May 10, 2012

PHILIPPINE STOCK EXCHANGE, INC. 3rd Floor, Tower One and Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Ms. Janet A. Encarnacion Head, Disclosure Department

Gentlemen: Please find attached a copy of SEC Form 20-IS (Preliminary Information Statement) of Cebu Air, Inc. (the Corporation) which we have filed with the Securities and Exchange Commission in connection with the Annual Meeting of the Stockholders of the Corporation to be held on June 28, 2012. Thank you.

Very truly yours,

ROSALINDA F. RIVERA Corporate Secretary

/mhd

Airline Operations Center, Manila Domestic Airport, Pasay City, Philippines Trunkline: (632) 802-7000

COVER SHEET
1 5 4 6 7 5
SEC Registration Number

C E B U

A I R ,

I N C .

(Companys Full Name)

A I R L I N E D OM E S T I C

O P E R A T I O N S R O A D ,

C E N T E R , C I T Y

P A S A Y

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

Atty. Rosalinda F. Rivera Corporate Secretary

(Contact Person)

802-7000
(Company Telephone Number)

3 1
Day

2 0 -

I S

Fourth Thursday of June

Month Day
(Annual Meeting)

Month

(Form Type)

(Fiscal Year)

Preliminary Information Statement

N/A
(Secondary License Type, If Applicable)

Dept. Requiring this Doc.

Amended Articles Number/Section Total Amount of Borrowings

Total No. of Stockholders To be accomplished by SEC Personnel concerned

Domestic

Foreign

File Number

LCU

Document ID

Cashier

STAMPS Remarks: Please use BLACK ink for scanning purposes.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS JUNE 28, 2012

Notice is hereby given that the Annual Meeting of the Stockholders of CEBU AIR, INC. will be held on June 28, 2012 at 5:00 p.m. at Ballroom B of CROWNE PLAZA MANILA GALLERIA, Ortigas Avenue corner Asian Development Bank Avenue, Quezon City. The Agenda for the meeting is as follows: 1. Proof of notice of the meeting and existence of a quorum. 2. Reading and approval of the Minutes of the Annual Meeting of Stockholders held on July 7, 2011. 3. Presentation of Annual Report and approval of Financial Statements for the preceding year. 4. Election of Board of Directors. 5. Election of External Auditors. 6. Ratification of all acts of the Board of Directors and Management since the last annual meeting. 7. Consideration of such other matters as may properly come during the meeting. 8. Adjournment. For convenience in registering your attendance, please have available some form of identification, such as Voters I.D., or Drivers License. Pursuant to Section 2, Article VII of the Amended By-Laws of Cebu Air, Inc., proxies must be received by the Corporate Secretary for inspection and recording not later than five (5) working days before the time set for the meeting, or not later than June 21, 2012. We are not, however, soliciting proxies. Registration starts at 4:00 p.m. and will close at exactly 5:15 p.m. Only stockholders of record as of May 24, 2012 shall be entitled to vote.

By Authority of the Chairman

ROSALINDA F. RIVERA Corporate Secretary Airline Operations Center, Manila Domestic Airport, Pasay City, Philippines Trunkline: (632) 802-7000

SECURITIES AND EXCHANGE COMMISSION SEC FORM 20-IS Information Statement Pursuant to Section 20 of the Securities Regulation Code 1. Check the appropriate box: [] Preliminary Information Statement [ ] Definitive Information Statement 2. 3. Name of Registrant as specified in its charter Province, country or other jurisdiction of incorporation or organization SEC Identification Number BIR Tax Identification Code Address of principal office Registrants telephone number, including area code Date, time and place of the meeting of security holders : CEBU AIR, INC. (CEB or the Corporation) Cebu City, Philippines SEC Registration No. 154675 TIN No. 000-948-229-000 2nd Floor Doa Juanita Marquez Lim Building, Osmea Blvd., Cebu City (632) 802-7000

: : : :

4. 5. 6. 7.

8.

June 28, 2012 5:00 P.M. Ballroom B Crowne Plaza Manila Galleria Ortigas Avenue corner Asian Development Bank Avenue Quezon City, Metro Manila

9.

Approximate date on which the Information Statement is first to be sent or given to security holders

June 6, 2012

10.

Securities registered pursuant to Sections 8 and 12 of the Code or Sections 4 and 8 of the RSA (information on number of shares and amount of debt is applicable only to corporate registrants): Title of Each Class Number of Shares of Common Stock Outstanding or Amount of Debt Outstanding (as of April 30, 2012) 605,953,330

Common Stock, P1.00 par value 11.

Are any or all of registrant's securities listed on a Stock Exchange? Yes No _______

Cebu Air Inc.s common stock is listed on the Philippine Stock Exchange.

Date, Time and Place of Meeting of Security Holders Date Time and Place of Meeting : June 28, 2012 5:00 P.M. Ballroom B Crowne Plaza Manila Galleria Ortigas Avenue corner Asian Development Bank Avenue Quezon City, Metro Manila 2nd Floor Doa Juanita Marquez Lim Building, Osmea Blvd., Cebu City June 6, 2012

Complete Mailing Address of Principal Office

Approximate date on which the Information Statement is first to be sent or given to security holders Dissenters Right of Appraisal

Any stockholder of the Corporation may exercise his appraisal right against the proposed actions which qualify as instances giving rise to the exercise of such right pursuant to and subject to the compliance with the requirements and procedure set forth under Title X of the Corporation Code of the Philippines. There are no matters to be acted upon by the stockholders at the Annual Meeting of the Stockholders to be held on June 28, 2012 which would require the exercise of the appraisal right. Interest of Certain Persons in or Opposition to Matters to be acted upon None of the following persons have any substantial interest, direct or indirect, in any matter to be acted upon other than election to office: 1. Directors or officers of the Corporation at any time since the beginning of the last fiscal year; 2. Nominees for election as directors of the Corporation; 3. Associate of any of the foregoing persons. Voting Securities and Principal Holders Thereof (a) The Corporation has 605,953,330 outstanding shares as of April 30, 2012. Every stockholder shall be entitled to one vote for each share of stock held as of the established record date. (b) All stockholders of record as of May 24, 2012 are entitled to notice and to vote at the Corporations Annual Meeting of Stockholders.

(c) Section 8, Article VII of the By-Laws of the Corporation states that, for purposes of
determining the stockholders entitled to notice of, or to vote or be voted at any meeting of stockholders or any adjournments thereof, or entitled to receive payment of any dividends or other distribution or allotment of any rights, or for the purpose of any other lawful action, or for making any other proper determination of stockholders, the

Board of Directors may provide that the stock and transfer books be closed for a stated period, which shall not be more than sixty (60) days nor less than thirty (30) days before the date of such meeting. In lieu of closing the stock and transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders. A determination of stockholders of record entitled to notice of or to vote or be voted at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Election of Directors Section 1 (a), Article II of the By-Laws of the Corporation provides that the directors of the Corporation shall be elected by plurality vote at the annual meeting of the stockholders for that year at which a quorum is present. At each election for directors, every stockholder shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate his votes by giving one candidate as many votes as the number of such directors multiplied by the number of his shares shall equal, or by distributing such votes on the same principle among any number of candidates. The report attached to this SEC Form 20-IS is the management report to stockholders required under SRC Rule 20 to accompany the SEC Form 20-IS and is hereinafter referred to as the Management Report. Security Ownership of Certain Record and Beneficial Owners and Management Security Ownership of Certain Record and Beneficial Owners of more than 5% of the Corporations voting securities as of April 30, 2012
Title of Class Common Names and addresses of record owners and relationship with the Corporation CPAir Holdings, Inc. 43/F Robinsons Equitable Tower, ADB Avenue corner Poveda Street, Ortigas Center, Pasig City (stockholder) PCD Nominee Corporation (Non-Filipino) 37/F Tower 1, The Enterprise Center, Ayala Ave. corner Paseo de Roxas, Makati City (stockholder) PCD Nominee Corporation (Filipino) 37/F Tower 1, The Enterprise Center, Ayala Ave. corner Paseo de Roxas, Makati City (stockholder) Name of beneficial owner and relationship with record owner Same as record owner (See note 1) Number of % to Total Shares Held Outstanding 400,816,841 66.15%

Citizenship Filipino

Common

PDTC Participants and their clients (See note 2)

Non-Filipino

158,239,109 (See note 3)

26.11%

Common

PDTC Participants and their clients (See note 2)

Filipino

39,942,111

6.59%

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 Corporations 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. Out of the PCD Nominee Corporation (Non-Filipino) account, The Hongkong and Shanghai Banking Corp. Ltd. -Clients Acct. holds for various trust accounts the following shares of the Corporation as of April 30, 2012: The Hongkong and Shanghai Banking Corp. Ltd. -Clients Acct. No. of shares 101,118,611 % to Outstanding

3.

16.69%

The securities are voted by the trustees designated officers who are not known to the Corporation.

Security Ownership of Management as of April 30, 2012

Title of Class Name of beneficial Owner Amount & nature of beneficial ownership (Direct) 1 1 % to Total Outstanding

Position

Citizenship

Named Executive Officers1 Common 1. Lance Y. Gokongwei 2. Victor Emmanuel B. Custodio 3. Antonio Jose L. Rodriguez 4. Michael S. Shau 5. Jeanette U. Yu Sub-Total Other Directors and Executive Officers Common 6. Ricardo J. Romulo Common 7. John L. Gokongwei, Jr. Common 8. James L. Go Common 9. Jose F. Buenaventura Common 10. Robina Y. Gokongwei-Pe Common 11. Frederick D. Go Common 12. Antonio L. Go Common 13. Oh Wee Khoon Common 14. Jaime I. Cabangis 15. Bach Johann M. Sebastian 16. Rosita D. Menchaca 17. Candice Jennifer A. Iyog 18. Joseph G. Macagga 19. Robin C. Dui 20. Alejandro B. Reyes 21. Rosalinda F. Rivera 22. William S. Pamintuan -

Director, President and Chief Executive Officer Vice President Vice President Vice President Vice President - Treasurer

Filipino Filipino Filipino Filipino Filipino

* * * * * * * * * * * * *

Chairman Director Director Director Director Director Director (Independent) Director (Independent) Chief Financial Officer Senior Vice President Chief Strategist Vice President Vice President Vice President Vice President Vice President Corporate Secretary Assistant Corporate Secretary

1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Singaporean 10,000 Filipino Filipino 10,008 10,009 Filipino Filipino Filipino Filipino Filipino Filipino Filipino

All directors and executive officers as a group unnamed

Notes: 1. As defined under Part IV (B) (1) (b) of SRC Rule 12, the named executive officers to be listed refer to the Chief Executive Officer and those that are the four (4) most highly compensated executive officers as of April 30, 2012. * less than 0.01%

Voting Trust Holders of 5% or more - as of April 30, 2012 There are no persons holding more than 5% of a class under a voting trust or similar agreement. Changes in Control There has been no change in the control of the Corporation since the beginning of its last fiscal year. Directors and Executive Officers Information required hereunder is incorporated by reference to the section entitled Board of Directors and Executive Officers of the Registrant on Item 8, pages 28 to 34 of the Management Report. The incumbent directors of the Corporation are expected to be nominated by management for re-election this year. The incumbent members of the Nomination Committee of the Corporation are as follows: 1. John L. Gokongwei, Jr. 2. James L. Go (Chairman) 3. Lance Y. Gokongwei 4. Frederick D. Go 5. Oh Wee Khoon (independent director)

The incumbent members of the Audit Committee of the Corporation are as follows: 1. John L. Gokongwei, Jr. 2. James L. Go 3. Lance Y. Gokongwei 4. Frederick D. Go 5. Antonio L. Go (independent director) (Chairman) 6. Oh Wee Khoon (independent director)

The incumbent members of the Remuneration and Compensation Committee of the Corporation are as follows: 1. John L. Gokongwei, Jr. 2. James L. Go (Chairman) 3. Lance Y. Gokongwei 4. Frederick D. Go 5. Antonio L. Go (independent director)

Information required by the SEC under SRC Rule 38 on the nomination and election of Independent Directors. The following criteria and guidelines shall be observed in the pre-screening, short listing, and nomination of Independent Directors: A. Definition 1. An independent director is a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent

judgment in carrying out his responsibilities as a director in the corporation and includes, among others, any person who: 1.1 Is not a director or officer or substantial stockholder of the corporation or of its related companies or any of its substantial shareholders except when the same shall be an independent director of any of the foregoing; Does not own more than two percent (2%) of the shares of the corporation and/or its related companies or any of its substantial shareholders; Is not a relative of any director, officer or substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders. For this purpose, relatives include spouse, parent, child, brother, sister, and the spouse of such child, brother or sister; Is not acting as a nominee or representative of any director or substantial shareholder of the corporation, and/or any of its related companies and/or any of its substantial shareholders, pursuant to a Deed of Trust or under any contract or arrangement; Has not been employed in any executive capacity by the corporation, any of its related companies and/or by any of its substantial shareholders within the last two (2) years. Is not retained, either personally or through his firm or any similar entity, as professional adviser, by the corporation, any of its related companies and/or any of its substantial shareholders, within the last two (2) years; or Has not engaged and does not engage in any transaction with the corporation and/or with any of its related companies and/or with any of its substantial shareholders, whether by himself and/or with other persons and/or through a firm of which he is a partner and/or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arms length and are immaterial.

1.2 1.3

1.4

1.5

1.6

1.7

2.

No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code, committed within five (5) years prior to the date of his election, shall qualify as an independent director. This is without prejudice to other disqualifications which the corporations Manual on Corporate Governance provides. Any controversy or issue arising from the selection, nomination or election of independent directors shall be resolved by the Commission by appointing independent directors from the list of nominees submitted by the stockholders. When used in relation to a company subject to the requirements above: 4.1 4.2 Related company means another company which is: (a) its holding company, (b) its subsidiary, or (c) a subsidiary of its holding company; and Substantial shareholder means any person who is directly or indirectly the beneficial owner of more than ten percent (10%) of any class of its equity security.

3.

4.

B. Qualifications and Disqualifications of Independent Directors 1. An independent director shall have the following qualifications:

1.1 1.2

He shall have at least one (1) share of stock of the corporation; He shall be at least a college graduate or he has sufficient management experience to substitute for such formal education or he shall have been engaged or exposed to the business of the corporation for at least five (5) years; He shall be twenty one (21) years old up to seventy (70) years old, however, due consideration shall be given to qualified independent directors up to the age of eighty (80); He shall have been proven to possess integrity and probity; and He shall be assiduous.

1.3

1.4 1.5 2.

No person enumerated under Section II (5) of the Code of Corporate Governance shall qualify as an independent director. He shall likewise be disqualified during his tenure under the following instances or causes: 2.1 He becomes an officer or employee of the corporation where he is such member of the board of directors/trustees, or becomes any of the persons enumerated under letter A hereof; His beneficial security ownership exceeds two percent (2%) of the outstanding capital stock of the corporation where he is such director; Fails, without any justifiable cause, to attend at least 50% of the total number of Board meetings during his incumbency unless such absences are due to grave illness or death of an immediate family. Such other disqualifications that the Corporate Governance Manual provides.

2.2 2.3

2.4

C. Number of Independent Directors All companies are encouraged to have independent directors. However, issuers of registered securities and public companies are required to have at least two (2) independent directors or at least twenty percent (20%) of its board size. D. Nomination and Election of Independent Directors 1. The Nomination Committee (the Committee) shall have at least three (3) members, one of whom is an independent director. It shall promulgate the guidelines or criteria to govern the conduct of the nomination. The same shall be properly disclosed in the corporations information or proxy statement or such other reports required to be submitted to the Commission. Nomination of independent director/s shall be conducted by the Committee prior to a stockholders meeting. All recommendations shall be signed by the nominating stockholders together with the acceptance and conformity by the would-be nominees. The Committee shall pre-screen the qualifications and prepare a final list of all candidates and put in place screening policies and parameters to enable it to effectively review the qualifications of the nominees for independent director/s.

2.

3.

4.

After the nomination, the Committee shall prepare a Final List of Candidates which shall contain all the information about all the nominees for independent directors, as required under Part IV (A) and (C) of Annex "C" of SRC Rule 12, which list, shall be made available to the Commission and to all stockholders through the filing and distribution of the Information Statement, in accordance with SRC Rule 20, or in such other reports the Corporation is required to submit to the Commission. The name of the person or group of persons who recommended the nomination of the independent director shall be identified in such report including any relationship with the nominee. Only nominees whose names appear on the Final List of Candidates shall be eligible for election as independent director/s. No other nomination shall be entertained after the Final List of Candidates shall have been prepared. No further nominations shall be entertained nor allowed on the floor during the actual annual stockholders' meeting. Election of Independent Director/s 6.1 Except as those required under this Rule and subject to pertinent existing laws, rules and regulations of the Commission, the conduct of the election of independent director/s shall be made in accordance with the standard election procedures of the company or its by-laws. It shall be the responsibility of the Chairman of the Meeting to inform all stockholders in attendance of the mandatory requirement of electing independent director/s. He shall ensure that an independent director/s are elected during the stockholders meeting. Specific slot/s for independent directors shall not be filled-up by unqualified nominees. In case of failure of election for independent director/s, the Chairman of the Meeting shall call a separate election during the same meeting to fill up the vacancy.

5.

6.

6.2

6.3 6.4

E. Termination/Cessation of Independent Directorship In case of resignation, disqualification or cessation of independent directorship and only after notice has been made with the Commission within five (5) days from such resignation, disqualification or cessation, the vacancy shall be filled by the vote of at least a majority of the remaining directors, if still constituting a quorum, upon the nomination of the Committee otherwise, said vacancies shall be filled by the stockholders in a regular or special meeting called for that purpose. An independent director so elected to fill a vacancy shall serve only for the unexpired term of his predecessor in office. The New By-Laws of the Corporation dated May 28, 2007 include the provisions of SRC Rule 38, as amended. Presented below is the Final List of Candidates for Independent Directors: 1. Mr. Antonio L. Go was elected as an independent director of the Corporation on 6 December 2007. He also currently serves as director and President of Equitable Computer Services, Inc. and is Chairman of Equicom Savings Bank. He is also a director of Medilink Network, Inc., Maxicare Healthcare Corporation, Equicom Manila Holdings, United Industrial Corporation Limited, Oriental Petroleum and Minerals Corporation, Pin-An Holdings, Inc., Equicom Information Technology, and ALGO Leasing and Finance, Inc. He is also a trustee of Go Kim

Pah Foundation and Equitable Foundation, Inc. He graduated from Youngstown University, United States with a Bachelor of Science degree in Business Administration. He attended the International Advanced Management program at the International Management Institute, Geneva, Switzerland as well as the Financial Planning/Control program at the ABA National School of Bankcard Management, Northwestern University, United States. 2. Mr. Oh Wee Khoon was elected as an independent director of the Corporation effective 3 January 2008. He is the founder and managing director of Sobono Energy Private Limited. He is also the Vice Chairman of the Sustainable Energy Association of Singapore. He graduated with honours from the University of Manchester Institute of Science and Technology with a Bachelor of Science degree in Mechanical Engineering. He obtained his Masters degree in Business Administration from the National University of Singapore. The Certification of Independent Directors executed by the above-mentioned independent directors are attached hereto as Annex A and Annex B, respectively. The name of the person who recommended the nomination of the foregoing candidates for Independent Directors is as follows: CPAir Holdings, Inc. - controlling shareholder of the Corporation owning 66.15% of the Corporations total outstanding capital stock as of April 30, 2012. CPAir Holdings, Inc. has no relationship with Mr. Antonio L. Go and Mr. Oh Wee Khoon, the candidates for independent directors of the Corporation. Significant Employees There are no persons who are not executive officers of the Corporation who are expected by the Corporation to make a significant contribution to the business. Family Relationships 1. 2. 3. 4. 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. Ms. Robina Gokongwei-Pe is the daughter of Mr. John L. Gokongwei, Jr. Mr. Frederick D. Go is the nephew of Mr. John L. Gokongwei, Jr.

Involvement in Certain Legal Proceedings of Directors and Executive Officers To the best of the Corporations knowledge and belief and after due inquiry, none of the Corporations directors or executive officers are involved in any of the following events for the past five years and up to the date of this SEC Form 20-IS: 1. Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; 2. Any conviction by final judgment in a criminal proceeding; 3. Being subjected to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign,
9

permanently or temporarily enjoining, barring, suspending or otherwise limiting their involvement in any type of business, securities, commodities or banking activities; or 4. Being found by a domestic or foreign court of competent jurisdiction (in a civil action), the Philippine SEC or comparable foreign body, or a domestic or foreign exchange or other organized trading market or self regulatory organization, to have violated a securities or commodities law or regulation and the judgment has not been reversed, suspended, or vacated. Certain Relationships and Related Party Transactions The Corporation, in its regular conduct of business, had engaged in transactions with its ultimate parent company, its joint venture and affiliates. See Note 26 (Related Party Transactions) of the Notes to the Consolidated Financial Statements as of December 31, 2011 on pages 48 to 51 of the audited consolidated financial statements as of December 31, 2011. Information on the parent of the Corporation, the basis of control, and the percentage of voting securities owned as of April 30, 2012: Parent Company CPAir Holdings, Inc. Number of Shares Held 400,816,841 % Held 66.15%

Compensation of directors and executive officers Summary Compensation Table The following are our Companys Chief Executive Officer (CEO) and four most highly compensated executive officers for the years ended 2010, 2011 and 2012 estimates: Name Lance Y. Gokongwei Victor Emmanuel B. Custodio Antonio Jose L. Rodriguez Michael S. Shau Jeanette U. Yu Position President and CEO Vice President Vice President Vice President Vice President - Treasurer

The following table identifies and summarizes the aggregate compensation of the Companys CEO and the four most highly compensated executive officers for the years ended 2010, 2011 and 2012 estimates:
Year CEO and the most highly compensated executive officers named above 2010 2011 2012 Estimates 2010 2011 2012 Estimates Salaries 24,888,814 34,186,380 48,039,077 73,989,515 76,860,270 87,286,709 Bonuses 2,334,133 3,062,481 4,067,057 6,515,634 6,516,539 7,398,109 Other Income Total 27,222,947 37,24,861 52,106,134 80,505,149 83,376,809 94,684,818

Aggregate compensation paid to all officers and directors as a group unnamed

10

Standard Arrangements Other than payment of reasonable per diem, there are no standard arrangements pursuant to which directors of the Corporation are compensated, or are to be compensated, directly or indirectly, for any services provided as a director for the last completed fiscal year and the ensuing year. Other Arrangements There are no other arrangements pursuant to which any director of the Corporation was compensated, or is to be compensated, directly or indirectly, during the Corporations last completed fiscal year, and the ensuing year, for any service provided as a director. Employment Contracts and Termination of Employment and Change-in-Control Arrangement There are no agreements between the Corporation and its directors and executive officers providing for benefits upon termination of employment, except for such benefits to which they may be entitled under the Corporations pension plans. Warrants and Options Outstanding There are no outstanding warrants or options held by the Corporations CEO, the named executive officers, and all officers and directors as a group. Independent Public Accountants Sycip Gorres Velayo & Co. (SGV & Co.) has acted as the Corporations 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 years meetings and are expected to be present at the current years annual meeting of stockholders. They may also make a statement and respond to appropriate questions with respect to matters for which their services were engaged. The current handling partner of SGV & Co. has been engaged by the Corporation in 2011 and is expected to be rotated every five years. Action with respect to reports The following are included in the agenda of the Annual Meeting of Stockholders for the approval of the stockholders: 1. Reading and approval of the Minutes of the Annual Meeting of Stockholders held on July 7, 2011. 2. Presentation of Annual Report and approval of Financial Statements for the preceding year. 3. Election of Board of Directors. 4. Election of External Auditors.

11

5. Ratification of all acts of the Board of Directors and Management since the last annual meeting. A summary of the matters approved and recorded in the Minutes of the Annual Meeting of the Stockholders last July 7, 2011 is as follows: (a) reading and approval of the minutes of the Annual Stockholders Meeting held on June 24, 2010 and the minutes of the Special Meeting of Stockholders held on August 20, 2010; (b) presentation of annual report and approval of financial statements for the preceding year; (c) election of Board of Directors; (d) election of external auditors; and (e) ratification of all acts of the Board of Directors and management since the last annual meeting. Brief description of material matters approved by the Board of Directors and Management and disclosed to the SEC and PSE since the last annual meeting of stockholders held on July 7, 2011 for ratification by the stockholders: Date of Board Approval July 7, 2011 Description Results of the Organizational Meeting of the Board of Directors. Retirement of Mr. Hansley Heinrych C. See effective November 30, 2011 and the appointment of Mr. Bach Johann M. Sebastian in the interim as Chief Financial Officer and Compliance Officer. Appointment of Mr. Jaime I. Cabangis as Chief Financial Officer effective January 2, 2012.

November 14, 2011

December 12, 2011

Voting Procedures The vote required for approval or election: Pursuant to Article VII, Section 3 of the By-Laws of the Corporation, no stockholders meeting shall be competent to decide any matter or transact any business, unless a majority of the outstanding capital stock is present or represented thereat, except in those cases in which the Corporation law requires the affirmative vote of a greater proportion. The method by which votes will be counted: Article VII, Section 4 of the By Laws provides that voting upon all questions at all meetings of the stockholders shall be by shares of stock and not per capital. Article VII, Section 2 of the By Laws also provides that stockholders may vote at all meetings the number of shares registered in their respective names, either in person or by proxy duly given in writing and duly presented to and received by the Corporate Secretary for inspection and recording not later than five (5) working days before the time set for the meeting, except such period shall be reduced to one (1) working day for meetings that are adjourned due to lack of the necessary quorum. No proxy bearing a signature which is not legally acknowledged by the Corporate Secretary shall be honored at the meetings. Proxies shall be valid and effective for five (5) years, unless the proxy provides for a shorter period, and shall be suspended for any meeting wherein the stockholder appears in person.

12

Article II, Section 1 (a) provides that the directors of the Corporation shall be elected by plurality vote at the annual meeting of the stockholders for that year at which a quorum is present. At each election of directors, every stockholder shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate his votes by giving one candidate as many votes as the number of such directors multiplied by the number of his shares shall equal, or by distributing such votes on the same principle among any number of candidates. The Secretary shall record all the votes and proceedings of the stockholders and of the directors in a book kept for that purpose.

Restriction that Limits the Payment of Dividends on Common Shares None.

Recent Sales of Unregistered or Exempt Securities, Including Recent Issuance of Securities Constituting an Exempt Transaction. Not Applicable. All shares of the Corporation are listed in the Philippine Stock Exchange. Discussion on compliance with leading practices on corporate governance The Corporation adheres to the principles and practices of good corporate governance, as embodied in its Corporate Governance Manual, Code of Business Conduct and related SEC Circulars. On September 24, 2010, the Board of Directors approved the adoption of a revised Corporate Governance Manual in accordance with SEC Memorandum Circular No. 6 (Series of 2009) dated June 22, 2009. Continuous improvement and monitoring of governance and management policies have been undertaken to ensure that the Corporation observes good governance and management practices. This is to assure the shareholders that the Corporation conducts its business with the highest level of integrity, transparency and accountability. A Certification of Compliance with the Manual on Corporate Governance is submitted by the Corporation every year to the SEC and PSE. Beginning in 2011, the Corporation likewise submitted a Corporate Governance Disclosure Report to the PSE. The Corporation likewise consistently strives to raise its financial reporting standards by adopting and implementing prescribed Philippine Financial Reporting Standards.

CEBU AIR, INC., AS REGISTRANT, WILL PROVIDE WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF THE REGISTRANTS ANNUAL REPORT ON SEC FORM 17-A. SUCH WRITTEN REQUESTS SHOULD BE DIRECTED TO THE OFFICE OF THE CORPORATE SECRETARY, 40/F ROBINSONS EQUITABLE TOWER, ADB AVENUE CORNER POVEDA ST., ORTIGAS CENTER, PASIG CITY, METRO MANILA, PHILIPPINES.

13

SIGNATURE PAGE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this report is true, complete and correct. This report is signed in the City of Pasig on May 4, 2012.

CEBU AIR, INC.

ROSALINDA F. RIVERA Corporate Secretary

/mhd

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Information Required by the SEC Pursuant to SRC Rule 20 PART 1 - BUSINESS AND GENERAL INFORMATION Item 1. Business

Cebu Air, Inc. (the Company) is an airline that operates under the trade name Cebu Pacific Air and is the leading low-cost carrier in the Philippines. It pioneered the low fare, great value strategy in the local aviation industry by providing scheduled air travel services targeted to passengers who are willing to forego extras for fares that are typically lower than those offered by traditional full-service airlines while offering reliable services and providing passengers with a fun travel experience. The Company was incorporated in August 26, 1988 and was granted a 40-year legislative franchise to operate international and domestic air transport services in 1991. It commenced its scheduled passenger operations in 1996 with its first domestic flight from Manila to Cebu. In 1997, it was granted the status as an official Philippine carrier to operate international services by the Office of the President of the Philippines pursuant to Executive Order (EO) No. 219. International operations began in 2001 with flights from Manila to Hong Kong. In 2005, the Company adopted the low-cost carrier (LCC) business model. The core element of the LCC strategy is to offer affordable air services to passengers. This is achieved by having: high-load, highfrequency flights; high aircraft utilization; a young and simple fleet composition; and low distribution costs. As of December 31, 2011, the Company operates an extensive route network serving 53 domestic routes and 24 international routes with a total of 2,206 scheduled weekly flights. It operates from four hubs, including the Ninoy Aquino International Airport (NAIA) Terminal 3 located in Pasay City, Metro Manila; Mactan-Cebu International Airport located in Lapu-Lapu City, part of Metropolitan Cebu; Diosdado Macapagal International Airport (DMIA) located in Clark, Pampanga; and Davao International Airport located in Davao City, Davao del Sur. As of December 31, 2011, the Company operates a fleet of 37 aircraft which comprises of ten Airbus A319, 19 Airbus A320, and eight ATR 72-500 aircraft. It operates its Airbus aircraft on both domestic and international routes and operates the ATR 72-500 aircraft on domestic routes, including destinations with runway limitations. The average aircraft age of the Companys fleet is approximately 3.6 years as of December 31, 2011. The Company has three principal distribution channels: the internet; direct sales through booking sales offices, call centers and government/corporate client accounts; and third-party sales outlets. Aside from passenger service, it also provides airport-to-airport cargo services on its domestic and international routes. In addition, the Company offers ancillary services such as cancellation and rebooking options, inflight merchandising such as sale of duty-free products on international flights, baggage and travel-related products and services. The percentage contributions to the Companys revenues of its principal business activities are as follows: For the Years Ended December 31 2011 2010 2009 Passenger Services 80.2% 84.8% 83.7% Cargo Services 6.5% 7.2% 7.2% Ancillary Services 13.3% 8.0% 9.1% 100.0%
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100.0%

100.0%

No material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of business was made in the past three years. The Company has not been subjected to any bankruptcy, receivership or similar proceeding in the said period. Distribution Methods of Products or Services The Company has three principal distribution channels: the internet; direct sales through booking sales offices, call centers and government/corporate client accounts; and third-party sales outlets. Internet In January 2006, the Company introduced its internet booking system. Through www.cebupacificair.com, passengers can book flights and purchase services online. The system also provides passengers with real time access to the Companys flight schedules and fare options. Booking Offices and Call Centers As of December 31, 2011, the Company has a network of seven booking offices located throughout the Philippines and one booking office located in Hong Kong. It directly operates these booking offices which also handle customer service issues, such as customer requests for change of itinerary. In addition, the Company operates two in-house call centers, one in Manila and the other in Cebu. It also uses a thirdparty call centre outsourcing service to help accommodate heavy call traffic. Its employees who work as reservation agents are also trained to handle customer service inquiries and to convert inbound calls into sales. Purchases made through call centers can be settled through various modes, such as credit cards, payment centers and authorized agents. Government/Corporate Client Accounts As of December 31, 2011, the Company has government and corporate accounts for passenger sales. It provides these accounts with direct access to its reservation system and seat inventory as well as credit lines and certain incentives. Further, clients may choose to settle their accounts by post-transaction remittance or by using pre-enrolled credit cards. Third Party Sales Outlets As of December 31, 2011, the Company has a network of distributors in the Philippines selling its domestic and international air services within an agreed territory or geographical coverage. Each distributor maintains and grows its own client base and can impose on its clients a service or transaction fee. Typically, a distributors client base would include agents, travel agents or end customers. The Company also has a network of foreign general sales agents, wholesalers, and preferred sales agents who market, sell and distribute the Companys air services in other countries. Publicly Announced New Product or Service The Company continues to analyze its route network. It can opt to increase frequencies on existing routes or add new routes/destinations. It can also opt to eliminate unprofitable routes and redeploy capacity. The Company plans to expand its fleet over the course of the next three years to 53 aircraft by the end of 2014 (net of redelivery of six leased aircraft). The additional aircraft will support the Companys plans to increase frequency on current routes and to add new city pairs and destinations. The Company has increased frequencies on domestic routes such as Manila to Naga, Busuanga, Roxas; Cebu to Dumaguete, Ozamis, Puerto Princesa; and Davao to Iloilo and international routes such as Manila to Incheon and Bangkok. It also plans to launch services from Manila to Siem Reap, Cambodia and Kalibo to Hong
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Kong, and reinstate its Manila - Hanoi, Vietnam and Manila - Xiamen, China operations in 2012. The Company is also set to launch long-haul flights by the third quarter of 2013, eyeing routes to cities where there are significant Filipino communities. For this purpose, the Company has entered in to operating leases for four brand-new Airbus A330 aircraft to be delivered between 2013 and 2014. Airbus A330 aircraft can carry up to 400 passengers and can allow the Company to embark on long-haul flights that are within 11 hours from the Philippines. Further, the Company has turned into firm orders its existing options for seven Airbus A320 aircraft for delivery between 2015 to 2016. The Company has also placed a new firm order for 30 Airbus A321neo (New Engine Option) aircraft with options for a further ten Airbus A321neos. Airbus A321neos will be a first of its type to operate in the Philippines, being a larger and longer-haul version of the familiar Airbus A320. These 220-seater aircraft will have a much longer range which will enable the Company to serve cities in Australia, India and Northern Japan, places the A320 cannot reach. This order for A321neo aircraft will be delivered between 2017 and 2021. The Company has also signed a joint venture agreement with CAE, world leader in aviation training, to establish an aviation training center for airlines in the Asia Pacific region. The joint venture to be known as the Philippine Academy for Aviation Training, Inc. (PAAT) is scheduled to start operations in the third quarter of 2012 in Clark Freeport Zone, northwest of Manila. The new training center will be a worldclass, one-stop training center for the Company and a hub for training services for other airlines. The facility will initially cater to Airbus A319/320/321 series pilot type-rating training requirements, among others. It will be initially equipped with two Airbus A320 Full Flight Simulators with the capability to expand by two additional simulators. Training is also expected to be added for other aviation personnel in the future, such as cabin crew, dispatch, ground handling personnel and cadets. Each simulator can train/certify approximately 300-700 pilots per simulator per year. Competition The Philippine aviation authorities deregulated the airline industry in 1995 eliminating certain restrictions on domestic routes and frequencies which resulted in fewer regulatory barriers to entry into the Philippine domestic aviation market. On the international market, although the Philippines currently operates under a bilateral framework, whereby foreign carriers are granted landing rights in the Philippines on the basis of reciprocity as set forth in the relevant bilateral agreements between the Philippine government and foreign nations, in March 2011, the Philippine government issued EO 29 which authorizes the Civil Aeronautics Board (CAB) and the Philippine Air Panels to pursue more aggressively the international civil aviation liberalization policy to boost the countrys competitiveness as a tourism destination and investment location. Among others, EO 29 provides the following: In the negotiation of the Air Services Agreements (ASAs), the Philippine Air Panels may offer and promote third, fourth and fifth freedom rights to the countrys 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 countrys 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 EO may significantly increase competition. Currently, the Company faces intense competition on both its domestic and international routes. The level and intensity of competition varies from route to route based on a number of factors. Principally, it
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competes with other airlines that service the routes it flies. However, on certain domestic routes, the Company also considers alternative modes of transportation, particularly sea and land transport, to be competitors for its services. Substitutes to its services also include video conferencing and other modes of communication. The Companys main competitor in the Philippines is Philippine Airlines (PAL), a full-service Philippine flag carrier. Most of the Companys domestic and international destinations are also serviced by PAL. The Company also competes in the Philippines with Air Philippines Express, a domestic operator with relations to PAL. Certain smaller airlines, including Zest Air and South East Asian Airlines (Seair) also compete with the Company domestically. According to CAB data, the Company is the leading domestic airline in the Philippines by passengers carried, with a market share of 45.2% for the year ended December 31, 2011. The Company is the leading regional low-cost airline offering services to more destinations and serving more routes with a higher frequency between the Philippines and other ASEAN countries than any other airline in the Philippines. The Company currently competes with the following LCCs and full-service airlines in its international operations: AirAsia, Tiger Airways (Tiger), Jetstar Airways, PAL, Cathay Pacific, Singapore Airlines, Thai Airways, among others. AirAsia has been operating in the Philippines since 2005, with one daily flight between Kuala Lumpur and Clark, and one daily flight between Kota Kinabalu and Clark. In 2010, AirAsia set up a joint venture in the Philippines, and in March 2012, received its Air Operator Certificate from the Civil Aviation Authority of the Philippines (CAAP). With the receipt of the certificate, AirAsia now has the permission to fly on Philippine airspace. It is set to fly from the DMIA to domestic destinations - specifically Davao and Kalibo. The Philippine joint venture operates out of Clark in Pampanga, currently with two Airbus A320 aircraft. In 2010, Seair sealed a lease and marketing agreement with Tiger, where Seair taps Tigers established internet booking system to distribute its seats. Seair operates Singapore flights to/from Clark using two 144-seater Airbus A319 aircraft leased from Tiger. Raw Materials Fuel is a major cost component for airlines. The Companys fuel requirements are classified by location and sourced from various suppliers. The Companys fuel suppliers at its international stations include PTT-Bangkok Aviation, Petronas-Kuala Lumpur, Shell-Singapore, SK Corp-Korea and Kuwait Aviation-Hongkong, among others. It also purchases fuel from PTT Philippines and Phoenix Petroleum. The Company purchases fuel stocks on a per parcel basis, in such quantities as are sufficient to meet its monthly operational requirements. Most of the Companys 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 Companys business is not dependent upon a single customer or a few customers that a loss of anyone of which would have a material adverse effect on the Company. Transactions with and/or Dependence on Related Parties The Companys significant transactions with related parties are described in detail in Note 26 of the Notes to Consolidated Financial Statements.

