A320 10 19 ATR 72-500 7 – Airbus A319 4 – ATR 72-600 ‒ 2 Airbus A330 ‒ 1 Engines ‒ 5

21 27

Under the terms of the ECA loan and commercial loan facilities (Note 18), upon the event of

default, the outstanding amount of loan (including accrued interest) will be payable by CALL or

ILL or BLL or SLL or SALL or VALL or POALL or PTALL or PTHALL, or SAALL or SBALL

or SCALL or by the guarantors, which are CPAHI and JGSHI. CPAHI and JGSHI are guarantors

to loans entered into by CALL, ILL, BLL, SLL and SALL. Failure to pay the obligation will

allow the respective lenders to foreclose the securing assets.

As of December 31, 2016 and 2015, the carrying amounts of the securing assets (included under

the ‘Property and equipment’ account) amounted to P=56.9 billion and P=53.0 billion, respectively.

Forward Sale Agreement

On February 23, 2015, the Group signed a forward sale agreement with Sunrise Asset

Management, a subsidiary of Allegiant Travel Company (collectively known as “Allegiant”),

covering the Group’s sale of six Airbus A319 aircraft. The aircraft are scheduled for delivery on

various dates in 2015 until 2016.

In 2015, the Parent Company delivered the first two out of six Airbus A319 aircraft to Allegiant

and recognized P=80.3 million loss on sale in the 2015 consolidated statements of comprehensive

income.

In 2016, the Parent Company delivered the remaining four out of six airbus A319 aircraft to

Allegiant and recognized P=962.6 million loss on sale in the 2016 consolidated statements of

comprehensive income.

In 2016, the Parent Company signed another forward sale agreement with Allegiant covering the

last remaining four A319 aircraft. The aircraft are scheduled for delivery on various dates in 2017

and 2018.

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*SGVFS022041*

Operating Fleet

As of December 31, 2016 and 2015, the Group’s operating fleet follows:

2016 2015

Owned (Note 18):

Airbus A320 29 26

Airbus A319 4 8

Airbus A330 1 –

ATR 72-500 8 8

ATR 72-600 2 –

Under operating lease (Note 30):

Airbus A320 7 7

Airbus A330 6 6

57 55

Construction in-progress represents the cost of airframe 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, 2016 and 2015, the Group’s capitalized pre-delivery payments as

construction in-progress amounted to P=14,466.6 million and P=10,418.8 million, respectively

(Note 30).

As of December 31, 2016 and 2015, the gross amount of fully depreciated property and equipment

which are still in use by the Group amounted to P=1,394.3 million and P=1,194.4 million,

respectively.

As of December 31, 2016 and 2015, there are no temporarily idle property and equipment.

14. Investments in Joint Ventures and in an Associate

Investments in Joint Ventures

The Parent Company has numerous investments in joint arrangements that are accounted for as

joint ventures. These represent the 60.00%, 49.00% and 35.00% interests in PAAT, A-plus and

SIAEP, respectively.

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 50% share in net income

and net assets of the joint venture.

PAAT was created to address 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. PAAT was formally incorporated in the

Philippines on January 27, 2012 and started commercial operations in December 2012.

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.

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*SGVFS022041*

A-plus was incorporated in the Philippines 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.

Investment in an Associate

In May 2016, the Parent Company entered into Value Alliance Agreement with other low cost

carriers (LCCs), namely, Scoot Pte. Ltd, Nok Airlines Public Company Limited, CEBGO, and

Vanilla Air Inc. The alliance aims to increase passenger traffic by creating interline partnerships

and parties involved have agreed to create joint sales and support operations to expand services

and products available to passengers. This is achieved through LCCs’ investment in ABB.

In November 2016, the Parent Company acquired shares of stock in ABB amounting to

P=43.7 million. ABB is an entity incorporated in Singapore in 2016 to manage the ABB settlement

system, which facilitates the settlement of sales proceeds between the issuing and carrying

airlines, and of the transaction fee due to ABB. The investment in ABB is accounted under equity

method.

The investment gave the Parent Company a 15% shareholding proportion to ABB which is

classified as an investment in an associate and is accounted for at equity method. However, since

ABB is still non-operational as of December 31 2016, the investment is recognized at cost and is

subject to any remeasurement within the measurement period.

The movements in the carrying values of the Group’s investments in joint ventures in A-plus,

SIAEP, PAAT and ABB follow:

2016

A-plus SIAEP PAAT Total

Cost

Balance at beginning of year P=87,012,572 P=304,763,900 P=134,873,645 P=526,650,117

Investment made during the year ‒ 181,405,000 ‒ 181,405,000

Balance at end of year 87,012,572 486,168,900 134,873,645 708,055,117

Accumulated Equity in

Net Income (Loss)

Balance at beginning of year 120,336,602 (123,621,797) 2,259,065 (1,026,130)

Equity in net income during the year 146,530,942 2,769,782 29,008,118 178,308,842

Dividends declared (123,250,380) ‒ ‒ (123,250,380)

Balance at end of year 143,617,164 (120,852,015) 31,267,183 54,032,332

Net Carrying Value P=230,629,736 P=365,316,885 P=166,140,828 P=762,087,449

2015

A-plus SIAEP PAAT Total

Cost

Balance at beginning of year P=87,012,572 P=304,763,900 P=134,873,645 P=526,650,117

Accumulated Equity in

Net Income (Loss)

Balance at beginning of year 104,840,802 (59,053,072) 18,901,639 64,689,369

Equity in net income (loss) during

the year 116,629,797 (64,568,725) (16,642,574) 35,418,498

Dividends declared (101,133,997) – – (101,133,997)

Balance at end of year 120,336,602 (123,621,797) 2,259,065 (1,026,130)

Net Carrying Value P=207,349,174 P=181,142,103 P=137,132,710 P=525,623,987

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*SGVFS022041*

Selected financial information of A-plus, SIAEP and PAAT as of December 31 follow:

2016

A-plus SIAEP PAAT

Total current assets P=795,460,819 P=698,461,242 P=286,174,849

Noncurrent assets 155,159,767 1,664,971,439 804,157,578

Current liabilities (479,947,656) (384,081,485) (78,688,833)

Noncurrent liabilities ‒ (935,588,667) (679,361,939)

Equity 470,672,930 1,043,762,529 332,281,655

Proportion of the Group’s ownership 49% 35% 50%

Carrying amount of the investments P=230,629,736 P=365,316,885 P=166,140,828

2015

A-plus SIAEP PAAT

Total current assets P=650,452,860 P=483,125,816 P=266,000,656

Noncurrent assets 261,601,217 1,569,590,695 757,860,538

Current liabilities (388,851,643) (604,693,999) (30,994,557)

Noncurrent liabilities (100,040,854) (930,473,645) (718,601,218)

Equity 423,161,580 517,548,867 274,265,419

Proportion of the Group’s ownership 49% 35% 50%

Carrying amount of the investments P=207,349,174 P=181,142,103 P=137,132,710

Summary of statements of comprehensive income of A-plus, SIAEP and PAAT for the twelve

month period ended December 31 follow:

2016

A-plus SIAEP PAAT

Revenue P=987,094,549 P=969,132,649 P=305,467,453

Expenses (653,807,786) (937,444,460) (193,942,399)

Other income (expenses) 62,291,042 (18,573,663) (46,126,617)

Income before tax 395,577,805 13,114,526 65,398,437

Income tax expense 96,535,066 5,200,863 7,382,199

Net income P=299,042,739 P=7,913,663 P=58,016,238

Group’s share of profit for the year P=146,530,942 P=2,769,782 P=29,008,119

2015

A-plus SIAEP PAAT

Revenue P=905,813,968 P=387,432,455 P=157,878,689

Expenses (603,475,105) (562,632,105) (149,404,852)

Other income (expenses) 8,283,751 (9,236,769) (40,522,812)

Income (loss) before tax 310,622,614 (184,436,419) (32,048,975)

Income tax expense 72,602,620 45,652 1,236,173

Net income (loss) P=238,019,994 (P=184,482,071) (P=33,285,148)

Group’s share of profit for the year P=116,629,797 (P=64,568,725) (P=16,642,574)

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*SGVFS022041*

2014

A-plus SIAEP PAAT

Revenue P=831,652,059 P=749,982,173 P=227,958,105

Expenses (537,954,937) (847,033,722) (164,004,339)

Other income (expenses) 22,550,458 (79,043) (16,239,773)

Income before tax 316,247,580 (97,130,592) 47,713,993

Income tax expense 94,657,252 2,142,521 2,729,153

Net income (loss) P=221,590,328 (P=99,273,113) P=44,984,840

Share of profit for the year P=108,579,261 (P=34,745,590) P=22,492,420

The fiscal year-end of A-plus and SIAEP is every March 31 while the year-end of PAAT is every

December 31.

The share of the Parent Company in the net income of A-plus included in the consolidated

retained earnings amounted to P=143.6 million and P=120.3 million as of December 31, 2016 and

2015, respectively, which is not currently available for dividend distribution unless declared by

A-plus.

The share of the Parent Company in the net income of PAAT included in the consolidated retained

earnings amounted to P=31.3 million and P=2.3 million as of December 31, 2016 and 2015,

respectively, which is not currently available for dividend distribution unless declared by PAAT.

As of December 31, 2016 and 2015, SIAEP’s accumulated losses amounted to P=120.9 million and

P=123.6 million, respectively.

15. Goodwill

This account, which has a balance of P=566.8 million as of December 31, 2016 and 2015,

represents the goodwill arising from the acquisition of CEBGO (Note 7). Goodwill is attributed to

the following:

Achievement of Economies of Scale

Using the Parent Company’s network of suppliers and other partners to improve cost and

efficiency of CEBGO, thus, improving CEBGO’s overall profit, given its existing market share.

Defensive Strategy

Acquiring a competitor enables the Parent Company to manage overcapacity in certain

geographical areas/markets.

Impairment testing of Goodwill and Intangible Assets with Indefinite Useful Lives

For purposes of impairment testing of these assets, CEBGO was considered as the CGU.

In 2016, 2015 and 2014, management assessed that no impairment losses should be recognized for

these intangible assets with indefinite useful lives. These intangible assets pertain to to establish

brand and market opportunities under the strategic alliance with CEBGO (Note 16).

Key assumptions used in the VIU calculation

As of December 31, 2016 and 2015, the recoverable amount of the CGU has been determined

based on a VIU calculation using five-year cash flow projections. Key assumptions in the VIU

calculation of the CGU are most sensitive to the following:

- 40 -

*SGVFS022041*

Future revenues, profit margins and revenue growth rates: These assumptions are based on the

past performance of CEBGO, market developments and expectations in the industry.

Discount rates: The discount rate used for the computation of the net present value is the

weighted average cost of equity and was determined by reference to comparable entities.

Sensitivity to changes in assumptions

Management believes that no reasonably possible change in any of the above key assumptions

would cause the carrying values of goodwill and intangible assets arising from the acquisition of

CEBGO to materially exceed their recoverable amounts.

16. Other Noncurrent Assets

This account includes security deposits provided to lessors and maintenance providers and other

refundable deposits to be applied against payments for future aircraft deliveries. It also includes

intangible assets representing costs to establish brand and market opportunities under the strategic

alliance with CEBGO amounting to P=852.2 million as of December 31, 2016 and 2015 (Note 7).

Refer to Note 15 for the impairment test of these intangible assets with indefinite useful lives.

17. Accounts Payable and Other Accrued Liabilities


2016 2015

Accrued expenses P=5,104,775,244 P=5,157,226,549

Accounts payable (Notes 27 and 30) 3,980,459,969 3,773,396,965

Airport and other related fees payable 2,434,975,393 1,709,712,692

Advances from agents and others 676,600,363 594,568,902

Accrued interest payable (Note 18) 187,706,795 202,219,547

Other payables 199,119,178 165,865,051

P=12,583,636,942 P=11,602,989,706

Accrued Expenses

The Group’s accrued expenses include accruals for:

2016 2015

Compensation and benefits P=1,265,980,747 P=1,087,156,297

Maintenance (Note 30) 1,154,037,951 1,244,725,569

Advertising and promotion 674,203,129 617,181,652

Navigational charges 530,636,176 571,133,449

Repairs and services 322,682,258 370,928,260

Landing and take-off fees 282,123,740 332,074,021

Training costs 219,131,480 232,894,451

Ground handling charges 195,330,532 90,081,351

Fuel 176,846,265 191,519,501

Aircraft insurance 59,144,684 65,216,676

(Forward)

- 41 -

*SGVFS022041*

2016 2015

Rent (Note 30) P=45,019,497 P=67,155,690

Catering supplies 30,789,342 44,222,872

Reservation costs 28,232,840 –

Professional fees 4,679,765 102,348,155

Others 115,936,838 140,588,605

P=5,104,775,244 P=5,157,226,549

Others represent accrual of security, utilities, insurance and other expenses.

Accounts Payable

Accounts payable consists 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. It also includes other nontrade payables.

Airport and Other Related Fees Payable

Airport and other related fees payable are amounts payable to the Philippine Tourism Authority,

Air Transportation Office, Mactan-Cebu International Airport and Manila International Airport

Authority arising from aviation security, terminal fees and travel taxes.

