2020 Airline Industry Briefing

Airline Industry Briefing
24 August 2020
24 August 2020 Airline Industry Briefing #SGVforABetterPhilippines

Objectives
To provide industry updates and developments
To manage the Firm's audit risk by ensuring all significant and pervasive industry risks are
identified
To ensure that all engagement teams adopt a uniform stand/position on the identified risks
To provide inputs to facilitate the planning events of teams handling clients in the airline/air
transportation industry
To understand the potential impact of the changes/developments in the accounting and

auditing standards
Page 2 24 August 2020 Airline Industry Briefing #SGVforABetterPhilippines
Agenda
1:30– 1:40 INTRODUCTION
INDUSTRY UPDATES
1:40 - 2:20 Industry trends and developments
2:30 - 2:50 Low Cost Carriers (LCCs)
2:50 - 3:20 Philippine Economic Update
3:20 - 3:30 Break
ACCOUNTING AND AUDITING CONSIDERATIONS
3:30 - 3:50 COVID-19: Accounting Considerations
3:50 - 4:20 Accounting challenges and auditing issues
4:20 - 4:40 2020 Relevant Tax Updates
Financial risk management and derivatives
4:40 - 5:00
accounting
5:00 – 5:15 Q&A

Introduction

Overview of Airline Industry
Characteristics of the
Airline Classification Operating Models
Industry
Network or major carrier
Hub-
and-
Regional carrier spoke
Highly Seasonal
Competitive
Low cost carrier Point-to-point

A B
Capital
Intensive Regulated
Air Cargo carrier

Combination
Profitability is sensitive to
varied factors
Segmentation of the Airline Business
Short-haul Long-haul
Full-service
Low cost/value

Industry Updates
• Industry Trends and Developments
• Low Cost Carriers (LCC)
• Philippine Economic Updates

Industry Considerations
Sales/Revenue Operations
Multiple distribution channel and Capacity, route and yield

settlement system management
48 %
90 %
IT Dependent 50%
Financing of aircraft/ fleet
Varied fare structure and 62 %
acquisition including related
complex fare basis
parts
Fleet maintenance
program Airports
Code share
arrangements
Fuel cost
Crew and labor cost management
management
Multiple location

Top 20 Industry Risks (Pre COVID-19)
2019 2018Risk
1 1 Competition
6
2 2 Fuel Prices
3 5 Data intelligence threats and cybercrime
8 4
5
4 3 Cost Control
5 7 Macroeconomic factors
3
Risk
Radar
1 2
9
6 4 Safety Management
7 N/A Brand Reputation
5
1 2
7 9
8 11 Foreign Exchange
3
4
7
9 9 Key Labor shortages

10
10 10 Business interruptions
10
2019
2018

Fleet Profile (Local Airlines)
DHC 8-400 B777 ATR 72-500 ATR 72-600

15% 10% 10% 17%
A350
DHC 8-300 6%
A330
4%
10%
A330
15% A320
A321 NEO 100%
A320
17% 8%
A321 NEO A320 A321 CEO

A321 CEO 8% 46% 9%
25%
2018 2019 Q2 2020 2018 2019 Q2 2020 2018 2019 Q2 2020
Leased 88 85 85 Leased 42 49 51 Leased 21 24 24
Owned 9 12 13 Owned 29 26 26 Owned - - -
Total 97 97 98 Total 71 75 77 Total 21 24 24
Wide Body
Narrow Body
* Based on the combined fleet of top three local airlines as of Q2 2020

Revenue Streams
An Overview: Where Do Airlines Get Their Revenue?
Ticket
Sales Frequent Ground
Flyer Handling
Primary
Transporting
Cargo
Secondary Catering
Priority Ancillary
Boarding/
Choice seats No Charter
show/refund/
rebooking
In-flight MRO
Entertainment Food & Prepaid &
Beverages excess baggage

Revenue - Global Distribution System
Sales/UTR Recognition Settlement
Airline Revenue &