Patents, Trademarks, Licenses, Franchises, Concessions and Royalty Agreements Trademarks The Company has registered the Cebu Pacific and the Cebu Pacific feather-like device trademarks with the Philippine Intellectual Property Office (PIPO). In the Philippines, certificates of registration of a trade mark filed with the PIPO prior to the effective date of the Philippine Intellectual Property Code (PIPC) in 1998 are generally effective for a period of 20 years from the date of the certificate, while those filed after the PIPC became effective are generally effective for a shorter period of ten years, unless terminated earlier. The Company currently has no trademark applications pending with the PIPO. However, it has 27 trademark applications pending with the China Trademark Office. The Company has also registered the business name Cebu Pacific Air with the Department of Trade and Industry (DTI). Registering a business name with the DTI precludes another entity engaged in the same or similar business from using the same business name as one that has been registered. A registration of a business name shall be effective for five years from the initial date of registration and must be renewed within the first three months following the expiration of the five-year period from the date of original registration. Licenses / Permits The Company operates its business in a highly regulated environment. The Companys business depends upon the permits and licenses issued by the government authorities or agencies for its operations which include the following: Legislative Franchise to Operate a Public Utility Certificate of Public Convenience and Necessity Letter of Authority Air Operator Certificate Certificate of Registration Certificate of Airworthiness

The Company also has to seek approval from the relevant airport authorities to secure airport slots for its operations. Franchise In 1991, pursuant to Republic Act (RA) No. 7151, the Company was granted a franchise to operate air transportation services, both domestic and international. In accordance with the Companys franchise, which extends up to year 2031: a) The Company is subject to franchise tax of five percent of the gross revenue derived from air transportation operations. For revenue earned from activities other than air transportation, the Company is subject to regular corporate income tax and to real property tax. In the event that any competing individual, partnership or corporation received and enjoyed tax privileges and other favorable terms which tended to place the Company at any disadvantage, then such privileges shall have been deemed by the fact itself of the Companys tax privileges and shall operate equally in favor of the Company.

b)

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

Government Approval of Principal Products or Services The Company operates its business in a highly regulated environment. The Companys business depends upon the permits and licenses issued by the government authorities or agencies for its operations which include the following: Legislative Franchise to Operate a Public Utility Certificate of Public Convenience and Necessity Letter of Authority Air Operator Certificate Certificate of Registration Certificate of Airworthiness

The Company also has to seek approval from the relevant airport authorities to secure airport slots for its operations. Effects of Existing or Probable Government Regulations on the Business Civil Aeronautics Administration and CAAP
Policy-making for the Philippine civil aviation industry started with RA 776, known as the Civil

Aeronautics Act of the Philippines (the Act), passed in 1952. The Act established the policies and laws governing the economic and technical regulation of civil aeronautics in the country. It established the guidelines for the operation of two regulatory organizations, CAB for the regulation of the economic activities of airline industry participants and the Air Transportation Office, which was later transformed into the CAAP, created pursuant to RA 9497, otherwise known as the Civil Aviation Authority Act of 2008. The CAB is authorized to regulate the economic aspects of air transportation, to issue general rules and regulations to carry out the provisions of RA 776, and to approve or disapprove the conditions of carriage or tariff which an airline desires to adopt. It has general supervision and regulation over air carriers, general sales agents, cargo sales agents, and airfreight forwarders, as well as their property, property rights, equipment, facilities and franchises. The CAAP, a government agency under the supervision of the Department of Transportation and Communications for purposes of policy coordination, regulates the technical and operational aspects of air transportation in the Philippines, ensuring safe, economic and efficient air travel. In particular, it establishes the rules and regulations for the inspection and registration of all aircraft and facilities owned and operated in the Philippines, determines the charges and/or rates pertinent to the operation of public air utility facilities and services, and coordinates with the relevant government agencies in relation to airport security. Moreover, CAAP is likewise tasked to operate and maintain domestic airports, air navigation and other similar facilities in compliance with the International Civil Aviation Organization (ICAO), the specialized agency of the United Nations whose mandate is to ensure the safe, efficient and orderly evolution of international civil aviation. The Company complies with and adheres to existing government regulations. Category 2 Rating In early January 2008, the Federal Aviation Administration (FAA) of the United States (U.S.) downgraded the aviation safety ranking of the Philippines to Category 2 from the previous Category 1 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
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the ICAO. The lower Category 2 rating means a country either lacks laws or regulations necessary to oversee airlines in accordance with minimum international standards, or its civil aviation authority is deficient in one or more areas, such as technical expertise, trained personnel, recordkeeping or inspection procedures. Further, it means Philippine carriers can continue flying to the U.S. but only under heightened FAA surveillance or limitations. In addition, the Philippines has been included in the Significant Safety Concerns posting by the ICAO as a result of an unaddressed safety concern highlighted in the recent ICAO audit. As a result of this unaddressed safety concern, Air Safety Committee (ASC) of the European Union banned all Philippine commercial air carriers from operating flights to and from Europe. The ASC based its decision on the absence of sufficient oversight by the CAAP. Although the Company does not currently operate flights to the U.S. and Europe, the foregoing may adversely affect its ability to establish new routes to other countries that base their decision on flight access on the FAA and ASCs evaluation. EO 28 and 29 In March 2011, the Philippine government issued EO 28 which provides for the reconstitution and reorganization of the existing Single Negotiating Panel into the Philippine Air Negotiating Panel (PANP) and Philippine Air Consultation Panel (PACP) (collectively, the Philippine Air Panels). The PANP shall be responsible for the initial negotiations leading to the conclusion of the relevant ASAs while the PACP shall be responsible for the succeeding negotiations of such ASAs or similar arrangements. Also in March 2011, the Philippine government issued EO 29 which authorizes the CAB and the Philippine Air Panels to pursue more aggressively the international civil aviation liberalization policy to boost the countrys 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 countrys 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 countrys 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. Research and Development The Company incurred minimal amounts for research and development activities, which do not amount to a significant percentage of revenues. Cost and Effects of Compliance with Environmental Laws The operations of the Company are subject to various laws enacted for the protection of the environment. The Company has complied with the following applicable environmental laws and regulations: Presidential Decree No. 1586 (Establishing an Environmental Impact Assessment System) which directs every person, partnership or corporation to obtain an Environmental Compliance Certificate (ECC) before undertaking or operating a project declared as environmentally critical by the President
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of the Philippines. Petro-chemical industries, including refineries and fuel depots, are considered environmentally critical projects for which an ECC is required. The Company has obtained ECCs for the fuel depots it operates and maintains for the storage and distribution of aviation fuel for its aircraft. 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 Companys 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 Companys operations generate waste water and effluents for the disposal of which a Discharge Permit was obtained from the LLDA and the EMB of Region 7 which enables it to discharge and dispose of liquid waste or water effluent generated in the course of its operations at specifically designated areas. The Company also contracted the services of government-licensed and accredited third parties to transport, handle and dispose its waste materials.

Compliance with the foregoing laws does not have a material effect to the Companys capital expenditures, earnings and competitive position. On an annual basis, the Company spends approximately P132,000 in connection with its compliance with applicable environmental laws. Employees As of December 31 2011, the Company has 2,676 permanent full time employees, categorized as follows: Division: Operations... Commercial Support Departments(1) Employees 1,933 457 286 2,676
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 Companys employees are not unionized, and it has not experienced any labor strikes or work stoppages in the past three years.

Risk The major business risks facing the Company are as follows: (1) Cost and Availability of Fuel The cost and availability of fuel are subject to many economic and political factors and events occurring throughout the world, the most important of which are not within the Companys 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 Companys operations and profitability. The Company implements various fuel management strategies to manage the risk of rising fuel prices including hedging. (2) Competition The Company faces intense competition on its domestic and international routes, both from other lowcost 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 lowcost airline operations of their own in an effort to increase market share, any of which could negatively affect the Companys business. The Company also faces competition from ground and sea transportation alternatives, including buses, trains, ferries, boats and cars, which are the principal means of transportation in the Philippines. Video teleconferencing and other methods of electronic communication, and improvements therein, also add a new dimension of competition to the industry as they, to a certain extent, provide lower-cost substitutes for air travel. The Company focuses on areas of costs, on-time performance, service delivery and scheduling to remain competitive. (3) Lack of Marketing Alliance Many airlines have marketing alliances with other airlines under which they market and advertise their status as marketing alliance partners. The Company is not a member of any such marketing alliance with respect to its passenger services. Its lack of alliance could harm its business and competitive ability. The Company may try to enter into code sharing agreements, interlining agreements or any other marketing alliances in the future. (4) Economic Downturn The deterioration in the financial markets has heralded a recession in many countries, which led to significant declines in employment, household wealth, consumer demand and lending and, as a result, has adversely affected economic growth in the Philippines and elsewhere. Since a substantial portion of airline travel, for both business and leisure, is discretionary, the airline industry tends to experience adverse financial results during general economic downturns. Any deterioration in the economy could negatively affect consumer sentiment and lead to a reduction in demand for flying which could adversely affect the Companys business. The Company could also experience difficulty accessing the financial markets, which could make it more difficult or expensive to obtain funding in the future.

(5) Availability of Debt Financing The Companys 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 Companys ability to grow its business and its future profitability. (6) Foreign Exchange and Interest Rate Fluctuations The Companys exposure to foreign exchange rate fluctuations is principally in respect of its U.S. dollardenominated 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 Companys 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 Companys result of operations. The Company may enter into derivative contracts in the future to hedge foreign exchange exposure. In addition, the Company may fix the interest rates for a portion of its loans. (7) Airport and Air Traffic Control Infrastructure Constraints The Company relies on operational efficiency to reduce unit costs and provide reliable service. Any delay to the addition of capacity at airports or upgrade of facilities in the Philippines could affect the Companys operational efficiency. (8) Reliance on Third Party Facilities and Service Providers The Companys inability to lease, acquire or access airport facilities and service providers on reasonable terms to support its growth or to maintain its current operations would have a material adverse effect on our business, prospects, financial condition and results of operations. Furthermore, the Companys reliance on third parties to provide essential services on its behalf gives the Company less control over the efficiency, timeliness and quality of services. (9) Safety and Security The Company is exposed to potentially significant losses in the event that any of its aircraft is lost or subject to an accident, terrorist incident or other disaster. In addition, any such event would give rise to significant costs related to passenger claims, repairs or replacement of a damaged aircraft and its temporary or permanent loss from service. Moreover, aircraft accidents or incidents, even if fully insured, are likely to create a public perception that the airline is less safe than other airlines, which could significantly reduce its passenger volumes and have a material adverse effect on its business, prospects, financial condition and results of operations. Terrorist attacks could also result in decreased seat load factors and yields and could result in increased costs, such as increased fuel expenses or insurance costs. The Company is committed to operational safety and security. Its commitment to safety and security is reflected in its rigorous aircraft maintenance program and flight operations manuals, intensive flight crew, cabin crew and employee training programs and strict compliance with applicable regulations regarding aircraft and operational safety and security.

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(10) Maintenance Cost and Performance of Maintenance Repair Organizations As the fleet ages, maintenance and overhaul expenses will increase. Any significant increase in maintenance and overhaul expenses and the inability of maintenance repair organizations to provide satisfactory service could adversely affect the business. The Company enters into long term contracts to manage maintenance and overhaul expenses. (11) Reliance on Automated Systems and the Internet The Company depends on automated systems to operate its business, including, among others, its website, its reservation and its departure control systems. Any disruption to its website or online reservation and telecommunication services could result in losses, increased expenses and could harm its reputation. (12) Dependence on the Efforts of Executive Officers and Other Key Management The Companys success depends to a significant extent upon the continued services of its executive officers and other key management personnel. The unavailability of any of its executive officers and other key management or failure to recruit suitable or comparable replacements could have a material adverse effect on its business, prospects, financial condition and results of operations. (13) Retaining and Attracting Qualified Personnel The Companys business model requires it to have highly skilled, dedicated and efficient pilots, engineers and other personnel. Its growth plans will require the Company to hire, train and retain a significant number of new employees in the future. However, from time to time, the airline industry has experienced a shortage of skilled personnel, particularly pilots and engineers. The Company competes against fullservice airlines which offer wage and benefit packages that exceed those offered by the Company. The inability of the Company to hire, train and retain qualified employees at a reasonable cost could result in inability to execute its growth strategy, which would have a material adverse effect on its business, prospects, financial condition and results of operations. In addition, the Company may find it increasingly challenging to maintain its corporate culture as it replaces or hires additional personnel. The Company may have to increase wages and benefits to attract and retain qualified personnel. (14) Availability of Insurance Insurance is fundamental to airline operations. Because of terrorist attacks or other world events, certain aviation insurance could become unavailable or available only for reduced amounts of coverage that are insufficient to comply with the levels of coverage required by the Companys aircraft lenders and lessors or applicable government regulations. Any inability to obtain insurance, on commercially acceptable terms or at all, for the Companys general operations or specific assets would have a material adverse effect on its business, prospects, financial condition and results of operations. (15) Regulations The Company has no control over applicable regulations. Changes in the interpretation of current regulations or the introduction of new laws or regulations could have a material adverse effect on its business, prospects, financial condition and results of operations.

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(16) Catastrophes and Other Factors Beyond the Companys Control Like other airlines, the Company is subject to delays caused by factors beyond its control, including weather conditions, traffic congestion at airports, air traffic control problems and increased security measures. In the event that the Company delays or cancels flights for any of these reasons, revenues and profits would be reduced and the Companys reputation would suffer which could result in a loss of customers. (17) Unionization, Work Stoppages, Slowdowns and Increased Labor Costs At present, the Company has a non-unionized workforce. However, in the event the employees unionize, it could result to demands that may increase operating expenses and adversely affect the Companys profitability. Likewise, disagreements between the labor union and management could result to work slowdowns or stoppages or disruptions which could be harmful to the business. (18) Restrictions under the Philippine Constitution and other Laws The Company is subject to nationality restrictions under the Philippine Constitution and other laws, limiting ownership of public utility companies to citizens of the Philippines or corporations or associations organized under the laws of the Philippines of which at least 60% of the capital stock outstanding is owned and held by citizens of the Philippines. There is a risk that these ownership restrictions may be breached which could result in the revocation of the Companys franchise generally and its rights to fly on certain international routes. (19) Relationship with Third Party Sales Outlets While part of the Companys strategy is to increase bookings through the internet, sales through third party sales outlets remain an important distribution channel. There is no assurance that the Company will be able to maintain favorable relationships with them nor be able to suitably replace them. The Companys revenues could be adversely impacted if third parties who sell its air services elect to prioritize other airlines. (20) Outbreaks Any present or future outbreak of contagious diseases could have a material adverse effect on the Companys business, prospects, financial condition and results of operations. (21) Domestic Concentration Since the Companys operations have focused and, at least in the near term, will continue to focus on air travel in the Philippines, it would be materially and adversely affected by any circumstances causing a reduction in demand for air transportation in the Philippines, including adverse changes in local economic and political conditions, negative travel advisories issued by foreign governments, declining interest in the Philippines as a tourist destination, or significant price increases linked to increases in airport access costs and fees imposed on passengers. (22) Investment Risk The Company has investment securities, the values of which are dependent on fluctuating market prices. Any negative movement in the market price of the Companys investments could affect the Companys results of operations.

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The foregoing risks are not all inclusive. Other risks that may affect the Companys business and operations may not be included in the above disclosure. Item 2. Properties

As of the December 31, 2011, the Company does not own any land or buildings. It leases the office space used for its corporate headquarters from the Philippine Aerospace Development Corp., while it leases its hangar, aircraft parking and other operational space from the Manila International Airport Authority. Kindly refer to Notes 12, 16 and 29 of the Notes to Consolidated Financial Statements for the detailed discussions on Properties, Leases, Purchases and Capital Expenditure Commitments. Item 3. Legal Proceedings

The Company is subject to law suits and legal actions in the ordinary course of business. The Company is not a party to, and its properties are not subject of, any material pending legal proceedings that could be expected to have a material adverse effect on the Companys financial position or result of operations.

PART II - OPERATIONAL AND FINANCIAL INFORMATION Market for Registrants Common Equity and Related Stockholder Matter

Item 4.

Market Information The principal market for the Companys common equity is the Philippine Stock Exchange (PSE). Sales prices of the common stock follow: High P77.00 Low P63.75

First quarter (January to March 2012)

As of May 4, 2012, the latest trading date prior to the completion of this report, sales price of the common stock is at P70.00. Holders The number of shareholders of record as of April 30, 2012 was 61. Common shares outstanding as of April 30, 2012 were 605,953,330 with a par value of P1.00 per share.

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List of Top 20 Stockholders of Record As of April 30, 2012 Number of Shares Held 400,816,841 158,239,109 39,942,111 6,595,190 60,000 50,000 40,000 40,000 36,400 35,000 20,000 16,000 10,000 6,000 5,000 5,000 4,000 4,000 4,000 4,000 2,800 2,500 2,000 2,000 1,800 1,000 1,000 1,000 7,289,799 613,236,550 7,283,220 605,953,330 % to Total Outstanding 66.15% 26.11% 6.59% 1.09% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.20%

Name of Stockholders 1. CPAir Holdings, Inc. 2. PCD Nominee Corporation (Non-Filipino) 3. PCD Nominee Corporation (Filipino) 4. JG Summit Holdings, Inc. 5. BNC Ingredients Corporation 6. Pablo M. Pagtalunan &/or Francisca P. Pagtalunan 7. Elizabeth Yu Gokongwei 7. Girme L. Gutierrez &/or Carmencita R. Gutierrez 8. Ricardo Sy Po 9. Christopher Paulus Nicolas T. Po 10. Philippine British Assurance Co., Inc. 11. Raul Veloso Del Mar 12. Bienvenido Syquia Bautista 13. Mario H. Liuag &/or Lydia P. Liuag 14. Eric Macario Bernabe 14. Estevez Villaruz (Esvill), Inc. 15. Francisco Paulino V. Cayco 15. Sally Chua Co 15. Vicente Lim Co 15. Antonio M. Suarez 16. Leodigario S.P. Aquino &/or Danah R. Antonio 17. Alfonso S. Teh 18. Ofelia R. Blanco 18. Mario F. Sales 19. Manuel M. Domingo 20. Adrienne Nicole Yiu Lu 20. Juanita So Ong or Alvin So Ong 20. Lucille Chiongbian Solon Other stockholders Total Less: Treasury shares Total Outstanding shares Dividends

100.00%

On March 17, 2011, the Board of Directors (BOD) of the Company approved the declaration of a regular cash dividend in the amount of P2.00 per share and a special cash dividend in the amount of P1.00 per share from the unrestricted retained earnings of the Company to all stockholders of record as of April 14, 2011 and payable on May 12, 2011. Restriction that Limits the Payment of Dividends on Common Shares None. Recent Sales of Unregistered Securities Not Applicable. All shares of the Company are listed in the PSE.

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Item 5.

Management's Discussion and Analysis or Plan of Operation

The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto, which form part of this Report. The consolidated financial statements and notes thereto have been prepared in accordance with the Philippine Financial Reporting Standards (PFRS). Results of Operations Year Ended December 31, 2011 Compared with Year Ended December 31, 2010 Revenues The Company generated revenues of P33.935 billion in the year ended December 31, 2011, 16.7% higher than the P29.089 billion revenues earned last year. Growth in revenues is accounted for as follows: Passenger Revenues Passenger revenues increased by P2.552 billion or 10.4% to P27.208 billion in the year ended December 31, 2011 from P24.656 billion registered in 2010. This increase was primarily due to the 14.1% growth in passenger volume to 11.9 million from 10.5 million in the year ended December 31, 2010 driven by the increased number of flights and higher seat load factor of 86.3% in 2011. Number of flights went up by 10.5% year on year primarily as a result of the increase in the number of aircraft operated to 37 aircraft as of December 31, 2011 from 31 aircraft as of end 2010. The reinstatement of fuel surcharge also contributed to improved passenger revenues in 2011. Increase in revenues, however, was partially offset by the reduction in average fares by 3.3% to P2,280 from P2,357 in 2010, partly due to elimination of free baggage allowance from the fare as part of the Companys unbundling of fares strategy. Cargo Revenues Cargo revenues grew by P97.672 million or 4.7% to P2.193 billion in the year ended December 31, 2011 from P2.096 billion in the year ended December 31, 2010 following the increase in the volume and average freight charges of cargo transported in 2011. Ancillary Revenues Ancillary revenues went up by P2.197 billion or 94.0% to P4.534 billion in the year ended December 31, 2011 from P2.337 billion posted last year. As part of its unbundling of fares strategy, the Company commenced charging for every checked-in luggage with the elimination of free baggage allowance. Improved online bookings also contributed to the increase. Online bookings accounted for 48.6% of the total tickets sold during the year compared to 41.7% in 2010. Expenses The Company incurred operating expenses of P30.408 billion in the year ended December 31, 2011, 34.3% higher than the P22.639 billion operating expenses recorded in the year ended December 31, 2010. Increase in expenses due to seat growth was partially offset by the strengthening of the Philippine peso against the U.S. dollar as referenced by the appreciation of the Philippine peso to an average of P43.31 per U.S. dollar for the year ended December 31, 2011 from an average of P45.12 per U.S. dollar last year based on the Philippine Dealing System (PDS) weighted average rates. Operating expenses increased as a result of the following: Flying Operations Flying operations expenses moved up by P5.933 billion or 52.0% to P17.350 billion in the year ended December 31, 2011 from P11.417 billion charged in 2010. Aviation fuel expenses grew by 55.2% to P15.221 billion from P9.808 billion in the year ended December 31, 2010 consequent to the increase in the volume of fuel consumed as a result of the increased number of flights year on year. Rise in aviation
15

fuel expenses was further influenced by the surge in aviation fuel prices as referenced by the increase in the average published fuel MOPS price of U.S.$125.50 per barrel in the twelve months ended December 31, 2011 from U.S.$90.10 average per barrel in the same period last year. Higher flight deck expenses owing to higher pilot costs, including training, also contributed to the increase in flying operations expenses. Aircraft and Traffic Servicing Aircraft and traffic servicing expenses increased by P529.471 million or 21.5% to P2.991 billion in the year ended December 31, 2011 from P2.462 billion registered in 2010 as a result of the overall increase in the number of flights flown in 2011. Higher expenses were particularly attributable to more international flights operated for which airport and ground handling charges were generally higher compared to domestic flights. International flights increased by 22.4% year on year. Depreciation and Amortization Depreciation and amortization expenses grew by P531.481 million or 25.3% to P2.632 billion in the year ended December 31, 2011 from P2.101 billion in the year ended December 31, 2010. The acquisition of three Airbus A320 aircraft, one ATR 72-500 aircraft and one spare Airbus engine in 2011 primarily resulted to the increase. Moreover, 2011 was first full year in which depreciation was recorded for the three Airbus A320 aircraft delivered in the last quarter of 2010. Additional Asset Retirement Obligation (ARO) capitalized in 2011 and the additional ARO provision during the last quarter of 2010 also contributed to the growth in depreciation and amortization expense. Repairs and Maintenance Repairs and maintenance expenses went up by P228.625 million or 10.0% to P2.519 billion in the year ended December 31, 2011 from P2.290 billion posted last year. Increase was driven by the overall increase in the number of flights which was offset in part by the appreciation of the Philippine peso against the U.S. dollar as referenced by the strengthening of the Philippine peso to an average of P43.31 per U.S. dollar for the twelve month ended December 31, 2011 from an average of P45.12 per U.S. dollar in 2010. Aircraft and Engine Lease Aircraft and engine lease expenses moved up by P113.576 million or 7.1% to P1.718 billion in the year ended December 31, 2011 from P1.605 billion charged in the year ended December 31, 2010. Increase in aircraft and engine lease expenses was due to the lease of two Airbus A320 aircraft and one ATR 72-500 engine in 2011, partially offset by the effect of the appreciation of the Philippine peso against the U.S. dollar during the current year. Reservation and Sales Reservation and sales expenses increased by P144.654 million or 10.8% to P1.481 billion in the year ended December 31, 2011 from P1.336 billion registered last year. Higher spending to build market presence and establish brand name in its international operations accounted for the increase. Moreover, increase in commission expenses relative to increased sales also contributed to the growth in reservation and sales expenses. General and Administrative General and administrative expenses grew by P125.565 million or 18.1% to P820.453 million in the year ended December 31, 2011 from P694.888 million incurred in 2010. Growth in general and administrative expenses was primarily attributable to the increased flight and passenger activity in 2011. Passenger Service Passenger service expenses went up by P117.305 million or 18.3% to P756.786 million in the year ended December 31, 2011 from P639.481 million posted in the year ended December 31, 2010 consequent to the additional cabin crew hired for the three Airbus A320 aircraft acquired during the last quarter of 2010

16

and five Airbus A320 acquired in 2011. Increased passenger liability insurance premiums relative to the increase in the number of aircraft also contributed to the increase. Operating Income As a result of the foregoing, the Company finished with an operating income of P3.528 billion for the year ended December 31, 2011, 45.3% lower than the P6.450 billion operating income earned last year. Other Income (Expenses) Interest Income Interest income moved up by P409.902 million or 172.6% to P647.398 million in the year ended December 31, 2011 from P237.496 million recorded in 2010. Increased cash from operations were placed in short-term money markets and investment securities which generated interests thus resulting to a considerable increase in interest income in 2011. Interest rates on placements and interest earned on debt securities were also higher this year. Fuel Hedging Gains Fuel hedging gains of P477.128 million in the year ended December 31, 2011 resulted from the higher mark-to-market valuation on fuel hedging positions consequent to the significant increase in fuel prices from end of 2010. Foreign Exchange Gains Net foreign exchange gains of P50.155 million in the year ended December 31, 2011 resulted from the appreciation of the Philippine peso against the U.S. dollar as referenced by the strengthening of the Philippine peso to an average of P43.31 per U.S. dollar for the twelve months ended December 31, 2011 from an average of P45.12 per U.S. dollar for the twelve months ended December 31, 2010 based on PDS weighted average rates. The Companys major exposure to foreign exchange rate fluctuations is in respect of U.S. dollar denominated long-term debt incurred in connection with aircraft acquisitions. Equity in Net Income of Joint Venture The Company had equity in net income of joint venture of P42.318 million in the year ended December 31, 2011, P17.070 million or 67.6% higher than the P25.249 million equity in net income of joint venture earned last year. Increase in this account was due to the increase in net income from the current operations of Aviation Partnership (Philippines) Corporation (A-plus), partially offset by the net loss incurred by SIA Engineering (Philippines) Corporation (SIAEP) in 2011. Fair Value Losses of Financial Assets designated at Fair Value through Profit or Loss (FVPL) Fair value losses amounted to P143.555 million for the year ended December 31, 2011 resulting from the decline in the fair values of quoted debt and equity instruments designated at FPVL. Interest Expense Interest expense declined by P77.213 million or 8.3% to P854.270 million in the year ended December 31, 2011 from P931.482 million registered in 2010. Decrease was due to the repayment of the Companys obligations in accordance with the loan repayment schedules and lower interest rates on outstanding debts during the current year. Likewise, the strengthening of the Philippine peso against the U.S. dollar in 2011 complemented the decline. Income before Income Tax As a result of the foregoing, the Company recorded income before income tax of P3.747 billion for the year ended December 31, 2011, 46.0% lower than the P6.940 billion income before income tax posted in the year ended December 31, 2010.