Advances from Agents and Others

Advances from agents and others represent cash bonds required from major sales and ticket

offices or agents. These also include commitment fees received for the sale and purchase

agreement of four A319 aircraft amounting P=198.9 million (US$4.0 million) and P=188.2 million

(US$4.0 million) as of December 31, 2016 and 2015, respectively. Commitment fees applied for

the delivery of four aircraft in 2016 and two aircraft in 2015 amounted to P=194.0 million

(US$4.0 million) and P=93.8 million (US$2.0 million), respectively.

Accrued Interest Payable

Accrued interest payable pertains to accrual of interest expense, which 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.

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*SGVFS022041*

18. Long-term Debt


2016

Annual Interest Rates Range

(Note 28) Maturities US Dollar

Philippine Peso

Equivalent

ECA loans 2.00% to 6.00%

Various dates

through 2024 US$131,595,704 P=6,542,938,380

1.00% to 2.00%

(US Dollar LIBOR)

117,841,373 5,859,073,088

249,437,077 12,402,011,468

US Dollar

commercial loans

3.00% to 6.00%

Various dates

through 2025 122,813,513 6,106,287,889

1.00% to 2.00%

(US Dollar LIBOR) 376,581,824 18,723,648,273

Philippine Peso

commercial loans

2.00% to 3.00%

(PDST-R2)

2016 through

2026 ‒ 5,578,490,000

499,395,337 30,408,426,162

US$748,832,414 P=42,810,437,630

2015

Annual Interest Rates Range

(Note 28) Maturities US Dollar

Philippine Peso

Equivalent

ECA loans 2.00% to 6.00%

Various dates

through 2024

US$188,082,868 P=8,851,179,775

1.00% to 2.00%

(US Dollar LIBOR)

133,887,484 6,300,745,013

321,970,352 15,151,924,788

US Dollar

commercial loans

3.00% to 6.00%

Various dates

through 2024

146,684,784 6,902,985,959

1.00% to 2.00%

(US Dollar LIBOR) 308,841,368 14,534,074,744

455,526,152 21,437,060,703

US$777,496,504 P=36,588,985,491

The following current and noncurrent portion of long-term debt follow:

2016

US Dollar

Philippine Peso

Equivalent

Current

US Dollar loans US$130,378,207 P=6,482,404,460

Philippine Peso loans ‒ 557,849,000

130,378,207 7,040,253,460

Noncurrent

US Dollar loans 618,454,207 30,749,543,170

Philippine Peso loans ‒ 5,020,641,000

618,454,207 35,770,184,170

US$748,832,414 P=42,810,437,630

- 43 -

*SGVFS022041*

2015

US Dollar

Philippine Peso

Equivalent

Current US Dollar loans US$115,250,726 P=5,423,699,184

Noncurrent US Dollar loans 662,245,778 31,165,286,307

US$777,496,504 P=36,588,985,491

ECA Loans

On various dates from 2005 to 2012, the Parent Company entered into ECA-backed loan facilities

to partially finance the purchases of ten (10) Airbus A319 aircraft, seven (7) ATR 72-500

turboprop aircraft and ten (10) Airbus A320 aircraft. The security trustee of these ECA loans

established SPEs, namely CALL, BLL, SLL, SALL, VALL and POALL, 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 ATR 72-500 turboprop aircraft and (b) twelve-year finance lease

arrangement for the Airbus A319 and A320 aircraft. The quarterly and semi-annual payments

made by the Parent Company to these SPEs correspond to the principal and interest payments

made by the SPEs to the ECA-backed lenders. The quarterly and semi-annual lease rentals to the

SPEs 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 2016 and 2015, the Parent Company exercised the option to purchase four and two of the ten

Airbus A319 aircraft, respectively, which were subsequently sold to a third party as part of a

forward sale arrangement (Note 13). The purchase required the prepayment of the balance of the

loan facility attributed to the sold Airbus A319 aircraft. The total amount of loans paid amounted

to P=870.5 million and P=534.5 million in 2016 and 2015, respectively. The breakage cost for the

related loan prepayments amounted to P=45.6 million and P=26.7 million in 2016 and 2015,

respectively.

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 are a mix of fixed and variable rates. Fixed annual

interest rates ranges from 2.00% to 6.00% and variable rates are based on US dollar LIBOR

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

- 44 -

*SGVFS022041*

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 (Note 13).

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 December 31, 2016 and 2015, the total outstanding balance of the ECA loans amounted to

P=12,402.0 million (US$249.4 million) and P=15,151.9 million (US$322.0 million), respectively.

Interest expense amounted to P=401.0 million, P=487.7 million and P=551.5 million in 2016, 2015

and 2014, respectively.

US Dollar Commercial Loans

On various dates from 2007 to 2016, the Group entered into a commercial loan facility to partially

finance the purchase of 19 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 SPEs,

namely ILL, PTALL, PTHALL, SAALL, SBALL and SCALL, which purchased the aircraft from

the Parent Company pursuant to (a) ten-year finance lease arrangement for the Airbus

A320 aircraft, (b) six-year finance lease arrangement for the engines and (c) five-year finance

lease arrangement for the QEC Kit. The quarterly and semi-annual payments made by the Parent

Company to these SPEs correspond to the principal and interest payments made by the SPEs to the

ECA-backed lenders. 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.

The terms of the commercial loans follow:

Term of ten years starting from the delivery date of each aircraft.

Combination of annuity style and equal principal repayments made on a quarterly and semi-

annual basis for the two aircraft, engines and the QEC Kit.

Interests on loans are a mix of fixed and variable rates. Interest rates ranges from 1.00% to

6.00%.

The facilities provide for material breach as an event of default, upon which, 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, 2016 and 2015, the total outstanding balance of the US dollar commercial

loans amounted to P=24,829.9 million (US$499.4 million) and P=21,437.1 million

(US$455.5 million), respectively. Interest expense amounted to P=751.9 million, P=585.4 million

and P=461.7 million in 2016, 2015 and 2014, respectively.

Philippine Peso Commercial Loans

In 2016, the Group entered into a Philippine peso commercial loan facility to partially finance the

acquisition of two ATR 72-600 aircraft and one Airbus A330 aircraft.

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*SGVFS022041*

The terms of the commercial loans follow:

Term of ten years starting from the delivery date of each aircraft.

Forty equal consecutive principal repayments made on a quarterly basis.

Interests on loans are variable rates. Interest rates ranges from 2.00% to 3.00%.

The facilities provide that, upon event of default, the outstanding amount of loan will be

payable, including interest accrued. The lenders will foreclose mortgaged assets, namely the

aircraft.

As of December 31, 2016, the total outstanding balance of Peso commercial loans amounted to

P=5,578.5 million with current and noncurrent obligations amounting to P=557.8 million and

P=5,020.6 million, respectively. Interest expense amounted to P=17.3 million.

The Group is not in breach of any terms on the ECA and commercial loans.

19. Other Noncurrent Liabilities


2016 2015

Asset Retirement Obligation (ARO) P=2,465,671,139 P=1,344,571,000

Deferred revenue on rewards program 376,960,452 92,542,820

Accrued maintenance – 224,413,463

P=2,842,631,591 P=1,661,527,283

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 estimates made by the Group’s engineers, which include

estimates of certain redelivery costs at the end of the operating aircraft lease.

The rollforward analysis of the Group’s ARO follow:

2016 2015

Balance at beginning of year P=1,344,571,000 P=586,069,196

Provision for ARO 1,121,100,139 863,960,835

Payment of ARO during the year ‒ (105,459,031)

Balance at end of year P=2,465,671,139 P=1,344,571,000

In 2016, 2015 and 2014, ARO expenses included as part of repairs and maintenance amounted to

P=1,121.1 million, P=864.0 million and P=476.0 million, respectively (Note 22). In 2014, the Group

returned four aircraft under its operating lease agreements.

Deferred Revenue on Rewards Program

This account pertains to estimated liability under the Getgo lifestyle rewards program.

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*SGVFS022041*

Accrued Maintenance

This account pertains to accrual of maintenance costs of aircraft based on the number of flying

hours or cycles but will be settled beyond one year based on management’s assessment.

20. Equity

The details of the number of common shares and the movements thereon follow:

2016 2015

Authorized - at P=1 par value 1,340,000,000 1,340,000,000

Beginning of year 605,953,330 605,953,330

Issued and outstanding 605,953,330 605,953,330

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 consolidated statements of financial position. The registration

statement was approved on October 11, 2010. After its listing with the PSE, there have been no

subsequent offerings of common stock. The Group has 95 and 96 existing certified shareholders

as of December 31, 2016 and 2015, respectively.

Treasury Stock

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 shares. 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 7,283,220 shares held on treasury costing P=529.3 million as of

December 31, 2016 and 2015, restricting the Parent Company from declaring an equivalent

amount from unappropriated retained earnings as dividends.

Appropriation of Retained Earnings

On November 10, 2016, December 3, 2015 and November 27, 2014, the Parent Company’s BOD

appropriated P=6.6 billion, P=1.0 billion and P=3.0 billion, respectively, from its unrestricted retained

earnings as of December 31, 2016 for purposes of the Group’s re-fleeting program. The

appropriated amount will be used for the settlement of pre-delivery payments and aircraft lease

commitments (Notes 18, 30 and 31). As of December 31, 2016 and 2015, the Group has

appropriated retained earnings totaling P=14,516.8 million and P=7,916.8 million, respectively.

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*SGVFS022041*

Project name BOD approval

Expected Receipt

Date

Re-fleeting program

2016 November 10, 2016 2017-2021

2015 December 3, 2015 2016-2021

2014 November 27, 2014 2016-2021

Unappropriated Retained Earnings

The income of the subsidiaries and JVs that are recognized in the consolidated statements of

comprehensive income are not available for dividend declaration unless these are declared by the

subsidiaries and JV (Note 14). Likewise, retained earnings are restricted for the payment of

dividends to the extent of the cost of common shares held in treasury amounting to P=529.3 million.

On May 20, 2016, 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 share and a special cash dividend in the amount of

P=605.9 million or P=1.00 per share from the unrestricted retained earnings of the Parent Company

to all stockholders of record as of June 9, 2016 and payable on July 5, 2016. Total dividends

declared amounted to P=1,211.9 million as of December 31, 2016.

On June 24, 2015, 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 share and a special cash dividend in the amount of

P=302.9 million or P=0.50 per share from the unrestricted retained earnings of the Parent Company

to all stockholders of record as of July 16, 2015 and payable on August 11, 2015. Total dividends

declared amounted to P=908.9 million as of December 31, 2015.

On June 26, 2014, 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 share from the unrestricted retained earnings of the

Parent Company to all stockholders of record as of July 16, 2014 and payable on August 11, 2014.

Total dividends declared and paid amounted to P=606.0 million as of December 31, 2014.

After reconciling items which include fair value adjustments on financial instruments, unrealized

foreign exchange loss, recognized deferred tax assets and others, and cost of common stocks held

in treasury, the amount of retained earnings that is available for dividend declaration as of

December 31, 2016 amounted to P=1,673.7 million.

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 ratio,

which is gross debt divided by total capital. JGSHI includes within gross debt all interest-bearing

loans and borrowings, while capital represents total equity.

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*SGVFS022041*

The Group’s debt-to-capital ratios follow:

2016 2015

(a) Long-term debt (Note 18) P=42,810,437,630 P=36,588,985,491

(b) Equity 33,505,272,519 24,955,195,156

(c) Debt-to-equity ratio (a/b) 1.3:1 1.5:1

The JGSHI Group’s policy is to keep the debt-to-equity ratio at the 2:1 level as of

December 31, 2016 and 2015. Such ratio is currently being managed on a group level by the

Group’s ultimate parent.

21. Ancillary Revenues

Ancillary revenues consist of:

2016 2015 2014

Baggage fees P=5,496,894,601 P=4,955,384,497 P=4,116,640,154

Rebooking, refunds, cancellation

fees, etc. 3,961,855,541 3,338,921,090 2,920,343,253

Others 2,284,264,613 2,065,142,241 1,628,505,970

P=11,743,014,755 P=10,359,447,828 P=8,665,489,377

Others pertain to revenues from in-flight sales, advanced seat selection fees, reservation booking

fees and others (Note 27).

22. Operating Expenses

Flying Operations


2016 2015 2014

Aviation fuel expense (Note 11) P=15,821,328,265 P=17,659,066,443 P=23,210,305,406

Flight deck 3,310,321,766 2,797,680,638 2,406,983,028

Aviation insurance 196,129,796 255,071,777 292,982,743

Others 366,568,889 204,541,676 242,204,830

P=19,694,348,716 P=20,916,360,534 P=26,152,476,007



2016 2015 2014

Airport charges P=3,931,733,367 P=3,508,816,000 P=2,843,602,317

Ground handling 2,105,087,686 1,887,062,871 1,518,884,645

Others 541,163,750 451,220,434 442,725,527

P=6,577,984,803 P=5,847,099,305 P=4,805,212,489

Others pertain to staff expenses incurred by the Group such as basic pay, employee training cost

and allowances.

- 49 -

*SGVFS022041*


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 related costs of other contractual

obligations under aircraft operating lease agreements (Note 30). These amounted to

P=1,121.1 million, P=864.0 million and P=476.0 million in 2016, 2015 and 2014, respectively

(Note 19).