Accounting System
Global Distribution System
❖ Travel Agents
❖ Ticketing Office A B C G H I
❖ Web sales
D E F Remittances
❖ Mobile application
Passengers’ tickets reservation

10 Typical Key Cost Components for Airline
INTERNATIONAL AIRLINES LOCAL AIRLINES

Repairs and maintenance Flight amenities
Flight amenities Passenger food
4% 1%
1% 3%
Passenger food Reservation and selling costs
4% 3%
Landing and take-
Landing and take-off fees off fees
4% 4%
Interest
expense* Interest expense*
5% Fuel and oil 7% Fuel and oil
Reservation and selling
33% 33%
costs
5%
Ground handling
charges
8%
Ground handling charges
9%
Crew and staff costs
9%
Crew and staff costs

16% Depreciation, Depreciation,
amortization and Repairs and amortization and
obsolescence maintenance obsolescence
19% 13% 19%
* December 31, 2019 data

Local Source: Consolidated figures of PAL and CEBPac (17A Annual Report)
International: Consolidated figures of top 5 international airlines (Qatar, Singapore, ANA, Cathay and Emirates)
Fuel Prices
Jet fuel price average

for 2020: $46.3/bbl

Airline Industry Critical Success Factors
Management Fuel Four aspects of the impact of COVID-19

strength Management Cost savings
on civil aviation
Operational impact: impact on the
Revenue
number of flights, seats offered, for
passenger and cargo flights segmented
Asset into international and domestic
Management
operations.
Labor CSF Economic impact: impact on the
revenues of air carriers, airports and air
navigation service provider (ANSPs).
Liquidity Aircraft utilization: aircraft utilization
Mix and
and grounded aircraft by aircraft category.
Fleet
efficiency market Country-pair traffic: level of flights at the
share
Alliances country-pair level on weekly basis.
(source: https://www.icao.int/sustainability/Pages/COVID-19-Air-
Traffic-Dashboard.aspx)

Airline Industry Specific Metrics
No. of passengers No. of seats

x RPK ASK x
Km travelled Km travelled
Revenue
Revenue RPK
ASK
RPK ASK
RASK
Yield Load Factor

Cost
Legend: ASK
RPK - Revenue passenger kilometers
ASK - Available seat kilometers
RASK - Revenue per available seat kilometer CASK
CASK - Cost per available seat kilometer
Other Airline Industry Key Performance Indicators
Liquidity (cash, cash equivalents, short-term Cargo revenue ton miles

investments and available credit) Margin percentage (regional carriers only)
Total capitalization (debt, equity and off-balance-
Major customer level of revenue (regional
sheet financings)
carriers only)
EBITDAR
EBITDAR as a percentage of total revenue
(EBITDAR margin)
Labor expense per ASK
Fuel price per barrel
Aircraft utilization

COVID-19: Timeline of Events
Passenger yields went down sharply as well as bookings, airlines unable to fill seats.
Dramatic case spread outside Asia Pacific hit bookings and led to surge of ‘imported’ cases in and outside Asia, driving border
closures.
Outlook for international travel is below domestic travel in the longer term.

COVID-19: Philippine Aviation News

COVID-19: Impact Assessment
Worldwide flights went down by almost 94% in April. Industry virtually grounded outside US and Asia domestic markets.
While international markets are not showing much recovery signs as travel advisories, quarantine and border closures
are still in place, domestic markets started to improve after April.

COVID-19: Impact Assessment
Economists’ forecasts expect output loss twice as large

as Global Financial Crisis.
Post lock-down return to air travel likely to be in stages.
Domestic markets to open in 3rd quarter, international markets much
slower
Recession alone would push global RPKs down by 8% in
Q3.
Airlines will run out of cash before recovery arrives.

A typical airline had 2 months of cash at the start of the year.