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Provision forIncome Tax Provision for income tax for the year ended December 31, 2011 amounted to P122.585 million, of which, P52.679 million pertains to current income tax recognized as a result of the taxable income in 2011. Provision for deferred income tax amounted to P69.906 million resulting from the recognition of deferred tax liabilities on future taxable amounts during the year. Net Income Net income for the year ended December 31, 2011 amounted to P3.624 billion, a decline of 47.6% from the P6.922 billion net income earned in 2010. Year Ended December 31, 2010 Compared with Year Ended December 31, 2009 Revenues The Company posted revenues of P29.089 billion for the year ended December 31, 2010 which was 24.8% higher than the P23.311 billion revenues generated last year. Considerable improvement in revenues is accounted for as follows: Passenger Revenues Passenger revenues increased by P5.152 billion or 26.4% to P24.656 billion in the year ended December 31, 2010 from P19.504 billion revenues posted last year. This increase was primarily due to the 19.5% increase in passenger volume to 10.5 million in the twelve months ended December 31, 2010 from 8.8 million in the twelve months ended December 31, 2009. This was driven by the increase in number of flights year on year and higher seat load factor in 2010. The Company increased the size of its fleet by adding two Airbus A320 aircraft and two ATR 72-500 aircraft during the twelve months ended December 31, 2009. These aircraft were in operation for the entire twelve months ended December 31, 2010 thereby resulting in more flights compared to 2009. Moreover, three Airbus A320 aircraft arrived during the last quarter of 2010 which further contributed to the increased number of flights. Total number of flights in 2010 was up by 8.2% year on year. The increase in passenger revenues for the twelve months ended December 31, 2010 compared with the twelve months ended December 31, 2009 was also attributable to the increase in the average fares which moved up by 5.8% to P2,357 in 2010 from P2,227 in prior year. Cargo Revenues Cargo revenues increased by P411.194 million or 24.4% to P2.096 billion in the year ended December 31, 2010 from P1.684 billion in the year ended December 31, 2009, mainly as a result of the increase in the volume of cargo transported during the period. Ancillary Revenues Ancillary revenues increased by P214.862 million or 10.1% to P2.337 billion in the year ended December 31, 2010 from P2.122 billion registered in 2009. Changes in the Companys travel regulations led to the reduction in rebooking, refunds and cancellation fees as the Company no longer allows booking changes including cancellations within 24 hours from the estimated date of departure. This offset the increase in revenues generated from excess baggage and other ancillary services. Excluding rebooking, refunds and cancellation fees, ancillary revenues grew by 33.7% in the twelve months ended December 31, 2010 compared with the twelve months ended December 31, 2009. The introduction of additional ancillary revenue sources and increases in rates contributed to the improvement in other ancillary revenues in 2010. Expenses The Company incurred expenses of P22.639 billion for the year ended December 31, 2010, 12.4% higher than the P20.147 billion expenses incurred last year. Increase in expenses due to seat growth was partially offset by the strengthening of the Philippine peso against the U.S. dollar to an average of P45.12 per U.S. dollar for the twelve months ended December 31, 2010 from an average of P47.64 per U.S. dollar in 2009 based on the Philippine Dealing System weighted average rates. Expenses increased as a result of the following:
18

Flying Operations Flying operations expenses increased by P2.560 billion or 28.9% to P11.417 billion in the year ended December 31, 2010 from P8.857 billion in the year ended December 31, 2009. Increase in flying operations expenses was mainly attributable to the increase in aviation fuel expenses by 33.3% to P9.808 billion in the twelve months ended December 31, 2010 from P7.360 billion incurred last year as a result of the overall increase in the number of flights as well as increase in aviation fuel prices. Aviation fuel prices rose as referenced by the increase in the average published MOPS price of U.S. $90.10 per barrel in the twelve months ended December 31, 2010 compared to the U.S. $69.97 per barrel in 2009. Aircraft and Traffic Servicing Aircraft and traffic servicing expenses decreased by P170.026 million or 6.5% to P2.462 billion in the year ended December 31, 2010 from P2.632 billion posted in 2009. Decline was mainly due to lower airport charges further reduced by the strengthening of the Philippine peso against the U.S. dollar in 2010. Repairs and Maintenance Repairs and maintenance expenses decreased by P278.995 million or 10.9% to P2.290 billion in the year ended December 31, 2010 from P2.569 billion last year. Decline in repairs and maintenance expenses resulted from the Companys effective cost management. The appreciation of the Philippine peso against the U.S. dollar in 2010 also contributed to the decrease. Depreciation and Amortization Depreciation and amortization expenses increased by P183.246 million or 9.6% to P2.101 billion in the year ended December 31, 2010 from P1.918 billion in the year ended December 31, 2009 mainly because of the addition of two ATR 72-500 aircraft during the course of the twelve months ended December 31, 2009 which were in operation for the entire twelve months ended December 31, 2010 and the acquisition of three Airbus A320 aircraft during the last quarter of 2010. The acquisition of one spare engine in fourth quarter 2009 also contributed to the increase. Aircraft and Engine Lease Aircraft and engine lease expenses decreased by P119.031 million or 6.9% to P1.605 billion in the year ended December 31, 2010 from P1.724 billion in prior year consequent to the return of two leased Boeing 757 aircraft in June and October 2009. Decline in aircraft and engine lease expenses was also attributable to the strengthening of the Philippine peso to an average of P45.12 per U.S. dollar for the twelve months ended December 31, 2010 compared to an average of P47.64 per U.S. dollar for the twelve months ended December 31, 2009. Reservation and Sales Reservation and sales expenses increased by P341.289 million or 34.3% to P1.336 billion in the year ended December 31, 2010 from P0.995 billion in 2009. This increase was primarily attributable to the increased advertising and promotions expenditures incurred to promote the Companys services on the Companys international routes during the twelve months ended December 31, 2010. Increase was also due to higher commission expenses as a result of the overall increase in passenger and cargo volumes, especially on the international operations. General and Administrative General and administrative expenses decreased by P127.622 million or 15.5% to P694.888 million in year ended December 31, 2010 from P822.510 million last year. This was due to the impairment loss on other receivables recognized in 2009 which offset the increase in other general and administrative expenses due to the additional staff and service requirements associated with the increased flight and passenger activity in the twelve months ended December 31, 2010.

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Passenger Service Passenger service expenses increased by P58.585 million or 10.1% to P639.481 million in the year ended December 31, 2010 from P580.896 million in the year ended December 31, 2009. This increase was mainly due to the additional cabin crew requirements for Airbus A319 fleet consequent to the reconfiguration of said aircraft which increased the seat capacity from 150 passengers to 156 passengers thereby requiring more cabin crew to attend to passenger needs. The Company also hired additional cabin crew for the three Airbus A320 aircraft acquired in the last quarter of 2010. Operating Income As a result of the foregoing, the Company registered operating income of P6.450 billion for the year ended December 31, 2010, 103.9% higher than the P3.164 billion posted in 2009. Other Income (Expenses) Interest Expense Interest expense decreased by P81.345 million or 8.0% to P931.482 million in the year ended December 31, 2010 from P1012.827 million in the year ended December 31, 2009. Decline was due to the repayment of the Companys outstanding obligations in accordance with the loan repayment schedules partially offset by the interest incurred on additional loans availed during the last quarter of 2010. Likewise, the strengthening of the Philippine peso against the U.S. dollar in 2010 also contributed to the decline. Long-term debt as of December 31, 2010 amounted to P18.433 billion, 7.7% higher than the P17.110 balance as of December 31, 2009. Additional loans were obtained during the last quarter of 2010. Foreign Exchange Gains Foreign exchange gains increased by P158.797 million or 38.0% to P576.979 million in the year ended December 31, 2010 from P418.182 million in prior year. This was due to the strengthening of the Philippine peso against the U.S. dollar to an average of P45.12 per U.S. dollar for the twelve months ended December 31, 2010 from an average of P47.64 per U.S. dollar in 2009. The Companys principal exposure to foreign exchange rate fluctuations is in respect of U.S. dollar denominated long-term debt incurred in connection with aircraft acquisitions. Fuel Hedging Gains Fuel hedging gains of P474.255 million in the year ended December 31, 2010 resulted from the higher mark-to-market valuation on fuel hedging positions. Interest Income Interest income increased by P228.647 million or 2584.0% to P237.496 million in the year ended December 31, 2010 from P8.849 million in 2009. Increased cash from operations were placed in shortterm money markets and investment securities which earned interests thus resulting to a significant increase in interest income in the current year. Fair Value Gains of Financial Assets designated at FVPL Fair value gains amounted to P107.631 million for the year ended December 31, 2010. This resulted from the changes in the fair values of quoted debt and equity instruments designated at FVPL acquired during the current year. Equity in Net Income (Loss) of Joint Venture The Company had equity in net income of joint venture of P25.249 million in the year ended December 31, 2010, an improvement from last years net loss of P25.474 million as the losses of SIAEP, a company which was established in July 2008 and began commercial operations in August 2009, narrowed. Higher income generated by the current operations of A-plus also accounted for the improvement.
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Income before Income Tax As a result of the foregoing, the Company posted income before income tax of P6.940 billion for the year ended December 31, 2010, 114.3% higher than the P3.238 billion registered in 2009. Provision for (Benefit from) Income Tax Provision for income tax for the year ended December 31, 2010 was P17.760 million. Increase in provision for income tax was mainly due to the deferred tax liabilities recognized in connection with the net unrealized foreign exchange gains on foreign currency denominated obligations as a result of the strengthening of the Philippine peso during the year. Net Income Audited net income for the year ended December 31, 2010 surged to P6.922 billion, 112.5% higher than the P3.258 billion net income posted in 2009. Year Ended December 31, 2009 Compared with Year Ended December 31, 2008 Revenues The Company posted revenues of P23.311 billion for the year ended December 31, 2009, 18.4% higher than the P19.682 billion revenues posted last year. Substantial growth in revenues is accounted for as follows: Passenger Revenues Passenger revenues increased by P2.400 billion or 14.0% to P19.504 billion in the year ended December 31, 2009 from P17.104 billion in the year ended December 31, 2008. Increase in passenger revenues was primarily due to the increase in passenger volume to 8.8 million in 2009 from 6.7 million in 2008, resulting from the addition of two Airbus A320 aircraft and two ATR 72-500 aircraft, increased frequency in existing routes and the introduction of new destinations in 2009, including Ozamis, Surigao, Siargao, Cauayan, Catarman, Virac and Calbayog. In addition, the Company acquired four Airbus A320 aircraft and six ATR 72-500 aircraft during the course of 2008, which were in operation throughout 2009, their first full year of service. Total number of flights also increased by 41.9% to 80,725 in 2009 from 56,872 in 2008, with the number of international and domestic flights increasing by 24.9% and 46.3%, respectively. The effect of the increase in passenger volume was partially offset by the decrease in the average one-way fares by 13.2% to P2,227 in 2009 from P2,567 in 2008. Cargo Revenues Cargo revenues increased by P345.888 million or 25.8% to P1.684 billion in the year ended December 31, 2009 from P1,339 billion in 2008, primarily as a result of the increase in the volume of cargo carried on existing routes which, in turn, was largely due to the increase in the number of flights flown in 2009 as compared with 2008. Ancillary Revenues Ancillary revenues increased by P883.028 million or 71.3% to P2.122 billion in the year ended December 31, 2009 from P1.239 billion in prior year. This increase was primarily due to the increase in rebooking, refunds and cancellation fees and increased excess baggage revenues consequent to the increase in the number of passengers carried. The Company also generated higher ancillary revenues on a unit basis on its international flights. In addition, 2009 was the first complete year in which the Company recognized ancillary revenues resulting from the new services the Company was able to provide with its Navitaire reservation systems, such as charges for prepaid baggage, advance seat selection and website administration as well as commissions earned in respect of sales of travel insurance and from hotel partners.

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Expenses The Company incurred expenses of P20.147 billion for the year ended December 31, 2009, 12.2% higher than the P17.954 billion expenses incurred for the year ended December 31, 2008. Increase in expenses was partially influenced by the devaluation of the Philippine peso to an average of P47.637 per U.S. dollar for the twelve months ended December 31, 2009 from an average of P44.475 per U.S. dollar for the twelve months ended December 31, 2008. Expenses increased as a result of the following: Flying Operations Flying operations expenses decreased by P750.691 million or 7.8% to P8.857 billion in the year ended December 31, 2009 from P9.608 billion in 2008, primarily as a result of the decrease in aviation fuel expenses by 13.4% to P7.360 billion in 2009 from P8.502 billion in 2008. Aviation fuel prices decreased to an average published MOPS price of U.S.$69.97 per barrel in 2009 from U.S.$121.36 per barrel in 2008. The decrease in aviation fuel prices was partially offset by the increase in the volume of fuel consumed in 2009 compared with 2008 as a result of an overall increase in the number of flights. Decrease in flying operations expenses was partially reduced by the increases in flight deck and aviation insurance expenses due to the addition of two Airbus A320 aircraft and two ATR 72-500 aircraft in 2009. Aircraft and Traffic Servicing Aircraft and traffic servicing expenses increased by P684.923 million or 35.2% to P2.632 billion in the year ended December 31, 2009 from P1.947 billion in the previous year primarily as a result of the overall increase in the number of flights, including increased number of international flights for which landing and take-off fees and groundhandling charges are generally higher than those of domestic flights. Repairs and Maintenance Repairs and maintenance expenses increased by P722.437 million or 39.1% to P2,569 billion in the year ended December 31, 2009 from P1.847 billion in the year ended December 31, 2008, mainly due to the overall increase in the number of flights and the weakening of the Philippine peso to an average of P47.637 per U.S. dollar for the twelve months ended December 31, 2009 from an average of P44.475 per U.S. dollar for the twelve months ended December 31, 2008. Depreciation and Amortization Depreciation and amortization expenses increased by P370.930 million or 24.0% to P1.918 billion in the year ended December 31, 2009 from P1.547 billion in 2008. Increase was due to the addition of two ATR 72-500 aircraft in 2009. Moreover, 2009 was the first full year in which depreciation was recorded on the four ATR 72-500 aircraft delivered in late 2008. Aircraft and Engine Lease Aircraft and engine lease expenses increased by P661.039 million or 62.2% to P1.724 billion in the year ended December 31, 2009 from P1.063 billion last year. This was mainly caused by the lease of two additional Airbus A320 aircraft in 2009 at generally higher lease rates compared with the other leased aircraft. Devaluation of the Philippine peso against the U.S. dollar during the year also contributed to the increase. Reservation and Sales Reservation and sales expenses increased by P142.682 million or 16.7% to P994.695 million in the year ended December 31, 2009 from P852.012 million in the year ended December 31, 2008. This increase was attributable to the increase in commission expenses due to the overall increase in the number of passengers, as well as in the increase in advertising and promotion costs. Advertising and promotions expenditures increased in line with the growth of the business. Conversely, increase in reservation and sales expenses was partially offset by the decrease in bookings and reservations costs in 2009 as a result of the introduction of the Navitaire reservation systems.

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General and Administrative General and administrative expenses increased by P259.677 million or 46.1% to P822.510 million in the year ended December 31, 2009 from P562.834 million in 2008. This increase was primarily due to the non-recurring provision of P209.662 million relating to the receivable from Air Slovakia, to which the Company had sub-leased two aircraft. Likewise, increase was attributable to the increase in staff and related services expenses associated with the increased flight and passenger activity in 2009. Excluding this non-recurring provision, general and administrative expenses would have increased by 8.9%, amounting to P612.848 million. Passenger Service Passenger service expenses increased by P70.171 million or 13.7% to P580.896 million in the year ended December 31, 2009 from P510.725 million in the previous year. This increase was primarily due to an increase in cabin crew costs, partially offset by a decrease in the cost of passenger food and supplies. Operating Income As a result of the foregoing, the Company registered operating income of P3.164 billion for the year ended December 31, 2009, 83.1% higher than the P1.728 billion posted in 2008. Other Income (Expenses) Interest Expense - net Net interest expense increased by P179.744 million or 21.8% to P1.004 billion in the year ended December 31, 2009 from P.824 billion in the year ended December 31, 2008. Increase was primarily due to the additional long-term debt incurred in 2009 relating to the purchase of two ATR 72-500 aircraft, as well as the devaluation of the peso to an average of P47.637 per U.S. dollar for the year ended 31 December 2009 from an average of P44.475 per U.S. dollar for the year ended 31 December 2008. Further, the Company had incurred long-term debt in September 2008 in relation with the acquisition of four ATR 72-500 aircraft, and 2009 was the first year in which interest expenses on these loans were recognized for the entire twelve months. Foreign Exchange Gains (Losses) Foreign exchange gains (losses) increased by P1.925 billion or 127.7% to a gain of P418.182 million in the year ended December 31, 2009 from a loss of P1,507.231 million last year. The Companys principal exposure to foreign exchange rate fluctuations is in respect of the U.S. dollar denominated long-term debt incurred in connection with aircraft acquisitions, as well as in aviation fuel purchase contracts which are also denominated in U.S. dollars. Fuel Hedging Gains (Losses) Fuel hedging gains (losses) comprised a non-recurring gain of P685.575 million in the year ended December 31, 2009 as a result of certain hedging positions in 2009 being marked to market at forward prices that were higher than those at the times the Company entered into those hedging positions, as well as from the differences between the valuations of positions at the end of 2008 and actual gains and losses in 2009. On the other hand, fuel hedging gains (losses) comprised a non-recurring loss of P2,594.492 million in 2008 as a result of the significantly decreasing fuel prices in late 2008. Equity in Net Income (Loss) of Joint Venture The Company had equity in net loss of joint venture of P25.474 million in the year ended December 31, 2009 compared with equity in net income of joint venture of P15.530 million in prior year. The decrease was primarily attributable to the net loss incurred by SIAEP, a company which was established in July 2008 and began commercial operations in August 2009, partially offset by net income from the operations of A-plus.

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Income before Income Tax As a result of the foregoing, the Company posted income before income tax of P3.238 billion for the year ended December 31, 2009, 201.7% higher than the P3.183 billion net loss before income tax registered in 2008. Provision for (Benefit from) Income Tax Provision for (benefit from) income tax decreased to a benefit of P19.502 million in the year ended December 31, 2009 from an expense of P77.321 million in 2008. The decrease of provision for income tax was due to the recognition of additional deferred tax assets from the net operating loss carry-over, minimum corporate income tax, impairment loss on receivables and asset retirement obligation. These are temporary differences expected to be reversed more than 12 months after the financial position date. Net Income Audited net income for the year ended December 31, 2009 amounted to P3.258 billion, 199.9% higher than the P3.260 billion net loss posted in the year ended December 31, 2008. As of December 31, 2011, except as otherwise disclosed in the financial statements and to the best of the Companys knowledge and belief, there are no material off-balance sheet transactions, arrangements and obligations (including contingent obligations). As of December 31, 2011, except as otherwise disclosed in the financial statements and to the best of the Companys knowledge and belief, there are no transactions, arrangements and obligations with other unconsolidated entities or other persons created during the reporting period that would have a significant adverse impact on the Companys operations and/or financial condition. Financial Position December 31, 2011 versus December 31, 2010 As of December 31, 2011, the Companys consolidated balance sheet remains solid, with net debt to equity of 0.57 [total debt after deducting cash and cash equivalents (including financial assets held-fortrading at fair value and available-for-sale assets) divided by total equity]. Consolidated assets grew to P55.681 billion from P49.937 billion as of December 31, 2010 as the Company added aircraft to its fleet. Equity grew to P19.166 billion from P17.907 billion in prior year while book value per share amounted to = = = P31.63 as of December 31, 2011 from P29.20 as of December 31, 2010. = The Companys cash requirements have been mainly sourced through cash flow from operations. Net cash from operating activities amounted to P7.995 billion. As of December 31, 2011, net cash used in investing activities amounted to P4.291 billion which included payments in connection with the purchase of aircraft. Net cash used in financing activities amounted to P4.504 billion. Net cash used in financing activities mainly comprised the repayments of certain long-term debt and the payment of cash dividends to the Companys stockholders. As of December 31, 2011, except as otherwise disclosed in the financial statements and to the best of the Companys knowledge and belief, there are no events that will trigger direct or contingent financial obligation that is material to the Company, including any default or acceleration of an obligation.

24

Material Changes in the 2011 Financial Statements (Increase/Decrease of 5% or more versus 2010) Material changes in the Statements of Consolidated Comprehensive Income were explained in detail in the managements discussion and analysis or plan of operations stated above. Consolidated Statements of Financial Position - December 31, 2011 versus December 31, 2010 8.3% decrease in Cash and Cash Equivalents Due to payments made in connection with the acquisition of Airbus A320 and A321Neo aircraft, repayment of certain long-term debt and distribution of cash dividends to the Companys stockholders. 15.9% decrease in Financial Assets at FVPL Due to decline in the fair value of quoted debt and equity instruments and the settlement of certain derivative financial instruments relative to its fuel hedges. 7.4% increase in Expendable Parts, Fuel, Materials and Supplies Due to higher fuel prices during the year. 5.5% increase in Other Current Assets Due to advance rentals made for the additional leased aircraft. 20.7% increase in Property and Equipment Due mainly to the acquisition of three Airbus A320 aircraft, one ATR 72-500 aircraft and one spare Airbus engine and the capitalization of additional ARO asset during the year. 10.8% increase in Investment in Shares of Stock and Joint Ventures Due to investment in PAAT and share in the net income of A-plus during the period. 19.4% increase in Other Noncurrent Assets Due to deposits made for the delivery of leased Airbus A320 aircraft. 19.9% increase in Accounts Payable and Other Accrued Liabilities Due to increase in trade payables and accruals of certain operating expenses as a result of the increased flight and passenger activity in the twelve months ended December 31, 2011. 14.0% increase in Unearned Transportation Revenue Due to increase in sale of passenger travel services. 13.2% increase in Long-Term Debt (including Current Portion) Due to additional loans availed to finance the purchase of the three Airbus A320 aircraft acquired during the year partially offset by the repayment of certain outstanding long-term debt in accordance with the repayment schedule.
100.0% increase in Financial Liabilities at FVPL Due to decline in value of certain derivative financial instruments.

44.8% increase in Deferred Tax Liabilities- net Due to future taxable amount recognized during the year. 100.0% increase in Treasury Stocks Due to purchase of 7,283,220 shares of common stocks.

25

107.4% increase in Net Unrealized Losses on Available-for-Sale Investment Due to decrease in fair value of the acquired quoted equity security. 20.1% increase in Retained Earnings Due to net income during the year partially offset by the cash dividends distributed to stockholders. Fuel prices have significantly increased in 2012 and this will have an impact on the Companys operating income. For 2011, there are no significant element of income that did not arise from the Companys continuing operations. The Company generally records higher domestic revenue in January, March, April, May and December as festivals and school holidays in the Philippines increase the Companys seat load factors in these periods. Accordingly, the Companys revenue is relatively lower in July to September due to decreased domestic travel during these months. Any prolonged disruption in the Companys operations during such peak periods could materially affect its financial results. In addition, the Company has capital expenditure commitments which principally relate to the acquisition of aircraft. Kindly refer to Note 29 of the Notes to Consolidated Financial Statements for the detailed discussion on Purchase and Capital Expenditure Commitments.

Key Performance Indicators The Company sets certain performance measures to gauge its operating performance periodically and to assess its overall state of corporate health. Listed below are major performance measures, which the Company has identified as reliable performance indicators. Analyses are employed by comparisons and measurements based on the financial data as of December 31, 2011 and 2010 and for the years ended December 31, 2011 and 2010: Key Financial Indicators Total Revenue Pre-tax Core Net Income EBITDAR Margin Cost per Available Seat Kilometre (ASK) (Php) Cost per ASK (U.S. cents) Seat Load Factor 2011 P33.935 billion P3.363 billion 23.2% 2.46 5.68 86% 2010 P29.089 billion P5.781 billion 34.9% 2.18 4.84 85%

The manner by which the Company calculates the above key performance indicators for both year-end 2011 and 2010 is as follows: Total Revenue = The sum of revenue obtained from the sale of air transportation services for passengers and cargo and ancillary revenue.
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Pre-tax Core Net Income

Operating income after deducting net interest expense and adding equity income/loss of joint venture Operating income after adding depreciation and amortization and aircraft and engine lease expenses divided by total revenue 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 Total number of passengers divided by the total number of actual seats on actual flights flown

EBITDAR Margin

Cost per ASK

Seat Load Factor

Item 6.

Financial Statements

The financial statements are filed as part of this report.

Item 7.

Independent Public Accountants and Audit Related Fees

Independent Public Accountants Sycip Gorres Velayo & Co. (SGV & Co.) has acted as the Companys 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 years meetings and are expected to be present at the current years 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 Company in 2011 and is expected to be rotated every five years. A. Audit Fees

The following table sets out the aggregate fees billed for each of the last three years for professional services rendered by SGV & Co. 2011 Audit and audit-related fees P 2,310,000 2010 P 2,100,000 2009 P 1,700,000

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The audit committees approval policies and procedures for the services rendered by the external auditors: The Corporate Governance Manual of the Company provides that the audit committee shall, among others: 1. Evaluate all significant issues reported by the external auditors relating to the adequacy, efficiency, and effectiveness of policies, controls, processes and activities of the Company. 2. Ensure that other non-audit work provided by the external auditors is not in conflict with their functions as external auditors. 3. Ensure the compliance of the Company with acceptable auditing and accounting standards and regulations. B. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.

PART III - CONTROL AND COMPENSATION INFORMATION Item 8. Board of Directors and Executive Officers of the Registrant

Currently, the Board consists of nine members, of which two are independent directors. The table below sets forth certain information regarding the members of our Board. Name Ricardo J. Romulo. John L. Gokongwei, Jr... James L. Go... Lance Y. Gokongwei. Jose F. Buenaventura. Robina Y. Gokongwei-Pe...... Frederick D. Go. Antonio L. Go* . Oh Wee Khoon..
* He is not related to any of the other directors

Age 78 85 72 45 77 50 42 71 53

Position Chairman... Director. Director. Director, President and Chief Executive Officer Director. Director. Director. Independent Director Independent Director

Citizenship Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Singaporean

All of the above directors have served their respective offices since July 7, 2011. There are no other directors who resigned or declined to stand for re-election to the board of directors since the date of the last annual meeting of the stockholders for any reason whatsoever. Messrs. Antonio L. Go and Oh Wee Khoon are the independent directors of the Company.

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The table below sets forth certain information regarding our executive officers. Name Age Position Senior Vice President Chief Strategist..... Chief Financial Officer... Vice President . Vice President . Vice President . Vice President . Vice President . Vice President.. Vice President - Treasurer.... Vice President . Vice President . Corporate Secretary. Assistant Corporate Secretary... Citizenship

Bach Johann M. Sebastian. Hansley Heinrych C. See*... Victor Emmanuel B. Custodio... Rosita D. Menchaca... Candice Jennifer A. Iyog... Joseph G. Macagga Antonio Jose L. Rodriguez ... Robin C. Dui.. Jeanette U. Yu Michael S. Shau. Alejandro B. Reyes Rosalinda F. Rivera.... William S. Pamintuan

50 37 53 49 39 46 58 65 58 48 44 41 49

Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino

* Has retired from service effective November 30, 2011. Succeeded by Jaime I. Cabangis effective January 2, 2012

The table below sets forth certain information regarding our senior consultants. Name Garry R. Kingshott. Mark Breen.................... Age 59 36 Citizenship Australian Irish

The business experience for the past five years of each of our directors, executive officers and senior consultants is set forth below: Ricardo J. Romulo has been the Chairman of our Board since December 1995. He is also a director of JG Summit Holdings, Inc. and a Senior Partner in Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles. Mr. Romulo is also Chairman of Federal Phoenix Assurance Company, Inc., InterPhil Laboratories, Inc., and Manchester International Holdings Unlimited Corporation. He is Vice Chairman of Planters Development Bank and a director of SM Development Corporation, Philippine American Life and General Insurance Company, and Zuellig Pharma Corporation. He received his Bachelor of Laws degree from Georgetown University and Doctor of Laws degree from Harvard Law School. John L. Gokongwei, Jr. has been a director of our Company since December 1995. He is the Chairman Emeritus and a member of the Board of Directors of JG Summit Holdings, Inc. and certain of its subsidiaries. He also continues to be a member of the Executive Committee of JG Summit Holdings, Inc. He is currently the Chairman of the Gokongwei Brothers Foundation, Inc., Deputy Chairman and Director of United Industrial Corporation Limited and Singapore Land Limited, and a director of JG Summit Capital Markets Corporation and Oriental Petroleum and Minerals Corporation. He is also a non29

executive director of A. Soriano Corporation. Mr. John L. Gokongwei, Jr. received a Masters degree in Business Administration from De La Salle University and attended the Advanced Management Program at Harvard Business School. James L. Go has been a director of our Company since May 2002. He is the Chairman and Chief Executive Officer of JG Summit Holdings, Inc. and, as such, he heads the Executive Committee of JG Summit Holdings, Inc. He is currently the Chairman and Chief Executive Officer of Universal Robina Corporation, Robinsons Land Corporation, JG Summit Petrochemical Corporation, Robinsons, Inc., and Oriental Petroleum and Minerals Corporation. He is also the President and a Trustee of the Gokongwei Brothers Foundation, Inc. He was elected director of the Philippine Long Distance Telephone Company (PLDT) on November 3, 2011 and was also appointed a member of PLDTs Technology Strategy Committee. He is also a director of Panay Electric Co., United Industrial Corporation Limited, Singapore Land Limited, Marina Centre Holdings, Inc., Hotel Marina City Private Limited and JG Summit Capital Markets Corporation. Mr. James L. Go received a Bachelor of Science degree and a Master of Science degree in Chemical Engineering from the Massachusetts Institute of Technology. Lance Y. Gokongwei has been the President and Chief Executive Officer of our Company since 1997. He is the President and Chief Operating Officer of JG Summit Holdings, Inc., Universal Robina Corporation and JG Summit Petrochemical Corporation, and the Vice Chairman and Deputy Chief Executive Officer of Robinsons Land Corporation. He is also the Chairman of Robinsons Bank, Vice Chairman of JG Summit Capital Markets Corporation, and a director of Oriental Petroleum and Minerals Corporation, United Industrial Corporation Limited, and Singapore Land Limited. He is also trustee, secretary and treasurer of the Gokongwei Brothers Foundation, Inc. Mr. Lance Y. Gokongwei received a Bachelor of Science degree in Finance and a Bachelor of Science degree in Applied Science from the University of Pennsylvania. Jose F. Buenaventura has been director of our Company since December 1995. He is a Senior Partner in Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles. Mr. Buenaventura is a Director and President of Consolidated Coconut Corporation and Milano & Co., Inc. He is also a member of the Board of The Country Club, Inc., Peter Paul Philippine Corporation, GROW, Inc., Grow Holdings, Inc., Total Consolidated Asset Management, Inc., Philippine First Insurance Co., Inc. and Philam Plans, Inc. Mr. Buenaventura received his Bachelor of Laws degree from the Ateneo de Manila University School of Law and his Master of Laws Degree from Georgetown University Law Centre, Washington D.C. He was admitted to the Philippine Bar in 1959. Robina Y. Gokongwei-Pe was elected as a director of our Company effective 1 August 2007. She is currently a director of JG Summit Holdings, Inc., Robinsons Land Corporation, Robinsons Bank and JG Summit Capital Markets Corporation. She is currently the President and Chief Operating Officer of the Robinsons Retail Group, consisting of Robinsons Department Store, Robinsons Supermarket, Handyman, True Value, Robinsons Specialty Stores, Robinsons Appliances and Toys R Us and Saizen by Daiso Japan. She obtained her Bachelor of Arts degree in Journalism from the New York University. Frederick D. Go was elected as a director of our Company effective 1 August 2007. He is currently the President and Chief Operating Officer of Robinsons Land Corporation and Robinsons Recreation Corporation. He is the Group General Manager of Shanghai Ding Feng Real Estate Development Company Limited, Xiamen Pacific Estate Investment Company Limited, Chengdu Ding Feng Real Estate Development Company Limited, Taicang Ding Feng Real Estate Development Company Limited, and Chongqing Robinsons Land Real Estate Company Limited. He is an alternate director of United Industrial Corporation Limited and Singapore Land Limited. He also serves as a director of Universal Robina Corporation, JG Summit Petrochemical Corporation, Robinsons Bank, Secret Recipes Corporation, Ho Tsai Dimsum Incorporated, Cebu Light Industrial Park and Philippine Hotels Federation. He is also the President of the Philippine Retailers Association. He received a Bachelor of Science degree in Management Engineering from the Ateneo De Manila University.
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Mr. Antonio L. Go was elected as an independent director of the Corporation on 6 December 2007. He also currently serves as director and President of Equitable Computer Services, Inc. and is Chairman of Equicom Savings Bank. He is also a director of Medilink Network, Inc., Maxicare Healthcare Corporation, Equicom Manila Holdings, United Industrial Corporation Limited, Oriental Petroleum and Minerals Corporation, Pin-An Holdings, Inc., Equicom Information Technology, and ALGO Leasing and Finance, Inc. He is also a trustee of Go Kim Pah Foundation and Equitable Foundation, Inc. He graduated from Youngstown University, United States with a Bachelor of Science degree in Business Administration. He attended the International Advanced Management program at the International Management Institute, Geneva, Switzerland as well as the Financial Planning/Control program at the ABA National School of Bankcard Management, Northwestern University, United States. Mr. Oh Wee Khoon was elected as an independent director of the Corporation effective 3 January 2008. He is the founder and managing director of Sobono Energy Private Limited. He is also the Vice Chairman of the Sustainable Energy Association of Singapore. He graduated with honours from the University of Manchester Institute of Science and Technology with a Bachelor of Science degree in Mechanical Engineering. He obtained his Master's degree in Business Administration from the National University of Singapore. Bach Johann M. Sebastian is the Senior Vice President - Chief Strategist of our Company and is Head of Corporate Strategy effective 5 May 2007. He is also the Senior Vice President and Director of Corporate Planning of JG Summit, URC and RLC. Prior to joining our Company in 2002, he was Senior Vice President and Chief Corporate Strategist at PSI Technologies and RFM Corporation. He was also Chief Economist and Director of the Policy and Planning Group at the Department of Trade and Industry. He received a Bachelor of Arts degree in Economics from the University of the Philippines and a Masters degree in Business Management from the Asian Institute of Management. He has eight years experience in the airline industry, all of which have been with our Company. Hansley Heinrych C. See was the Chief Financial Officer of our Company. He was also the Compliance Officer, Corporate Information Officer and the head of Investors Relations Department until his retirement on November 30, 2011. He joined Cebu Pacific in 2005 as Director of Corporate Planning and was promoted to Vice President in December 2006. He joined the JG Summit Group in 2001 with the Corporate Planning department and moved to Litton Mills and Universal Robina Corporation - China as Finance Manager. Prior to joining the group, he worked as a Research Analyst at Abacus Securities and as an Investment Manager at Hambrecht and Quist Asia Pacific (Philippines), a private equity/venture capital firm with headquarters in the United States and with operations in Asia. Mr. Hansley Heinrych C. See received his Bachelor of Science degree in Management Engineering from the Ateneo de Manila University. He has six years experience in the airline industry, all of which have been with our Company. He was succeeded by Jaime I. Cabangis effective January 1, 2012. Jaime I. Cabangis was appointed as the Chief Financial Officer of our Company since January 2, 2012. Prior to his appointment, he was the former Chief Financial Officer and Corporate Center Unit Head of Digitel Telecommunications, Inc, and Digitel Mobile Philippines, Inc. He was also the Chief Financial Officer of URC International Co. Ltd., URC Asean Brands Co. Ltd, and Hong Kong China Foods, Co. Ltd from July 2001 to December 2002. He is a certified public accountant and was a partner of SGV and Co. where he worked for 21 years. He received his Masters degree in Business Management from the Asian Insitute of Management. He earned his Bachelors degree in Commerce Major in Accounting at Manuel L. Quezon University where he graduated Summa Cum Laude. Mr. Jaime Cabangis has less than a year of experience in the airline industry. Victor Emmanuel B. Custodio has been the Vice President for Flight Operations of our Company since 2004. An instructor pilot in the A320, he was also a Check Airman in both the DC-9 and B-757. Prior to joining Cebu Pacific, he served as the Presidential Pilot and Aide de Camp of Philippine Presidents
31