Reservation and sales relate to the cost to sell or distribute airline tickets and other ancillaries

provided to passengers such as costs to maintain the Group’s web-based booking channel,

reservation ticketing office costs and advertising expenses. These amounted to P=3,211.7 million,

P=2,625.5 million and P=2,154.0 million in 2016, 2015 and 2014, respectively.

23. General and Administrative Expenses


2016 2015 2014

Staff cost P=642,010,384 P=512,655,998 P=458,971,856

Security and professional fees 498,893,458 487,854,049 318,235,374

Utilities 133,315,208 145,433,281 124,694,997

Rent expenses 85,337,118 89,687,818 54,056,070

Travel and transportation 32,378,068 24,674,634 30,807,870

Others 421,109,241 291,843,153 310,051,527

P=1,813,043,477 P=1,552,148,933 P=1,296,817,694

Others include membership dues, annual listing maintenance fees, supplies, bank charges and

others.

24. 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 and traffic servicing, repairs and

maintenance, reservation and sales, general and administrative, and passenger service.

Defined Benefit Plans

The Group has funded, noncontributory, defined benefit plans covering substantially all of its

regular employees. The benefits are based on years of service and compensation on the last year

of employment.

The range of assumptions used to determine pension benefits of the Group in 2016, 2015 and 2014

are as follows:

2016 2015 2014

Average remaining working life 11 - 18 years 8 - 12 years 12 years

Discount rate 5.44% - 5.60% 5.00% - 5.13% 4.59%

Salary rate increase 5.50% - 5.50% 5.00% - 5.70% 5.50%

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*SGVFS022041*

As of December 31, 2016 and 2015, the discount rate used in determining the pension liability is

determined by reference to market yields at the reporting date on Philippine government bonds.

The amounts recognized as pension liability follow:

2016 2015

Present value of defined benefit obligation P=1,011,183,379 P=897,284,330

Fair value of plan assets (442,414,064) (350,803,616)

P=568,769,315 P=546,480,714

Remeasurement gains (losses) recognized in OCI follow:

2016 2015

Actuarial gains (losses) from benefit obligation P=26,153,078 (P=78,455,711)

Return on plan assets, excluding amount included in

net interest cost (14,941,894) (4,546,622)

Amount to be recognized in OCI P=11,211,184 (P=83,002,333)

Movements in the fair value of plan assets follow:

2016 2015

Balance at beginning of year P=350,803,616 P=339,755,463

Actual contribution during the year 90,523,372 ‒

Interest income included in net interest cost 16,028,970 15,594,775

Return on plan assets, excluding amount included in

net interest cost (14,941,894) (4,546,622)

Balance at end of year P=442,414,064 P=350,803,616

The plan assets consist of:

2016 % 2015 %

Cash P=308,307,900 70% P=220,210,013 63%

Investment in debt securities 132,884,688 30% 129,658,904 37%

Receivables 1,259,576 – 964,910 –

442,452,164 350,833,827

Liabilities (38,100) – (30,211) –

P=442,414,064 100% P=350,803,616 100%

The Group expects to contribute about P=100.0 million into the pension fund for the year ending

2017. The actual returns on plan assets amounted to P=1.1 million in 2016 and P=11.0 million in

2015.

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*SGVFS022041*

Changes in present value of the defined benefit obligation follow:

2016 2015


Current service cost 111,059,054 99,123,882

Interest cost 43,351,629 33,312,525

Benefits paid (14,358,556) (39,028,700)

Actuarial loss/gain due to:

Experience adjustments 14,942,532 130,890,864

Changes in financial assumption (50,652,461) (43,207,906)

Changes in demographical assumption 9,556,851 (9,227,247)

Balance at end of year P=1,011,183,379 P=897,284,330

Movements in pension liability follow:

2016 2015


Pension expense during year 138,381,713 116,841,632

Recognized in OCI (11,211,184) 83,002,333

Benefits paid during year (14,358,556) (39,028,700)

Actual contribution during the year (90,523,372) ‒

Balance at end of year P=568,769,315 P=546,480,714

The benefits paid during 2016 and 2015 were paid out of Parent Company’s operating funds.

Components of pension expense included in the Group’s consolidated statements of

comprehensive income follow:

2016 2015 2014

Current service cost P=111,059,054 P=99,123,882 P=129,329,209

Interest cost 27,322,659 17,717,750 29,275,183

Total pension expense P=138,381,713 P=116,841,632 P=158,604,392

Shown below are the sensitivity analyses that has been determined based on reasonably possible

changes of the assumption occurring as of the end of the reporting period, assuming if all other

assumptions were held constant.

2016

PVO

Discount rates 6.44% (+1.00%) P=876,336,520

4.44% (-1.00%) 1,084,771,639

Salary increase rates 6.50% (+1.00%) 1,089,891,204

4.50% (-1.00%) 870,361,689

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*SGVFS022041*

2015

PVO

Discount rates 6.07% (+1.00%) P=805,004,689

4.07% (-1.00%) 1,007,319,468

Salary increase 6.25% (+1.00%) 1,011,435,017

4.25% (-1.00%) 799,914,451

Each year, an Asset-Liability Matching Study (ALM) is performed with the result being analyzed

in terms of risk-and-return profiles. As of December 31, 2016, the Parent Company’s investment

consists of 30% of debt instruments and 70% for cash and receivables. The principal technique of

the Parent Company’s ALM is to ensure the expected return on assets to be sufficient to support

the desired level of funding arising from the defined benefit plans.

Shown below is the maturity profile of the undiscounted benefit payments of the Parent Company

as of December 31, 2016 and 2015:

2016

Plan Year

Normal

Retirement

Other Normal

Retirement Total

Less than one year P=76,544,468 P=18,337,349 P=94,881,817

One to less than five years 104,783,952 117,513,603 222,297,555

Five to less than 10 years 377,296,385 250,693,933 627,990,318

10 to less than 15 years 524,841,500 310,748,389 835,589,889


20 years and above 3,062,076,773 791,217,401 3,853,294,174

2015

Plan Year

Normal

Retirement

Other Normal

Retirement Total

Less than one year P=44,962,186 P=15,486,233 P=60,448,419

One to less than five years 96,657,822 94,977,649 191,635,471

Five to less than 10 years 286,609,848 218,291,737 504,901,585



20 years and above 2,598,202,480 668,230,299 3,266,432,779

The average duration of the expected benefit payments as of December 31, 2016 and 2015 is

20.73 years and 20.72 years, respectively.

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*SGVFS022041*

25. Income Taxes

Provision for (benefit from) income tax consists of:

2016 2015 2014

Current:

MCIT P=162,594,552 P=125,929,367 P=61,319,704

Deferred (200,566,039) (984,359,953) (36,181,936)

(P=37,971,487) (P=858,430,586) P=25,137,768

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, under Section 11 of RA No. 7151 (Parent Company’s Congressional Franchise) and

under Section 15 of RA No. 9517 (CEBGO’s Congressional Franchise) known as the “ipso facto

clause” and the “equality clause”, respectively, the Group is allowed to benefit from the tax

privileges being enjoyed by competing airlines. The Group’s major competitor, by virtue of

PD No. 1590, is enjoying tax exemptions which are likewise being claimed by the Group, if

applicable, including but not limited to the following:

a. To depreciate its assets to the extent of not more than twice as fast the normal rate of

depreciation; and

b. To carry over as a deduction from taxable income any NOLCO incurred in any year up to five

years following the year of such loss.

The components of the Group’s deferred tax assets and liabilities follow:

2016 2015

Deferred tax assets on:

NOLCO P=1,388,753,996 P=1,372,727,074

Unrealized foreign exchange losses - net 1,154,300,719 597,768,972

ARO - liability 739,701,342 420,073,060

MCIT 349,843,622 224,135,377

Pension liability 170,630,795 151,876,449

Deferred revenue - Customer Loyalty Program 113,088,136 – Allowance for credit losses 99,398,977 74,742,533

Unrealized loss on net derivative liabilities – 733,048,541

4,015,717,587 3,574,372,006

(Forward)

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*SGVFS022041*

2016 2015

Deferred tax liabilities on:

Double declining depreciation P=2,624,040,175 P=2,512,429,449

Business combination (Note 7) 185,645,561 185,645,561

Unrealized gain on net derivative assets 132,532,172 –

2,942,217,908 2,698,075,010

Net deferred tax assets P=1,073,499,679 P=876,296,996

The Group’s recognized deferred tax assets and deferred tax liabilities are expected to be reversed

more than twelve months after the reporting date.

Movement in accrued retirement cost amounted to P=3.4 million and P=21.1 million in 2016 and

2015, respectively, is presented under other comprehensive income.

Parent Company

Details of the NOLCO and MCIT are as follows:

NOLCO

Year Incurred Amount Expired/Applied Balance Expiry Year

2012 P=1,301,721,876 (P=1,301,721,876) P=– 2017

2013 956,965,884 (956,965,884) – 2018

2014 1,361,594,609 (333,410,350) 1,028,184,259 2019

2015 955,474,545 – 955,474,545 2020

P=4,575,756,914 (P=2,592,098,110) P=1,983,658,804

MCIT


2013 P=45,518,668 (P=45,518,668) P=– 2016

2014 61,319,704 – 61,319,704 2017

2015 117,297,005 – 117,297,005 2018

2016 148,442,253 – 148,442,253 2019

P=372,577,630 (P=45,518,668) P=327,058,962

The Parent Company has outstanding registrations with the BOI as a new operator of air transport

on a pioneer and non-pioneer status under the Omnibus Investments Code of 1987 (Executive

Order 226) (Note 32).

On 20 out of 24 registrations, the Parent Company can avail of bonus years in certain specified

cases but the aggregate ITH availments (basic and bonus years) shall not exceed eight years.

As of December 31, 2016 and 2015, the Parent Company has complied with externally imposed

capital requirements set by the BOI in order to avail the ITH incentives for aircraft of registered

activity (Note 32).

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*SGVFS022041*

CEBGO

Details of NOLCO and MCIT are as follows:

NOLCO


2011 P=461,346,433 (P=461,346,433) P=– 2016

2012 1,305,854,856 (199,411,786) 1,106,443,070 2017

2013 853,571,166 – 853,571,166 2018

2014 685,506,938 – 685,506,938 2019

P=3,306,279,393 (P=660,758,219) P=2,645,521,174

MCIT


2015 P=8,632,361 P=– P=8,632,361 2018

2016 14,152,299 – 14,152,299 2019

P=22,784,660 P=– P=22,784,660

As of December 31, 2016, CEBGO has recognized its previously unrecognized deferred tax assets

arising from deductible temporary differences, NOLCO and MCIT. Details follow:

Amount

NOLCO P=3,306,279,393

Allowance for credit losses 67,268,308

Pension liability 40,225,883

MCIT 8,632,361

Customer loyalty program 3,554,623

P=3,425,960,568

A reconciliation of the statutory income tax rate to the effective income tax rate follows:

2016 2015 2014

Statutory income tax rate 30.00% 30.00% 30.00%

Adjustments resulting from:

Nondeductible items 0.09 0.19 0.87

Interest income subjected to

final tax (0.33) (0.63) (2.69)

Others (0.55) (1.29) (2.94)

Income subject to ITH (29.60) (52.60) (22.38)

Effective income tax rate (0.39%) (24.33%) 2.86%

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 Group recognized EAR expenses (allocated under different expense accounts

in the consolidated statements of comprehensive income) amounting P=4.0 million, P=3.3 million

and P=6.5 million in 2016, 2015 and 2014, respectively.

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*SGVFS022041*

26. Earnings Per Share

The following reflects the income and share data used in the basic/diluted EPS computations:

2016 2015 2014

(a) Net income attributable to

common shareholders P=9,754,136,196 P=4,387,225,875 P=853,498,216

(b) Weighted average number of

common shares for basic EPS 605,953,330 605,953,330 605,953,330

(c) Basic/diluted earnings per share P=16.10 P=7.24 P=1.41

The Group has no dilutive potential common shares in 2016, 2015 and 2014.

27. 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 consolidated 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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*SGVFS022041*

The significant transactions and outstanding balances of the Group with the related parties follow:

2016

Related Party

Amount/

Volume

Outstanding

Balance

Terms

Conditions

Ultimate parent company

(1) JGSHI

Due from related parties P=‒ P=‒ Non-interest bearing

Unsecured,

No impairment

Parent company

(2) CPAHI

Due from related parties ‒ 65,800 Non-interest bearing

Unsecured,

No impairment

JV in which the Company is a venture

(3) A-plus

Due from related parties 36,759,598 25,361,011 Non-interest bearing

Unsecured,

No impairment

Trade receivables 61,625,182 61,625,182 Non-interest bearing

Unsecured,

No impairment

Trade payables 1,008,951,483 (37,183,124) Non-interest bearing

Unsecured,

No impairment

(4) SIAEP


Unsecured,

No impairment

Trade payables 67,351,578 (2,894,088) Non-interest bearing

Unsecured,

No impairment

(5) PAAT, Inc.

Due from related parties

Loans 5,960,066 90,977,300 2% interest per annum

Unsecured,

No impairment

Sublease agreement 32,530,938 5,012,599 Payable monthly

Unsecured,

No impairment

Others 70,246 130,407 Non-interest bearing

Unsecured,

No impairment

Trade payables 141,115,807 ‒ Non-interest bearing

Unsecured,

No impairment

Entities under common control

(6) Robinsons Bank Corporation (RBC)

Cash and cash equivalents 112,512,140,676 20,612,039,521 Non-interest bearing

Unsecured,

No impairment

Due to related parties 67,165,661 (1,183,359) Non-interest bearing

Unsecured,

No impairment

Trade receivables 3,745,476 258,643 Non-interest bearing

Unsecured,

No impairment


Unsecured,

No impairment

(7) Universal Robina Corporation (URC)


Unsecured,

No impairment

Due to related parties 73,047 (36,121,604) Non-interest bearing

Unsecured,

No impairment


Unsecured,

No impairment

(8) Robinsons Land Corporation (RLC)

Trade receivables 29,396,331 3,015,177 Interest bearing

Unsecured,

No impairment


Unsecured,

No impairment

(Forward)

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*SGVFS022041*

2016

Related Party

Amount/

Volume

Outstanding

Balance

Terms

Conditions

(9) Robinsons Handyman, Inc.

Trade payables P=3,332,363 (P=253,778) Non-interest bearing

Unsecured,

No impairment

(10) Summit Publishing Inc. (SPI)


Unsecured,

No impairment

Trade payables 18,618,073 (516,610) Non-interest bearing

Unsecured,

No impairment

(11) JG Petrochemical Corporation

(JGPC)

Trade receivables 845,291 172,357 Non-interest bearing

Unsecured,

No impairment

(12) Robinsons Inc.

Due to related parties 8,074,862 (384,591) Non-interest bearing

Unsecured,

No impairment


Unsecured,

No impairment

Trade payables 31,731,414 – Non-interest bearing

Unsecured,

No impairment

(13) Jobstreet.com Phils., Inc.


Unsecured,

No impairment

Trade payables 1,205,600 ‒ Non-interest bearing

Unsecured,

No impairment

2015

Related Party

Amount/

Volume

Outstanding

Balance

Terms

Conditions

Ultimate parent company

(14) JGSHI

Due from related parties P=4,405,758 P=194,920 Non-interest bearing

Unsecured,

No impairment

Parent company

(15) CPAHI

Due from related parties – 65,800 Non-interest bearing

Unsecured,

No impairment

JV in which the Company is a venture

(16) A-plus


Unsecured,

No impairment


Unsecured,

No impairment

(17) SIAEP


Unsecured,

No impairment


Unsecured,

No impairment

(18) PAAT, Inc.

Due from related parties

Loans 5,960,066 90,977,300 2% interest per annum

Unsecured,

No impairment

Sublease agreement 31,880,370 8,925,181 Payable monthly

Unsecured,

No impairment

Others 82,732 121,262 Non-interest bearing

Unsecured,

No impairment


Unsecured,

No impairment

(Forward)

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2015

Related Party

Amount/

Volume

Outstanding

Balance

Terms

Conditions


(19) Robinsons Bank Corporation (RBC)

Cash and cash equivalents P=103,480,442,308 P=298,083,980 Non-interest bearing

Unsecured,

No impairment


Unsecured,

No impairment


Unsecured,

No impairment


Unsecured,

No impairment

(20) Universal Robina Corporation

(URC)


Unsecured,

No impairment


Unsecured,

No impairment


Unsecured,

No impairment

(21) Robinsons Land Corporation (RLC)

Trade receivables 19,174,493 3,087,041 Interest bearing

Unsecured,

No impairment


Unsecured,

No impairment

(22) Robinsons Handyman, Inc.


Unsecured,

No impairment

(23) Summit Publishing Inc. (SPI)


Unsecured,

No impairment


Unsecured,

No impairment

(24) JG Petrochemical Corporation

(JGPC)


Unsecured,

No impairment

(25) Robinsons, Inc.

Due to related parties 329,962 (819,486) Non-interest bearing

Unsecured,

No impairment


Unsecured,

No impairment

Trade payables 31,272,028 – Non-interest bearing

Unsecured,

No impairment

(26) Jobstreet.com Phils., Inc.


Unsecured,

No impairment

Trade payables 404,800 (404,800) Non-interest bearing

Unsecured,

No impairment

Consolidated Statement of Comprehensive Income

Year

Sale of Air

Transportation Service

Interest

Income

Ancillary

Revenues

Repairs and

Maintenance

JV in which the Parent

Company is a venturer 2016 P=– P=– P=– P=701,792,101

A-plus 2015 P=– P=– P=– P=84,698,669

2014 P=– P=– P=– P=605,056,538

SIAEP 2016 677,614 – – 196,800,152

2015 439,483 – – –

2014 – – – 116,413,193

PAAT 2016 – – 32,530,938 –

2015 – – 37,663,884 –

2014 – – 26,104,946 –

(Forward)

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Consolidated Statement of Comprehensive Income

Year

Sale of Air

Transportation Service

Interest

Income

Ancillary

Revenues

Repairs and

Maintenance


RSB 2016 P=3,369,060 P=– P=– P=–

2015 P=2,472,792 P=– P=– P=–

2014 P=2,620,575 P=– P=– P=–

URC 2016 44,137,335 – – –

2015 40,768,879 – – –

2014 41,337,092 – – –

RLC 2016 29,396,331 – – –

2015 19,174,493 – – –

2014 13,928,598 – – –

SPI 2016 2,721,457 – – –

2015 3,498,402 – – –

2014 5,183,283 – – –

JGPC 2016 845,291 – – –

2015 921,695 – – –

2014 958,570 – – –

Robinsons Inc. 2016 33,749,652 – – –

2015 29,549,943 – – –

2014 26,231,941 – – –

Jobstreet.com Phils, Inc. 2016 582,450 – – –

2015 682,300 – – –

2014 624,615 – – –

Total 2016 P=115,479,190 – P=32,530,938 P=898,592,253

2015 P=97,507,987 – P=37,663,884 P=84,698,669

2014 P=90,884,674 – P=26,104,946 P=721,469,731

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, 2016, 2015 and

2014. 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’ account 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

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*SGVFS022041*

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’ account in the consolidated statements of comprehensive income

and any unpaid amount as of reporting date as trade payable under ‘Accounts payable and

other accrued liabilities’ account.

4. The Group maintains deposit accounts and short-term investments with RSB which is reported

under ‘Cash and cash equivalents’ account. 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 under ‘Due to related parties’ account.

5. The Group provides air transportation services to certain related parties, for which unpaid

amounts are recorded as trade receivables under ‘Receivables’ account in the consolidated

statements of financial position.

The Group also purchases goods from URC for in-flight sales and recorded as trade payable, if

unpaid, in the consolidated statements of financial position. Total amount of purchases in

2016, 2015 and 2014 amounted to P=37.2 million, P=44.8 million and P=34.1 million,

respectively.

6. In 2012, the Group entered into a sub-lease agreement with PAAT for its office space.

The lease agreement is for a period of 15 years from November 29, 2012 until

November 19, 2027.

7. In 2013 and 2012, under the shareholder loan agreement, the Group provided a loan to PAAT

to finance the purchase of its Full Flight Simulator, other equipment and other working capital

requirements. Aggregate loans provided by the Group amounted to P=155.4 million

(US$3.5 million). The loans are subject two percent (2%) interest per annum. In 2014, the

Group collected P=41.7 million (US$0.9 million) from PAAT as partial payment of the loan.

As of December 31, 2016 and 2015, loan to PAAT amounted to P=91.0 million

(US$2.3 million).

8. In 2014, the Parent Company entered into sublease agreements with CEBGO for the lease of

its five (5) A320 Airbus aircraft. The sublease period for each aircraft is for two years, but

was pre-terminated in 2015.

9. In 2015, the Parent Company entered into sublease arrangements with CEBGO for the lease of

its eight (8) ATR 72-500 aircraft. The sublease period for each aircraft is for two years.

10. In 2016, the Parent Company entered into sublease arrangements with CEBGO for the lease of

its two (2) ATR 72-600 aircraft. The sublease period for each aircraft is for six years.

The compensation of the Group’s key management personnel by benefit type follows:

2016 2015 2014

Short-term employee benefits P=137,740,617 P=135,392,431 P=150,010,391

Post-employment benefits 2,690,640 3,560,866 10,011,731

P=140,431,257 P=138,953,297 P=160,022,122

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.

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28. Financial Risk Management Objectives and Policies

The Group’s principal financial instruments, other than derivatives, comprise cash and cash

equivalents, financial assets at FVPL, 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 these 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 JGSHI. The Group has its

own BOD, which is ultimately responsible for the oversight of the Group’s risk management

process, and is involved in 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 together 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 the internal 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.

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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.

The ERM framework revolves around the following seven 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.

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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.

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 banks 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.

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Maximum exposure to credit risk without taking account of any credit enhancement

The table below shows the gross maximum exposure to credit risk (including derivative assets) of

the Group as of December 31, 2016 and 2015, without considering the effects of collaterals and

other credit risk mitigation techniques.

2016 2015


Cash and cash equivalents* P=10,263,876,130 P=4,675,299,344

Receivables

Trade receivables 1,667,078,389 1,398,342,106

Due from related parties 124,270,740 125,623,460

Interest receivable 3,544,120 1,377,036

Others** 663,230,536 528,512,366

2,458,123,785 2,053,854,968

Refundable deposits*** 29,182,000 27,135,401

P=12,751,181,915 P=6,756,289,713 * Excluding cash on hand

** Include nontrade receivables from insurance, employees and counterparties

***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

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:

2016

Philippines

Asia

(excluding

Philippines) Europe Others Total


Cash and cash equivalents* P=8,639,055,061 P=1,050,673,161 P=574,147,908 P=– P=10,263,876,130

Receivables

Trade receivables 1,184,733,983 462,199,939 ‒ 20,144,467 1,667,078,389

Due from related parties 124,270,740 ‒ ‒ ‒ 124,270,740

Interest receivable 3,544,120 ‒ ‒ ‒ 3,544,120

Others** 332,399,980 234,255,648 ‒ 96,574,908 663,230,536

Refundable deposits*** ‒ 29,182,000 ‒ ‒ 29,182,000

P=10,284,003,884 P=1,776,310,748 P=574,147,908 P=116,719,375 P=12,751,181,915

***Excluding cash on hand

***Include nontrade receivables from insurance, employees and counterparties


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2015

Philippines

Asia

(excluding

Philippines) Europe Others Total


Cash and cash equivalents* P=3,928,723,397 P=726,099,935 P=20,476,012 P=– P=4,675,299,344

Receivables

Trade receivables 1,141,591,909 237,602,342 19,147,855 – 1,398,342,106

Due from related parties 125,623,460 – – – 125,623,460

Interest receivable 1,377,036 – – – 1,377,036

Others** 228,982,224 57,032,291 242,497,851 – 528,512,366

Refundable deposits*** – – 27,135,401 – 27,135,401

P=5,426,298,026 P=1,020,734,568 P=309,257,119 P=– P=6,756,289,713




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, 2016 and 2015:

2016

Neither Past Due Nor Specifically Impaired Past Due

High

Grade

Standard

Grade

Substandard

Grade

or Individually

Impaired Total

Cash and cash equivalents* P=10,263,876,130 P=– P=– P=– P=10,263,876,130

Receivables

Trade receivables 1,658,567,195 ‒ ‒ 8,511,194 1,667,078,389

Due from related parties 124,270,740 ‒ ‒ ‒ 124,270,740

Interest receivable 3,544,120 ‒ ‒ ‒ 3,544,120

Others** 335,395,724 5,016,083 ‒ 322,818,729 663,230,536

Refundable deposits*** 29,182,000 ‒ ‒ ‒ 29,182,000

P=12,414,835,909 P=5,016,083 P=‒ P=331,329,923 P=12,751,181,915




2015

Neither Past Due Nor Specifically Impaired Past Due

High

Grade

Standard

Grade

Substandard

Grade

or Individually

Impaired Total

Cash and cash equivalents* P=4,675,299,344 P=– P=– P=– P=4,675,299,344

Receivables

Trade receivables 1,375,625,887 14,277,661 – 8,438,558 1,398,342,106

Due from related parties 125,623,460 – – – 125,623,460

Interest receivable 1,377,036 – – – 1,377,036

Others** 190,565,126 29,975,692 – 307,971,548 528,512,366

Refundable deposits*** 27,135,401 – – – 27,135,401

P=6,395,626,254 P=44,253,353 P=– P=316,410,106 P=6,756,289,713




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.

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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.