Corazon Aquino and Fidel Ramos. He was formerly the Acting Director of Operations of the 250th Presidential Airlift Wing, the Squadron Commander of the Headquarters Squadron of the 250th Presidential Airlift Wing and the Air Operations Officer of the 250th Presidential Airlift Wing. Capt. Custodio graduated from the Philippine Military Academy in 1983 where he received his Bachelor of Science degree (cum laude) and the Philippine Air Force Flying School in 1985 where he was awarded the Minister of National Defence Saber for graduating at the top of his class. Prior to being assigned in the 250th Presidential Airlift Wing, he was assigned in the 205th Helicopter Wing where he flew as a combat pilot all over the Philippines and received numerous medals and commendations such as the Bronze Cross Medal, Military Merit Medal, Military Commendation Medal and the Combat Kagitingan Badge. He has 30 years of experience in the aviation industry, the last 15 of which have been with Cebu Pacific. Rosita D. Menchaca is the Vice President for Inflight Services of our Company effective May 2009 and was previously Vice President for Passenger Service from February 2007 to May 2009. She joined our Company in 1996 as a Cabin Crew Supervisor and has since been promoted twice, first to Director, Cabin Services, in November 1999 and in May 2006 to Head of Passenger Services. She previously worked with Philippine Airlines as a flight attendant for two years and joined Saudi Arabian Airlines in 1985 as a Senior Flight Attendant for eight years. Ms. Rosita D. Menchaca received her Bachelor of Science degree in Psychology from Silliman University. She has 27 years experience in the airline industry, the last 14 of which have been with our Company. Candice Jennifer A. Iyog has been with our Company since September 2003 and was appointed Vice President for Marketing and Distribution of our Company in September 2008. Prior to this position, she was Vice President for Marketing and Product from February 2007 to September 2008. She was formerly the General Manager of Jobstreet.com and was also the marketing manager of NABISCO. She also worked at URC as Product Manager and, as such, handled major snack food brands of URC such as Chippy, Piattos and Nova. Ms. Candice Jennifer A. Iyog received her Bachelor of Science degree in Management from the Ateneo de Manila University. She has eight years experience in the airline industry, all of which have been with our Company. Joseph G. Macagga has been the Vice President for Fuel and Cargo Operations of our Company since September 2004. He started with Cebu Pacific as Manager for Purchasing and handled Internal Audit for more than two years. He served as Audit Manager for JG Summit Holdings, Inc. for five years and worked for the Audit Division of SyCip Gorres Velayo & Co for three years. A Certified Public Accountant, Mr. Joseph G. Macagga received his Bachelor of Science degree in Commerce, Major in Accounting from the University of Sto. Tomas. He has 15 years experience in the airline industry, all of which have been with our Company. Antonio Jose L. Rodriguez has been the Vice President for Airport Services of our Company since March 2010. He previously worked with various multinational companies including California Manufacturing Co. from 1993 to 2003, initially as Human Resources Manager and later on as Director and finally as Vice President in charge of the Human Resources Group. He was also AVP-Human Resources of Allied Thread Co. Inc. for the period from 1990 to 1992. Prior to this, he was employed with Triumph International (Phils.) Inc. from 1985 to 1990. He is a graduate of De La Salle University where he completed Lia-Com a double degree course, majoring in Business Administration and Behavioural Sciences. He has six years experience in the airline industry, all of which have been with our Company. Robin C. Dui has been the Vice President - Comptroller of our Company since 1998. He was formerly with the Audit Division of SyCip Gorres Velayo & Co for four years. He previously worked with Philippine Airlines for 18 years as Manager - General Accounting, Director - Operations Accounting, Director - Revenue Accounting and Vice President - Comptroller. He also previously held the position of Director - Finance of GrandAir for one year. He has had experience in the airline industry for 19 years. A Certified Public Accountant, Mr. Robin C. Dui obtained a Bachelor of Science degree in Business
32

Administration. He has 31 years experience in the airline industry, 12 of which have been with our Company. Jeanette U. Yu has been the Vice President - Treasurer of our Company since 1995. She is also the Chief Financial Officer of Oriental Petroleum and Minerals Corporation and the Senior Vice President and Treasurer of JG Summit Capital Markets Corporation and Vice President of URC. Prior to joining URC in 1980, she worked for AEA Development Corporation and Equitable Banking Corporation. Ms. Jeanette U. Yu received her Bachelor of Science degree in Business Administration from St. Theresas College in Quezon City. She has 15 years experience in the airline industry, all of which have been with our Company. Michael S. Shau joined our Company in May 2007 as VP Airport and Administration Services and was appointed Vice President for People and Administration Services of our Company effective March 2010. He has been with the JG Summit Group since January 1999 and has held various senior management positions with his last assignment as Business Unit General Manager of Universal Robina Corporation Packaging Division. He received a degree in Industrial Management Engineering, Minor in Mechanical Engineering and completed all academic requirements for a Masters degree in Business Management, both from De La Salle University. He has four years experience of the airline industry, all of which have been with our Company. Alejandro B. Reyes has been the Vice President for Commercial Planning of our company since January 2008. He previously worked as Senior Vice President of PhilWeb. Prior to this, he held various positions with The Inquirer Group, the latest of which was Senior Vice President and Chief Operating Officer of the Inquirer Publications, Inc. Mr. Alejandro B. Reyes graduated Summa Cum Laude from Georgetown University with a Bachelor of Science degree in International Economics. He received his Masters degree in Business Administration from the University of Virginia. He has four years of experience in the airline industry, all of which have been with our Company. Rosalinda F. Rivera was appointed Corporate Secretary of our Company effective 31 October 2006. She is also the Corporate Secretary of JG Summit, URC, RLC, JG Summit Petrochemical Corporation and CPAir Holdings, Inc. Prior to joining the JG group, she was a Senior Associate at Puno and Puno Law Offices. She received a Juris Doctor degree from the Ateneo de Manila University School of Law and a Master of Law degree in International Banking from Boston University School of Law. She was admitted to the Philippine Bar in 1995. She has five years experience in the airline industry, all of which have been with our Company. William S. Pamintuan has been the Assistant Corporate Secretary of our Company since December 1995. He is presently the First Vice President, Deputy General Counsel and Head Legal of MERALCO and the Corporate Secretary of Digital Telecommunications Phils., Inc. and Digitel Mobile Phils., Inc.. He obtained his Bachelor of Laws degree from the University of the Philippines and has 16 years experience in the airline industry, all of which have been with our Company. Garry R. Kingshott is one of our Companys senior consultants. He provides advice to the President with respect to fare structuring, cost management, route development and market entry strategies. Garry was previously with Jet Lite (India) and Ansett International Limited (Australia) as their Chief Executive officer. Garry has 21 years combined experience in aviation consultancy and the airline industry, and joined our Company in 2008. Mark Breen is one of our Companys senior consultants. He provides advice to the President on operations-related functions, including airport services, emergency response procedures, airline service quality, supplier evaluation, product selection, sourcing of spares, inventory management, crew management and control centre management. Mark was previously with Sama as their Chief Operating Officer. Mark was educated at the College of Commerce and is a graduate of Transport Management. He
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also has a Masters Degree in Air Transport Management from the College of Aeronautics, School of Engineering of Cranfield University. He has a vast amount of airline experience from his time with, among others, Sama, AirAsia, Gulf Air and Ryan Air. He has 16 years experience in the airline industry, and joined our Company in 2009. The Companys executive officers can be reached at the address of its business office at Airline Operations Center, Domestic Road, Pasay City. Involvement in Certain Legal Proceedings of Directors and Executive Officers Except as otherwise disclosed, to the best of the Companys knowledge and belief and after due inquiry, none of the Companys directors, nominees for election as director, or executive officer have in the past five years: (i) had any petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within a two year period of that time; (ii) convicted by final judgment in a criminal proceeding, domestic or foreign, or have been subjected to a pending judicial proceeding of a criminal nature, domestic or foreign, excluding traffic violations and other minor offences; (iii) subjected to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise limiting their involvement in any type of business, securities, commodities or banking activities; or (iv) found by a domestic or foreign court of competent jurisdiction (in a civil action), the Philippine Securities and Exchange Commission (SEC) or comparable foreign body, or a domestic or foreign exchange or other organized trading market or self regulatory organization, to have violated a securities or commodities law or regulation and the judgment has not been reversed, suspended, or vacated. Family Relationship Mr. James L. Go is the brother of Mr. John L. Gokongwei, Jr. Mr. Lance Y. Gokongwei is the son of Mr. John L. Gokongwei, Jr. Mr. Frederick D. Go is the nephew of Mr. John L. Gokongwei, Jr. Ms. Robina Y. Gokongwei-Pe is the daughter of Mr. John L. Gokongwei, Jr.

Item 9.

Executive Compensation

The following are our Companys Chief Executive Officer (CEO) and four most highly compensated executive officers for the years ended 2010, 2011 and 2012 estimates: Name Lance Y. Gokongwei . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Victor Emmanuel B. Custodio . . . . . . . . . . . . . . . . . . . . . . . . Antonio Jose L. Rodriguez . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael S. Shau . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jeanette U. Yu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Position President and CEO Vice President Vice President Vice President Vice President - Treasurer

34

The following table identifies and summarizes the aggregate compensation of the Companys CEO and the four most highly compensated executive officers for the years ended 2010, 2011 and 2012 estimates:
Year CEO and the most highly compensated executive officers named above 2010 2011 2012 Estimates Aggregate compensation paid to all officers and directors as a group unnamed 2010 2011 2012 Estimates Salaries 24,888,814 34,186,380 48,039,077 73,989,515 76,860,270 87,286,709 Bonuses 2,334,133 3,062,481 4,067,057 6,515,634 6,516,539 7,398,109 Other Income Total 27,222,947 37,24,861 52,106,134 80,505,149 83,376,809 94,684,818

Standard Arrangements Other than payment of reasonable per diem as may be determined by the Board for every meeting, there are no standard arrangements pursuant to which directors of the Company are compensated, or are to be compensated, directly or indirectly, for any services provided as a director for the last completed year and the ensuing year. Other Arrangements There are no other arrangements pursuant to which directors of the Company are compensated, or are to be compensated, directly or indirectly, for any services provided as a director for the last completed year and the ensuing year. Employment Contracts and Termination of Employment and Change-in-Control Arrangement There are no agreements between the Company and its directors and executive officers providing for benefits upon termination of employment, except for such benefits to which they may be entitled under the Companys pension plans. Warrants and Options Outstanding There are no outstanding warrants or options held by the Companys CEO, the named executive officers, and all officers and directors as a group.

35

Item 10.

Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Record and Beneficial Owners of more than 5% of the Corporations voting securities as of April 30, 2012
Names and addresses of record owners and relationship with the Corporation CPAir Holdings, Inc. 43/F Robinsons Equitable Tower, ADB Avenue corner Poveda Street, Ortigas Center, Pasig City (stockholder) PCD Nominee Corporation (Non-Filipino) 37/F Tower 1, The Enterprise Center, Ayala Ave. corner Paseo de Roxas, Makati City (stockholder) PCD Nominee Corporation (Filipino) 37/F Tower 1, The Enterprise Center, Ayala Ave. corner Paseo de Roxas, Makati City (stockholder) Name of beneficial owner and relationship with record owner Same as record owner (See note 1)

Title of Class Common

Citizenship Filipino

Number of % to Total Shares Held Outstanding 400,816,841 66.15%

Common

PDTC Participants and their clients (See note 2)

Non-Filipino

158,239,109 (See note 3)

26.11%

Common

PDTC Participants and their clients (See note 2)

Filipino

39,942,111

6.59%

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 Corporations 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. Out of the PCD Nominee Corporation (Non-Filipino) account, The Hongkong and Shanghai Banking Corp. Ltd. -Clients Acct. holds for various trust accounts the following shares of the Corporation as of April 30, 2012: The Hongkong and Shanghai Banking Corp. Ltd. -Clients Acct. No. of shares 101,118,611 % to Outstanding 16.69%

3.

The securities are voted by the trustees designated officers who are not known to the Corporation.

36

Security Ownership of Management as of April 30, 2012

Title of Class Name of beneficial Owner Amount & nature of beneficial ownership (Direct) 1 1 % to Total Outstanding

Position

Citizenship

Named Executive Officers1 Common 1. Lance Y. Gokongwei 2. Victor Emmanuel B. Custodio 3. Antonio Jose L. Rodriguez 4. Michael S. Shau 5. Jeanette U. Yu Sub-Total Other Directors and Executive Officers Common 6. Ricardo J. Romulo Common 7. John L. Gokongwei, Jr. Common 8. James L. Go Common 9. Jose F. Buenaventura Common 10. Robina Y. Gokongwei-Pe Common 11. Frederick D. Go Common 12. Antonio L. Go Common 13. Oh Wee Khoon Common 14. Jaime I. Cabangis 15. Bach Johann M. Sebastian 16. Rosita D. Menchaca 17. Candice Jennifer A. Iyog 18. Joseph G. Macagga 19. Robin C. Dui 20. Alejandro B. Reyes 21. Rosalinda F. Rivera 22. William S. Pamintuan -

Director, President and Chief Executive Officer Vice President Vice President Vice President Vice President - Treasurer

Filipino Filipino Filipino Filipino Filipino

* * * * * * * * * * * * *

Chairman Director Director Director Director Director Director (Independent) Director (Independent) Chief Financial Officer Senior Vice President Chief Strategist Vice President Vice President Vice President Vice President Vice President Corporate Secretary Assistant Corporate Secretary

1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Filipino 1 Singaporean 10,000 Filipino Filipino 10,008 10,009 Filipino Filipino Filipino Filipino Filipino Filipino Filipino

All directors and executive officers as a group unnamed

Notes: 1. As defined under Part IV (B) (1) (b) of SRC Rule 12, the named executive officers to be listed refer to the Chief Executive Officer and those that are the four (4) most highly compensated executive officers as of April 30, 2012. * less than 0.01%

Voting Trust Holders of 5% or more - as of April 30, 2012 There are no persons holding more than 5% of a class under a voting trust or similar agreement.

37

PART IV - CORPORATE GOVERNANCE

Item 11.

Corporate Governance

The Corporation adheres to the principles and practices of good corporate governance, as embodied in its Corporate Governance Manual, Code of Business Conduct and related SEC Circulars. On September 24, 2010, the Board of Directors approved the adoption of a revised Corporate Governance Manual in accordance with SEC Memorandum Circular No. 6 (Series of 2009) dated June 22, 2009. Continuous improvement and monitoring of governance and management policies have been undertaken to ensure that the Corporation observes good governance and management practices. This is to assure the shareholders that the Corporation conducts its business with the highest level of integrity, transparency and accountability. A Certification of Compliance with the Manual on Corporate Governance is submitted by the Corporation every year to the SEC and PSE. Beginning in 2011, the Corporation likewise submitted a Corporate Governance Disclosure Report to the PSE. The Corporation likewise consistently strives to raise its financial reporting standards by adopting and implementing prescribed Philippine Financial Reporting Standards.

38

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, January 25, 2010, valid until December 31, 2012 SEC Accreditation No. 0012-FR-2 (Group A), February 4, 2010, valid until February 3, 2013

INDEPENDENT AUDITORS REPORT

The Stockholders and the Board of Directors Cebu Air, Inc. 2nd Floor, Doa Juanita Marquez Lim Building Osmea Boulevard, Cebu City We have audited the accompanying consolidated financial statements of Cebu Air, Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2011 and 2010, and the consolidated statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2011, and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

A member firm of Ernst & Young Global Limited

*SGVMC117488*

-2Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cebu Air, Inc. and its subsidiaries as at December 31, 2011 and 2010, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2011 in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO.

Michael C. Sabado Partner CPA Certificate No. 89336 SEC Accreditation No. 0664-AR-1 (Group A), March 11, 2011, valid until March 10, 2014 Tax Identification No. 160-302-865 BIR Accreditation No. 08-001998-73-2009, June 1, 2009, Valid until May 31, 2012 PTR No. 3174824, January 2, 2012, Makati City March 13, 2012

*SGVMC117488*

CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31 2010

2011 ASSETS Current Assets Cash and cash equivalents (Note 7) Financial assets at fair value through profit or loss (Note 8) Receivables (Note 9) Expendable parts, fuel, materials and supplies (Note 10) Other current assets (Note 11) Total Current Assets Noncurrent Assets Property and equipment (Notes 12, 16, 29 and 30) Investment in shares of stock and joint ventures (Notes 13 and 32) Available-for-sale investment (Note 8) Other noncurrent assets (Note 14) Total Noncurrent Assets P8,957,783,986 = 3,261,077,998 836,786,224 397,527,340 278,691,061 13,731,866,609 41,037,543,621

= P9,763,288,972 3,879,438,631 862,409,591 370,032,035 264,073,803 15,139,243,032 33,985,701,079

369,644,738 409,478,237 114,532,000 110,367,200 327,847,154 391,452,391 41,948,841,449 34,797,724,971 = P55,680,708,058 P49,936,968,003 =

LIABILITIES AND EQUITY Current Liabilities Accounts payable and other accrued liabilities (Note 15) Unearned transportation revenue (Note 4 and 5) Current portion of long-term debt (Notes 12 and 16) Financial liabilities at fair value through profit or loss (Note 8) Due to related parties (Note 26) Total Current Liabilities Noncurrent Liabilities Long-term debt - net of current portion (Notes 12 and 16) Deferred tax liabilities - net (Note 24) Other noncurrent liabilities (Notes 17 and 22) Total Noncurrent Liabilities Total Liabilities Equity (Note 18) Common stock Capital paid in excess of par value Treasury stock Net unrealized losses on available-for-sale investment (Note 8) Retained earnings Total Equity P6,710,838,876 = 5,253,433,343 2,467,451,166 60,857,586 36,302,174 14,528,883,145 = P5,598,486,319 4,606,311,016 2,056,043,837 35,529,304 12,296,370,476

18,404,442,267 221,786,183 3,360,073,173 21,986,301,623 36,515,184,768

16,376,664,867 153,130,071 3,203,752,687 19,733,547,625 32,029,918,101

613,236,550 613,236,550 8,405,568,120 8,405,568,120 (529,319,321) (2,714,902) (5,630,261) 8,890,960,134 10,681,668,202 19,165,523,290 17,907,049,902 = P55,680,708,058 P49,936,968,003 =

See accompanying Notes to Consolidated Financial Statements.

*SGVMC117488*

CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

2011 REVENUE Sale of air transportation services (Note 4): Passenger Cargo Ancillary revenue (Note 19) EXPENSES Flying operations (Note 20) Aircraft and traffic servicing (Note 20) Depreciation and amortization (Note 12) Repairs and maintenance (Note 20) Aircraft and engine lease (Note 29) Reservation and sales General and administrative (Note 21) Passenger service Other expenses (Note 23) OPERATING INCOME OTHER INCOME (EXPENSE) Interest income (Notes 7 and 8) Fuel hedging gains (Note 8) Foreign exchange gains Equity in net income (loss) of joint venture (Note 13) Fair value gains (losses) of financial assets designated at fair value through profit or loss (Note 8) Interest expense (Notes 16 and 17) INCOME BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 24) NET INCOME Net unrealized losses on available-for-sale investment (Note 8) Benefit from income tax (Notes 8 and 24) OTHER COMPREHENSIVE INCOME, NET OF TAX TOTAL COMPREHENSIVE INCOME Basic/Diluted Earnings Per Share (Note 25)
See accompanying Notes to Consolidated Financial Statements.

Years Ended December 31 2010 2009

= P P27,208,405,751 P24,656,078,237 =19,504,340,982 = 2,095,612,223 1,684,418,350 2,193,283,974 2,337,108,499 2,122,246,979 4,533,713,050 33,935,402,775 29,088,798,959 23,311,006,311 17,350,168,400 2,991,278,104 2,632,410,923 2,518,570,260 1,718,431,374 1,480,637,473 820,453,486 756,785,558 138,839,386 30,407,574,964 3,527,827,811 647,397,939 477,128,001 50,154,940 42,318,202 (143,554,705) (854,269,588) 219,174,789 3,747,002,600 122,584,882 3,624,417,718 (4,164,799) 1,249,440 (2,915,359) P3,621,502,359 = P5.93 = 11,417,488,512 2,461,807,197 2,100,929,764 2,289,945,384 1,604,855,579 1,335,983,655 694,888,478 639,480,811 93,293,869 22,638,673,249 6,450,125,710 237,495,750 474,255,226 576,978,771 25,248,534 107,631,255 (931,482,279) 490,127,257 6,940,252,967 17,759,687 6,922,493,280 (3,878,432) 1,163,530 (2,714,902) = P6,919,778,378 = P11.78 8,857,014,923 2,631,833,249 1,917,683,713 2,568,940,713 1,723,886,536 994,694,826 822,510,363 580,896,015 49,503,211 20,146,963,549 3,164,042,762 8,848,551 685,574,528 418,182,126 (25,474,123) (1,012,826,822) 74,304,260 3,238,347,022 (19,501,683) 3,257,848,705 =3,257,848,705 P = P5.59

*SGVMC117488*

CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Year Ended December 31, 2011 Net unrealized losses on Appropriated Unappropriated available-for-sale Retained Retained investment Earnings Earnings Treasury Stock (Note 8) (Note 18) (Note 18) (Note 18) P = P = (P2,714,902) = P8,890,960,134 = 933,500,000 (933,500,000) 3,624,417,718 (2,915,359) (2,915,359) 933,500,000 2,690,917,718 (529,319,321) (1,833,709,650) (P529,319,321) = (P5,630,261) = P933,500,000 = P9,748,168,202 =

Balance at January 1, 2011 Appropriation of retained earnings Net income Other comprehensive income Total comprehensive income Treasury stock Dividends paid Balance at December 31, 2011

Common Stock (Note 18) P613,236,550 = P613,236,550 =

Capital Paid in Excess of Par Value (Note 18) P8,405,568,120 = P8,405,568,120 =

Total Equity P17,907,049,902 = 3,624,417,718 (2,915,359) 3,621,502,359 (529,319,321) (1,833,709,650) P19,165,523,290 =

Balance at January 1, 2010 Net income Other comprehensive income Total comprehensive income Issuance of shares Transaction costs Balance at December 31, 2010

Common Stock (Note 18) = P582,574,750 30,661,800 = P613,236,550

For the Year Ended December 31, 2010 Net unrealized losses on Appropriated Unappropriated Capital Paid in available-for-sale Retained Retained Excess of Par investment Earnings Earnings Total Equity Value (Note 18) (Note 8) (Note 18) (Note 18) = P4,703,920,250 = P = P = P1,968,466,854 = P7,254,961,854 6,922,493,280 6,922,493,280 (2,714,902) (2,714,902) (2,714,902) 6,922,493,280 6,919,778,378 3,802,063,200 3,832,725,000 (100,415,330) (100,415,330) = P8,405,568,120 (P2,714,902) = = P = P8,890,960,134 P17,907,049,902 =

*SGVMC117488*

-2For the Year Ended December 31, 2009 Capital Paid in Retained Excess of Par Earnings Common Stock Value (Note 18) (Deficit) (Note 18) = P582,574,750 = P4,703,920,250 (P1,289,381,851) = 3,257,848,705 = P582,574,750 = P4,703,920,250 = P1,968,466,854

Balance at January 1, 2009 Total comprehensive income Balance at December 31, 2009
See accompanying Notes to Consolidated Financial Statements.

Total Equity = P3,997,113,149 3,257,848,705 = P7,254,961,854

*SGVMC117488*

CEBU AIR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

2011

Years Ended December 31 2010 2009

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P3,747,002,600 P6,940,252,967 =3,238,347,022 = = P Adjustments for: Depreciation and amortization (Note 12) 2,632,410,923 2,100,929,764 1,917,683,713 Interest expense (Notes 16 and 17) 854,269,588 931,482,279 1,012,826,822 Fair value gain (loss) of financial assets at fair value through profit or loss (Note 8) 143,554,705 (107,631,255) Loss (gain) on disposal of property and equipment (Note 12) (1,168,434) 4,050,103 Provision for credit losses on receivables (Note 9) 2,127,309 209,662,427 Unrealized foreign exchange gains (29,680,099) (574,806,957) (452,738,225) Equity in net loss (income) of joint venture (Note 13) (42,318,202) (25,248,534) 25,474,123 Fuel hedging gains (Note 8) (477,128,001) (474,255,226) (685,574,528) Interest income (Notes 7 and 8) (647,397,939) (237,495,750) (8,848,551) Operating income before working capital changes 8,559,404,700 5,256,832,803 6,179,545,141 Decrease (increase) in: Receivables 58,936,320 157,564,532 85,823,980 Other current assets (15,153,984) 77,065,113 1,842,289,762 Expendable parts, fuel, materials and supplies (27,495,305) (21,059,547) (193,665,823) Financial assets at fair value through profit or loss (derivatives) (Note 8) 1,011,022,845 212,132,124 Increase (decrease) in: Accounts payable and other accrued liabilities 554,321,416 561,841,257 1,314,883,706 Unearned transportation revenue 647,122,327 1,137,155,662 794,633,434 Due to related parties 772,870 (2,400,212) (60,627) Noncurrent liabilities (368,066,004) 50,624,954 (69,993,475) Financial liabilities at fair value through profit or loss (derivatives) (Note 8) (1,488,205,370) Net cash generated from operations 8,041,005,626 10,732,328,583 7,542,538,390 Interest paid (679,203,619) (803,117,030) (907,448,770) Interest received 633,365,232 94,496,407 8,848,551 Net cash provided by operating activities 7,995,167,239 10,023,707,960 6,643,938,171 CASH FLOWS FROM INVESTING ACTIVITIES Dividends received from a joint venture (Note 13) Proceeds from disposal of property and equipment (Note 12) Investment in shares of stocks (Notes 13 and 32) Acquisition of other noncurrent assets Acquisition of property and equipment (Notes 12 and 29) Advances to a related party (Note 26) Proceeds from disposal of other noncurrent assets Repayments of advances to a related party (Note 26) Net cash used in investing activities (Forward) 36,234,703 2,575,551 (33,750,000) (63,605,237) (4,232,090,595) (4,290,635,578) 21,959,482 162,020,516 (83,070,335) (2,361,432,894) (3,662,583,961) (5,923,107,192) 19,443,595 (33,813,500) (1,755,652,619) (1,792,140,000) 142,066,972 1,792,140,000 (1,627,955,552)

*SGVMC117488*

-2Years Ended December 31 2010 2009 = P (1,814,268,254) (14,143,844) (1,828,412,098) 7,239,271 3,194,809,792 646,049,663 = P3,840,859,455

2011 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common shares of stock (Note 18) Payments of transaction costs (Note 18) Acquisition of treasury shares (Note 18) Dividends paid Repayments of long-term debt Net repayments of borrowings from a related party (Note 28) Net cash provided by (used in) financing activities EFFECTS OF EXCHANGE RATE CHANGES IN CASH AND CASH EQUIVALENTS NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 7)
See accompanying Notes to Consolidated Financial Statements.

P P3,832,725,000 = = (100,415,330) (529,319,321) (1,833,709,650) (2,141,112,305) (1,791,793,102) (4,504,141,276) (5,895,371) (805,504,986) 9,763,288,972 P8,957,783,986 = (40,480,463) 1,900,036,105 (78,207,356) 5,922,429,517 3,840,859,455 = P9,763,288,972

*SGVMC117488*

CEBU AIR, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information Cebu Air, Inc. (the Parent Company) was incorporated and organized in the Philippines on August 26, 1988 to carry on, by means of aircraft of every kind and description, the general business of a private carrier or charter engaged in the transportation of passengers, mail, merchandise and freight, and to acquire, purchase, lease, construct, own, maintain, operate and dispose of airplanes and other aircraft of every kind and description, and also to own, purchase, construct, lease, operate and dispose of hangars, transportation depots, aircraft service stations and agencies, and other objects and service of a similar nature which may be necessary, convenient or useful as an auxiliary to aircraft transportation. The principal place of business of the Parent Company is at 2nd Floor, Doa Juanita Marquez Lim Building, Osmea Boulevard, Cebu City. The Parent Company has six 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) and Vector Aircraft Leasing Limited (VALL) (collectively known as the Group). CALL, ILL, BLL, SLL, SALL and VALL are SPEs in which the Parent Company does not have equity interest. CALL, ILL, BLL, SLL, SALL and VALL acquired the passenger aircraft for lease to the Parent Company under finance lease arrangements (Note 12) and funded the acquisitions through long-term debt (Note 16). In accordance with Standards Interpretations Committee (SIC) 12, Consolidation - Special Purpose Entities, the consolidated financial statements include the accounts of these SPEs (Note 2). The Parent Companys common stock was listed with the Philippine Stock Exchange (PSE) on October 26, 2010, the Parent Companys initial public offering (IPO). The Parent Companys ultimate parent is JG Summit Holdings, Inc. (JGSHI). The Parent Company is 66.15%-owned by CP Air Holdings, Inc. (CPAHI). In 1991, pursuant to Republic Act (RA) No. 7151, the Parent Company was granted a franchise to operate air transportation services, both domestic and international. In August 1997, the Office of the President of the Philippines gave the Parent Company the status of official Philippine carrier to operate international services. In September 2001, the Philippine Civil Aeronautics Board (CAB) issued the permit to operate scheduled international services and a certificate of authority to operate international charters. The Parent Company is registered with the Board of Investments (BOI) as a new operator of air transport on a pioneer and non-pioneer status. Under the terms of the registration and subject to certain requirements, the Parent Company is entitled to certain fiscal and non-fiscal incentives, including among others, an income tax holiday (ITH) for a period of four (4) years. The Parent Company can avail of bonus years in certain specified cases but the aggregate ITH availment (basic and bonus years) shall not exceed eight (8) years (Notes 24 and 31). Prior to the grant of the ITH and in accordance with the Parent Companys franchise, which extends up to year 2031: a. The Parent Company is subject to franchise tax of five percent (5%) of the gross revenue derived from air transportation operations. For revenue earned from activities other than air transportation, the Parent Company is subject to regular corporate income tax (RCIT) and to real property tax.

*SGVMC117488*

-2b. 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 Companys tax privileges and shall operate equally in favor of the Parent Company. On May 24, 2005, the Reformed-Value Added Tax (R-VAT) law was signed as RA No. 9337 or the R-VAT Act of 2005. The R-VAT law took effect on November 1, 2005 following the approval on October 19, 2005 of Revenue Regulation (RR) No. 16-2005 which provides for the implementation of the rules of the R-VAT law. Among the relevant provisions of RA No. 9337 are the following: a. The franchise tax of the Parent Company is abolished; b. The Parent Company shall be subject to RCIT; c. The Parent Company shall remain exempt from any taxes, duties, royalties, registration license, and other fees and charges; d. Change in RCIT rate from 32.00% to 35.00% for the next three years effective on November 1, 2005, and 30.00% starting on January 1, 2009 and thereafter; e. 70.00% cap on the input VAT that can be claimed against output VAT; and f. Increase in the VAT rate imposed on goods and services from 10.00% to 12.00% effective on February 1, 2006. On November 21, 2006, the President signed into law RA No. 9361, which amends Section 110(B) of the Tax Code. This law, which became effective on December 13, 2006, provides that if the input tax, inclusive of the input tax carried over from the previous quarter exceeds the output tax, the excess input tax shall be carried over to the succeeding quarter or quarters. The Department of Finance through the Bureau of Internal Revenue issued RR No. 2-2007 to implement the provisions of the said law. Based on the regulation, the amendment shall apply to the quarterly VAT returns to be filed after the effectivity of RA No. 9361. On December 16, 2008, the Parent Company was registered as a Clark Freeport Zone (CFZ) enterprise and committed to provide air transportation services both domestic and international for passengers and cargoes at the Diosdado Macapagal International Airport. The registration provides incentives, rights and privileges such as imposition of five percent tax on gross income earned in lieu of national and local taxes.

2. Basis of Preparation The accompanying consolidated financial statements of the Group have been prepared on a historical cost basis, except for financial assets and liabilities at fair value through profit or loss (FVPL) and available-for-sale (AFS) investment that have been measured at fair value. The financial statements of the Group are presented in Philippine Peso (P), the Parent Companys = functional and presentation currency. All amounts are rounded to the nearest peso unless otherwise indicated. Statement of Compliance The consolidated financial statements of the Group have been prepared in compliance with Philippine Financial Reporting Standards (PFRS).