The following tables show the aging analysis of the Group’s receivables:

2016

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=1,658,567,195 P=– P=– P=– P=– P=8,511,194 P=1,667,078,389

Due from related parties 124,270,740 ‒ ‒ ‒ ‒ ‒ 124,270,740

Interest receivable 3,544,120 ‒ ‒ ‒ ‒ ‒ 3,544,120

Others* 340,411,807 ‒ ‒ ‒ ‒ 322,818,729 663,230,536

P=2,126,793,862 P=– P=– P=– P=– P=331,329,923 P=2,458,123,785

*Include nontrade receivables from insurance, employees and counterparties

2015

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=1,389,903,548 P=– P=– P=– P=– P=8,438,558 P=1,398,342,106

Due from related parties 125,623,460 – – – – – 125,623,460

Interest receivable 1,377,036 – – – – – 1,377,036

Others* 199,754,607 – – – 20,786,211 307,971,548 528,512,366

P=1,716,658,651 P=– P=– P=– P=20,786,211 P=316,410,106 P=2,053,854,968

*Include nontrade receivables from insurance, employees and counterparties

Past due or individually impaired accounts consist of past due but not impaired receivables

amounted to nil and P=20.8 million as of December 31, 2016 and 2015, respectively, and past due

and impaired receivables amounting to P=331.3 million and P=316.4 million as of December 31,

2016 and 2015, 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 statements of financial position. For the past due and impaired

receivables, specific allowance for impairment losses amounted to P=331.3 million and

P=316.4 million as of December 31, 2016 and 2015, respectively (Note 10).

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, 2016 and 2015, outstanding cash bonds (included under

‘Accounts payable and other accrued liabilities’ account in the consolidated statements of

financial position) amounted to P=329.5 million and P=214.7 million, respectively (Note 17).

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

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*SGVFS022041*

certain threshold. These and the other factors, either singly or in tandem, constitute observable

events and/or data that meet the definition of an objective evidence of impairment.

The two methodologies applied by the Group in assessing and measuring impairment include:

(1) specific/individual assessment; and (2) collective assessment.

Under specific/individual assessment, the Group assesses each individually significant credit

exposure for any objective evidence of impairment, and where such evidence exists, accordingly

calculates the required impairment. Among the items and factors considered by the Group when

assessing and measuring specific impairment allowances are: (a) the timing of the expected cash

flows; (b) the projected receipts or expected cash flows; (c) the going concern of the

counterparty’s business; (d) the ability of the counterparty to repay its obligations during financial

crises; (e) the availability of other sources of financial support; and (f) the existing realizable value

of collateral. The impairment allowances, if any, are evaluated as the need arises, in view of

favorable or unfavorable developments.

With regard to the collective assessment of impairment, allowances are assessed collectively for

losses on receivables that are not individually significant and for individually significant

receivables when there is no apparent nor objective evidence of individual impairment yet.

A particular portfolio is reviewed on a periodic basis in order to determine its corresponding

appropriate allowances. The collective assessment evaluates and estimates the impairment of the

portfolio in its entirety even though there is no objective evidence of impairment yet on an

individual assessment. Impairment losses are estimated by taking into consideration the following

deterministic information: (a) historical losses/write-offs; (b) losses which are likely to occur but

have not yet occurred; and (c) the expected receipts and recoveries once impaired.

Liquidity risk

Liquidity is generally defined as the current and prospective risk to earnings or capital arising

from the Group’s inability to meet its obligations when they become due without recurring

unacceptable losses or costs.

The Group’s liquidity management involves maintaining funding capacity to finance capital

expenditures and service maturing debts, and to accommodate any fluctuations in asset and

liability levels due to changes in the Group’s business operations or unanticipated events created

by customer behavior or capital market conditions. The Group maintains a level of cash and cash

equivalents deemed sufficient to finance operations. As part of its liquidity 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 reporting 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 reporting 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.

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The tables below summarize the maturity profile of financial instruments based on remaining

contractual undiscounted cash flows as of December 31, 2016 and 2015:

2016

Less than one

month

1 to 3

months

3 to 12

months

1 to 5

years

More than

5 years Total

Financial Assets


Cash and cash equivalents P=10,183,729,447 P=112,512,857 P=– P=– P=– P=10,296,242,304

Receivables:

Trade receivables 1,659,477,487 ‒ ‒ 1,357,704 6,243,198 1,667,078,389

Due from related

parties* 22,093,143 3,464,762 98,712,835 ‒ ‒ 124,270,740

Interest receivable 3,544,120 – – – – 3,544,120

Others ** 260,701,554 69,269,857 10,440,396 67,152,373 255,666,356 663,230,536

Derivative financial

instruments not

designated as accounting

hedges ‒ ‒ ‒ 441,773,905 ‒ 441,773,905

Refundable deposits ‒ ‒ ‒ 29,182,000 ‒ 29,182,000

P=12,129,545,751 P=185,247,476 P=109,153,231 P=539,465,982 P=261,909,554 P=13,225,321,994

Financial Liabilities

On-balance sheet

Accounts payable and other

accrued liabilities*** P=5,943,237,435 P=1,555,438,691 P=5,009,729,087 P=5,064,849 P=‒ P=12,513,470,062

Due to related parties* 38,618,547 ‒ ‒ ‒ ‒ 38,618,547

Long-term debt ‒ ‒ ‒ 7,123,567,004 35,686,870,626 42,810,437,630

P=5,981,855,982 P=1,555,438,691 P=5,009,729,087 P=7,128,631,853 P=35,686,870,626 P=55,362,526,239

***Receivable and payable on demand


***Excluding government-related payables 2015

Less than one

month

1 to 3

months

3 to 12

months

1 to 5

years

More than

5 years Total

Financial Assets


Cash and cash equivalents P=4,628,358,567 P=77,731,496 P=– P=– P=– P=4,706,090,063

Receivables:

Trade receivables 1,389,696,872 – 2,780,182 – 5,865,052 1,398,342,106

Interest receivable 125,623,460 – – – – 125,623,460

Due from related

parties* 1,377,036 – – – – 1,377,036

Others ** 207,781,957 2,157,740 75,372,740 1,211,644 241,988,285 528,512,366

Refundable deposits – – – 27,135,401 – 27,135,401

P=6,352,837,892 P=79,889,236 P=78,152,922 P=28,347,045 P=247,853,337 P=6,787,080,432


On-balance sheet


instruments not

designated as accounting

hedges P=– P=– P=– P=1,671,213,914 P=772,281,224 P=2,443,495,138


accrued liabilities*** 5,833,676,569 1,051,834,620 1,862,805,953 1,066,516,117 250,776 9,815,084,035

Due to related parties* 38,115,803 – – – – 38,115,803

Long-term debt – – 5,419,595,530 22,249,673,135 8,919,716,826 36,588,985,491

P=5,871,792,372 P=1,051,834,620 P=7,282,401,483 P=24,987,403,166 P=9,692,248,826 P=48,885,680,467

***Receivable and payable on demand


***Excluding government-related payables

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.

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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, 2016, 2015 and 2014, approximately 32.0%, 31.0% and 29.0%, 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 USD. As of

December 31, 2016, 2015 and 2014, 67.0 %, 67.4% and 67.2%, respectively, of the Group’s

financial liabilities were denominated in USD.

The Group does not have any foreign currency hedging arrangements as of December 31, 2016

and 2015.

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.

2016

US Dollar

Hong Kong

Dollar

Singaporean

Dollar

Other

Currencies* Total

Financial Assets

Cash and cash equivalents P=4,912,681,176 P=54,676,207 P=55,960,921 P=723,197,429 P=5,746,515,733

Receivables 781,078,986 36,162,127 15,390,372 468,403,780 1,301,035,265

Financial assets at FVPL 441,773,905 ‒ ‒ ‒ 441,773,905

Refundable deposits** 29,182,000 ‒ ‒ ‒ 29,182,000

P=6,164,716,067 P=90,838,334 P=71,351,293 P=1,191,601,209 P=7,518,506,903


Financial Liabilities at FVPL


accrued liabilities*** P=570,793,915 P=29,556,483 P=42,767,198 P=3,329,850,478 P=3,972,968,074

Long-term debt 37,231,947,630 ‒ ‒ ‒ 37,231,947,630

Others**** 224,413,504 ‒ ‒ ‒ 224,413,504

P=38,027,155,049 P=29,556,483 P=42,767,198 P=3,329,850,478 P=41,429,329,208

****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 statements of financial position

****Excluding government-related payables

****Included under ‘Other noncurrent liabilities’ in the consolidated statements of financial position

2015

US Dollar

Hong Kong

Dollar

Singaporean

Dollar

Other

Currencies* Total

Financial Assets

Cash and cash equivalents P=2,157,992,877 P=28,618,072 P=23,598,454 P=550,734,832 P=2,760,944,235

Receivables 319,932,610 27,987,568 23,597,364 268,906,696 640,424,238

Refundable deposits** 27,135,401 – – – 27,135,401

P=2,505,060,888 P=56,605,640 P=47,195,818 P=819,641,528 P=3,428,503,874


Financial Liabilities at FVPL


instruments not designated

as accounting hedges P=2,443,495,138 P=– P=– P=– P=2,443,495,138


accrued liabilities*** 4,136,229,873 43,755,668 54,483,493 248,494,675 4,482,963,709

Long-term debt 36,588,985,491 – – – 36,588,985,491

Others**** 224,413,504 – – – 224,413,504

P=43,393,124,006 P=43,755,668 P=54,483,493 P=248,494,675 P=43,739,857,842

****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 statements of financial position

****Excluding government-related payables

****Included under ‘Other noncurrent liabilities’ in the consolidated statements 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, 2016 and 2015 follow:

2016 2015

US dollar P=49.720 to US$1.00 P=47.060 to US$1.00

Singapore dollar P=34.354 to SGD1.00 P=33.517 to SGD1.00

Hong Kong dollar P=6.421 to HKD1.00 P=6.086 to HKD1.00

The following table sets forth the impact of the range of reasonably possible changes in the

USD - Peso exchange value on the Group’s pre-tax income for the years ended December 31,

2016, 2015 and 2014 (in thousands).

2016 2015 2014

Changes in foreign exchange value P=2 (P=2) P=2 (P=2) P=2 (P=2)

Change in pre-tax income (P=1,315,342) P=1,315,342 (P=1,737,699) P=1,737,699 (P=1,687,711) P=1,687,711

Other than the potential impact on the Group’s pre-tax income, 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=2,326.5 million, P=2,132.7 million and P=1,778.5 million for the years December 31, 2016, 2015

and 2014, 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

statements of financial position and on some financial instruments not recognized in the

consolidated statements 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 18).

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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 18):

December 31, 2016

<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 banks(Note 18)

Floating rate

US Dollar London Interbank Offering

Rate (LIBOR) US$16,295,558 US$16,531,413 US$16,002,466 US$15,151,894 US$15,330,362 US$38,529,680 US$117,841,373 P=5,859,073,080 P=5,860,658,097

Commercial loans from banks (Note 18)

Floating rate 44,763,630 43,819,261 44,531,884 45,249,977 46,007,719 152,209,353 376,581,824 18,723,648,282 18,969,392,037

US$61,059,188 US$60,350,674 US$60,534,350 US$60,401,871 US$61,338,081 US$190,739,033 US$494,423,197 P=24,582,721,362 P=24,830,050,134

December 31, 2015

<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 banks (Note 18)

Floating rate

US Dollar LIBOR US$15,982,346 US$16,140,463 US$16,362,447 US$16,130,052 US$15,030,481 US$54,241,695 US$133,887,484 P=6,300,745,013 P=6,280,226,991

Commercial loans from banks (Note 18)

Floating rate 32,797,061 33,258,070 33,734,931 34,223,316 34,716,386 140,111,604 308,841,368 14,534,074,745 14,869,925,168

US$48,779,407 US$49,398,533 US$50,097,378 US$50,353,368 US$49,746,867 US$194,353,299 US$442,728,852 P=20,834,819,758 P=21,150,152,159

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*SGVFS022041*

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, 2016, 2015 and 2014.

2016 2015 2014

Changes in interest rates 1.50% (1.50%) 1.50% (1.50%) 1.50% (1.50%)

Changes in pre-tax income (P=392,086,223) P=392,086,223 (P=274,842,903) P=274,842,903 (P=183,855,223) P=183,855,223

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 at fair value through profit or loss.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates,

with all other variables held constant, of the Group’s income before tax and the relative impact on

the Group’s net assets as of December 31, 2016 and 2015:

Change in Basis

Points

Effect on Profit

Before Tax

2016 +100% P=5,915,843

-100% (5,915,843)

2015 +100% P=10,278,994

-100% (10,278,994)

29. Fair Value Measurement

The carrying amounts approximate fair values for the Group’s financial assets and liabilities due

to its short-term maturities, except for the following financial assets and other financial liabilities

as of December 31, 2016 and 2015:

2016 2015

Carrying Value Fair Value Carrying Value Fair Value

Financial Assets


Refundable deposits*

(Note 16) P=29,182,000 P=34,248,959 P=27,135,401 P=30,107,952


Other financial liability

Long-term debt**

(Note 18) P=42,810,437,630 P=42,744,359,043 P=36,588,985,491 P=37,501,137,327

**Included under ‘Other noncurrent assets’ account in the consolidated statements of financial position.

**Including current portion.

The methods and assumptions used by the Group in estimating the fair value of financial assets

and other financial liabilities are:

Noninterest - 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 3% to 4% in 2016 and 2015.

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

rates used range from 2% to 6% as of December 31, 2016 and 2015.

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*SGVFS022041*

The Group uses the following hierarchy for determining and disclosing the fair value of financial

assets and liabilities designated at FVPL and derivative financial instruments 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:

2016

Level 1 Level 2 Level 3 Total

Assets and liabilities measured at

fair value:

Financial assets (liabilities) at

FVPL (Note 9) P=441,773,905 P=− P=– P=441,773,905

Assets and liabilities for which

fair values are disclosed:

Refundable deposits P=− P=− P=34,248,959 P=34,248,959

Long-term debt − (42,744,359,043) − (P=42,744,359,043)

2015

Level 1 Level 2 Level 3 Total

Assets and liabilities measured at

fair value:

Financial assets (liabilities) at

FVPL (Note 9) (P=2,443,495,138) P=− P=– (P=2,443,495,129)

Assets and liabilities for which

fair values are disclosed:

Refundable deposits P=− P=− P=30,107,952 P=30,107,952

Long-term debt − (37,501,137,327) − (37,501,137,327)

There were no transfers within any hierarchy level of fair value measurements for the years ended

December 31, 2016 and 2015, respectively.

30. 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 Lessors No. of Units Lease Expiry

April 2007 Inishcrean Leasing Limited

(Inishcrean)

1 October 2019

March 2008 GY Aviation Lease 0905 Co. Limited 2 January 2019

March 2008 APTREE Aviation Trading 2 Co. Ltd 1 October 2019

Wells Fargo Bank Northwest

National Assoc.

1 October 2019

July 2011 SMBC Aviation Capital Limited 2 February 2018

Note: The lease agreements were amended, when applicable, to effect the novation of lease rights by the original lessors

to new lessors as allowed under the lease agreements.

In 2007, the Group entered into operating lease agreement with Inishcrean for the lease of

one (1) Airbus A320, which was delivered in 2007, and with CIT Aerospace International for the

lease of four (4) Airbus A320 aircraft, which were delivered in 2008. In 2015, the Group

extended the lease agreement with Inishcrean for another three years.

In March 2008, the Parent Company entered into operating lease agreements with GY Aviation

Lease 0905 Co. Limited (GY Aviation) for the lease of two (2) Airbus A320 aircraft, which were

delivered in 2009, and two Airbus A320 aircraft with two other lessors, which were received in

2012. In November 2010, the Parent Company signed an amendment to the operating lease

agreements, advancing the delivery of the two (2) Airbus A320 aircraft to 2011 from 2012.

In 2016, the Group extended the lease agreement with GY Aviation Lease 0905 Co. Limited for

another two years pursuant to a letter of intent (LOI) signed in the first quarter of the same year.

In July 2011, the Group entered into an operating lease agreement with RBS Aerospace Ltd.

(RBS) for the lease of two (2) Airbus A320 aircraft, which were delivered in March 2012.

The lease agreement with RBS was amended to effect the novation of lease rights by the original

lessors to new lessors as allowed under the existing lease agreements.

A330 aircraft

The following table summarizes the specific lease agreements on the Group’s Airbus A330

aircraft:

Date of Lease Agreement Lessors No. of Units Lease Term

February 2012 CIT Aerospace International 4 12 years with pre-termination

option

July 2013 A330 MSN 1552 Limited and A330

MSN 1602 Limited*

2 12 years with pre-termination

option

*New lessors per Deed of Novation and Amendment signed on August 2014 and March 2015

On February 21, 2012, the Group entered into a lease agreement with CIT Aerospace International

for four (4) Airbus A330-300 aircraft. The lease term of the aircraft is 12 years with an early

pre-termination option.

On July 19, 2013, the Group entered into an aircraft operating lease agreements with Intrepid

Aviation for the lease of two (2) Airbus A330-300 aircraft, which were delivered in

September 2014 and March 2015.

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As of December 31, 2016, the Group has six (6) Airbus A330 aircraft under operating lease

(Note 13), wherein one (1) Airbus was delivered in 2015.

The first two (2) A330 aircraft were delivered in June 2013 and September 2013. Three (3) A330

aircraft were delivered in February 2014, May 2014 and September 2014. One (1) A330 aircraft

was delivered in March 2015.

Lease expenses relating to aircraft leases (included in ‘Aircraft and engine lease’ account in the

consolidated statements of comprehensive income) amounted to P=4,253.7 million,

P=4,024.6 million and P=3,503.5 million in 2016, 2015 and 2014, respectively.

Future minimum lease payments under the above-indicated operating aircraft leases follow:

2016 2015 2014

US Dollar

Philippine peso

Equivalent US Dollar

Philippine Peso

Equivalent US Dollar

Philippine Peso

Equivalent

Within one year US$88,821,146 P=4,416,187,364 US$90,260,208 P=4,247,645,406 US$88,551,265 P=3,960,012,577

After one year but not more

than five years 345,847,247 17,195,525,129 309,193,470 14,550,644,708 314,017,649 14,042,869,274

Over five years 206,018,543 10,243,241,938 332,977,141 15,669,904,258 395,380,828 17,681,430,645

US$640,686,936 P=31,854,954,431 US$732,430,819 P=34,468,194,372 US$797,949,742 P=35,684,312,496

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:

2016 2015 2014

Within one year P=167,226,528 P=135,299,739 P=127,970,825

After one year but not more than

five years 710,187,772 564,977,120 539,700,300

Over five years 3,477,917,440 2,433,712,858 2,065,948,495

P=4,355,331,740 P=3,133,989,717 P=2,733,619,620

Lease expenses relating to both cancellable and noncancellable non-aircraft leases (allocated under

different expense accounts in the consolidated statements of comprehensive income) amounted to

P=625.8 million, P=488.6 million and P=337.1 million in 2016, 2015 and 2014, respectively.

Service Maintenance Commitments

On June 21, 2012, the Parent Company has entered into a 10-year charge per aircraft landing

(CPAL) 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 Parent Company 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 Total Care service support for the Trent 700 engines on up to

eight A330 aircraft. Contract term shall be from delivery of the first A330 until the redelivery of

the last A330.

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*SGVFS022041*

On July 12, 2012, the Parent Company has entered into a maintenance service contract with

SIAEC for the maintenance, repair and overhaul services of its A319 and A320 aircraft.

Specific services from SIAEC are Base Maintenance, Fleet Technical Management (FTM),

Inventory Technical Management (ITM) and C&E for Line Maintenance Services for the A319

and A320. These agreements remained in effect as of December 31, 2016.

Aircraft and Spare Engine Purchase Commitments

In August 2011, the Group entered in a commitment with Airbus S.A.S 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.

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 30 firm and ten options A321 NEO aircraft to be delivered beginning 2017.

The agreement also includes an engine maintenance services program for a period of ten years

from the date of entry into service of each engine.

On October 20, 2015, the Group entered into a Sale and Purchase Contract with Avions Transport

Regional G.I.E. to purchase 16 firm ATR 72-600 aircraft and up to 10 additional option ATR

72-600 aircraft. These aircraft are scheduled to be delivered from 2016 to 2020. Two ATR72-600

were received during 2016.

As of December 31, 2016, the Group will take delivery of 30 Airbus A321 NEO aircraft and

14 ATR 72-600.

The above-indicated commitments relate to the Group’s re-fleeting and expansion programs.

These agreements remained in effect as of December 31, 2016.

Capital Expenditure Commitments

The Group’s capital expenditure commitments relate principally to the acquisition of aircraft fleet,

aggregating to P=114,323.7 million and P=93,797.6 million as of December 31, 2016 and 2015,

respectively.

2016

US Dollar

Philippine Peso

Equivalent

Within one year

US$483,178,223 P=24,023,621,236


five years 1,886,172,565 93,780,499,949

US$2,369,350,788 P=117,804,121,185

2015

US Dollar

Philippine Peso

Equivalent

Within one year US$294,434,836 P=13,856,103,384


five years 1,698,714,532 79,941,505,899

US$1,993,149,368 P=93,797,609,283

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*SGVFS022041*

Contingencies

The Group has pending suits, claims and contingencies which are either pending decisions by the

courts or being contested or under evaluation, the outcome of which are not presently

determinable. The information required by PAS 37, Provisions, Contingent Liabilities and

Contingent Assets, is not disclosed until final settlement, on the ground that it might prejudice the

Group’s position (Note 17).

31. Supplemental Disclosures to the Consolidated Statements of Cash Flows

The principal noncash investing activities of the Group were as follows:

a. On December 31, 2015 the Group recognized a liability based on the schedule of pre-delivery

payments amounting P=482.0 million. These incurred costs are recognized under the

‘Construction in progress’ account. The liability was paid in the following year.

b. The Parent Company paid P=488.6 million for the acquisition of CEBGO (Note 7).

Cash flows used to acquire CEBGO, after the cash attributable to the business combination of

P=256.7 million, amounted to P=231.8 million.

c. The Group applied creditable withholding taxes against income tax payable and these

amounted to P=45.9 million, P=51.0 million and P=21.0 million in 2016, 2015 and 2014,

respectively.

32. Registration with the BOI

The Parent Company is registered with the BOI as a new operator of air transport on a pioneer

status on eleven (11) A320 and non-pioneer status for eleven (11) Airbus A320 aircraft and

two (2) Airbus A330 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

(Notes 1, 13 and 25):

Date of Registration Registration Number ITH Period

November 3, 2010 2010-180 Jan 2011 - Dec 2016

November 16, 2011 2011-241 Nov 2011 - Nov 2017

January 17, 2012 2012-013 Mar 2012 - Feb 2016

January 17, 2012 2012-014 Mar 2012 - Feb 2016

December 6, 2012 2012-262 Dec 2012 - Dec 2018

February 11,2013 2013-045 Feb 2013 - Feb 2019

April 11, 2013 2013-089 Apr 2013 - Apr 2019

July 29, 2013 2013-166 July 2013 - July 2017

September 13, 2013 2013-185 Sept 2013 - Sept 2019

September 13, 2013 2013-186 Sept 2013 - Sept 2019

October 3, 2013 2013-201 Oct 2013 - Oct 2017

January 17, 2014 2014-012 Jan 2014 - Jan 2020

February 19, 2014 2014-037 Feb 2014 - Feb 2020

May 21, 2014 2014-080 May 2014 - May 2018

May 21, 2014 2014-081 May 2014 - May 2018

January 22, 2015 2015-011 Jan 2015 - Jan 2019

January 22,2015 2015-012 Jan 2015 - Jan 2019

February 17, 2015 2015-039 Feb 2015 - Feb 2019

March 9, 2015 2015-061 Mar 2015 - Mar 2019

October 22, 2015 2015-225 Oct 2015 - Oct 2019

November 4, 2015 2015-238 Nov 2015 - Nov 2019

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*SGVFS022041*

Date of Registration Registration Number ITH Period

February 23, 2016 2016-040 Feb 2016 - Feb 2020

March 2, 2016 2016-045 Mar 2016 - Mar 2020

May 26, 2016 2016-100 May 2016 - May 2020

a. An ITH for a period of four (4) years for non-pioneer status and six (6) years for pioneer

status.

b. Employment of foreign nationals. This may be allowed in supervisory, technical or advisory

positions for five (5) years from date of registration.

c. Importation of capital equipment, spare parts and accessories at zero (0%) duty from date of

effectivity of Executive Order (E.O.) No. 70 and its Implementing Rules and Regulations for a

period of five (5) years reckoned from the date of its registration or until the expiration of

E.O. 70, whichever is earlier.

d. Avail of a bonus year in each of the following cases but the aggregated ITH availments

(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 the ratio set by the BOI.

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. 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

availments as against the previous year, if the project meets the prescribed ratio of capital

equipment to the number of workers set by the BOI. This may be availed of for the first

five (5) years from date of registration but not simultaneously with 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 ten-year period, shall be filed within one (1) year from date of

committed start of commercial operation.

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-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.

- 80 -

*SGVFS022041*

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 semestral 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 semester.

As of December 31, 2016 and 2015, the Parent Company has complied with externally imposed

capital requirements set by the BOI in order to avail the ITH incentives for aircraft of registered

activity.

33. Approval of the Consolidated Financial Statements

The consolidated financial statements were approved and authorized for issue by the BOD on

March 21, 2017.

34. Standards issued but not yet Effective

Pronouncements issued but not yet effective are listed below. Unless otherwise indicated, the

Group does not expect that the future adoption of the said pronouncements to have a significant

impact on its consolidated financial statements. The Group intends to adopt the following

pronouncements when these becomes effective.

Effective beginning on or after January 1, 2017

Amendments to PFRS 12, Clarification of the Scope of the Standard (Part of Annual

Improvements to PFRSs 2014 - 2016 Cycle)

The amendments clarify that the disclosure requirements in PFRS 12, other than those relating

to summarized financial information, apply to an entity’s interest in a subsidiary, a joint

venture or an associate (or a portion of its interest in a joint venture or an associate) that is

classified (or included in a disposal group that is classified) as held for sale.

Amendments to PAS 7, Statement of Cash Flows, Disclosure Initiative

The amendments to PAS 7 require an entity to provide disclosures that enable users of

financial statements to evaluate changes in liabilities arising from financing activities,

including both changes arising from cash flows and non-cash changes (such as foreign

exchange gains or losses). On initial application of the amendments, entities are not required

to provide comparative information for preceding periods. Early application of the

amendments is permitted.

Application of amendments will result in additional disclosures in the 2017 consolidated

financial statements of the Group.