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-3Basis of Consolidation The consolidated financial statements include the financial statements of the Parent Company and the SPEs that it controls. SIC 12, prescribes guidance on the consolidation of SPE. Under SIC 12, an SPE should be consolidated when the substance of the relationship between the company and the SPE indicates that the SPE is controlled by the company. Control over an entity may exist even in cases where an enterprise owns little or none of the SPEs equity, such as when an entity retains majority of the residual risks related to the SPE or its assets in order to obtain benefits from its activities. The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. All significant intercompany transactions and balances, including intercompany profits and unrealized profits and losses, are eliminated in the consolidation.

3. Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of new and amended PFRS and Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) that are discussed below. Except as otherwise indicated, the adoption of the new and amended PFRS and Philippine Interpretations did not have any effect on the consolidated financial statements of the Group. Amendment to Philippine Accounting Standards (PAS) 24, Related Party Disclosures This amended Standard clarified the definition of a related party. The new definitions emphasize a symmetrical view of related party relationships and clarify the circumstances in which persons and key management personnel affect related party relationships of an entity. In addition, the amendment introduces an exemption from the general related party disclosure requirements for transactions with government and entities that are controlled, jointly controlled or significantly influenced by the same government as the reporting entity. PAS 32, Financial Instruments: Presentation (Amendment) - Classification of Rights Issues The Amendment alters the definition of a financial liability in PAS 32 to enable entities to classify rights issues and certain options or warrants as equity instruments. The Amendment is applicable if the rights are given pro rata to all of the existing owners of the same class of an entitys non-derivative equity instruments, to acquire a fixed number of the entitys own equity instruments for a fixed amount in any currency. Amendment to Philippine Interpretation IFRIC 14, Prepayments of a Minimum Funding Requirement The Amendment removes an unintended consequence when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover such requirements. The Amendment permits a prepayment of future service cost by the entity to be recognized as a pension asset. Amendment to Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities and Equity Instruments This Philippine Interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss.

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-4Improvements to PFRS 2010 Improvements to PFRS, an omnibus of amendments to standards, deal primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following interpretation and amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Group. PFRS 3, Business Combinations PFRS 7, Financial Instruments Disclosures PAS 1, Presentation of Financial Statements PAS 27, Consolidated and Separate Financial Statements PAS 34, Interim Financial Statements Philippine Interpretation IFRIC 13, Customer Loyalty Programmes

Future Changes in Accounting Policies The Group will adopt the following new and amended PFRS and Philippine Interpretations enumerated below when these become effective. Except as otherwise indicated, the following new and amended PFRS and Philippine Interpretations will not have significant impact on the consolidated financial statements of the Group: Effective 2012 PFRS 7, Financial Instruments: Disclosures (Amendment) - Enhanced Derecognition Disclosure Requirements (effective for annual periods beginning on or after July 1, 2011) The amendment requires additional disclosure about financial assets that have been transferred but not derecognized to enable the user of the Groups financial statements to understand the relationship with those assets that have not been derecognized and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognized assets to enable the user to evaluate the nature of, and risks associated with, the entitys continuing involvement in those derecognized assets. Amendments to PAS 12, Income Taxes - Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after January 1, 2012) The amendment clarified the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in PAS 40, Investment Property, should be determined on the basis that its carrying value amount will be recovered through sale. Furthermore, it introduces the requirement that deferred tax on non-depreciable assets are measured using revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset. PAS 1, Presentation of Financial Statements - Presentation of Items in Other Comprehensive Income (effective for annual periods beginning on or after January 1, 2012) The amendments to PAS 1 change the grouping of items presented in other comprehensive income. Items that could be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no other impact on the Groups financial position and performance.

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-5Effective 2013 PFRS 7, Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2013) These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set-off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: a) The gross amounts of those recognized financial assets and recognized financial liabilities; b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the statement of financial position; c) The net amounts presented in the statement of financial position; d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and e) The net amount after deducting the amounts in (d) from the amounts in (c) above. The amendments to PFRS 7 are to be applied retrospectively. The amendment affects disclosures only and has no impact on the Groups financial position or performance.

PFRS 10, Consolidated Financial Statements (effective for annual periods beginning on or after January 1, 2013) PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. PFRS 11, Joint Arrangements (effective for annual periods beginning on or after January 1, 2013) PFRS 11 replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities Non-monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. PFRS 12, Disclosures of Involvement with Other Entities (effective for annual periods beginning periods on or after January 1, 2013) PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. These disclosures relate to an entitys interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required.

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-6 PFRS 13, Fair Value Measurement (effective for annual periods beginning on or before January 1, 2013) PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. PAS 1, Financial Statement Presentation - Presentation of Items of Other Comprehensive Income (effective for annual periods beginning on or after July 1, 2012) The amendments to PAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has therefore no impact on the Groups financial position or performance. Amendments to PAS 19, Employee Benefits (effective for annual periods beginning on or after January 1, 2013) Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The Group is currently assessing the impact of the amendment to PAS 19. Revised PAS 27, Separate Financial Statements (effective for annual periods beginning on or after January 1, 2013) As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. Revised PAS 28, Investments in Associates and Joint Ventures (effective for annual periods beginning on or after January 1, 2013) As a consequence of the new PFRS 11, Joint Arrangements, and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine (effective for annual periods beginning on or after January 1, 2013) This Philippine Interpretation applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine (production stripping costs) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset.

Effective 2014 PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2014) These amendments to PAS 32 clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous.

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-7Effective 2015 PFRS 9, Financial Instruments: Classification and Measurement (effective for annual periods beginning on or after January 1, 2015) PFRS 9 as issued reflects the first phase on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. In subsequent phases, hedge accounting and impairment of financial assets will be addressed with the completion of this project expected on the first half of 2012. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Groups financial assets, but will potentially have no impact on classification and measurements of financial liabilities. Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate The implementation of the Philippine Interpretation is deferred until the final Review Standard is issued by IASB and after an evaluation on the requirements and guidance in the standard vis--vis the practices and regulations in the Philippine real estate industry is completed. This Philippine Interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This Philippine Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion.

4. Summary of Significant Accounting Policies Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates and other sales taxes or duty. The following specific recognition criteria must also be met before revenue is recognized: Sale of air transportation services Passenger ticket and cargo waybill sales are initially recorded under Unearned transportation revenue account in the consolidated statement of financial position until recognized under Revenue account in the consolidated statement of comprehensive income when the transportation service is rendered by the Group (e.g., when passengers and cargo are lifted). Unearned tickets are recognized as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and historical trends. The related commission is recognized as outright expense upon the receipt of payment from customers, and is included under Reservation and sales account. Ancillary revenue Revenue from in-flight sales and other services are recognized when the goods are delivered or the services are carried out.

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-8Interest income Interest on cash, cash equivalents, short-term cash investments and debt securities classified as financial assets at fair value through profit or loss (FVPL) is recognized as the interest accrues using the effective interest method. Expense Recognition Expenses are recognized when it is probable that a decrease in future economic benefits related to decrease in an asset or an increase in liability has occurred and the decrease in economic benefits can be measured reliably. Expenses that arise in the course of ordinary regular activities of the Group include, among others, the operating expenses on the Groups operation. Cash and Cash Equivalents Cash represents cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of placement and that are subject to an insignificant risk of changes in value. Cash and cash equivalents, excluding cash on hand, are classified and accounted for as loans and receivables. Financial Instruments Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized using the settlement date accounting. Derivatives are recognized on a trade date basis. Initial recognition of financial instruments Financial instruments are recognized initially at the fair value of the consideration given. Except for financial instruments at FVPL, the initial measurement of financial assets includes transaction costs. The Group classifies its financial assets into the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, AFS investments and loans and receivables. Financial liabilities are classified into financial liabilities at FVPL and other financial liabilities carried at cost or amortized cost. The Group has no HTM investments as of December 31, 2011 and 2010. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of fair value The fair value of financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

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-9The Group follows the hierarchy in Philippine Interpretations Committee (PIC) Question and Answer (Q&A) No. 2010-01: PAS 39.AG71-72, Rate used in determining the fair value of government securities in the Philippines, beginning January 1, 2010, for the determination of fair value of government securities in the Philippines, using market data published by the Philippine Dealing and Exchange Corporation or PDEx: a. Current bid yield, if available, on the reporting date. b. When a current bid yield is not available, the last or close yield on the reporting date. c. When there is no transaction for a security on the reporting date, the PDSI-R2 rate may be used. The consensus in the Q&A has been approved by the PIC on March 2, 2010 and approved by the Financial Reporting Standards Committee on June 4, 2010. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Any difference noted between the fair value and the transaction price is treated as expense or income, unless it qualifies for recognition as some type of asset or liability. Day 1 profit or loss Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from an observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit or loss) in profit or loss unless it qualifies for recognition as some other type of asset or liability. In cases where the transaction price used is made of data which is not observable, the difference between the transaction price model value is only recognized in profit or loss, when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 profit or loss amount. Financial assets and financial liabilities at FVPL Financial assets and financial liabilities at FVPL include financial assets and financial liabilities held for trading purposes, derivative instruments or those designated upon initial recognition as at FVPL. Financial assets and financial liabilities are designated by management on initial recognition when any of the following criteria are met: The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or The assets or liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

As of December 31, 2011 and 2010, the Groups financial assets at FVPL consist of derivative assets, as well as private and government debt and equity securities (Note 8).

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- 10 Financial assets and financial liabilities at FVPL are presented in the consolidated statement of financial position at fair value. Changes in fair value are reflected in profit or loss. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded in other revenue according to the terms of the contract, or when the right of the payment has been established. Derivatives recorded at FVPL The Group is a counterparty to certain derivative contracts such as commodity options. Such derivative financial instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently re-measured at fair value. Any gains or losses arising from changes in fair values of derivatives (except those accounted for as accounting hedges) are taken directly to profit or loss. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. For the purpose of hedge accounting, hedges are classified primarily as either: (a) a hedge of the fair value of an asset, liability or a firm commitment (fair value hedge); or (b) a hedge of the exposure to variability in cash flows attributable to an asset or liability or a forecasted transaction (cash flow hedge). The Group did not apply hedge accounting on its derivative transactions for the years ended December 31, 2011 and 2010. The Group enters into fuel derivatives to manage its exposure to fuel price fluctuations. Such fuel derivatives are not designated as accounting hedges. These derivatives are entered into for risk management purposes. The gains or losses on these instruments are accounted for directly as charges to or credits against current operations under Fuel hedging gains (losses) account in profit or loss. As of December 31, 2011 and 2010, the Group has no embedded derivatives. AFS investments AFS investments are those non-derivative investments which are designated as such or do not qualify to be classified or designated as financial assets at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS investments are subsequently measured at fair value. The unrealized gains and losses are recognized directly in equity [other comprehensive income (loss)] under Net unrealized gain (loss) on AFS investments account in the statement of financial position. When the investment is disposed of, the cumulative gain or loss previously recognized in the statement of comprehensive income is recognized in the statement of income. Where the Group holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Dividends earned while holding AFS investments are recognized in the statement of income when the right of the payment has been established. The losses arising from impairment of such investments are recognized in the statement of income and removed from the Net unrealized gain (loss) on AFS investments account. The AFS investment of the Group represents a quoted equity security (Note 8).

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- 11 Receivables Receivables are non-derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. After initial measurement, receivables are subsequently carried at amortized cost using the effective interest method less any allowance for impairment loss. Amortized cost is calculated by taking into account any discount or premium on acquisition, and includes fees that are an integral part of the effective interest rate (EIR) and transaction costs. Gains and losses are recognized in profit or loss, when the receivables are derecognized or impaired, as well as through the amortization process. This accounting policy applies primarily to the Groups trade and other receivables (Note 9) and certain refundable deposits. Financial liabilities Issued financial instruments or their components, which are not designated at FVPL are classified as other financial liabilities where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, other financial liabilities are subsequently measured at cost or amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR. Any effects of restatement of foreign currency-denominated liabilities are recognized in profit or loss. This accounting policy applies primarily to the Groups accounts payable and other accrued liabilities, long-term debt, and other obligations that meet the above definition (Notes 15, 16 and 17). Impairment of Financial Assets The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Assets carried at amortized cost If there is objective evidence that an impairment loss on financial assets carried at amortized cost (i.e., receivables) has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the assets original EIR. Time value is generally not considered when the effect of discounting is not material. The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss shall be recognized in profit or loss. The asset, together with the associated allowance accounts, is written-off when there is no realistic prospect of future recovery.

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- 12 The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in the collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. The Group performs a regular review of the age and status of these accounts, designed to identify accounts with objective evidence of impairment and provide the appropriate allowance for impairment loss. The review is accomplished using a combination of specific and collective assessment approaches, with the impairment loss being determined for each risk grouping identified by the Group. AFS investments The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Interest continues to be accrued at the original EIR on the reduced carrying amount of the asset and is recorded under interest income in profit or loss. If, in a subsequent year, the fair value of a debt instrument increases, and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is also reversed through profit or loss. For equity investments classified as AFS investments, objective evidence would include a significant or prolonged decline in the fair value of the investments below its cost. The determination of what is significant and prolonged is subject to judgment. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized is removed from other comprehensive income and recognized in profit or loss. Impairment losses on equity investments are not reversed through the statement of comprehensive income. Increases in fair value after impairment are recognized directly in other comprehensive income. Derecognition of Financial Instruments Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either: (a) has transferred substantially all the risks and rewards of ownership and retained control over the asset; or (b) has neither transferred nor retained the risks and rewards of the asset but has transferred the control over the asset.

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- 13 When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Groups continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Offsetting Financial Instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements; thus, the related assets and liabilities are presented gross in the consolidated statement of financial position. Expendable Parts, Fuel, Materials and Supplies Expendable parts, fuel, materials and supplies are stated at lower of cost and net realizable value (NRV). Cost of flight equipment expendable parts, materials and supplies are stated at acquisition cost determined on a moving average cost method. Fuel is stated at cost on a weighted average cost method. NRV is the estimated selling price in the ordinary course of business less estimated costs to sell. Property and Equipment Property and equipment are carried at cost less accumulated depreciation, amortization and impairment loss, if any. The initial cost of property and equipment comprises its purchase price, any related capitalizable borrowing costs attributed to progress payments incurred on account of aircraft acquisition under construction and other directly attributable costs of bringing the asset to its working condition and location for its intended use. Cost also includes asset retirement obligation (ARO) relating to the leased passenger aircraft. Subsequent costs are capitalized as part of Property and equipment account only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Subsequent costs such as actual costs of heavy maintenance visits for passenger aircraft are capitalized and depreciated based on the estimated number of years or flying hours, whichever is applicable, until the next major overhaul or inspection. Generally, heavy maintenance visits are required every five to six years for airframe and ten years or 20,000 flight cycles, whichever comes first, for landing gear. All other repairs and maintenance are charged against current operations as incurred. Construction in-progress are transferred to the related Property and equipment account when the construction or installation and related activities necessary to prepare the property and equipment for their intended use are completed, and the property and equipment are ready for service. Construction in-progress is not depreciated until such time when the relevant assets are completed and available for use.

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- 14 Depreciation and amortization of property and equipment commence once the property and equipment are available for use and are computed using the straight-line method over the estimated useful lives (EULs) of the assets, regardless of utilization. The EULs of property and equipment of the Group follows: Passenger aircraft* Engines Rotables Ground support equipment EDP Equipment, mainframe and peripherals Transportation equipment Furniture, fixtures and office equipment Communication equipment Special tools Maintenance and test equipment Other equipment
* With residual value of 15.00%

15 years 15 years 15 years 5 years 3 years 5 years 5 years 5 years 5 years 5 years 5 years

Leasehold improvements are amortized over the shorter of their EULs or the corresponding lease terms. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss, in the year the item is derecognized. The assets residual values, useful lives and methods of depreciation and amortization are reviewed and adjusted, if appropriate, at each financial year-end. ARO The Group is contractually required under various lease contracts to restore certain leased aircraft to its original condition and to bear the cost of restoration at the end of the contract period. The Group recognizes the present value of these costs as ARO asset (included under Property and equipment) and ARO liability (included under Noncurrent liabilities). The Group depreciates ARO asset on a straight-line basis over the EUL of the related asset or the lease term, whichever is shorter, or written off as a result of impairment of the related asset. The Group amortizes ARO liability using the effective interest method and recognizes accretion expense (included in interest expense) over the lease term. The Group regularly assesses the provision for ARO and adjusts the related asset and liability (Note 5). Aircraft Maintenance and Overhaul Cost The Group recognizes aircraft maintenance and overhaul expenses in accordance with the contractual terms. The maintenance contracts are classified into two: (a) those based on time and material basis (TMB), and (b) power-by-the-hour (PBH) contract. For maintenance contract under TMB, the Group recognizes expenses based on expense as incurred method. For maintenance contract under PBH, the Group recognizes expense on an accrual basis.

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- 15 Investment in Shares of Stock and Joint Ventures The investment in shares of stock represents 60% investment by the Group in Philippine Academy for Aviation Training, Inc. (PAAT). A joint venture (JV) is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. A jointly controlled entity is a JV that involves the establishment of a separate entity in which each venturer has an interest. The Groups 49.00% and 35.00% investments in Aviation Partnership (Philippines) Corporation (A-plus) and SIA Engineering (Philippines) Corporation (SIAEP), respectively, are accounted for under the equity method (Note 13). Under the equity method, the investments in JV are carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Groups share of net assets of the JV, less any allowance for impairment in value. The consolidated statement of comprehensive income reflects the Groups share in the results of operations of the JV. Dividends received are treated as a revaluation of the carrying value of the investment. The financial statements of the investee companies used in the preparation of the consolidated financial statement are prepared as of the same date with the Group. The investee companies accounting policies conform to those by the Group for like transactions and events in similar circumstances. Impairment of Nonfinancial Assets This accounting policy applies primarily to the Groups property and equipment and investments in JV. At each reporting date, the Group assesses whether there is any indication that its nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an assets (or cash-generating units) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). An assessment is made at each statement of financial position date as to whether there is any indication that a previously recognized impairment loss may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss. After such a reversal, the depreciation and amortization expense is adjusted in future years to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining life.

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- 16 Impairment of Investment in JV The Groups investment in JV is tested for impairment in accordance with PAS 36 as a single asset, by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, whenever application of the requirements in PAS 39 indicates that the investment may be impaired. An impairment loss recognized in those circumstances is not allocated to any asset that forms part of the carrying amount of the investment in a JV. Accordingly, any reversal of that impairment loss is recognized in accordance with PAS 36 to the extent that the recoverable amount of the investment subsequently increases. In determining the value in use of the investment, an entity estimates: (a) its share of the present value of the estimated future cash flows expected to be generated by the JV, including the cash flows from the operations of the JV and the proceeds on the ultimate disposal of the investment; or (b) the present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal. Common Stock Common stocks are classified as equity and recorded at par. Proceeds in excess of par value are recorded as Capital paid in excess of par value in the consolidated statement of financial position. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds. Treasury Stock Own equity instruments which are acquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in the profit and loss on the purchase, sale, issue or cancellation of the Parent Companys own equity instruments. Retained Earnings Retained earnings represent accumulated earnings of the Group less dividends declared. Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from equity when approved and declared by the BOD, in the case of cash dividends; or by the BOD and shareholders, in the case of stock dividends. Provisions and Contingencies Provisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of a past event; (b) it is probable (i.e., more likely than not) that an outflow of assets embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense in profit or loss. Contingent liabilities are not recognized in the consolidated statement of financial position but are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized but disclosed in the consolidated financial statements when an inflow of economic benefits is probable. If it is virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the consolidated financial statements.

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- 17 Pension Costs Pension cost is actuarially determined using the projected unit credit method. This method reflects services rendered by employees up to the date of valuation and incorporates assumptions concerning employees projected salaries. Actuarial valuations are conducted with sufficient regularity, with option to accelerate when significant changes to underlying assumptions occur. Pension cost includes current service cost, interest cost, expected return on any plan assets, actuarial gains and losses and the effect of any curtailment or settlement. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged against profit or loss when the net cumulative unrecognized actuarial gains and losses at the end of the previous period exceed 10.00% of the higher of the present value of the defined benefit obligation and the fair value of plan assets at that date. The excess actuarial gains or losses are recognized over the average remaining working lives of the employees participating in the plan. The asset or liability recognized in the consolidated statement of financial position in respect of defined benefit retirement plan is the present value of the defined benefit obligation as of statement of financial position date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. The defined benefit obligation is calculated annually by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash inflows using long term government bond risk-free interest rates that have terms to maturity approximating the terms of the related pension liability for applying a single weighted average discount rate that reflects the estimated timing and amount of benefit payments. Income Taxes Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted as of the reporting date. Deferred tax Deferred tax is provided using the liability method on all temporary differences, with certain exceptions, at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, with certain exceptions. Deferred tax assets are recognized for all deductible temporary differences with certain exceptions, and carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over RCIT and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient taxable income will be available against which the deductible temporary differences and carryforward benefits of unused tax credits from excess MCIT and unused NOLCO can be utilized. Deferred tax assets, however, are not recognized when it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of transaction, affects neither the accounting income nor taxable profit or loss. Deferred tax liabilities are not provided on non-taxable temporary differences associated with interests in JV. With respect to interests in JV, deferred tax liabilities

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- 18 are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amounts of deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date, and are recognized to the extent that it has become probable that future taxable income will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted as of the statement of financial position date. Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in profit or loss or other comprehensive income. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Leases The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: a. there is a change in contractual terms, other than a renewal or extension of the arrangement; b. a renewal option is exercised or an extension granted, unless that term of the renewal or extension was initially included in the lease term; c. there is a change in the determination of whether fulfillment is dependent on a specified asset; or d. there is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for (a), (c) and (d) scenarios above, and at the date of renewal or extension period for scenario (b). Group as lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included under Property and equipment account with the corresponding liability to the lessor included under Long-term debt account in the consolidated statement of financial position. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss.

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- 19 Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the EUL of the asset and the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term. Group as lessor Leases where the Group does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned. Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress, and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. The Group had not capitalized any borrowing costs for the years ended December 31, 2011 and 2010 as all borrowing costs from outstanding long-term debt relate to assets that are at state ready for intended use (Note 16). Foreign Currency Transactions Transactions in foreign currencies are initially recorded in the Groups functional currency using the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency using the Philippine Dealing and Exchange Corp. (PDEX) closing rate prevailing at the reporting date. All differences are taken to the consolidated statement of comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the prevailing closing exchange rate as of the date of initial transaction. Earnings (Loss) Per Share (EPS) Basic EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares issued and outstanding during the year, adjusted for any subsequent stock dividends declared. Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. For the years ended December 31, 2011, 2010 and 2009, the Group does not have any dilutive potential ordinary shares.

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- 20 Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM). The CODM, who is responsible for resource allocation and assessing performance of the operating segment, has been identified as the President. The nature of the operating segment is set out in Note 6. Events After the Reporting Period Post-year-end events that provide additional information about the Groups position at the reporting date (adjusting event) are reflected in the consolidated financial statements. Post-yearend 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 Groups accounting policies, management has exercised judgments and estimates in determining the amounts recognized in the consolidated financial statements. The most significant uses of judgments and estimates follow. Judgments a. Going concern The management of the Group has made an assessment of the Groups ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the Group is not aware of any material uncertainties that may cast significant doubts upon the Groups ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on a going concern basis. b. Classification of financial instruments The Group exercises judgment in classifying a financial instrument, or its component, on initial recognition as either a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, financial liability or equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated statement of financial position. In addition, the Group classifies financial assets by evaluating, among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination of whether quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arms length basis. c. Fair values of financial instruments Where the fair values of certain financial assets and liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques, including the discounted cash flow model. The inputs to these models are taken from observable market data where possible, but where this is not feasible, estimates are used in establishing fair values. The judgments include considerations of liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For derivatives, the Group generally relies on counterparties valuation.

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- 21 The fair values of the Groups financial instruments are presented in Note 28. d. Impairment of financial assets In determining whether an impairment loss should be recorded in profit or loss, the Group makes judgments as to whether there is any objective evidence of impairment as a result of one or more events that has occurred after initial recognition of the asset and that loss event or events has an impact on the estimated future cash flows of the financial assets or the group of financial assets that can be reliably estimated. This observable data may include adverse changes in payment status of borrowings in a group, or national or local economic conditions that correlate with defaults on assets in the portfolio. e. Classification of leases Management exercises judgment in determining whether substantially all the significant risks and rewards of ownership of the leased assets are transferred to the Group. Lease contracts, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased items, are capitalized. Otherwise, they are considered as operating leases. The Group also has lease agreements where it has determined that the risks and rewards related to the leased assets are retained with the lessors. Such leases are accounted for as operating leases (Note 29). f. Consolidation of SPEs The Group periodically undertakes transactions that may involve obtaining the right to control or significantly influence the operations of other companies. These transactions include the purchase of aircraft and assumption of certain liabilities. Also, included are transactions involving SPEs and similar vehicles. In all such cases, management makes an assessment as to whether the Group has the right to control or significantly influence the SPEs, and based on this assessment, the SPE is consolidated as a subsidiary or associated company. In making this assessment, management considers the underlying economic substance of the transaction and not only the contractual terms.

Determination of functional currency PAS 21 requires management to use its judgment to determine the entitys functional currency such that it most faithfully represents the economic effects of the underlying transactions, events and conditions that are relevant to the entity. In making this judgment, each entity in the Group considers the following: a) the currency that mainly influences sales prices for financial instruments and services (this will often be the currency in which sales prices for its financial instruments and services are denominated and settled); b) the currency in which funds from financing activities are generated; and c) the currency in which receipts from operating activities are usually retained. The Groups consolidated financial statements are presented in Philippine peso, which is also the Parent Companys functional currency. g. Contingencies The Group is currently involved in certain legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the defense in these matters and is based upon an analysis of potential results. The Group currently does not believe that these proceedings will have a material

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- 22 adverse effect on the Groups financial position and results of operations. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (Note 29). h. Allocation of revenue, costs and expenses Revenue, costs and expenses are classified as exclusive and common. Exclusive revenue, cost and expenses such as passenger revenue, cargo revenue, excess baggage revenue, fuel and insurance surcharge, fuel and oil expense, hull/war/risk insurance, maintenance expense, depreciation (for aircraft under finance lease), lease expense (for aircraft under operating lease) and interest expense based on the related long-term debt are specifically idenified 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. Estimates The key assumptions concerning the future and other sources of estimation uncertainty at the statement of financial position date that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next year are discussed below: a. Estimation of allowance for credit losses on receivables The Group maintains allowance for impairment losses at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. These factors include, but are not limited to, the length of the Groups relationship with the agents, customers and other counterparties, the payment behavior of agents and customers, other counterparties and other known market factors. The Group reviews the age and status of receivables, and identifies accounts that are to be provided with allowances on a continuous basis. The related balances follow (Note 9): Receivables Allowance for credit losses 2011 P1,069,370,364 = 232,584,140 2010 = P1,094,993,731 232,584,140

b. Determination of NRV of expendable parts, fuel, materials and supplies The Groups 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.

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- 23 The related balances follow (Note 10): 2011 Expendable Parts, Fuel, Materials and Supplies At NRV At cost P243,906,026 = 153,621,314 2010 = P246,212,162 123,819,873

As of December 31, 2011 and 2010, allowance for inventory write-down for expendable parts amounted to P20.5 million. No additional provision for inventory write-down was recognized = by the Group in 2011 and 2010. c. Estimation of ARO The Group is contractually required under certain lease contracts to restore certain leased passenger aircraft to stipulated return condition and to bear the costs of restoration at the end of the contract period. Since the first operating lease entered by the Group in 2001, these costs are accrued based on an internal estimate which includes estimates of certain redelivery costs at the end of the operating aircraft lease. The Group recognizes the present value of these costs as ARO asset and ARO liability. Assumptions used to compute ARO are reviewed and updated annually by the Group. In 2011, the Group recognized additional ARO asset and ARO liability amounting = P279.9 million for the costs of restoration of two (2) new leased passenger aircraft of the Group. In 2010, the Group contracted a third-party engineer to reassess the amount of future restoration costs. Based on the reassessment, the Group recognized additional ARO asset and ARO liability amounting to P705.7 million in 2010 (Note 17). As of December 31, 2011 and = 2010, the present value of the cost of restoration is computed based on the Groups average borrowing cost. The amount and timing of recorded expenses for any period would differ if different judgments were made or different estimates were utilized. The recognition of ARO would increase noncurrent assets and noncurrent liabilities, which results in increase of depreciation expense and interest expense. As of December 31, 2011 and 2010, the Groups ARO liability (included under Other noncurrent liabilities account in the statements of financial position) has a carrying value of = P2,437.7 million and P2,070.1 million, respectively (Note 17). The related depreciation and = amortization expense for the years ended December 31, 2011 and 2010 amounted to = P317.5 million and P234.8 million, respectively (Note 12). = d. Estimation of useful lives and residual values of property and equipment The Group estimates the useful lives of its property and equipment based on the period over which the assets are expected to be available for use. The Group estimates the residual value of its property and equipment based on the expected amount recoverable at the end of its useful life. The Group reviews annually the EULs and residual values of property and equipment based on factors that include physical wear and tear, technical and commercial obsolescence and other limits on the use of the assets. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the EUL or residual value of property and equipment would increase recorded depreciation and amortization expense and decrease noncurrent assets.

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- 24 As of December 31, 2011 and 2010, the carrying values of the Groups property and equipment amounted to P41,037.5 million and P33,985.7 million, respectively (Note 12). The = = Groups depreciation and amortization expense amounted to P2,632.4 million and = = P2,100.9 million as of December 31, 2011 and 2010, respectively (Note 12). e. Impairment of nonfinancial assets The Group assesses the impairment of nonfinancial assets, particularly property and equipment and investment in JV, whenever events or changes in circumstances indicate that the carrying amount of the nonfinancial asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for overall business; and significant negative industry or economic trends.

An impairment loss is recognized whenever the carrying amount of an asset or investment exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less cost to sell and value in use. The fair value less cost to sell is the amount obtainable from the sale of an asset in an arms length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual assets or investments or, if it is not possible, for the cash-generating unit to which the asset belongs. In determining the present value of estimated future cash flows expected to be generated from the continued use of the assets, the Group is required to make estimates and assumptions that can materially affect the consolidated financial statements. As of December 31, 2011 and 2010, the carrying values of the Groups property and equipment amounted to P41,037.5 million and P33,985.7 million, respectively (Note 12). = = Investment in shares of stock and JV amounted to P409.5 million and P369.6 million as of = = December 31, 2011 and 2010, respectively (Note 13). There were no provision for impairment losses on the Companys property and equipment and investment in JV for the years ended December 31, 2011 and 2010. f. Estimation of pension and other employee benefit costs The determination of the obligation and cost of pension and other employee benefits is dependent on the selection of certain assumptions used in calculating such amounts. Those assumptions include, among others, discount rates and salary increase rates (Note 22). Actual results that differ from the Groups assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Group believes that the assumptions are reasonable and appropriate, significant differences between actual experiences and assumptions may materially affect the cost of employee benefits and related obligations.

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- 25 The Groups pension liability (included in Other noncurrent liabilities account in the consolidated statements of financial position) amounted to P251.6 million and P210.2 million = = as of December 31, 2011 and 2010, respectively (Notes 17 and 22). The Group also estimates other employee benefit obligations and expense, including the cost of paid leaves based on historical leave availments of employees, subject to the Groups policy. These estimates may vary depending on the future changes in salaries and actual experiences during the year. g. Recognition of deferred tax assets The Group assesses the carrying amounts of deferred income taxes at each reporting date and reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. As of December 31, 2011 and 2010, the Group had certain gross deductible and taxable temporary differences which are expected to expire or reverse within the ITH period, and for which deferred tax assets and deferred tax liabilities were not set up on account of the Parent Companys ITH. As of December 31, 2011 and 2010, the Group has deferred tax assets amounting = P1,069.3 million and P1,026.2 million, respectively (Note 24). Unrecognized deferred tax as = of December 31, 2011 and 2010 amounted to P104.1 million and P121.5 million, respectively. = = h. Passenger revenue recognition Passenger sales are recognized as revenue when the obligation of the Group to provide transportation service ceases, either: (a) when transportation services are already rendered; or (b) when the Group estimates that unused tickets are already expired. The value of unused tickets is included as unearned transportation revenue in the consolidated statement of financial position and recognized as revenue based on estimates. These estimates are based on historical experience. While actual results may vary from these estimates, the Group believes it is unlikely that materially different estimates for future refunds, exchanges, and forfeited tickets would be reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time the estimates were made. As of December 31, 2011 and 2010, the balances of the Groups unearned transportation revenue amounted to P5,253.4 million and P4,606.3 million, respectively. Ticket sales that = = are not expected to be used for transportation are recognized as revenue using estimates regarding the timing of recognition based on the terms and conditions of the tickets and historical trends.

6. Segment Information The Group has one reportable operating segment, which is the airline business (system-wide). This is consistent with how the Groups 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.

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- 26 The revenue of the operating segment was mainly derived from rendering transportation services. All sales are made to external customers. Transfer prices between operating segments are on an arms length basis in a manner similar to transactions with third parties. The amount of segment assets and liabilities are based on the measurement principles that are similar with those used in measuring the assets and liabilities in the consolidated statement of financial position which is in accordance with PFRS. Segment information for the reportable segment is shown in the following table:
Revenue Net income Depreciation and amortization Interest expense Interest income 2011 P35,152,401,857 = 3,624,417,718 2,632,410,923 854,269,588 647,397,939 2010 = P30,510,408,495 6,922,493,280 2,100,929,764 931,482,279 237,495,750 2009 = P24,423,611,516 3,257,848,705 1,917,683,713 1,012,826,822 8,848,551

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:
2011 Total segment revenue of reportable operating segment Nontransport revenue and other income Total revenue P33,935,402,775 = 1,216,999,082 P35,152,401,857 = 2010 = P29,088,798,959 1,421,609,536 = P30,510,408,495 2009 = P23,311,006,311 1,112,605,205 = P24,423,611,516

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:
2011 Total segment income of reportable segment Add (deduct) unallocated items: Nontransport revenue and other income Nontransport expenses and other charges Benefit from (provision for) income tax Net income Other comprehensive loss, net of tax Total comprehensive income P3,527,827,811 = 1,216,999,082 (997,824,293) (122,584,882) 3,624,417,718 (2,915,359) P3,621,502,359 = 2010 = P6,450,125,710 1,421,609,536 (931,482,279) (17,759,687) 6,922,493,280 (2,714,902) = P6,919,778,378 2009 = P3,164,042,762 1,112,605,205 (1,038,300,945) 19,501,683 3,257,848,705 = P3,257,848,705

The Groups major revenue-producing asset is the fleet of aircraft owned by the Group, which is employed across its route network (Note 12). The Group has no significant customer which contributes 10.00% or more to the revenues of the Group.

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- 27 -

7. Cash and Cash Equivalents This account consists of: Cash on hand Cash in banks (Note 26) Short-term placements (Note 26) 2011 P16,641,225 = 503,830,598 8,437,312,163 P8,957,783,986 = 2010 = P14,424,238 669,548,018 9,079,316,716 = P9,763,288,972

Cash in banks earns interest at the respective bank deposit rates. Short-term placements, which represent money market placements, are made for varying periods of up to three months depending on the immediate cash requirements of the Group. Short-term placements denominated in Philippine peso earn an average interest of 4.57%, 2.20% and 0.50% in 2011, 2010 and 2009, respectively. Moreover, short-term placements in US dollar earn an average of 1.55%, 1.20% and nil in 2011, 2010 and 2009, respectively. Interest income on cash and cash equivalents, presented in the consolidated statements of comprehensive income, amounted to P394.4 million, P133.5 million and P8.8 million in 2011, = = = 2010 and 2009, respectively.

8. Investment and Trading Securities Financial Assets at FVPL This account consists of: 2011 Designated at FVPL Quoted debt securities: Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges P2,021,911,190 = 1,039,254,600 3,061,165,790 183,032,000 3,244,197,790 16,880,208 P3,261,077,998 = 2010 = P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165 489,917,466 = P3,879,438,631

On June 30, 2010, the Group acquired from JGSHI the financial assets designated at FVPL and AFS by execution of deed of assignment. At inception, the Group classified this group of debt and equity securities as financial assets designated at FVPL since their performance are managed and evaluated on a fair value basis in accordance with the Groups documented investment strategy. The information about these financial instruments is reported to management on that basis. In 2011 and 2010, the Group earned interest income of P222.4 million and P104.0 million, = = respectively, from debt securities as financial assets designated at FVPL. Also, the Group earned dividend income from equity securities amounting P21.4 million and nil in 2011 and 2010, = respectively.

*SGVMC117488*

- 28 The financial assets designated at FVPL are shown inclusive of unrealized gain (loss) amounting = P1.1 million and (P189.4) million in 2011 and 2010, respectively. = Commodity options The Group enters into fuel derivatives to manage its exposure to fuel price fluctuations. Such fuel derivatives are not designated as accounting hedges. The gains or losses on these instruments are accounted for directly as a charge against or credit to profit or loss. As of December 31, 2011 and 2010, the Group has outstanding fuel hedging transactions with notional quantity of 600,000 US barrels and 845,000 US barrels, respectively. The notional quantity is the amount of the derivatives underlying asset or liability, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The options can be exercised at various calculation dates with specified quantities on each calculation date. The options have various maturity dates through December 31, 2012. Fair value changes on derivatives The changes in fair value of all derivative financial instruments not designated as accounting hedges follow: 2011 Balance at beginning of period Derivative assets Derivative liabilities Net changes in fair value of derivatives Fair value of settled instruments Balance at end of period Attributable to: Derivative assets Derivative liabilities P489,917,466 = 489,917,466 477,128,001 967,045,467 (1,011,022,845) (P43,977,378) = P16,880,208 = (P60,857,586) = 2010 = P227,794,364 227,794,364 474,255,226 702,049,590 (212,132,124) = P489,917,466 = P489,917,466 = P

AFS Investment This account represents investment in a quoted equity security. As of December 31, 2011 and 2010, the carrying value of AFS investment amounted to P110.4 million and P114.5 million, = = respectively. The Group earned dividend income from equity securities amounting P9.2 million = and nil as of December 31, 2011 and 2010, respectively. In 2011 and 2010, the Group recognized unrealized loss on AFS amounting P5.6 million and = = P2.7 million, net of tax amounting to P2.4 million and P1.2 million, respectively. = =

*SGVMC117488*

- 29 9. Receivables This account consists of: Trade receivables (Notes 26) Interest receivable Due from related parties (Note 26) Others Less allowance for credit losses 2011 P546,244,400 = 146,244,351 35,174,259 341,707,354 1,069,370,364 232,584,140 P836,786,224 = 2010 = P471,465,815 134,819,376 86,576,474 402,132,066 1,094,993,731 232,584,140 = P862,409,591

Trade receivables are noninterest-bearing and generally have 30 to 90 days terms. In 2010, there was reclassification of advances to suppliers from Receivables to Other current assets. The Group made the reclassification to make receivables purely financial assets since advances to suppliers are to be settled through goods and services. Interest receivable pertains to accrual of interest income from FVPL and short-term placements. Accrued interest income from FVPL amounted to P133.7 million and P120.3 million, in 2011 and = = 2010 respectively. Accrued interest income from short-term placements amounted to = P12.5 million and P14.5million in 2011 and 2010, respectively. = Others include receivable under a sublease agreement denominated in US dollar equivalent to = P225.4 million with another airline company. This receivable is fully provided with allowance for credit losses. The account also includes receivables from employees and counterparties. The changes in the allowance for credit losses on receivables follow:
2011 Balance at beginning of year Unrealized foreign exchange gain on allowance for credit losses Provision for credit losses (Note 21) Write-off Balance at end of year Trade Receivables P6,330,875 = P6,330,875 = Others P226,253,265 = P226,253,265 = 2010 Trade Receivables = P6,330,875 2,127,309 (2,127,309) = P6,330,875 Others = P239,185,934 (12,932,669) = P226,253,265 Total = P245,516,809 (12,932,669) 2,127,309 (2,127,309) = P232,584,140 Total P232,584,140 = P232,584,140 =

Balance at beginning of year Unrealized foreign exchange gain on allowance for credit losses Provision for credit losses (Note 21) Write-off Balance at end of year

*SGVMC117488*

- 30 As of December 31, 2011 and 2010, the specific allowance for credit losses on trade receivables and other receivables amounted to P6.3 million and P226.3 million. In 2010, the Group has = = written off receivables amounting P2.1 million. =

10. Expendable Parts, Fuel, Materials and Supplies This account consists of: 2011 At NRV: Expendable parts At cost: Fuel Materials and supplies P243,906,026 = 128,721,614 24,899,700 153,621,314 P397,527,340 = 2010 = P246,212,162 100,926,756 22,893,117 123,819,873 = P370,032,035

The cost of expendable and consumable parts, and materials and supplies recognized as expense (included under Repairs and maintenance account in the consolidated statement of comprehensive income) for years ended December 31, 2011, 2010 and 2009 amounted to = P180.2 million, P172.2 million and P94.5 million, respectively. The cost of fuel reported as = = expense under Flying operations amounted to P15,220.7 million, P9,807.8 million and = = = P7,360.3 million in 2011, 2010 and 2009, respectively (Note 20).

11. Other Current Assets This account consists of: Prepaid rent Advances to suppliers Prepaid insurance Others 2011 P163,245,902 = 55,060,231 39,222,963 21,161,965 P278,691,061 = 2010 = P135,568,016 50,042,184 39,089,719 39,373,884 = P264,073,803

Prepaid rent pertains to advance rental on aircraft under operating lease and on office spaces in airports (Note 29). Advances to suppliers include advances made for the purchase of various aircraft parts. 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.

*SGVMC117488*

- 31 -

12. Property and Equipment The composition and movements in this account follow:
EDP Ground Equipment, Support Mainframe and Equipment Peripherals P287,461,784 = 25,865,014 313,326,798 168,090,218 41,584,392 209,674,610 P103,652,188 = P481,156,584 = 70,782,742 (8,549,941) 543,389,385 367,763,752 68,957,261 (8,549,941) 428,171,072 P115,218,313 = 2011 Special Tools P12,390,580 = 463,956 12,854,536 11,219,201 385,839 11,605,040 P1,249,496 = Maintenance and Test Equipment P6,410,377 = 6,607 6,416,984 5,721,144 162,902 5,884,046 P532,938 = Other Equipment P67,213,501 = 3,362,805 70,576,306 39,071,895 9,510,969 48,582,864 P21,993,422 = Construction In-progress 2011

Cost Balance at January 1, 2011 Additions Reclassification Disposals/others Balance at December 31, 2011 Accumulated Depreciation and Amortization Balance at January 1, 2011 Depreciation and amortization Disposals/others Balance at December 31, 2011 Net Book Value at December 31, 2011

Passenger Aircraft (Notes 16 and 30) P34,334,987,863 = 4,740,977,470 1,644,273,171 40,720,238,504 7,319,413,492 2,289,360,717 9,608,774,209 P31,111,464,295 =

Engines P1,696,909,369 = 494,867,438 2,191,776,807 586,415,896 112,982,084 699,397,980 P1,492,378,827 =

Rotables P798,821,749 = 318,949,438 (2,365,257) 1,115,405,930 131,556,202 59,544,967 (2,365,257) 188,735,912 P926,670,018 =

Leasehold Improvements P156,829,956 = 12,114,636 168,944,592 99,528,562 19,817,569 119,346,131 P49,598,461 =

Transportation Equipment

Sub-total

P133,129,222 P37,889,296,527 = = 19,122,866 5,670,564,968 1,656,387,807 (5,443,507) (16,358,705) 146,808,581 45,199,890,597 74,929,505 20,777,889 (4,036,390) 91,671,004 8,747,697,627 2,613,024,879 (14,951,588) 11,345,770,918

P55,137,577 P34,115,035,679 = =

Cost Balance at January 1, 2011 Additions Reclassification Disposals/others Balance at December 31, 2011 Accumulated Depreciation and Amortization Balance at January 1, 2011 Depreciation and amortization Disposals/others Balance at December 31, 2011 Net Book Value at December 31, 2011

Furniture, Fixtures and Office Communication Equipment Equipment P64,624,423 = 9,408,567 74,032,990 41,582,454 8,228,192 49,810,646 P24,222,344 = P7,237,019 = 1,282,366 8,519,385 4,347,656 1,098,142 5,445,798 P3,073,587 =

Total

P4,788,168,629 P42,835,341,056 = = 4,000,571,313 9,685,660,582 (1,656,387,807) (16,358,705) 7,132,352,135 52,504,642,933 8,849,639,977 2,632,410,923 (14,951,588) 11,467,099,312 P7,132,352,135 P41,037,543,621 = =

*SGVMC117488*

- 32 -

2010 Passenger Aircraft (Notes 16 and 30) = P29,082,449,841 4,617,905,673 1,480,356,826 (845,724,477) 34,334,987,863 5,608,304,763 1,802,923,773 (91,815,044) 7,319,413,492 = P27,015,574,371 Ground Support Equipment = P226,290,672 61,171,112 287,461,784 125,785,164 42,305,054 168,090,218 = P119,371,566

Cost Balance at January 1, 2010 Additions Reclassification Disposals/others Balance at December 31, 2010 Accumulated Depreciation and Amortization Balance at January 1, 2010 Depreciation and amortization Disposals/others Balance at December 31, 2010 Net Book Value at December 31, 2010

Engines = P1,861,014,616 (164,105,247) 1,696,909,369 500,303,926 95,647,460 (9,535,490) 586,415,896 = P1,110,493,473

Rotables = P645,242,966 249,857,038 (96,278,255) 798,821,749 87,047,351 46,311,472 (1,802,621) 131,556,202 = P667,265,547

EDP Equipment, Mainframe and Peripherals = P401,958,225 79,198,359 481,156,584 306,959,766 60,803,986 367,763,752 = P113,392,832 2010

Leasehold Improvements = P123,328,105 33,634,663 (132,812) 156,829,956 84,204,878 15,353,198 (29,514) 99,528,562 = P57,301,394

Transportation Equipment

Sub-total

= P132,976,761 P32,473,261,186 = 13,870,536 5,022,002,718 1,513,991,489 (13,718,075) (1,119,958,866) 133,129,222 37,889,296,527 68,991,712 19,343,695 (13,405,902) 74,929,505 6,781,597,560 2,082,688,638 (116,588,571) 8,747,697,627

= P58,199,717 P29,141,598,900 =

Cost Balance at January 1, 2010 Additions Reclassification Disposals/others Balance at December 31, 2010 Accumulated Depreciation and Amortization Balance at January 1, 2010 Depreciation and amortization Disposals/others Balance at December 31, 2010 Net Book Value at December 31, 2010

Furniture, Fixtures and Office Equipment = P54,222,266 10,402,157 64,624,423 34,648,972 6,933,482 41,582,454 = P23,041,969

Communication Equipment = P6,174,321 1,062,698 7,237,019 3,407,186 940,470 4,347,656 = P2,889,363

Special Tools = P11,933,090 457,490 12,390,580 10,720,871 498,330 11,219,201 = P1,171,379

Maintenance and Test Equipment = P5,697,385 712,992 6,410,377 5,596,765 124,379 5,721,144 = P689,233

Other Equipment = P59,654,657 7,558,844 67,213,501 29,327,430 9,744,465 39,071,895 = P28,141,606

Construction In-progress

Total

= P3,409,527,269 P36,020,470,174 = 3,027,480,866 8,069,677,765 (1,513,991,489) (134,848,017) (1,254,806,883) 4,788,168,629 42,835,341,056 6,865,298,784 2,100,929,764 (116,588,571) 8,849,639,977 = P4,788,168,629 P33,985,701,079 =

*SGVMC117488*

- 33 Passenger Aircraft Held as Securing Assets Under Various Loans In 2005 and 2006, the Group entered into Export Credit Agency (ECA)-backed loan facilities (ECA loans) to partially finance the purchase of ten Airbus A319 aircraft. In 2007, the Group also entered into a commercial loan facility to partially finance the purchase of two Airbus A320 aircraft, one CFM 565B4/P engine, two CFM 565B5/P engines and one Quick Engine Change (QEC) Kit. In 2008, the Group entered into both ECA loans and commercial loans to partially finance the purchase of six Avion de Transport Regional (ATR) 72-500 turboprop aircraft. Then in 2009, ECA loans were availed to finance the purchase of two ATR 72-500 turboprop aircraft. In 2010, the Group entered into ECA loan to finance the purchase of three Airbus A320 aircraft. In 2011, the Group entered into ECA loan to finance the purchase of three additional Airbus A320 aircraft. Under the terms of the ECA loan and the commercial loan facilities (Note 16), upon the event of default, the outstanding amount of loan (including accrued interest) will be payable by CALL or ILL or BLL or SLL or SALL or VALL, or by the guarantors which are CPAHI and JGSHI. Failure to pay the obligation will allow the respective lenders to foreclose the securing assets. As of December 31, 2011 and 2010, the carrying amounts of the securing assets (included under the Property and equipment account) amounted to P30.4 billion and P26.6 billion, respectively. = = On July 18, 2010, one ATR 72-500 turboprop aircraft was damaged due to a hard landing at the Ninoy Aquino International Airport (NAIA). The Company initially decided to repair the aircraft, however, in October 2010, the Companys engineer concluded this as a constructive loss, wherein it is more beneficial to dispose the aircraft since the reparation cost is higher than the book value of the said aircraft. On November 30, 2010, the Group received insurance proceeds and terminated the related loan. Accordingly, rights over the aircraft went to the insurers. Operating Fleet As of December 31, 2011 and 2010, the Groups operating fleet follows: 2011 Owned (Note 16): Airbus A319 Airbus A320 ATR 72-500 Under operating lease (Note 29): Airbus A320 10 8 8 11 37 2010 10 5 7 9 31

Construction in-progress represents the cost of aircraft and engine construction in progress and buildings and improvements and other ground property under construction. Construction in-progress is not depreciated until such time when the relevant assets are completed and available for use. As of December 31, 2011 and 2010, the Groups capitalized pre-delivery payments as construction-in-progress amounted to P6.9 billion and P4.8 billion, respectively (Note 29). = = As of December 31, 2011 and 2010, the gross amount of fully depreciated property and equipment which are still in use by the Group amounted to P556.2 million and P430.4 million, respectively. = =

*SGVMC117488*

- 34 -

13. Investment in Shares of Stock and Joint Ventures The investment in shares of stock represents 60% investments by the Group in PAAT. PAAT was created to provide training for pilots, cabin crews, aviation management services and guest services for purposes of addressing the Groups 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 (Note 32). As of December 31, 2011, the Company has investment in PAAT amounting =33.8 million, net of subscription payable of P = P101.3 million. The investment in joint ventures represents the Groups 49.00% and 35.00% interest in A-plus and SIAEP, respectively. A-plus and SIAEP were established for the purpose of providing line, light and heavy maintenance services to foreign and local airlines, utilizing the facilities and services at airports in the country, as well as aircraft maintenance and repair organizations. A-plus was incorporated on May 24, 2005 and started commercial operations on July 1, 2005 while SIAEP was incorporated on July 27, 2008 and started commercial operations on August 17, 2009. PAAT was incorporated on January 27, 2012. A-plus and SIAEP are foreign corporations while PAAT is a domestic corporation. The movements in the carrying values of the Groups investments in joint ventures in A-plus and SIAEP follow:
2011 SIAEP P304,763,900 = (52,248,581) (8,531,818) (60,780,399) P243,983,501 = 2010 SIAEP = P304,763,900 (47,011,448) (5,237,133) (52,248,581) = P252,515,319

Cost Accumulated Equity in Net Income (Loss) Balance at beginning of period Equity in net income (loss) for the period Dividends received Balance at end of period Net Carrying Value

A-plus P87,012,572 = 30,116,847 50,850,020 (36,234,703) 44,732,164 P131,744,736 =

Total P391,776,472 = (22,131,734) 42,318,202 (36,234,703) (16,048,235) P375,728,237 =

Cost Accumulated Equity in Net Income (Loss) Balance at beginning of period Equity in net income (loss) for the period Dividends received Balance at end of period Net Carrying Value

A-plus = P87,012,572 21,590,662 30,485,667 (21,959,482) 30,116,847 = P117,129,419

Total = P391,776,472 (25,420,786) 25,248,534 (21,959,482) (22,131,734) = P369,644,738

*SGVMC117488*

- 35 Selected financial information of A-plus and SIAEP follows:

2011 Total current assets Total assets Total current liabilities Total liabilities Net income (loss) A-plus P396,481,683 = 449,545,110 178,874,540 178,874,540 84,118,310 SIAEP P267,039,671 = 871,670,211 228,070,700 228,070,700 (21,902,640) A-plus = P389,229,753 440,003,102 199,744,327 199,744,327 62,215,647 2010 SIAEP = P198,601,718 827,498,709 136,071,974 136,071,974 (14,963,237)

The fiscal year-end of A-plus and SIAEP is every March 31. The undistributed earnings of A-plus included in the consolidated retained earnings amounted to = P44.7 million and P30.1 million as of December 31, 2011 and 2010, respectively, which is not = currently available for dividend distribution unless declared by A-plus. The Group has no share of any contingent liabilities or capital commitments as of December 31, 2011 and 2010.

14. Other Noncurrent Assets This account consists of: Refundable deposits Creditable withholding tax Others 2011 P166,175,680 = 57,492,013 167,784,698 P391,452,391 = 2010 = P9,240,000 105,122,460 213,484,694 = P327,847,154

Refundable deposits pertain to security deposits provided to lessor for aircraft under operating lease. Others include option and commitment fees.

15. Accounts Payable and Other Accrued Liabilities This account consists of: Accrued expenses Trade payables (Note 26) Airport and other related fees payable Advances from agents and others Accrued interest payable (Note 16) Other payables 2011 P3,312,566,151 = 2,639,714,690 330,044,660 191,017,007 102,259,843 135,236,525 P6,710,838,876 = 2010 = P2,756,352,038 1,995,958,241 435,286,079 159,557,017 118,666,608 132,666,336 = P5,598,486,319

*SGVMC117488*

- 36 Accrued Expenses The Groups accrued expenses include accruals for: Maintenance Compensation and benefits Advertising and promotion Training costs Navigational charges Landing and take-off fees Repairs and services Fuel Ground handling charges Rent (Note 29) Aircraft insurance Catering supplies Reservation costs Others 2011 P861,990,342 = 505,238,321 408,910,866 359,401,193 231,723,393 226,106,789 165,768,719 153,277,223 108,131,398 91,959,267 41,924,552 38,980,896 13,658,115 105,495,077 P3,312,566,151 = 2010 = P637,721,177 519,578,237 292,832,984 221,810,780 185,830,569 237,135,007 115,290,273 66,914,013 185,902,242 71,405,104 41,059,836 38,441,922 11,773,991 130,655,903 = P2,756,352,038

Others represent accrual of professional fees, security, utilities and other expenses. Trade Payables Trade payables, which consist mostly of payables related to the purchase of inventories, are noninterest-bearing and are normally settled on a 60-day term. These inventories are necessary for the daily operations and maintenance of the aircraft, which include aviation fuel, expendables parts, equipment and in-flight supplies. Airport and Other Related Fees Payable Airport and other related fees payable are amounts payable to the Philippine Tourism Authority and Air Transportation Office on aviation security, terminal fees and travel taxes. Interest Payable Interest payable is related to long-term debt and normally settled quarterly throughout the year. Advances from Agents and Others Advances from agents and others represent cash bonds required from major sales and ticket offices or agents. Other Payables Other payables are 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.

*SGVMC117488*

- 37 -

16. Long-term Debt This account consists of:

2011 ECA loans Interest Rates Maturities 3.37% to 5.83% Various dates through 2023 0.85% to 2.05% (US Dollar LIBOR 6 months + margin or 3 months + margin) US Dollar US$248,553,773 Philippine Peso Equivalent P10,896,597,403 =

175,556,066 424,109,839 47,428,768

7,696,377,955 18,592,975,358 2,079,277,203

Commercial loans from foreign banks

4.11% to 5.67% Various dates through 2017 1.65% to 1.71% (US Dollar LIBOR 6 months + margin)

Less current portion

4,553,852 51,982,620 476,092,459 56,283,101 US$419,809,358 2010

199,640,872 2,278,918,075 20,871,893,433 2,467,451,166 P18,404,442,267 =

ECA loans

Interest Rates Maturities 3.37% to 5.83% Various dates through 2022 0.86% to 2.54% (US Dollar LIBOR 6 months + margin or 3 months + margin)

US Dollar US$242,476,310

Philippine Peso Equivalent = P10,630,161,421

117,484,686 359,960,996 54,455,626

5,150,528,642 15,780,690,063 2,387,334,644

Commercial loans from foreign banks

4.11% to 5.67% Various dates through 2017 1.64% to 2.12% (US Dollar LIBOR 6 months + margin)

Less current portion

6,037,500 60,493,126 420,454,122 46,898,810 US$373,555,312

264,683,997 2,652,018,641 18,432,708,704 2,056,043,837 = P16,376,664,867

ECA Loans In 2005 and 2006, the Group entered into ECA-backed loan facilities to partially finance the purchase of ten Airbus A319 aircraft. The security trustee of the ECA loans established CALL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to twelve-year finance lease agreements. The quarterly rental payments made by the Parent Company to CALL correspond to the principal and interest payments made by CALL to the ECA-backed lenders. The quarterly lease rentals to CALL are guaranteed by CPAHI and JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases.

*SGVMC117488*

- 38 In 2008, the Group entered into ECA-backed loan facilities to partially finance the purchase of six ATR 72-500 turboprop aircraft. The security trustee of the ECA loans established BLL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to ten-year finance lease agreements. The semi-annual rental payments made by the Parent Company to BLL corresponds to the principal and interest payments made by BLL to the ECA-backed lenders. The semi-annual lease rentals to BLL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases. On November 30, 2010, the Parent Company pre-terminated the lease agreement with BLL related to the disposal of one ATR 72-500 turboprop aircraft. The outstanding balance of the related loans and accrued interests amounting P638.1 million (US$14.5 million) and = = P13.0 million (US$0.3 million), respectively, were also pre-terminated. The proceeds from the insurance claim on the related aircraft were used to settle the loan and accrued interest. JGSHI was released as guarantor on the related loans. In 2009, the Group entered into ECA-backed loan facilities to partially finance the purchase of two ATR 72-500 turboprop aircraft. The security trustee of the ECA loans established SLL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to ten-year finance lease agreements. The semi-annual rental payments made by the Parent Company to SLL corresponds to the principal and interest payments made by SLL to the ECA-backed lenders. The semi-annual lease rentals to SLL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases. In 2010, the Group entered into ECA-backed loan facilities to partially finance the purchase of four Airbus A320 aircraft, delivered between 2010 to January 2011. The security trustee of the ECA loans established SALL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to twelve-year finance lease agreements. The quarterly rental payments made by the Parent Company to SALL corresponds to the principal and interest payments made by SALL to the ECA-backed lenders. The quarterly lease rentals to SALL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases. In 2011, the Group entered into ECA-backed loan facilities to fully finance the purchase of three Airbus A320 aircraft, delivered between 2011 to January 2012. The security trustee of the ECA loans established VALL, special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to twelve-year finance lease agreements. The quarterly rental payments made by the Parent Company to VALL corresponds to the principal and interest payments made by VALL to the ECA-backed lenders. The quarterly lease rentals to VALL are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft for a nominal amount at the end of such leases. 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 seven 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 four 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.

*SGVMC117488*

- 39 Interest on loans from the ECA lenders related to CALL and BLL is at fixed rates, which range from 3.78% to 5.83%. Interest on loans from ECA lenders related to SLL is fixed at 3.37% for one aircraft and US dollar LIBOR 6 months plus margin for the other aircraft. Interest on loans from the ECA lenders related to SALL and VALL for the seven Airbus A320 aircraft is US dollar LIBOR 3 months plus margin. As provided under the ECA-backed facility, CALL, BLL, SLL, SALL and VALL 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 and VALL 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 becomes insolvent, (e) failure to discharge any attachment or sequestration order against CALLs, BLLs, SLLs, SALLs and VALLs assets, (f) entering into an undervalued transaction, obtaining preference or giving preference to any person, contrary to the laws of the Cayman Islands, (g) sale of any aircraft under ECA financing prior to discharge date, (h) cessation of business, (i) revocation or repudiation by CALL or BLL or SLL or SALL or VALL, the Group, JGSHI or CPAHI of any transaction document or security interest, and (j) occurrence of an event of default under the lease agreement with the Parent Company. Upon default, the outstanding amount of loan will be payable, including interest accrued. Also, the ECA lenders will foreclose on secured assets, namely the aircraft. An event of default under any ECA loan agreement will occur if an event of default as enumerated above occurs under any other ECA loan agreement.

As of December 31, 2011 and 2010, the total outstanding balance of the ECA loans amounted to = P18,593.0 million (US$424.1 million) and P15,780.7 million (US$360.0 million), respectively. = Interest expense amounted to P549.8 million, P623.4 million and P732.8 million in 2011, 2010 = = = and 2009, respectively. Commercial Loans from Foreign Banks In 2007, the Group entered into a commercial loan facility to partially finance the purchase of two Airbus A320 aircraft, one CFM 565B4/P engine, two CFM 565B5/P engines and one QEC Kit. The security trustee of the commercial loan facility established ILL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company pursuant to (a) ten-year finance lease arrangement for the aircraft, (b) six-year finance lease arrangement for the engines and (c) five-year finance lease arrangement for the QEC Kit. The quarterly rental payments of the Parent Company correspond to the principal and interest payments made by ILL to the commercial lenders and are guaranteed by JGSHI. The Parent Company has the option to purchase the aircraft, the engines and the QEC Kit for a nominal amount at the end of such leases. In 2008, the Group also entered into a commercial loan facility, in addition to ECA-backed loan facility, to partially finance the purchase of six ATR 72-500 turboprop aircraft. The security trustee of the commercial loan facility established BLL, a special purpose company, which purchased the aircraft from the supplier and leases such aircraft to the Parent Company. The commercial loan facility is payable in 12 equal, consecutive, semi-annual installments starting six months after the utilization date.

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- 40 The terms of the commercial loans from foreign banks follow: Term of ten years starting from the delivery date of each Airbus A320 aircraft. Terms of six and five years for the engines and QEC Kit, respectively. Term of six years starting from the delivery date of each ATR 72-500 turboprop aircraft. Annuity style principal repayments for the two Airbus A320 aircraft and six ATR 72-500 turboprop aircraft, and equal principal repayments for the engines and the QEC Kit. Principal repayments shall be made on a quarterly and semi-annual basis for the two Airbus A320 aircraft, engines and the QEC Kit and six ATR 72-500 turboprop aircraft, respectively. Interest on the commercial loan facility for the two Airbus A320 aircraft shall be US dollar LIBOR 3 months plus margin. On February 29, 2009, the interest rates on the two Airbus A320 aircraft, engines and QEC Kit were fixed ranging from 4.11% to 5.67%. Interest on the commercial loan facility for the six ATR 72-500 turboprop aircraft shall be US dollar LIBOR 6 months plus margin. The commercial loan facility provides for material breach as an event of default. Upon default, the outstanding amount of loan will be payable, including interest accrued. The lenders will foreclose on secured assets, namely the aircraft.

As of December 31, 2011 and 2010, the total outstanding balance of the commercial loans from foreign banks amounted to P2,278.9 million (US$52.0 million) and P2,652.0 million (US$60.5 = = million), respectively. Interest expense amounted to P113.0 million, P137.7 million and P173.1 = = = million in 2011, 2010 and 2009, respectively. The Group is not in breach of any loan covenants as of December 31, 2011 and 2010.

17. Other Noncurrent Liabilities This account consists of: ARO Accrued maintenance Pension liability (Note 22) 2011 P2,437,668,334 = 670,810,817 251,594,022 P3,360,073,173 = 2010 = P2,070,145,159 923,451,428 210,156,100 = P3,203,752,687

ARO The Group is legally required under certain lease contracts to restore certain leased passenger aircraft to stipulated return conditions and to bear the costs of restoration at the end of the contract period. These costs are accrued based on an internal estimate made by the work of both third party and the Groups engineers in 2007, which includes estimates of certain redelivery costs at the end of the operating aircraft lease (see Note 5). In 2010, the Group employed third party professionals to reevaluate the Groups estimates on ARO. In relation to this, the Group recorded additional ARO asset and liability amounting = P705.7 million.

*SGVMC117488*

- 41 The rollforward analysis of the Groups ARO follows: Balance at beginning of year Additional provision for the year* Accretion expense** Capitalized during the year*** Payment of restorations during the year Balance at end of year 2010 2011 = P2,070,145,159 P1,194,091,048 = 705,651,245 170,402,866 191,472,734 279,926,767 (103,876,326) = P2,437,668,334 P2,070,145,159 =

*Related to the change in accounting estimates for the recognized ARO liability **Included under interest expense account in the consolidated statements of comprehensive income ***Related to recognized ARO liability for two additional Airbus A320 aircraft under operating lease agreements entered in 2011

Accrued Maintenance This account pertains to accrual of maintenance costs of aircraft based on the number of flying hours but will be settled beyond one year based on managements assessment.

18. Equity The details of the number of common shares and the movements thereon follow:
Authorized - at =1 par value P Beginning of year Treasury shares Issuance of shares during the year Issued and outstanding 2011 1,340,000,000 613,236,550 (7,283,220) 605,953,330 2010 1,340,000,000 582,574,750 30,661,800 613,236,550 2009 1,340,000,000 582,574,750 582,574,750

Issuance of Common Shares of Stock On October 26, 2010, the Parent Company listed with the PSE its common stock, by way of primary and secondary share offerings, wherein it offered 212,419,700 shares to the public at = P125.00 per share. Of the total shares sold, 30,661,800 shares are newly issued shares with total proceeds amounting P3,800.0 million. The Parent Companys share in the total transaction costs = incurred incidental to the IPO amounting P100.4 million, which is charged against Capital paid in = excess of par value in the consolidated statement of financial position. Treasury Shares On February 28, 2011, the BOD of the Company approved the creation and implementation of a share buyback program (SBP) up to P2,000.0 million worth of the Companys common share. = The SBP shall commence upon approval and shall end upon utilization of the said amount, or as may be otherwise determined by the BOD. As of December 31, 2011, the Company has repurchased a total of 7,283,220 shares for a total purchase price of P529.3 million at an average price of P72.68 per share. = =

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- 42 Appropriation of Retained Earnings On December 9, 2011, the Parent Companys BOD appropriated P933.5 million from its = unrestricted retained earnings as of December 31, 2011 for purposes of the Parent Companys refleeting program. Unappropriated Retained Earnings The income of the subsidiaries and JV that are recognized in the statements of comprehensive income are not available for dividend declaration unless these are declared by the subsidiaries and JV. Likewise, retained earnings are restricted for the payment of dividends to the extent of the cost of common shares held in treasury. On March 17, 2011, the BOD of the Parent Company approved the declaration of a regular cash dividend in the amount of P1,222.4 million or P2.00 per share and a special cash dividend in the = = amount of P611.2 million or P1.00 per share from the unrestricted retained earnings of the Parent = = Company to all stockholders of record as of April 14, 2011 and was paid on May 12, 2011. Capital Management The primary objective of the Groups 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 Groups ultimate parent monitors the use of capital structure using a debt-to-equity capital ratio which is gross debt divided by total capital. The ultimate parent includes within gross debt all interest-bearing loans and borrowings, while capital represent total equity, less any net unrealized gains (losses) reserve. The Groups debt-to-capital ratios follow: (a) Long term debt (Note 16) (b) Capital (c) Debt-to-capital ratio (a/b) 2010 2011 = P20,871,893,433 P18,432,708,704 = 19,165,523,290 17,907,049,902 1.0:1 1.1:1

The JGSHI Groups policy is to keep the debt to capital ratio at the 2:1 level as of December 31, 2011 and 2010. Such ratio is currently being managed on a group level by the Groups ultimate parent.