Amendments to PAS 12, Income Taxes, Recognition of Deferred Tax Assets for Unrealized

Losses

The amendments clarify that an entity needs to consider whether tax law restricts the sources

of taxable profits against which it may make deductions on the reversal of that deductible

temporary difference. Furthermore, these amendments provide guidance on how an entity

- 81 -

*SGVFS022041*

should determine future taxable profits and explain the circumstances in which taxable profit

may include the recovery of some assets for more than their carrying amount.

Entities are required to apply the amendments retrospectively. However, on initial application

of the amendments, the change in the opening equity of the earliest comparative period may

be recognized in opening retained earnings (or in another component of equity, as

appropriate), without allocating the change between opening retained earnings and other

components of equity. Entities applying this relief must disclose that fact. Early application

of the amendments is permitted.


Amendments to PFRS 2, Share-based Payment, Classification and Measurement of Share-

based Payment Transactions

The amendments to PFRS 2 address three main areas: the effects of vesting conditions on the

measurement of a cash-settled share-based payment transaction; the classification of a

share-based payment transaction with net settlement features for withholding tax obligations;

and the accounting where a modification to the terms and conditions of a share-based payment

transaction changes its classification from cash settled to equity settled.

On adoption, entities are required to apply these amendments without restating prior periods,

but retrospective application is permitted if elected for all three amendments and if other

criteria are met. Early application of the amendments is permitted.

Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, with

PFRS 4

The amendments address concerns arising from implementing PFRS 9, the new financial

instruments standard, before implementing the forthcoming insurance contracts standard.

These amendments allow entities to choose between the overlay approach and the deferral

approach to deal with the transitional challenges. The overlay approach gives all entities that

issue insurance contracts the option to recognize in OCI, rather than profit or loss, the

volatility that could arise when PFRS 9 is applied before the new insurance contracts standard

is issued. On the other hand, the deferral approach gives entities whose activities are

predominantly connected with insurance an optional temporary exemption from applying

PFRS 9 until the earlier of application of the forthcoming insurance contracts standard or

January 1, 2021.

The overlay approach and the deferral approach will only be available to an entity if it has not

previously applied PFRS 9.

PFRS 15, Revenue from Contracts with Customers

PFRS 15 establishes a new five-step model that will apply to revenue arising from contracts

with customers. Under PFRS 15, revenue is recognized at an amount that reflects the

consideration to which an entity expects to be entitled in exchange for transferring goods or

services to a customer. The principles in PFRS 15 provide a more structured approach to

measuring and recognizing revenue.

The new revenue standard is applicable to all entities and will supersede all current revenue

recognition requirements under PFRSs. Either a full or modified retrospective application is

required for annual periods beginning on or after January 1, 2018.

- 82 -

*SGVFS022041*

During 2016, the Group performed a preliminary assessment of PFRS 15, which is subject to

changes arising from a more detailed ongoing analysis. Furthermore, the Group is considering

the clarifications issued by International Accounting Standards Board (IASB) in April 2016

and will monitor any further developments.

PFRS 9, Financial Instruments

PFRS 9 reflects all phases of the financial instruments project and replaces PAS 39, Financial

Instruments: Recognition and Measurement, and all previous versions of PFRS 9. The

standard introduces new requirements for classification and measurement, impairment, and

hedge accounting. This new standard should be applied retrospectively, but providing

comparative information is not compulsory. For hedge accounting, the requirements are

generally applied prospectively, with some limited exceptions.

The adoption of PFRS 9 will have an effect on the classification and measurement of the

Group’s financial assets and impairment methodology for financial assets, but will have no

impact on the classification and measurement of the Group’s financial liabilities. The Group

is currently assessing the impact of adopting this standard.

Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value

(Part of Annual Improvements to PFRSs 2014 - 2016 Cycle)

The amendments clarify that an entity that is a venture capital organization, or other

qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to

measure its investments in associates and joint ventures at FVPL. These amendments also

clarify that if an entity that is not itself an investment entity has an interest in an associate or

joint venture that is an investment entity, the entity may, when applying the equity method,

elect to retain the fair value measurement applied by that investment entity associate or joint

venture to the investment entity associate’s or joint venture’s interests in subsidiaries.

This election is made separately for each investment entity associate or joint venture, at the

later of the date on which (a) the investment entity associate or joint venture is initially

recognized; (b) the associate or joint venture becomes an investment entity; and (c) the

investment entity associate or joint venture first becomes a parent. These amendments should

be applied retrospectively, with earlier application permitted.

Amendments to PAS 40, Investment Property, Transfers of Investment Property

The amendments clarify when an entity should transfer property, including property under

construction or development into, or out of investment property. These amendments state that

a change in use occurs when the property meets, or ceases to meet, the definition of

investment property and there is evidence of the change in use. A mere change in

management’s intentions for the use of a property does not provide evidence of a change in

use. These amendments should be applied prospectively to changes in use that occur on or

after the beginning of the annual reporting period in which the entity first applies the

amendments. Retrospective application is only permitted if this is possible without the use of

hindsight.

Philippine Interpretation International Financial Reporting Interpretation’s Committee

(IFRIC)-22, Foreign Currency Transactions and Advance Consideration

The interpretation clarifies that in determining the spot exchange rate to use on initial

recognition of the related asset, expense or income (or part of it) on the derecognition of a

non-monetary asset or nonmonetary liability relating to advance consideration, the date of the

transaction is the date on which an entity initially recognizes the nonmonetary asset or

nonmonetary liability arising from the advance consideration. If there are multiple payments

- 83 -

*SGVFS022041*

or receipts in advance, then the entity must determine a date of the transaction for each

payment or receipt of advance consideration. The interpretation may be applied on a fully

retrospective basis. Entities may apply the interpretation prospectively to all assets, expenses

and income in its scope that are initially recognized on or after the beginning of the reporting

period in which the entity first applies the interpretation or the beginning of a prior reporting

period presented as comparative information in the financial statements of the reporting period

in which the entity first applies the interpretation.


PFRS 16, Leases

Under the new standard, lessees will no longer classify their leases as either operating or

finance leases in accordance with PAS 17, Leases. Rather, lessees will apply the single-asset

model. Under this model, lessees will recognize the assets and related liabilities for most

leases on their statements of financial position, and subsequently, will depreciate the lease

assets and recognize interest on the lease liabilities in their profit or loss. Leases with a term

of 12 months or less or for which the underlying asset is of low value are exempted from these

requirements. The accounting by lessors is substantially unchanged as the new standard

carries forward the principles of lessor accounting under PAS 17. Lessors, however, will be

required to disclose more information in their financial statements, particularly on the risk

exposure to residual value.

Entities may early adopt PFRS 16 but only if they have also adopted PFRS 15. When

adopting PFRS 16, an entity is permitted to use either a full retrospective or a modified

retrospective approach, with options to use certain transition reliefs.

The new standard is expected to have significant impact in the Group.

Deferred effectivity

Amendments to PFRS 10 and PAS 28, Sale or Contribution of Assets between an Investor and

its Associate or Joint Venture

The amendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss of

control of a subsidiary that is sold or contributed to an associate or joint venture. These

amendments clarify that a full gain or loss is recognized when a transfer to an associate or

joint venture involves a business as defined in PFRS 3, Business Combinations. Any gain or

loss resulting from the sale or contribution of assets that does not constitute a business,

however, is recognized only to the extent of unrelated investors’ interests in the associate or

joint venture.

On January 13, 2016, the Financial Reporting Standards Council postponed the original

effective date of January 1, 2016 of the said amendments until the IASB has completed its

broader review of the research project on equity accounting that may result in the

simplification of accounting for such transactions and of other aspects of accounting for

associates and joint ventures.

*SGVFS022041*

INDEPENDENT AUDITORS’ REPORT

ON SUPPLEMENTARY SCHEDULES

The Stockholders and the Board of Directors

Cebu Air, Inc.

2nd Floor, Doña Juanita Marquez Lim Building

Osmeña Boulevard, Cebu City

We have audited, in accordance with Philippine Standards on Auditing, the consolidated financial

statements of Cebu Air, Inc. and its Subsidiaries (the Group) as at December 31, 2016 and 2015 and for

each of the three years in the period ended December 31, 2016, included in this Form 17-A and have

issued our report thereon dated March 21, 2017. Our audits were made for the purpose of forming an

opinion on the basic consolidated financial statements taken as a whole. The schedules listed in the Index

to Consolidated Financial Statements and Supplementary Schedules are the responsibility of the Group’s

management. Thus, schedules are presented for the purpose of complying with Securities Regulation

Code Rule 68, As Amended (2011), and are not part of the basic consolidated financial statements. These

schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated

financial statements and, in our opinion, fairly state, in all material respects, the information required to

be set forth therein in relation to the basic consolidated financial statements taken as a whole.

SYCIP GORRES VELAYO & CO.

Narciso T. Torres, Jr.

Partner

CPA Certificate No. 84208

SEC Accreditation No. 1511-A (Group A),

October 1, 2015, valid until September 30, 2018

Tax Identification No. 102-099-147

BIR Accreditation No. 08-001998-111-2015,

March 4, 2015, valid until March 3, 2018

PTR No. 5908769, January 3, 2017, Makati City

March 21, 2017

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines

Tel: (632) 891 0307 Fax: (632) 819 0872 ey.com/ph

BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018 SEC Accreditation No. 0012-FR-4 (Group A), November 10, 2015, valid until November 9, 2018



SCHEDULE A - FINANCIAL ASSETS

(CURRENT MARKETABLE EQUITYAND DEBT SECURITIES AND OTHER SHORT-TERM CASH INVESTMENTS)

DECEMBER 31, 2016

Amount Shown in Value Based on

Name of Issuing Entity and the Balance Sheet/ Market Quotations Income Received and

Description of Each Issue Notes at Balance Sheet Date Accrued

Various / USD Short-term cash investments P=3,381,611,183 P=3,381,611,183 P=34,731,373

Various / PHP Short-term cash investments 4,300,150,111 4,300,150,111 70,515,921

P=7,681,761,294 P=7,681,761,294 P=105,247,294

Various / Private Bonds – – –

Various / Government Bonds – – –

Various / Equity Securities – – –

Derivative Assets (Fuel Hedge) P=441,773,905 P=441,773,905 P=–

See Notes 8 and 9 of the Consolidated Financial Statements.

- 2 -


SCHEDULE B

AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS, EMPLOYEES, RELATED PARTIES AND PRINCIPAL STOCKHOLDERS

(OTHER THAN RELATED PARTIES)

DECEMBER 31, 2016

Balance Balance at End of Period

Name and Designation at Beginning

of Debtor of Period Additions Collections Write Offs Current Noncurrent Total

Various employees P=40,333,450 P=310,989,715 P=304,009,947 P=– P=41,892,143 P=5,421,075 P=47,313,218

- 3 -


SCHEDULE E - PROPERTY AND EQUIPMENT

DECEMBER 31, 2016

Balance Additions Balance

at Beginning Additions through Disposals and at End

Classification of Period at Cost Business Combination Reclassification Others of Period

Passenger Aircraft P=70,180,391,031 P=8,093,523,876 P=− P=4,351,607,461 (P=6,731,514,648) P=75,894,007,720

Engines 8,800,954,427 1,574,616,146 – – (905,884,607) 9,469,685,966

Rotables 3,224,302,949 553,091,249 – − (126,834,671) 3,650,559,527

EDP Equipment, Mainframe and

Peripherals 865,940,227 52,875,536 – (1,240,000) (43,800,751) 873,775,012

Ground Support Equipment 515,338,948 137,361,635 – − (3,435,189) 649,265,394

Leasehold Improvements 1,030,008,118 − – 295,997,691 − 1,326,005,809

Transportation Equipment 231,795,064 39,686,360 – − − 271,481,424

Furniture, Fixtures and Office

Equipment 158,892,556 34,976,928 –

−

(1,126,698) 192,742,786

Special Tools 14,213,796 594,216 – − − 14,808,012

Communication Equipment 15,023,503 11,303,157 – − − 26,326,660

Maintenance and Test Equipment 6,681,631 32,589 – − (176,103) 6,538,117

Other Equipment 99,147,611 6,966,369 – 1,240,000 (2,467,460) 104,886,520

Construction In-progress 10,576,116,375 8,621,026,175 – (4,647,605,152) − 14,549,537,398

P=95,718,806,236 P=19,126,054,236 P=− P=− (P=7,815,240,127) P=107,029,620,345

See Note 13 of the Consolidated Financial Statements.

- 4 -


SCHEDULE F - ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

Balance

Additions

Charged

Additions Charged

Balance

at Beginning to Costs and through Disposals and at End

Description of Period Expenses Business Combination Reclassification Others of Period

Passenger Aircraft P=18,918,279,072 P=4,197,295,780 P=– P=– (P=3,919,771,057) P=19,195,803,795

Engines 2,271,191,035 1,108,933,677 – – (440,884,843) 2,939,239,869

Rotables 668,272,255 284,567,783 – − (90,855,604) 861,984,434

EDP Equipment, Mainframe and

Peripherals 688,136,458 94,619,501

−

(1,240,000) (43,768,739) 737,747,220

Ground Support Equipment 391,633,417 60,885,023 – − (3,384,416) 449,134,024

Leasehold Improvements 327,657,757 196,797,075 – – − 524,454,832

Transportation Equipment 168,712,193 23,812,004 – – − 192,524,197

Furniture, Fixtures and Office

Equipment 100,290,381 21,635,398

– −

(1,151,040) 120,774,739

Special Tools 12,645,419 429,938 – – − 13,075,357

Communication Equipment 10,686,314 2,674,955 – – 79,224 13,440,493

Maintenance and Test Equipment 6,590,325 57,720 – – (176,103) 6,471,942

Other Equipment 78,890,597 6,986,563 – 1,240,000 (2,451,214) 84,665,946

Construction in-progress – – – – – –

P=23,642,985,223 P=5,998,695,417 P=− P=− (4,502,363,792) P=25,139,316,848

- 5 -


SCHEDULE H - LONG-TERM DEBT

DECEMBER 31, 2016

Amount Shown under

Caption "Current Portion of

Finance Lease Obligation" in

Related Balance Sheet

Amount Shown under

Caption " Finance Lease

Obligation" in Related

Balance Sheet

Title of Issue and

Type of Obligation Interest Rates Maturity Dates

Export Credit Agency-Backed Loans

2.00% to 6.00% Various dates

through 2023

P=1,699,487,313

P=4,843,451,067

1.00% to 2.00%

(US Dollar LIBOR) 810,215,121 5,048,857,967

Commercial Loans from banks

3.00% to 6.00%

Various dates

through 2017 1,830,367,889 4,275,920,000

Commercial Loans from banks

1.00% to 2.00%

(US Dollar LIBOR)

2.00% to 3.00%

(Phil.Pesos LIBOR)

Various dates

Through 2026

2,142,334,137

557,849,000

16,581,314,136

5,020,641,000

Total P=7,040,253,460 P=35,770,184,170


- 6 -


SCHEDULE K

CAPITAL STOCK

DECEMBER 31, 2016

Number of Shares

Authorized

Number of Shares Reserved

for Options, Warrants,

Conversion and Other

Rights

Number of Shares Issued Number of Shares Held by

and Outstanding as Directors,

Officers and

Employees

Shown under Related

Title of Issue Balance Sheet Caption Affiliates Others

Common Stock 1,340,000,000 605,953,330 – 407,412,031 509 198,540,790



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, 2016

PHILIPPINE FINANCIAL REPORTING STANDARDS AND

INTERPRETATIONS

Effective as of December 31, 2016

Adopted Not

Adopted

Not

Applicable

Framework for the Preparation and Presentation of Financial

Statements

Conceptual Framework Phase A: Objectives and qualitative

characteristics

PFRSs Practice Statement Management Commentary

Philippine Financial Reporting Standards

PFRS 1

(Revised)

First-time Adoption of Philippine Financial Reporting

Standards

Amendments to PFRS 1 and PAS 27: Cost of an

Investment in a Subsidiary, Jointly Controlled Entity or

Associate

Amendments to PFRS 1: Additional Exemptions for First-

time Adopters

Amendment to PFRS 1: Limited Exemption from

Comparative PFRS 7 Disclosures for First-time Adopters

Amendments to PFRS 1: Severe Hyperinflation and

Removal of Fixed Date for First-time Adopters

Amendments to PFRS 1: Government Loans

PFRS 2 Share-based Payment

Amendments to PFRS 2: Vesting Conditions and

Cancellations

Amendments to PFRS 2: Group Cash-settled Share-based

Payment Transactions

PFRS 3

(Revised)

Business Combinations

PFRS 4 Insurance Contracts

Amendments to PAS 39 and PFRS 4: Financial Guarantee

Contracts

PFRS 5 Non-current Assets Held for Sale and Discontinued

Operations

Amendment to PFRS 5: Changes in Methods of Disposal

PFRS 6 Exploration for and Evaluation of Mineral Resources

PFRS 7 Financial Instruments: Disclosures

Amendments to PFRS 7: Transition

- 2 -


INTERPRETATIONS


Adopted Not

Adopted

Not

Applicable

Amendments to PAS 39 and PFRS 7: Reclassification of

Financial Assets


Financial Assets - Effective Date and Transition

Amendments to PFRS 7: Improving Disclosures about

Financial Instruments

Amendments to PFRS 7: Disclosures - Transfers of

Financial Assets

Amendments to PFRS 7: Disclosures – Offsetting Financial

Assets and Financial Liabilities

Amendments to PFRS 7: Mandatory Effective Date of

PFRS 9 and Transition Disclosures

Amendment to PFRS 7, Applicability of the Amendments

to PFRS 7 to Condensed Interim Financial Statements

Amendment to PFRS 7, Servicing Contracts

PFRS 8 Operating Segments

PFRS 9 Financial Instruments

Amendments to PFRS 9: Mandatory Effective Date of

PFRS 9 and Transition Disclosures

PFRS 10 Consolidated Financial Statements

Amendments to PFRS 10, PFRS 12 and PAS 28,

Investment Entities: Applying the Consolidation Exception

PFRS 11 Joint Arrangements

Amendments to PFRS 11: Accounting for Acquisitions of

Interests in Joint Operations

PFRS 12 Disclosure of Interests in Other Entities



PFRS 13 Fair Value Measurement

PFRS 14 Regulatory Deferral Accounts

Philippine Accounting Standards

PAS 1

(Revised)

Presentation of Financial Statements

Amendment to PAS 1: Capital Disclosures

Amendments to PAS 32 and PAS 1: Puttable Financial

Instruments and Obligations Arising on Liquidation

Amendments to PAS 1: Presentation of Items of Other

Comprehensive Income

Amendments to PAS 1, Disclosure Initiative

PAS 2 Inventories

- 3 -


INTERPRETATIONS


Adopted Not

Adopted

Not

Applicable

PAS 7 Statement of Cash Flows

PAS 8 Accounting Policies, Changes in Accounting Estimates and

Errors

PAS 10 Events after the Balance Sheet Date

PAS 11 Construction Contracts

PAS 12 Income Taxes

Amendment to PAS 12 - Deferred Tax: Recovery of

Underlying Assets

PAS 16 Property, Plant and Equipment

Amendments to PAS 16 and PAS 38, Clarification of

Acceptable Methods of Depreciation and Amortization

Amendments to PAS 16 and PAS 41, Agriculture: Bearer

Plants

PAS 17 Leases

PAS 18 Revenue

PAS 19 Employee Benefits

Amendments to PAS 19: Actuarial Gains and Losses,

Group Plans and Disclosures

PAS 19

(Amended)

Employee Benefits

Amendment to PAS 19, Discount Rate: Regional Market

Issue

PAS 20 Accounting for Government Grants and Disclosure of

Government Assistance

PAS 21 The Effects of Changes in Foreign Exchange Rates

Amendment: Net Investment in a Foreign Operation

PAS 23

(Revised)

Borrowing Costs

PAS 24

(Revised)

Related Party Disclosures

PAS 26 Accounting and Reporting by Retirement Benefit Plans

PAS 27

(Amended)

Separate Financial Statements

Amendments to PAS 27: Equity Method in Separate


PAS 28

(Amended)

Investments in Associates and Joint Ventures



PAS 29 Financial Reporting in Hyperinflationary Economies

PAS 31 Interests in Joint Ventures

- 4 -


INTERPRETATIONS


Adopted Not

Adopted

Not

Applicable

PAS 32 Financial Instruments: Disclosure and Presentation

Amendments to PAS 32 and PAS 1: Puttable Financial

Instruments and Obligations Arising on Liquidation

Amendment to PAS 32: Classification of Rights Issues

Amendments to PAS 32: Offsetting Financial Assets and


PAS 33 Earnings per Share

PAS 34 Interim Financial Reporting

Amendment to PAS 34, Disclosure of Information

‘Elsewhere in the Interim Financial Report’

PAS 36 Impairment of Assets

PAS 37 Provisions, Contingent Liabilities and Contingent Assets

PAS 38 Intangible Assets

Amendments to PAS 16 and PAS 38, Clarification of

Acceptable Methods of Depreciation and Amortization

PAS 39 Financial Instruments: Recognition and Measurement

Amendments to PAS 39: Transition and Initial Recognition

of Financial Assets and Financial Liabilities

Amendments to PAS 39: Cash Flow Hedge Accounting of

Forecast Intragroup Transactions

Amendments to PAS 39: The Fair Value Option

Amendments to PAS 39 and PFRS 4: Financial Guarantee

Contracts


Financial Assets


Financial Assets – Effective Date and Transition

Amendments to Philippine Interpretation IFRIC–9 and PAS

39: Embedded Derivatives

Amendment to PAS 39: Eligible Hedged Items

PAS 40 Investment Property

PAS 41 Amendments to PAS 16 and PAS 41, Agriculture: Bearer

Plants

Philippine Interpretations

IFRIC 1 Changes in Existing Decommissioning, Restoration and

Similar Liabilities

IFRIC 2 Members' Share in Co-operative Entities and Similar

Instruments

IFRIC 4 Determining Whether an Arrangement Contains a Lease

- 5 -


INTERPRETATIONS


Adopted Not

Adopted

Not

Applicable

IFRIC 5 Rights to Interests arising from Decommissioning,

Restoration and Environmental Rehabilitation Funds

IFRIC 6 Liabilities arising from Participating in a Specific Market -

Waste Electrical and Electronic Equipment

IFRIC 7 Applying the Restatement Approach under PAS 29

Financial Reporting in Hyperinflationary Economies

IFRIC 8 Scope of PFRS 2

IFRIC 9 Reassessment of Embedded Derivatives

Amendments to Philippine Interpretation IFRIC–9 and PAS

39: Embedded Derivatives

IFRIC 10 Interim Financial Reporting and Impairment

IFRIC 11 PFRS 2- Group and Treasury Share Transactions

IFRIC 12 Service Concession Arrangements

IFRIC 13 Customer Loyalty Programmes

IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding

Requirements and their Interaction

Amendments to Philippine Interpretations IFRIC- 14,

Prepayments of a Minimum Funding Requirement

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

IFRIC 17 Distributions of Non-cash Assets to Owners

IFRIC 18 Transfers of Assets from Customers

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

SIC-7 Introduction of the Euro

SIC-10 Government Assistance - No Specific Relation to

Operating Activities

SIC-12 Consolidation - Special Purpose Entities

Amendment to SIC - 12: Scope of SIC 12

SIC-13 Jointly Controlled Entities - Non-Monetary Contributions

by Venturers

SIC-15 Operating Leases - Incentives

SIC-21 Income Taxes - Recovery of Revalued Non-Depreciable

Assets

SIC-25 Income Taxes - Changes in the Tax Status of an Entity or

its Shareholders

SIC-27 Evaluating the Substance of Transactions Involving the

Legal Form of a Lease

SIC-29 Service Concession Arrangements: Disclosures.

- 6 -


INTERPRETATIONS


Adopted Not

Adopted

Not

Applicable

SIC-31 Revenue - Barter Transactions Involving Advertising

Services

SIC-32 Intangible Assets - Web Site Costs

Not applicable standards have been adopted but the Group has no significant covered transactions as of and for the years ended December

31, 2016, 2015 and 2014.

*SGVFS022041*


SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS

AVAILABLE FOR DIVIDEND DECLARATION

DECEMBER 31, 2016

The table below presents the retained earnings available for dividend declaration as of December 31,

2016:

Unappropriated retained earnings, beginning P=8,554,739,181

Adjustments:

Fair value adjustment arising from fuel hedging gains (P=393,007,855)

Unrealized foreign exchange gains (1,172,267,183)

Recognized deferred tax assets (3,556,360,717)

Treasury stock (529,319,321) (5,650,955,076)

Unappropriated retained earnings, as adjusted to available for

dividend distribution, beginning 2,903,784,105

Add: Net income actually earned/realized during the year:

Net income during the period closed to retained earnings 8,197,475,530

Less: Non-actual/unrealized income net of tax:

Unrealized foreign exchange gains 27,917,587

Fair value adjustment arising from fuel hedging gains 1,587,708,081 6,581,849,862

9,485,633,967

Less: Dividend declaration during the year 1,211,906,660

Appropriations of retained earnings during the year 6,600,000,000

Total Retained earnings available for dividend declaration

as of December 31, 2016 P=1,673,727,307


MAP OF THE RELATIONSHIPS OF THE COMPANIES WITHIN THE GROUP


SCHEDULE OF FINANCIAL RATIOS

FOR THE YEARS ENDED December 31, 2016 and 2015

The following are the financial ratios that the Group monitors in measuring and analyzing its financial

soundness:

Financial Ratios 2016 2015

Liquidity Ratios

Current Ratio 54% 37%

Quick Ratio 46% 24%

Capital Structure Ratios

Debt-to-Equity Ratio (x) 1.28 1.47

Net Debt-to Equity Ratio (x) 0.97 1.28

Adjusted Net Debt-to Equity Ratio (x) 1.94 2.48

Asset to Equity Ratio (x) 3.00 3.40

Interest Coverage Ratio (x) 10.47 9.04

Profitability Ratios

EBITDAR Margin 38% 35%

EBIT Margin 20% 17%

Pre-tax core net income margin 18% 15%

Return on asset 11% 5%

Return on equity 33% 19%

Documents

CEBU AIR INC. Disclosures...PART I - BUSINESS AND GENERAL INFORMATION Item 1. Business Cebu Air, Inc. (the Parent Company) is an airline that operates under the trade name “Cebu