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- 43 -

19. Ancillary Revenue Ancillary revenue consists of:

Excess baggage fees Rebooking, refunds and cancellation fees Others 2011 P2,173,466,124 = 516,128,172 1,844,118,754 P4,533,713,050 = 2010 = P778,395,570 423,397,044 1,135,315,885 = P2,337,108,499 2009 = P733,642,196 690,763,508 697,841,275 = P2,122,246,979

Others pertain to revenues from in-flight sales and services provided through reservation system such as advance seat selection, website administration as well as commissions.

20. Operating Expenses Flying Operations Flying operations consists of:

Aviation fuel expense Flight deck Aircraft insurance Others 2011 P15,220,724,678 = 1,709,156,542 176,697,232 243,589,948 P17,350,168,400 = 2010 = P9,807,825,079 1,360,779,082 152,573,085 96,311,266 = P11,417,488,512 2009 = P7,360,258,422 1,175,907,540 146,903,306 173,945,655 = P8,857,014,923

Aircraft and Traffic Servicing Aircraft and traffic servicing consists of:
Airport charges Ground handling Others 2011 P1,715,448,209 = 941,465,556 334,364,339 P2,991,278,104 = 2010 = P1,405,341,791 758,912,700 297,552,706 = P2,461,807,197 2009 = P1,625,449,978 768,108,059 238,275,212 = P2,631,833,249

Others pertain to staff expenses incurred by the Company such as basic pay, employee training cost and allowances. Repairs and maintenance Repairs and maintenance expenses relate to the cost of maintaining, repairing and overhauling of all aircraft and engines, technical handling fees on pre-flight inspections and cost of aircraft spare parts and other related equipment.

21. General and Administrative Expenses This account consists of staff-related expenses, provision for credit losses on receivables, travel and transportation, rent, non-aircraft repairs and maintenance, utilities and insurance.

*SGVMC117488*

- 44 -

22. Employee Benefits Employee Benefit Cost Total personnel expenses, consisting of salaries, expense related to defined benefit plans and other employee benefits, are included in flying operations, aircraft traffic and servicing, repairs and maintenance, reservation and sales, general and administrative, and passenger service. Defined Benefit Plan The Parent Company has an unfunded, noncontributory, defined benefit plan covering substantially all of its regular employees. The benefits are based on years of service and compensation on the last year of employment. As of January 1, 2011, 2010 and 2009, the assumptions used to determine pension benefits of the Parent Company follow:
Average remaining working life Discount rate Salary rate increase 2011 12 years 6.54% 5.50% 2010 10 years 9.93% 5.50% 2009 9 years 13.49% 5.50%

As of December 31, 2011, 2010 and 2009, the discount rate used in determining the pension liability is 6.54%, 9.93% and 13.49%, which is determined by reference to market yields at the reporting date on Philippine government bonds. The amounts recognized as pension liability (included under Other noncurrent liabilities account in the consolidated statements of financial position) follow (Note 17): Present value of defined benefit obligation (PVO) Unrecognized actuarial loss Pension liability at end of year Movements in unrecognized actuarial gain (loss) follow: Balance at beginning of year Amortization of actuarial gain Actuarial loss due to PVO Balance at end of year Movements in the defined benefit liability follow: Balance at beginning of year Pension expense during year Benefits paid during year Balance at end of year 2011 P210,156,100 = 52,987,000 (11,549,078) P251,594,022 = 2010 = P172,317,200 40,229,800 (2,390,900) = P210,156,100 2011 (P20,037,800) = (53,664,078) (P73,701,878) = 2010 = P12,079,700 (32,117,500) (P20,037,800) = 2011 P325,295,900 = (73,701,878) P251,594,022 = 2010 = P230,193,900 (20,037,800) = P210,156,100

*SGVMC117488*

- 45 Components of pension expense included in the consolidated statements of comprehensive income follow:
Current service cost Interest cost Amortization of actuarial gain Total pension expense 2011 P33,075,200 = 19,911,800 P52,987,000 = 2010 = P24,318,200 15,911,600 = P40,229,800 2009 = P12,867,400 12,331,700 (5,937,300) = P19,261,800

Changes in the present value of the defined benefit obligation follow: Balance at beginning of year Current service cost Interest cost Benefits paid Actuarial loss Balance at end of year Amounts for the current and previous periods follow:
2011 Present value of retirement obligation Experience adjustments (gain)/loss P325,295,900 = 2010 = P230,193,900 (1,435,700) 2009 = P160,237,500 1,445,500 2008 = P91,413,300 1,199,000 2007 = P101,178,300 (10,200,000)

2011 P230,193,900 = 33,075,200 19,911,800 (11,549,078) 53,664,078 P325,295,900 =

2010 = P160,237,500 24,318,200 15,911,600 (2,390,900) 32,117,500 = P230,193,900

23. Other Expenses This account consists mainly of bank charges.

24. Income Taxes Provision for (benefit from) income tax consists of:
2011 Current MCIT Deferred P52,679,330 = 69,905,552 P122,584,882 = 2010 = P1,595,963 16,163,724 = P17,759,687 2009 = P4,585,763 (24,087,446) (P19,501,683) =

Provision for income tax pertains to RCIT or MCIT and deferred income tax. Income taxes include corporate income tax, as discussed below, and final taxes paid at the rate of 20.00% and 7.50% on peso-denominated and foreign currency-denominated short-term placements and cash in banks, respectively, which are final withholding taxes on gross interest income.

*SGVMC117488*

- 46 The NIRC of 1997 also provides for rules on the imposition of a 2.00% MCIT on the gross income as of the end of the taxable year beginning on the fourth taxable year immediately following the taxable year in which the Parent Company commenced its business operations. Any excess MCIT over the RCIT can be carried forward on an annual basis and credited against the RCIT for the three immediately succeeding taxable years. In addition, the NIRC of 1997 allows the Parent Company to deduct from its taxable income for the current year its accumulated net operating losses carried over (NOLCO) from the immediately preceding three consecutive taxable years. Details of the Parent Companys NOLCO and MCIT are as follows: NOLCO
Year Incurred 2008 2009 2010 Amount = P81,434,888 79,186,012 533,255,953 = P693,876,853 Expired/Applied (P81,434,888) = (79,186,012) (267,084,527) (P427,705,427) = Balance = P 266,171,426 = P266,171,426 Expiry Year 2011 2012 2013

In 2011, the Parent Company has applied NOLCO amounting P427.7 million. = MCIT
Year Incurred 2009 2010 2011 Amount = P4,585,763 1,595,963 52,679,330 = P58,861,056 Expired/Applied = P = P Balance = P4,585,763 1,595,963 52,679,330 = P58,861,056 Expiry Year 2012 2013 2014

The Parent Company has the following registrations with the BOI as a new operator of air transport on a non-pioneer status under the Omnibus Investments Code of 1987 (Executive Order 226):
Batch First Second Third Fourth Fifth Sixth Seventh Date of Registration December 14, 2005 June 4, 2008 November 3,2010 November 16, 2011 November 16, 2011 November 16, 2011 November 16, 2011 Registration Number 2005-213 2008-119 2010-180 2011-240 2011-241 2011-242 2011-243 ITH Period Jan 2007 - Dec 2010 Mar 2009 - Feb 2013 Jan 2011- Dec 2016 Nov 2011 - Nov 2015 Nov 2011 - Nov 2017 Nov 2011 - Nov 2015 Dec 2011 - Dec 2017 Number of Aircraft 20 8 5 1 1 1 1 37

On the above registrations, the Parent Company can avail of bonus years in certain specified cases but the aggregate ITH availment (basic and bonus years) shall not exceed eight (8) years. As of December 31, 2011 and 2010, the Parent Company has complied with externally imposed capital requirements set by the BOI in order to avail the ITH incentives for the first and second batch aircraft of registered activity (Note 31).

*SGVMC117488*

- 47 The components of the Groups deferred tax assets and liabilities follow: 2011 Deferred tax assets on: ARO - liability NOLCO Accrued retirement costs Allowance for credit losses MCIT Unrealized loss on financial assets designated at FVPL Unrealized loss on net derivative liability Unrealized loss on AFS investment* Deferred tax liabilities on: Unrealized foreign exchange gain - net ARO - asset Double depreciation Unrealized gain on derivative asset Unrealized gain on financial assets designated at FVPL Net deferred tax liabilities
* Movement under other comprehensive income

2010 = P621,043,542 208,163,056 63,046,830 69,775,242 6,181,726 1,163,530 969,373,926 529,838,886 248,190,060 194,506,665 117,679,009 32,289,377 1,122,503,997 = P153,130,071

P731,300,500 = 79,851,428 75,478,207 69,775,242 58,861,056 43,066,411 8,559,355 2,412,970 1,069,305,169 504,354,224 220,320,170 566,416,958 1,291,091,352 P221,786,183 =

The Groups recognized deferred tax assets and deferred tax liabilities are expected to be reversed more than twelve months after the statement of financial position date. The Group has the following gross deductible and taxable temporary differences which are expected to reverse within the ITH period, and for which deferred tax assets and deferred tax liabilities, respectively, were not set up on account of the Parent Companys ITH. 2011 Deductible temporary differences: Unrealized loss on net derivative liability Taxable temporary differences: ARO - asset Unrealized gain on derivative asset P15,446,196 = 2010 = P

P362,655,952 = P362,655,952 =

= P307,286,348 97,654,104 = P404,940,452

*SGVMC117488*

- 48 A reconciliation of the statutory income tax rate to the effective income tax rate follows:
Statutory income tax rate Adjustments resulting from: Income subject to ITH Interest income subjected to final tax Unrecognized deferred tax assets and liabilities Equity in net (income) loss of JV Nondeductible items Effective income tax rate 2011 30.00% (23.85) (3.13) (0.49) (0.29) 1.03 3.27% 2010 30.00% (29.71) (0.49) 0.41 (0.11) 0.16 0.26% 2009 30.00% (27.33) (0.08) (3.46) 0.24 0.03 (0.60%)

Entertainment, Amusement and Recreation (EAR) Expenses Current tax regulations define expenses to be classified as EAR expenses and set a limit for the amount that is deductible for tax purposes. EAR expenses are limited to 0.50% of net sales for sellers of goods or properties or 1.00% of net revenue for sellers of services. For sellers of both goods or properties and services, an apportionment formula is used in determining the ceiling on such expenses. The Parent Company recognized EAR expenses (allocated under different expense accounts in the consolidated statements of comprehensive income) amounting P 3.0 million, = = P4.8 million and P12.7 million in 2011, 2010 and 2009, respectively. =

25. Earnings Per Share The following reflects the income and share data used in the basic/dilutive EPS computations:
2011 (a) Net income attributable to common shareholders (b) Weighted average number of common shares for basic EPS (c) Basic/diluted earnings per share 2010 2009

= P P3,624,417,718 P6,922,493,280 =3,257,848,705 = 610,851,702 P5.93 = 587,685,050 = P11.78 582,574,750 = P5.59

The Group has no dilutive potential common shares in 2011, 2010 and 2009.

26. Related Party Transaction The Group has entered into transactions with its ultimate parent, its JV and affiliates principally consisting of advances, sale of passenger tickets, reimbursement of expenses, regular banking transactions, maintenance and administrative service agreements. In addition to the related information disclosed elsewhere in the financial statements, the following are the year-end balances in respect of transactions with related parties, which were carried out in the normal course of business on terms agreed with related parties during the year.

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- 49 The significant transactions and outstanding balances of the Group with the related parties follow:
Consolidated Statement of Financial Position Due from Due to Cash and Cash Related Related Trade Equivalents Parties Parties Receivables (Note 7) (Note 9) (Note 15) (Note 9) Ultimate parent company JGSHI Parent company CPAHI December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 P = P = 10,911,148 58,814,274 900,670 P1,549,019 = 350,000 42,357,610 P =

Trade Payables (Note 15) P = = P6,200

JV in which the Company is a venturer A-plus December 31, 2011 December 31, 2010 December 31, 2009 SIAEP December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009 December 31, 2011 December 31, 2010 December 31, 2009

5,888,125,425 4,552,678,192 225,301,492

15,336,100 26,929,793 35,416,334 6,739,406 832,407 4,072,597 2,187,605

950,163 858,368 563,510 32,653,745 33,709,732 30,666,495 129,142 1,149,247 611,204

6,500 5,631 48,544 2,914,865 2,183,937 1,809,752 1,678,260 1,671,261 1,964,812 649,303 281,841 314,339 790,521 855,930 630,178 56,048 263,484 3,396 501,268 1,131,598 500,914 P6,596,765 = = P6,393,682 = P5,271,935

12,696,455 71,153,167 11,647,754 25,510,246 1,371,659 150,859 511,746 798,825 6,241,941 2,157,837 421,647 241,740 1,463,190 21,113 315,858 2,569,040 3,677,235 51,922 3,512 P44,882,984 = = P81,247,827 = P14,881,135

PAAT, Inc.

Other related parties Robinsons Savings Bank (RSB) Universal Robina Corporation (URC) Digitel Telecommunication* (DIGITEL) Robinsons Land Corporation (RLC) Summit Publishing, Inc. (SPI) JG Petrochemical Corporation (JGPC) Robinsons Inc.

Unicon Insurance Brokers

December 31, 2011 P5,888,125,425 = P35,174,259 = P36,302,174 = December 31, 2010 P4,552,678,192 = = P86,576,474 = P35,529,304 December 31, 2009 = P225,301,492 = P40,389,601 = P73,716,757 *As of December 31, 2011, Digitel Telecommunication is no longer a related party Cebu Air, Inc.

Total

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- 50 -

Year JV JV in which the Company is a venture A-plus 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009 2011 2010 2009

Consolidated Statement of Comprehensive Income Sale of Air Transportation Service Interest Income Repairs and Maintenance P = 93,776 263,606 723,696 715,413 692,339 25,660,486 23,185,728 21,576,590 20,521,872 15,921,059 11,499,788 10,321,822 6,035,538 7,723,286 5,525,371 2,484,213 2,026,424 1,222,177 830,006 40,398 15,700,314 12,292,291 P79,769,514 = = P61,727,854 = P43,558,825 P = 288,358,555 28,960,516 240,915 P288,358,555 = = P28,960,516 = P240,915 P277,178,544 = 259,226,381 260,736,827 4,053,972 P277,178,544 = = P259,226,381 = P264,790,799

SIAEP

Other related parties RSB

URC

DIGITEL

RLC

SPI

JGPC

Robinsons Inc.

Total

*Other related parties pertain to entities which are subsidiaries of JGSHI and therefore, entities under common control.

There are no impairment losses recorded against outstanding balances with related parties as of December 31, 2011, 2010 and 2009. Also, these transactions are unsecured, interest-free and short-term in nature. The Groups significant transactions with related parties follow: 1. In 2010 and 2009, the Group provides noninterest-bearing advances to JGSHI recorded as Due from related parties. In 2010, total advances made to JGSHI amounted to P3.7 billion, = which was settled on June 30, 2010 by assigning debt and equity securities amounting to = P3.7 billion (Note 28). In 2009, total advances made to JGSHI amounted to P1.8 billion, = which were settled in the same year. 2. Expenses advanced by the Group on behalf of CPAHI. The said expenses are subject to reimbursement and are recorded under Receivables in the consolidated statements of financial position.

*SGVMC117488*

- 51 3. The Group entered into a Shared Services Agreement with A-plus. Under the aforementioned agreement, the Group will render certain administrative services to A-plus which include payroll processing and certain information technology-related functions. The Group also entered into a Ground Support Equipment (GSE) Maintenance Services Agreement with A-plus. Under the GSE Maintenance Services Agreement, the Group shall render routine preventive maintenance services on certain ground support equipment used by A-plus in providing technical GSE to airline operators in major airports in the Philippines. The Group also performs repair or rectification of deficiencies noted and supply replacement components. 4. For the aircraft maintenance program, the Group engaged SIAEC to render line maintenance, light aircraft checks and technical ramp handling services at various domestic and international airports which were performed by A-plus, and to maintain and provide aircraft heavy maintenance services which was performed by SIAEP. Cost of services are recorded as Repairs and maintenance in the consolidated statements of comprehensive income and any unpaid amount as of statement of financial position date as trade payable under Accounts payable and other accrued liabilities. 5. The Group maintains deposit accounts and short-term investments with RSB which is reported as Cash and cash equivalents. The Group also incurs liabilities to RSB for loan payments of its employees and to URC primarily for the rendering of payroll service to the Group which are recorded as Due to related parties. 6. The Group provides air transportation services to certain related parties, for which unpaid amounts are recorded as trade receivables under Receivables in the consolidated statements of financial position. The Group also purchases goods from URC for in-flight sales and recorded as trade payable, if unpaid, in the consolidated statements of financial position. Total amount of purchases in 2010, 2009 and 2008 amounted to P6.4 million, P0.4 million and = = = P3.4 million, respectively. 7. From January 1, 2011 up to March 17, 2011, a total of 6,595,190 common shares of the Parent Company were acquired by JGSHI. The compensation of the Groups key management personnel by benefit type follows:
Short-term employee benefits Post-employment benefits 2011 P119,792,501 = 14,136,670 P133,929,171 = 2010 =118,221,095 P 1,528,853 =119,749,948 P 2009 =92,213,212 P 3,404,135 =95,617,347 P

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 Groups pension plans.

27. Financial Risk Management Objectives and Policies The Groups principal financial instruments, other than derivatives, comprise cash and cash equivalents, financial assets at FVPL, AFS investments, receivables, payables and interest-bearing borrowings. The main purpose of these financial instruments is to finance the Groups 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.

*SGVMC117488*

- 52 The Groups BOD reviews and approves policies for managing each of these risks and they are summarized in the succeeding paragraphs, together with the related risk management structure. Risk Management Structure The Groups risk management structure is closely aligned with that of its ultimate parent. The Group has its own BOD which is ultimately responsible for the oversight of the Groups risk management process which involves identifying, measuring, analyzing, monitoring and controlling risks. The risk management framework encompasses environmental scanning, the identification and assessment of business risks, development of risk management strategies, design and implementation of risk management capabilities and appropriate responses, monitoring risks and risk management performance, and identification of areas and opportunities for improvement in the risk management process. The Group and the ultimate parent with its other subsidiaries (JGSHI Group) created the following separate board-level independent committees with explicit authority and responsibility for managing and monitoring risks. Each BOD has created the board-level Audit Committee to spearhead the managing and monitoring of risks. Audit Committee The Groups Audit Committee assists the Groups BOD in its fiduciary responsibility for the overall effectiveness of risk management systems, and both the internal and external audit functions of the Group. Furthermore, it is also the Audit Committees 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 Groups BOD is properly assisted in the development of policies that would enhance the risk management and control systems. Enterprise Risk Management Group (ERMG) The fulfillment of the risk management functions of the Groups BOD is delegated to the ERMG. The ERMG is primarily responsible for the execution of the Enterprise Risk Management (ERM) framework. The ERMGs 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.

*SGVMC117488*

- 53 Corporate Governance Compliance Officer Compliance with the principles of good corporate governance is one of the objectives of the Groups BOD. To assist the Groups BOD in achieving this purpose, the Groups 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 Groups 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 Groups Management Committee which makes risk mitigating decisions within the enterprise-wide risk management framework. ERM Framework The Groups BOD is also responsible for establishing and maintaining a sound risk management framework and is accountable for risks taken by the Group. The Groups BOD also shares the responsibility with the ERMG in promoting the risk awareness program enterprise-wide. The ERM framework revolves around the following eight interrelated risk management approaches: 1. Internal Environmental Scanning - it involves the review of the overall prevailing risk profile of the business unit to determine how risks are viewed and addressed by management. This is presented during the strategic planning, annual budgeting and mid-year performance reviews of the business unit. 2. Objective Setting - the Groups BOD mandates the Groups 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 Groups 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 managements attention, and risks which may materially weaken the Groups earnings and capital. 4. Risk Response - the Groups BOD, through the oversight role of the ERMG, approves the Groups responses to mitigate risks, either to avoid, self-insure, reduce, transfer or share risk. 5. Control Activities - policies and procedures are established and approved by the Groups 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.

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- 54 Risk Management Support Groups The Groups 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 Groups 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 partys ability to meet its obligation to the Group. The Group trades only with recognized, creditworthy third parties. It is the Groups policy that all customers who wish to trade on credit terms are being subjected to credit verification procedures. In addition, receivable balances are monitored on a continuous basis resulting in an insignificant exposure in bad debts. With respect to credit risk arising from the other financial assets of the Group, which comprise cash in bank and cash equivalents and certain derivative instruments, the Groups exposure to credit risk arises from default of the counterparty with a maximum exposure equal to the carrying amount of these instruments.

*SGVMC117488*

- 55 Maximum exposure to credit risk without taking account of any credit enhancement The table below shows the gross to credit risk (including derivative assets) of the Group as of December 31, 2011 and 2010, without considering the effects of collaterals and other credit risk mitigation techniques. 2011 Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities Loans and receivables Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14) 2010

P2,021,911,190 = 1,039,254,600 3,061,165,790 183,032,000 3,244,197,790 16,880,208 3,261,077,998 110,367,200 8,941,142,761

= P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165 489,917,466 3,879,438,631 114,532,000 9,748,864,734

471,465,815 546,244,400 134,819,376 146,244,351 86,576,474 35,174,259 402,132,066 341,707,354 1,094,993,731 1,069,370,364 9,240,000 166,175,680 = P13,548,134,003 P14,847,069,096 =

*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under Other noncurrent assets account in the consolidated statements of financial position.

Risk concentrations of the maximum exposure to credit risk Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Groups 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.

*SGVMC117488*

- 56 The Groups credit risk exposures, before taking into account any collateral held or other credit enhancements, are categorized by geographic location as follows:
2011 Philippines Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities Loans and receivables Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14) Asia (excluding Philippines) Europe Others Total

P2,021,911,190 = 966,672,000 2,988,583,190 183,032,000 3,171,615,190 3,171,615,190 8,284,718,611 431,367,661 142,991,628 35,174,259 58,424,350 667,957,898 P12,124,291,699 =

P = 72,582,600 72,582,600 72,582,600 72,582,600 110,367,200 656,424,150 112,455,082 3,252,723 33,125,717 148,833,522 P988,207,472 =

P = 16,880,208 16,880,208 2,421,657 250,157,287 252,578,944 166,175,680 P435,634,832 =

P =

P2,021,911,190 = 1,039,254,600 3,061,165,790 188,032,000 3,244,197,790 16,880,208 3,261,077,998 110,367,200 8,941,142,761

546,244,400 146,244,351 35,174,259 341,707,354 1,069,370,364 166,175,680 P P13,548,134,003 = =

*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under Other noncurrent assets account in the consolidated statement of financial position. 2010 Philippines Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities Loans and receivables Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14) Asia (excluding Philippines) Europe Others Total

= P159,862,560 948,259,200 1,108,121,760 1,108,121,760 136,094,034 1,244,215,794 9,461,735,841 355,871,039 71,058,584 86,576,474 77,620,296 591,126,393 = P11,297,078,028

= P17,853,621 69,221,278 87,074,899 87,074,899 206,652,904 293,727,803 287,128,893 84,845,412 4,248,439 59,537,007 148,630,858 = P729,487,554

= P1,525,694,362 1,525,694,362 1,525,694,362 147,170,528 1,672,864,890 30,749,364 6,633,159 264,974,763 302,357,286 9,240,000 = P1,984,462,176

= P382,679,360 382,679,360 285,950,784 668,630,144 668,630,144 114,532,000

= P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165 489,917,466 3,879,438,631 114,532,000 9,748,864,734

471,465,815 52,879,194 134,819,376 86,576,474 402,132,066 52,879,194 1,094,993,731 9,240,000 = P836,041,338 P14,847,069,096 =

*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under Other noncurrent assets account in the consolidated statement of financial position.

*SGVMC117488*

- 57 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, 2011 and 2010.
2011 Neither Past Due Nor Specifically Impaired High Standard Substandard Grade Grade Grade Financial assets at FVPL (Note 8) Derivative financial instruments not designated as accounting hedges Loans and receivables: Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14) Past Due or Individually Impaired

Total

P16,880,208 = 8,941,142,761 335,930,556 146,244,351 35,174,259 115,454,089 166,175,680 P9,757,001,904 =

P = 192,200,347 P192,200,347 =

P = P =

P = 18,113,497 226,253,265 P244,366,762 =

P16,880,208 = 8,941,142,761 546,244,400 146,244,351 35,174,259 341,707,354 166,175,680 P10,193,569,013 =

*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under Other noncurrent assets account in the consolidated statement of financial position. 2010 Neither Past Due Nor Specifically Impaired High Standard Substandard Grade Grade Grade Financial assets at FVPL (Note 8) Derivative financial instruments not designated as accounting hedges Loans and receivables: Cash and cash equivalents* (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others** Refundable deposits*** (Note 14) Past Due or Individually Impaired

Total

= P489,917,466 9,748,864,734 296,387,293 134,819,376 86,576,474 45,199,323 9,240,000 = P10,811,004,666

= P 96,158,122 83,708,347 = P179,866,469

= P = P

= P 78,920,400 273,224,396 = P352,144,796

= P489,917,466 9,748,864,734 471,465,815 134,819,376 86,576,474 402,132,066 9,240,000 P11,343,015,931 =

*Excluding cash on hand **Include nontrade receivables from derivative counterparties and employees ***Included under Other noncurrent assets account in the consolidated statement of financial position.

High grade cash and cash equivalents are short-term placements and working cash fund placed, invested, or deposited in foreign and local banks belonging to the top ten banks in terms of resources and profitability. High grade accounts are accounts considered to be of high value. The counterparties have a very remote likelihood of default and have consistently exhibited good paying habits. Standard grade accounts are active accounts with propensity of deteriorating to mid-range age buckets. These accounts are typically not impaired as the counterparties generally respond to credit actions and update their payments accordingly.

*SGVMC117488*

- 58 Substandard grade accounts are accounts which have probability of impairment based on historical trend. These accounts show propensity to default in payment despite regular follow-up actions and extended payment terms. Past due or individually impaired accounts consist of past due but not impaired receivables amounting to P92.4 million and P119.6 million as December 31, 2011 and 2010, respectively, and = = past due and impaired receivables amounting P232.6 million as of December 31, 2011 and 2010, = respectively. Past due but not impaired receivables are secured by cash bonds from major sales and ticket offices recorded under Accounts payable and other accrued liabilities account in the consolidated statement of financial position. For the past due and impaired receivables, specific allowance for impairment losses amounted to P232.6 million as of December 31, 2011 and 2010, = respectively (Note 9). For financial assets such as designated financial assets at FVPL and AFS investments, the Group assesses their credit quality using external credit ratings from Standard & Poors (S&P). Financial assets with at least A- are identified as high grade, at least B- as standard grade and not rated (NR) if the credit rating is not performed by an external credit rating agency. Below is a summary of the Groups FVPL and AFS external credit rating classification:
2011 Neither Past Due Nor Specifically Impaired High Standard Grade Grade Not Rated Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private BBB+ BB+ BB NR Government BB+ BB Quoted equity securities AAFS investments (Note 8) Quoted equity securities BBBPast Due or Individually Impaired

Total

P = 183,032,000 183,032,000 P183,032,000 =

P47,540,096 = 232,352,000 228,968,100 508,860,196 72,582,600 966,672,000 1,548,114,796 1,548,114,796 110,367,200 P1,658,481,996 =

P = 1,513,050,994 1,513,050,994 1,513,050,994 1,513,050,994 P1,513,050,994 =

P = P =

P47,540,096 = 232,352,000 228,968,100 1,513,050,994 2,021,911,190 72,582,600 966,672,000 3,061,165,790 183,032,000 3,244,197,790 110,367,200 P3,354,564,990 =

2010 Neither Past Due Nor Specifically Impaired High Standard Grade Grade Not Rated Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private BBB+ BB+ BB B+ BNR (Forward)

Past Due or Individually Impaired

Total

= P

= P47,785,600 160,021,480 81,662,412 234,719,360 159,862,560 684,051,412

= P 1,402,038,491 1,402,038,491

= P

= P47,785,600 160,021,480 81,662,412 234,719,360 159,862,560 1,402,038,491 2,086,089,903

*SGVMC117488*

- 59 2010 Neither Past Due Nor Specifically Impaired High Standard Grade Grade Not Rated Government BB Quoted equity securities AAFS investments (Note 8) Quoted equity securities BBB= P 285,950,784 285,950,784 = P285,950,784 = P1,017,480,478 1,701,531,890 1,701,531,890 114,532,000 = P1,816,063,890 = P 1,402,038,491 1,402,038,491 = P1,402,038,491

Past Due or Individually Impaired = P = P

Total = P1,017,480,478 3,103,570,381 285,950,784 3,389,521,165 114,532,000 = P3,504,053,165

The following tables show the aging analysis of the Groups receivables:
Neither Past Due Nor Impaired P450,744,710 = 146,244,351 31,977,638 115,454,089 P744,420,788 = 2011 Past Due But Not Impaired 31-60 days P43,594,752 = P43,594,752 = 61-90 days P40,712,136 = P40,712,136 = 91-180 days P1,591,235 = P1,591,235 = Past Over Due and 180 days Impaired Total P3,270,692 = P6,330,875 = P546,244,400 = 146,244,351 3,196,621 35,174,259 226,253,265 341,707,354 P6,467,313 = P232,584,140 P1,069,370,364 = =

Trade receivables Interest receivable Due from related parties Others*

*Include nontrade receivables from derivative counterparties and employees

2010 Past Due But Not Impaired 31-60 days = P29,123,386 = P29,123,386 61-90 days = P24,822,321 739,356 = P25,561,677 91-180 days = P12,190,557 38,400,282 = P50,590,839

Trade receivables Interest receivable Due from related parties Others*

Neither Past Due Nor Impaired = P392,545,415 134,819,376 86,576,474 128,907,670 = P742,848,935

Past Over Due and 180 days Impaired Total = P6,453,261 = P6,330,875 471,465,815 134,819,376 86,576,474 7,831,493 226,253,265 402,132,066 = P14,284,754 = P232,584,140 =1,094,993,731 P

*Include nontrade receivables from derivative counterparties and employees.

Collateral or credit enhancements As collateral against trade receivables from sales ticket offices or agents, the Group requires cash bonds from major sales ticket offices or agents ranging from P50,000 to P2.1 million depending = = on the Groups assessment of sales ticket offices and agents credit standing and volume of transactions. As of December 31, 2011 and 2010, outstanding cash bonds (included under Accounts payable and other accrued liabilities account in the consolidated statement of financial position) amounted to P161.4 million and P136.9 million, respectively (Note 15). There are no = = collaterals for impaired receivables. Impairment assessment The Group recognizes impairment losses based on the results of its specific/individual and collective assessment of its credit exposures. Impairment has taken place when there is a presence of known difficulties in the servicing of cash flows by counterparties, infringement of the original terms of the contract has happened, or when there is an inability to pay principal overdue beyond a certain threshold. These and the other factors, either singly or in tandem, constitute observable events and/or data that meet the definition of an objective evidence of impairment. The two methodologies applied by the Group in assessing and measuring impairment include: (1) specific/individual assessment; and (2) collective assessment.

*SGVMC117488*

- 60 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 counterpartys 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 Groups inability to meet its obligations when they become due without recurring unacceptable losses or costs. The Groups 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 Groups business operations or unanticipated events created by customer behavior or capital market conditions. The Group maintains a level of cash and cash equivalents deemed sufficient to finance operations. As part of its liquidity risk management, the Group regularly evaluates its projected and actual cash flows. It also continuously assesses conditions in the financial markets for opportunities to pursue fund raising activities. Fund raising activities may include obtaining bank loans and availing of export credit agency facilities. Financial assets The analysis of financial assets held for liquidity purposes into relevant maturity grouping is based on the remaining period at the statement of financial position date to the contractual maturity date or if earlier the expected date the assets will be realized. Financial liabilities The relevant maturity grouping is based on the remaining period at the statement of financial position date to the contractual maturity date. When counterparty has a choice of when the amount is paid, the liability is allocated to the earliest period in which the Group can be required to pay. When an entity is committed to make amounts available in installments, each installment is allocated to the earliest period in which the entity can be required to pay.

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- 61 The tables below summarize the maturity profile of financial instruments based on remaining contractual undiscounted cash flows as of December 31, 2011 and 2010:
Less than one month Financial Assets Financial assets at FVPL Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments Quoted equity securities Loans and receivables Cash and cash equivalents Receivables: Trade receivables Interest receivable Due from related parties* Others ** Financial Liabilities On-balance sheet Financial liabilities at amortized cost Accounts payable and other accrued liabilities*** Due to related parties* Long-term debt Others**** Off-balance sheet Contingent liability***** 1 to 3 months 2011 3 to 12 months 1 to 5 years More than 5 years

Total

P =

P =

P =

P1,726,543,574 = 1,726,543,574 1,726,543,574

P295,367,616 = 1,039,254,600 1,334,622,216 183,032,000 1,517,654,216

P2,021,911,190 = 1,039,254,600 3,061,165,790 183,032,000 3,244,197,790

8,941,142,761 450,744,710 146,244,351 31,977,638 115,454,089 P9,685,563,549 =

4,212,529 4,212,529 84,306,888 P88,519,417 =

12,644,340 12,644,340 1,591,235 3,196,621 P17,432,196 =

1,726,543,574 9,135,744 P1,735,679,318 =

1,517,654,216 110,367,200 465,823 226,253,265 P1,854,740,504 =

16,856,869 3,261,054,659 110,367,200 8,941,142,761 546,244,400 146,244,351 35,174,259 341,707,354 P13,381,934,984 =

P2,037,478,569 = 36,302,174 192,028,754 2,265,809,497 P2,265,809,497 =

P1,598,466,188 = 539,079,752 2,137,545,940 P2,137,545,940 =

P2,543,947,944 = 2,002,500,105 4,546,448,049 9,737,276,141 P14,283,724,190 =

P137,383,870 = 9,959,241,592 670,810,817 10,767,436,279 56,840,205,217 P67,607,641,496 =

P23,124,550 = 5,273,175,920 5,296,300,470 P5,296,300,470 =

P6,340,401,121 = 36,302,174 17,966,026,123 670,810,817 25,013,540,235 66,557,481,358 P91,591,021,593 =

*Receivable and payable on demand **Include nontrade receivables from derivative counterparties and employees ***Excluding government-related payables ****Included under Other noncurrent liabilities in the consolidated statement of financial position. *****Pertains to capital expenditure commitments (Note 29)
2010 3 to 12 months

Less than one month Financial Assets Financial assets at FVPL Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments Quoted equity securities Loans and receivables Cash and cash equivalents Receivables: Trade receivables Interest receivable (Forward)

1 to 3 months

1 to 5 years

More than 5 years

Total

= P51,745,229 51,745,229 51,745,229

= P6,510,240 32,606,000 39,116,240 39,116,240

= P13,472,306 2,144,050 15,616,356 15,616,356

= P1,868,966,549 312,750,450 2,181,716,999 2,181,716,999

= P2,299,273,923 1,338,688,650 3,637,962,573 285,950,784 3,923,913,357

= P4,239,968,247 1,686,189,150 5,926,157,397 285,950,784 6,212,108,181

51,745,229 9,776,460,386 386,222,100 134,819,376

139,059,297 178,175,537 56,120,518

351,425,270 367,041,626 11,647,971

2,181,716,999 17,009,403

3,923,913,357 104,120,000 465,823

490,484,567 6,702,592,748 104,120,000 9,776,460,386 471,465,815 134,819,376

*SGVMC117488*

- 62 2010 3 to 12 months = P 969,633 = P379,659,230

Less than one month Due from related parties* Others ** Financial Liabilities On-balance sheet Financial liabilities at amortized cost Accounts payable and other accrued liabilities*** Due to related parties* Long-term debt Others**** Off-balance sheet Contingent liability***** = P86,576,474 135,284,134 = P10,571,107,699

1 to 3 months = P 39,319,282 = P273,615,337

1 to 5 years = P 305,752 = P2,199,032,154

More than 5 years = P 226,253,265 = P4,254,752,445

Total = P86,576,474 402,132,066 =17,678,166,865 P

= P1,538,738,776 35,529,304 213,007,746 1,787,275,826 = P1,787,275,826

= P1,469,497,765 566,294,911 2,035,792,676 = P2,035,792,676

= P1,727,247,931 2,079,034,332 3,806,282,263 6,711,777,434 = P10,518,059,697

= P361,781,897 10,616,930,315 923,451,428 11,902,163,640 24,777,021,191 =36,679,184,831 P

= P19,886,872 8,713,422,758 8,733,309,630 = P8,733,309,630

= P5,117,153,241 35,529,304 22,188,690,062 923,451,428 28,264,824,035 31,488,798,625 =59,753,622,660 P

*Receivable and payable on demand **Include nontrade receivables from derivative counterparties and employees ***Excluding government-related payables ****Included under Other noncurrent liabilities in the consolidated statement of financial position. *****Pertains to capital expenditure commitments (Note 29)

Market Risk Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in foreign currency exchange rates, interest rates, commodity prices or other market changes. The Groups market risk originates from its holding of foreign exchange instruments, interest-bearing instruments and derivatives. Foreign currency risk Foreign currency risk arises on financial instruments that are denominated in a foreign currency other than the functional currency in which they are measured. It is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group has transactional currency exposures. Such exposures arise from sales and purchases in currencies other than the Parent Companys functional currency. During the years ended December 31, 2011, 2010 and 2009, approximately 25.0%, 24.40% and 23.20%, respectively, of the Groups total sales are denominated in currencies other than the functional currency. Furthermore, the Groups capital expenditures are substantially denominated in US Dollar. As of December 31, 2011 and 2010, 71.93% and 68.32%, respectively, of the Groups financial liabilities were denominated in US Dollar, respectively. The Group does not have any foreign currency hedging arrangements.

*SGVMC117488*

- 63 The tables below summarize the Groups exposure to foreign currency risk. Included in the tables are the Groups financial assets and liabilities at carrying amounts, categorized by currency.
Hong Kong Dollar 2011 Singaporean Dollar Other Currencies*

US Dollar Financial Assets Financial Assets at FVPL Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments: Quoted equity securities Cash and cash equivalents Receivables Refundable deposits** Financial Liabilities Accounts payable and other accrued liabilities*** Long-term debt Others****

Total

P2,021,911,190 = 1,039,254,600 3,061,165,790 183,032,000 3,244,197,790 16,880,208 3,261,077,998 110,367,200 712,920,906 445,489,378 166,175,680 P4,696,031,162 =

P = 287,899,905 22,922,687 P310,822,592 =

P = 33,375,457 26,657,135 P60,032,592 =

P = 328,292,828 121,927,679 P450,220,507 =

P2,021,911,190 = 1,039,254,600 3,061,165,790 183,032,000 3,244,197,790 16,880,208 3,261,077,998 110,367,200 1,362,489,096 616,996,879 166,175,680 P5,517,106,853 =

P3,335,028,805 = P39,759,803 = P33,404,496 = P131,471,536 = P3,539,664,640 = 20,871,893,433 20,871,893,433 670,810,817 670,810,817 P24,877,733,055 = P39,759,803 = P33,404,496 = P131,471,536 = P25,082,368,890 = * Other currencies include Malaysian ringgit, Korean won, New Taiwan dollar, Japanese yen, Australian dollar and Euro. ** Included under Other noncurrent assets account in the consolidated statement of financial position. ***Excluding government-related payables **** Included under Other noncurrent liabilities in the consolidated statement of financial position. 2010 Singaporean Dollar

US Dollar Financial Assets Financial Assets at FVPL Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments: Quoted equity securities Cash and cash equivalents Receivables Refundable deposits** Financial Liabilities Accounts payable and other accrued liabilities*** Long-term debt Others****

Hong Kong Dollar

Other Currencies*

Total

= P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165 489,917,466 3,879,438,631 114,532,000 1,567,055,465 348,009,633 9,240,000 = P5,918,275,729

= P 45,463,367 6,836,340 = P52,299,707

= P 13,116,910 36,788,388 = P49,905,298

= P 258,013,947 70,264,523 = P328,278,470

= P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165 489,917,466 3,879,438,631 114,532,000 1,883,649,689 461,898,884 9,240,000 = P6,348,759,204

= P2,527,277,204 = P35,990,964 = P45,849,225 = P79,987,436 = P2,689,104,829 18,432,708,704 18,432,708,704 923,451,428 923,451,428 = P21,883,437,336 = P35,990,964 = P45,849,225 = P79,987,436 = P22,045,264,961 * Other currencies include Malaysian ringgit, Korean won, New Taiwan dollar, Japanese yen, Australian dollar and Euro. ** Included under Other noncurrent assets account in the consolidated statement of financial position. ***Excluding government-related payables **** Included under Other noncurrent liabilities in the consolidated statement of financial position.

*SGVMC117488*

- 64 The exchange rates used to restate the Groups foreign currency-denominated assets and liabilities as of December 31, 2011 and 2010 follow: US dollar Singapore dollar Hong Kong dollar 2011 P43.84 to US$1.00 = P33.85 to SGD1.00 = P5.65 to HKD1.00 = 2010 = P43.84 to US$1.00 = P34.16 to SGD1.00 = P5.64 to HKD1.00

The following table sets forth the impact of the range of reasonably possible changes in the US dollar - Philippine peso exchange value on the Groups pre-tax income for the years ended December 31, 2011, 2010 and 2009 (in thousands).
2011 Changes in foreign exchange value P5 = Change in pre-tax income (P2,308,680) = Change in equity P12,588 = (P5) = P2,308,680 = (P12,588) = 2010 = P5 (P1,833,907) = = P13,063 (P5) = = P1,833,907 (P13,063 = 2009 = P5 (P2,161,052) = (P5) = = P2,161,052

Other than the potential impact on the Groups pre-tax income and change in equity from AFS investments, there is no other effect on equity. The Group does not expect the impact of the volatility on other currencies to be material. Commodity price risk The Group enters into commodity derivatives to manage its price risks on fuel purchases. Commodity hedging allows stability in prices, thus offsetting the risk of volatile market fluctuations. Depending on the economic hedge cover, the price changes on the commodity derivative positions are offset by higher or lower purchase costs on fuel. A change in price by US$10.00 per barrel of jet fuel affects the Groups fuel costs in pre-tax income by = P1,121.0 million, P989.8 million and P938.3 million as of December 31, 2011, 2010 and 2009, = = respectively, in each of the covered periods, assuming no change in volume of fuel is consumed. Interest rate risk Interest rate risk arises on interest-bearing financial instruments recognized in the consolidated statement of financial position and on some financial instruments not recognized in the consolidated statement of financial position (i.e., some loan commitments, if any). The Groups policy is to manage its interest cost using a mix of fixed and variable rate debt (Note 16).

*SGVMC117488*

- 65 The following tables show information about the Groups long-term debt that are exposed to interest rate risk and are presented by maturity profile (Note 16):
December 31, 2011 <1 year ECA-backed loans from foreign banks (Note 16) Floating rate US Dollar London Interbank Offering Rate (LIBOR) 6 months + margin US Dollar LIBOR 3 months+ margin Commercial loans from foreign banks (Note 16) Floating rate US Dollar LIBOR 6 months + margin >1-2 years >2-3 years >3-4 years >4-5 years >5 years Total (In US Dollar) Total (in Philippine Peso) Fair Value

US$1,256,891 12,810,096 14,066,987 1,557,084 US$15,624,071

US$1,174,361 13,153,759 14,328,120 1,635,163 US$15,963,283

US$1,224,172 13,477,803 14,701,975 1,361,605 US$16,063,580

US$1,276,096 13,819,378 15,095,474 US$15,095,474

US$1,329,485 14,163,694 15,493,179

US$5,737,756 96,132,575 101,870,331

US$11,998,761 163,557,305 175,556,066

P526,025,684 = 7,170,352,271 7,696,377,955 199,640,873 P7,896,018,828 =

P348,420,966 = 8,122,569,745 8,470,990,711 176,618,066 P8,647,608,777 =

4,553,852 US$15,493,179 US$101,870,331 US$180,109,918 December 31, 2010

<1 year ECA-backed loans from foreign banks (Note 16) Floating rate US Dollar London Interbank Offering Rate (LIBOR) 6 months + margin US Dollar LIBOR 3 months + margin Commercial loans from foreign banks (Note 16) Floating rate US Dollar LIBOR 6 months + margin

>1-2 years

>2-3 years

>3-4 years

>4-5 years

>5 years

Total (In US Dollar)

Total (in Philippine Peso)

Fair Value

US$1,211,956 7,268,522 8,480,478 1,484,287 US$9,964,765

US$1,132,585 7,482,058 8,614,643 1,556,977 US$10,171,620

US$1,181,953 7,741,580 8,923,533 1,635,135 US$10,558,668

US$1,232,086 7,986,369 9,218,455 1,361,101 US$10,579,556

US$1,284,346 8,231,612 9,515,958 US$9,515,958

US$7,291,709 65,439,910 72,731,619

US$13,334,635 104,150,051 117,484,686

= P584,590,468 4,565,938,174 5,150,528,642 264,683,997 P5,415,212,639 =

= P392,351,552 4,248,601,240 4,640,952,792 234,616,294 = P4,875,569,086

6,037,500 US$72,731,619 US$123,522,186

*SGVMC117488*

- 66 The following table sets forth the impact of the range of reasonably possible changes in interest rates on the Groups pre-tax income for the years ended December 31, 2011, 2010 and 2009.
Changes in interest rates Changes in pre-tax income 2011 1.50% (1.50%) (P104,185,842) = P104,185,842 = 2010 1.50% (P20,179,681) = (1.50%) = P20,179,681 2009 1.50% (P16,881,917) = (1.50%) = P16,881,917

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 Groups exposure to interest rate risk relates primarily to the Groups financial assets designated at FVPL. The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Groups pre-tax income, through the impact of mark-to-market of financial assets designated at FVPL which are recognized in profit or loss. Changes in market interest rates Changes in pre-tax income Changes in market interest rates Changes in pre-tax income 2011 (1.50%) 1.50% P263,355,208 = (P263,355,208) = 2010 1.50% (1.50%) (P210,554,767) = = P248,358,396

Other than the potential impact on the Groups pre-tax income, there is no other effect on equity.

28. Fair Value Measurement The methods and assumptions used by the Group in estimating the fair value of its financial instruments are: Cash and cash equivalents (excluding cash on hand), Receivables and Accounts payable and other accrued liabilities Carrying amounts approximate their fair values due to the relatively short-term maturity of these instruments. Investments in quoted equity securities Fair values are based on quoted prices published in markets. Amounts due from and due to related parties Carrying amounts of due from/to related parties, which are receivable/payable and due on demand, approximate their fair values. Non-interest bearing refundable deposits The fair values are determined based on the present value of estimated future cash flows using prevailing market rates. The Group used discount rates of 5.03% in 2011 and 6.93% in 2010. Derivative instruments The fair values of fuel derivatives are based on quotes obtained from an independent counterparty.

*SGVMC117488*

- 67 Long-term debt The fair value of long-term debt is determined using the discounted cash flow methodology, with reference to the Groups current incremental lending rates for similar types of loans. The discount curve used range from 3.67% to 4.44% as of December 31, 2011 and from 3.29% to 3.72% as of December 31, 2010. The following table summarizes the carrying amounts and fair values of all the Groups financial instruments.
2011 Carrying Value Financial Assets Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Quoted equity securities Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities Loans and receivables Cash and cash equivalents (Note 7) Receivables (Note 9) Trade receivables Interest receivable Due from related parties Others* Refundable deposits** (Note 14) Fair Value 2010 Carrying Value Fair Value

P2,021,911,190 = 1,039,254,600 3,061,165,790 183,032,000 3,244,197,790

P2,021,911,190 = 1,039,254,600 3,061,165,790 183,032,000 3,244,197,790

= P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165

= P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165

16,880,208 3,261,077,998 110,367,200 8,957,783,986 546,244,400 146,244,351 35,174,259 341,707,354 166,175,680 10,303,697,230 P13,564,775,228 =

16,880,208 3,261,077,998 110,367,200 8,957,783,986 546,244,400 146,244,351 35,174,259 341,707,354 126,709,251 10,264,230,801 P13,525,308,799 =

489,917,466 3,879,438,631 114,532,000 9,763,288,972 471,465,815 134,819,376 86,576,474 402,132,066 9,240,000 10,982,054,703 = P14,861,493,334

489,917,466 3,879,438,631 114,532,000 9,763,288,972 471,465,815 134,819,376 86,576,474 402,132,066 5,870,794 10,978,685,497 = P14,858,124,128

Total financial assets Financial Liabilities Financial liabilities at amortized cost: Accounts payable and other accrued liabilities*** (Note 15) P6,340,401,121 = Due to related parties 36,302,174 Long-term debt****(Note 16) 20,871,893,433 Others***** 670,810,817 Total financial liabilities P27,919,407,545 =

P6,340,401,121 = 36,302,174 18,461,269,306 670,810,817 P25,508,783,418 =

= P5,117,153,241 35,529,304 18,432,708,704 923,451,428 = P24,508,842,677

= P5,117,153,241 35,529,304 16,164,927,534 923,451,428 = P22,241,061,507

* Include nontrade receivables from derivative counterparties and employees. ** Included under Other noncurrent assets account in the consolidated statements of financial position. *** Excluding government-related payables. **** Includes current portion. ***** Included under Other noncurrent liabilities in the consolidated statements of financial position.

*SGVMC117488*

- 68 The Group uses the following hierarchy for determining and disclosing the fair value of financial assets designated at FVPL, derivative financial instruments and AFS investments by valuation techniques: (a) Level 1: quoted (unadjusted) prices in an active market for identical assets or liabilities; (b) Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and (c) Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. The table below shows the Groups financial instruments carried at fair value hierarchy classification:
2011 Level 1 Financial assets at FVPL (Note 8) Designated at FVPL Quoted debt securities Private Government Level 2 2010 Level 1 Level 2

P2,021,911,190 = 1,039,254,600 3,061,165,790 Quoted equity securities 183,032,000 3,244,197,790

P =

= P2,086,089,903 1,017,480,478 3,103,570,381 285,950,784 3,389,521,165

= P

Derivative financial instruments not designated as accounting hedges AFS investments (Note 8) Quoted equity securities

3,244,197,790 110,367,200 P3,354,564,990 =

16,880,208 16,880,208 P16,880,208 =

3,389,521,165 114,532,000 = P3,504,053,165

489,917,466 489,917,466 = P489,917,466

There are no financial instruments measured at Level 3. There were no transfers within any hierarchy level of fair value measurements for the years ended December 31, 2011 and 2010, respectively.

*SGVMC117488*

- 69 -

29. Commitments and Contingencies Operating Aircraft Lease Commitments The Group entered into operating lease agreements with certain leasing companies which cover the following aircraft: A320 aircraft The following table summarizes the specific lease agreements on the Groups Airbus A320 aircraft:
Date of Lease Agreement Original Lessors December 23, 2004 CIT Aerospace International (CITAI) New Lessors Wilmington Trust SP Services (Dublin) Limited* No. of Units Lease Term 2 May 2005 - May 2012 June 2005 - June 2012

April 23, 2007 May 29, 2007

Celestial Aviation Trading 17 Inishcrean Leasing Limited (CAT 17) Limited (Inishcrean)** CITAI

1 4

October 2007 - October 2016 March 2008 - March 2014 April 2008 - April 2014 May 2008 - May 2014 October 2008 - October 2014 January 2009 - January 2017

March 14, 2008

Celestial Aviation Trading 19 GY Aviation Lease Limited (CAT 19) 0905 Co. Limited*** Celestial Aviation Trading 23 Limited (CAT 23)

March 14, 2008

October 2011 - October 2019

July 13, 2011 RBS Aerospace Limited 2 March 2012 - February 2018 * Effective November 21, 2008 for the first aircraft and December 9, 2008 for the second aircraft. ** Effective June 24, 2009. *** Effective March 25, 2010.

On March 14, 2008, the Group entered into an operating lease agreement with CAT 19 for the lease of two Airbus A320 aircraft, which were delivered in 2009. On the same date, the Group also entered into another lease agreement with Celestial Aviation Trading 23 Limited (CAT 23) for the lease of two additional Airbus A320 aircraft to be received in 2012. In November 2010, the Group signed an amendment to the operating lease agreements with CAT 23, advancing the delivery of the two Airbus A320 aircraft to 2011 from 2012. Lease agreements with CITAI, CAT 17 and CAT 19 were amended to effect the novation of lease rights by the original lessors to new lessors as allowed under the existing lease agreements. On July 13, 2011, the Group entered into an operating lease agreement with RBS Aerospace Ltd. for the lease of two Airbus A320 aircraft, which shall be delivered in March 2012. This aircrafts shall replace the two aircrafts under Wilmington Trust SP Services (Dublin) Ltd. which contract shall expire on May 2012 and June 2012.

*SGVMC117488*

- 70 Future minimum lease payments under the above-indicated operating aircraft leases follow:
2011 US dollar US$46,796,685 303,869,815 312,695,865 US$663,362,365 Philippine peso equivalent P2,051,566,670 = 13,321,652,690 13,708,586,722 P 29,081,806,082 = 2010 US dollar US$37,805,531 113,948,252 8,408,350 US$160,162,133 Philippine peso equivalent = P1,657,394,460 4,995,491,378 368,622,089 = P7,021,507,927 2009 Philippine peso US dollar equivalent US$33,749,946 = P1,559,247,483 118,485,725 25,541,362 US$177,777,033 5,474,040,499 1,180,010,948 = P8,213,298,930

Within one year After one year but not more than five years Over five years

Lease expenses relating to aircraft leases (included in Aircraft and engine lease account in the consolidated statements of comprehensive income) amounted to P1,718.4 million, = = P1,604.9 million and P1,723.9 million in 2011, 2010 and 2009, respectively. = Boeing 757 aircraft On August 22, 2001, the Group entered into aircraft operating lease agreements with PALSI, Inc. (PALSI) and Pegasus Aviation IV, Inc. (Pegasus) for the lease of one B757-236 aircraft from each company. The respective lease terms are for a period of seven years. The delivery dates of the aircraft which were leased from Pegasus and PALSI were December 13, 2001 and February 18, 2002, respectively. The lease agreements expired on December 13, 2008 and February 18, 2009, and the two aircraft were returned to the lessors in June and October 2009. Under the aforementioned aircraft lease agreements, the Group paid PALSI and Pegasus monthly maintenance expenses based on billing statements (included in Accounts payable and other accrued liabilities account in the consolidated statements of financial position) throughout the lease term. On March 18, 2006, the Group entered into a sub-lease agreement with Air Slovakia for the sublease of the two B757-236 aircraft which were leased from PALSI and Pegasus. The sub-lease agreements were for a period of two years, which expired on February 18, 2009 and December 13, 2008. Rent income earned (included in the consolidated statements of comprehensive income) under the aforementioned sub-lease agreement amounted to = P131.7 million in 2009. A330 aircraft On December 6, 2011, the Group entered into an aircraft operating lease Memorandum of Understanding (MOU) with CIT Aerospace International for the lease of four Airbus A330-300 aircrafts, which are scheduled to be delivered from June 2013 to 2014. These aircrafts shall be used for the long-haul network expansion programs of the Group. 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%.

*SGVMC117488*

- 71 Future minimum lease payments under these noncancellable operating leases follow:
Within one year After one year but not more than five years Over five years 2011 P104,835,557 = 466,379,370 394,888,300 P966,103,227 = 2010 = P101,622,518 443,485,392 124,367,033 = P669,474,943 2009 = P92,283,350 406,896,291 230,752,642 = P729,932,283

Lease expenses relating to both cancellable and non-cancellable non-aircraft leases (allocated under different expense accounts in the consolidated statements of comprehensive income) amounted to P240.3 million, P231.2 million and P239.7 million in 2011, 2010 and 2009, = = = respectively. Aircraft and Spare Engine Purchase Commitments As of December 31, 2009, the Group has existing commitments to purchase 15 additional new Airbus A320 aircraft, which are scheduled for delivery between 2010 and 2014, and one spare engine to be delivered in 2011. In 2010, the Group exercised its option to purchase five Airbus A320 aircraft and entered into a new commitment to purchase two Airbus A320 aircraft to be delivered between 2011 and 2014. On May 2011, the Group turned into firm orders its existing options for the seven Airbus A320 aircraft which are scheduled to be delivered in 2015 to 2016. As of December 31, 2011, the Group has existing commitments to purchase 26 new Airbus A320 aircraft, three of which were delivered on January 25, September 29 and December 8, 2011, respectively. The remaining 23 Airbus A320 aircraft are scheduled to be delivered between 2012 and 2016, one of which was delivered in January 2012. The spare ending was delivered as scheduled in 2011. Also in 2007, the Group has committed to purchase six ATR 72-500 turboprop aircraft and has exercised an option to purchase additional four ATR 72-500 turboprop aircraft. These turboprop aircraft will cater to destinations in the countrys smaller airports. The Group has taken delivery of the initial six aircraft in 2008 and the remaining two were received during the first quarter of 2009. One ATR 72-500 turboprop aircraft was delivered in March 2011 to replace the aircraft disposed last November 2010. The Group terminated the purchase commitment for one ATR 72500 turboprop aircraft. On August 2011, the Group entered in a new commitment to purchase firm orders of thirty new A321 NEO Aircraft and ten addition option orders. These aircraft are scheduled to be delivered from 2017 to 2021. These aircraft shall be used for a longer range network expansion programs. The above-indicated commitments relate to the Groups re-fleeting and expansion programs.

*SGVMC117488*

- 72 Capital Expenditure Commitments The Groups capital expenditure commitments relate principally to the acquisition of aircraft fleet, aggregating to P66.58 billion as of December 31, 2011. = December 31, 2011 Philippine peso US dollar equivalent = US$245,151,805 P10,747,455,131 1,324,854,931 58,081,640,175 US$1,570,006,736 P68,829,095,306 =

Within one year After one year but not more than five years

Contingencies The Group has pending suits and claims for sums of money against certain general sales agents which are either pending decision by the courts or being contested, the outcome of which are not presently determinable. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the defense in these matters and is based upon an analysis of potential results. The Group currently does not believe that these proceedings will have a material adverse effect on the Groups financial position and results of operations. The Parent Company has a pending tax preassessment, the outcome of which is not presently determinable.

30. Supplemental Disclosures to the Consolidated Statements of Cash Flows The principal noncash activities of the Group were as follows: a. On June 30, 2010, JGSHI settled its payable to the Group through transfer of quoted debt and equity securities amounting P3.7 billion and accrued interest receivable amounting = to P71.4 million. The transfer price was at fair value. These investments are classified by the = Group as designated financial assets at FVPL and AFS investments amounting P3.5 billion = and P118.4 million, respectively (Notes 8 and 26). =
b.

On February 28, 2010, the Group sold an engine for P89.5 million with a book value of = = P72.2 million to a third party maintenance service provider (buyer). The transaction was settled through direct offset against the Groups US-dollar denominated liability to the buyer amounting to P88.3 million. =

c. On December 31, 2011, the Group recognized a liability based on the schedule of pre-delivery payments amounting to P564.2 million with a corresponding debit to Construction-in = progress account. The liability was paid on January 3, 2012. d. In 2011, the additions in Passenger aircraft account include capitalized ARO asset related to new operating lease agreements amounting P279.9 million (Note 17). In 2010, the additions = in Passenger aircraft account include increase in ARO asset amounting to P705.7 million due = to change in accounting estimates. The above capitalized ARO asset has corresponding recognition of ARO liability with the same amount.

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- 73 e. In 2011 and 2010, the Group acquired a total of six passenger aircraft by assuming direct liabilities (Notes 12 and 16). This transaction is considered as a non-cash financing activity.

31. Registration with the BOI The Parent Company is registered with the BOI as a new operator of air transport on a pioneer status on one (1) ATR72-500 and six (6) A320 and non-pioneer status for five (5) ATR72-500 and five (5) Airbus A320 aircraft. Under the terms of the registration and subject to certain requirements, the Parent Company is entitled to the following fiscal and non-fiscal incentives: a. ITH for Registration no. 2008-119: four (4) years from March 2009 to February 2013; Registration no. 2010-180: six (6) years from January 1, 2011 to December 31, 2016; Registration no. 2011-240: four (4) years from November 16, 2011 to November 16, 2015 Registration no. 2011-241: six (6) years from November 16, 2011 to November 16, 2017; Registration no. 2011-242: four (4) years from November 16, 2011 to November 16, 2015; Registration no. 2011-243: six (6) years from December 14, 2011 to December 13, 2017; a.i. Only income directly attributed to the revenue generated from the registered project shall be qualified for ITH. For this purpose, the Parent Company shall submit audited segregated income statements for this project. Net income from operation of registered activity shall be certified under oath by Chief Executive Officer or Chief Financial Officer. a.ii. The Parent Company shall submit the list of cost items common to all its projects/activities (whether BOI or non-BOI registered) and its methodology adopted in allocating common cost. The methodology to be adopted in accounting fixed assets particularly the plant, property and equipment account shall be the straight line depreciation method. a.iii. Furthermore, the interest expense on the firms liabilities shall proportionately be allocated for this project. b. Employment of foreign nationals. This may be allowed in supervisory, technical or advisory positions for five (5) years from date of registration. The president, general manager and treasurer of foreign-owned registered firms or their equivalent shall be subject to the foregoing limitations. c. Importation of capital equipment, spare parts and accessories at zero (0%) duty from date of registration to June 16, 2011 pursuant to E.O. 528 and its Implementing Rules and Regulations. d. Avail of a bonus year in each of the following cases but the aggregated ITH availment (regular and bonus years) shall not exceed eight (8) years. The ratio of total of imported and domestic capital equipment to the number of workers for the project does not exceed US$10,000 to one (1) worker; or The net foreign exchange savings or earnings amount to at least US$500,000 annually during the first three (3) years of operation.

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- 74 The indigenous raw materials used in the manufacture of the registered product must at least be fifty percent (50%) of the total cost of raw materials for the preceding years prior to the extension unless the BOI prescribes a higher percentage.

e. For the first five (5) years from date of registration, the Parent Company shall be allowed an additional deduction from taxable income of fifty percent (50%) of the wages corresponding to the increment in number of direct labor for skilled and unskilled workers in the year of availment as against the previous year if the project meets the prescribed ration of capital equipment to the number of workers set by the BOI of US$10,000 to one worker and provided that this incentive shall not be availed of simultaneously with the ITH. f. Tax credit equivalent to the national internal revenue taxes and duties paid on raw materials and supplies and semi-manufactured products used in producing its export product and forming part thereof for a ten (10) years from start of commercial operations. Request for amendment of the date of start of commercial operation for purposes of determining the reckoning date of the 10-year period, shall be files within one (1) year from date of committed start of commercial operation.

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.
j.

Exemption from wharfage dues, any export tax, duties, imports and fees for a ten (10) year period. Importation of consigned equipment for a period of ten (10) years from date of registration subject to posting of re-export bond.

k. Exemption from taxes and duties on imported spare parts and consumable supplies for export producers with CBMW exporting at least 100% of production. The Parent Company shall submit to the BOI a quarterly report on the actual investments, employment and sales pertaining to the registered project. The report shall be due 15 days after the end of each quarter.

32. Events After the Statement of Financial Position Date On January 13, 2012, JGSHI acquired all of the Groups debt and equity securities classified as financial assets at FVPL and AFS financial assets in exchange for a settlement amounting = P3,458.0 million. Market value of financial assets at FVPL and AFS financial assets at date of settlement amounted to P3,347.0 million and P110.4 million, respectively. = = The Company entered into a joint venture agreement with CAE International Holdings Limited on December 13, 2011. On December 19, 2011, the Company paid P33,750,000 representing = payment for its 25% out of the 135,000,000 Class A subscribed shares at Php1 par value. The joint venture named Philippine Academy For Aviation Training, Inc. was formally incorporated on January 27, 2012 (Note 13).

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- 75 -

33. Approval of the Consolidated Financial Statements The accompanying consolidated financial statements were approved and authorized for issue by the BOD on March 13, 2012.

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SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, January 25, 2010, valid until December 31, 2012 SEC Accreditation No. 0012-FR-2 (Group A), February 4, 2010, valid until February 3, 2013

INDEPENDENT AUDITORS REPORT ON SUPPLEMENTARY SCHEDULE

The Stockholders and the Board of Directors Cebu Air, Inc. 2nd Floor, Doa Juanita Marquez Lim Building Osmea Boulevard, Cebu City We have audited in accordance with Philippine Standards on Auditing the financial statements of Cebu Air, Inc. and its subsidiaries (the Group) for the year ended December 31, 2011, and have issued our report thereon dated March 13, 2012. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The Supplementary Schedule of Retained Earnings Available for Dividend Declaration as of December 31, 2011 is the responsibility of the Groups management. This schedule is presented for the purpose of complying with the requirements of SEC Memorandum Circular No. 11, Series of 2008, and is not part of the basic consolidated financial statements. The information in the schedule has 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 when considered in relation to the basic consolidated financial statements taken as a whole. SYCIP GORRES VELAYO & CO.

Michael C. Sabado Partner CPA Certificate No. 89336 SEC Accreditation No. 0664-AR-1 (Group A), March 11, 2011, valid until March 10, 2014 Tax Identification No. 160-302-865 BIR Accreditation No. 08-001998-73-2009, June 1, 2009, Valid until May 31, 2012 PTR No. 3174824, January 2, 2012, Makati City March 13, 2012

A member firm of Ernst & Young Global Limited

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CEBU AIR, INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULE OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION FOR THE YEAR ENDED DECEMBER 31, 2011

The table below presents the retained earnings available for dividend declaration as of December 31, 2011: Unappropriated Retained Earnings adjusted to available for dividend distribution, beginning = P3,678,128,638 Add: Net income during the period closed to retained earnings 3,624,417,718 Less: Recognized deferred tax asset 98,681,803 Fair value adjustments arising from mark-to-market gain of financial assets at fair value through profit and loss 143,554,705 Fair value adjustment arising from fuel hedging gains 43,977,378 Equity in net income of joint venture (42,318,202) Unrealized foreign exchange gain - net (except those attributable to Cash and Cash Equivalents) (35,575,469) 7,510,866,571 Less: Appropriation of retained earnings (933,500,000) Treasury shares (529,319,321) Unappropriated Retained Earnings available for dividend distribution, ending = P6,048,047,250
See accompanying Notes to Consolidated Financial Statements.

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