GLOBAL: Air Passenger Volumes
Industry-wide revenue passenger kilometers (RPKs) fell by a

massive 52.9% year-on-year in March, the largest decline in
recent history. In seasonally-adjusted terms global passenger
volumes returned to levels last seen in 2006.
The rebound continues to be dominated by rising demand in
domestic markets. International RPKs contracted by close to
100% for another month. However, some improvement is
expected in July as international travel restrictions have been
lifted in some parts of the world including the Schengen Area.
Passenger volumes continued to fall faster than the industry-
wide available seat-kilometres (ASKs). As a result, the global
passenger load factor reached all-time low for the month of
June, at 57.6%.

GLOBAL: Air Cargo Volumes
Industry-wide cargo tonne-kilometres (CTKs) declined by

17.6% year-on-year in June, after falling 20.1% in May.
Cargo demand in June was softer than would normally
be suggested by manufacturing output and new export
orders, which were stabilizing in most parts of the world
in June. That relative underperformance was driven by
air freight losing market share of total world trade in
recent months, as buyers are turning to cheaper but
slower means of transport.
Available cargo tonne-kilometres (ACTKs) fell 34.1%
year-on-year in June) resulting in the cargo load factor
rising 11.5ppts year-on-year. As for April and May, the
industry-wide load factor is close to record high levels.

GLOBAL: Passenger Load Factors
Capacity, as measured by industry-wide available seat kilometres (ASKs) fell by 36.2% annually in March. While the largest decline
remained in Asia Pacific (down 44.4%), all regions registered unprecedented capacity reductions.

GLOBAL: International Demand
International RPKs plummeted by 55.8% year-on-year in March, mainly driven by the widespread border closures and travel
restrictions. The steep declines were recorded across all regions.
Looking ahead, even when travel restrictions and lockdowns are lifted, the willingness of consumers to travel by air is expected to
remain limited initially, in particular on international markets.

PHILIPPINES: Airline Companies’ Share in International Market
As of December 31, 2019

30.53 million passengers
Astro Air 35,000

International
1% 30,000
In thousands
25,000
Cebu Pacific
20% 20,000
15,000
10,000
5,000
Foreign Carriers
46% -
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Foreign Carriers 8,150 8,710 9,162 9,133 8,725 9,593 10,358 11,395 12,423 14,053
Philippine Airlines 3,933 3,906 3,952 4,152 4,982 5,507 6,048 6,877 7,444 7,681
Philippine
Cebu Pacific 2,064 2,463 2,728 2,820 3,191 3,884 4,401 4,741 5,018 5,951
Airlines
25% Philippines Air Asia 97 223 324 617 705 770 913 1,357 1,720 2,492
Astro Air International - - - - - - - - 251 322
PAL Express 22 151 182 116 150 39 61 - - 19
Philippines Air Royal Air Charter Service - - - - - - - - - 11
Asia Cebgo, Inc. 7 211 285 270 164 72 - - - -
8%
Spirit de Manila 10 5 - - - - - - - -
Air Asia, Inc. - - 111 215 2 - - - - -
International passenger traffic statistics *Compound annual growth rate over the last 10 years.
Source: Civil Aeronautics Board (www.cab.gov.ph)

PHILIPPINES: Airline Companies’ Share in Domestic Market

29.54 million passengers
Philippine Airlines Others

6% 2%
30,000
CebGo 25,000
In thousands
6%
20,000
15,000
Cebu Pacific
Philippines AirAsia Inc. 44% 10,000
18%
5,000
PAL Express
24%
Domestic passenger traffic statistics *Compound annual growth rate over the last 10 years.
Source: Civil Aeronautics Board (www.cab.gov.ph)

How are Airlines responding to COVID-19?
Managing the crisis (immediate 3 months) – protecting Restarting the business – dealing with immediate risks as a
people and the business result of the crisis
Cutting number of flights • Passenger travel: In 2004 (post-SARS), when air travel
• Most of the airlines across the world will cut most of their bounced back so quickly, the global economy was
flights in the coming days as travel restrictions push thriving, and China was experiencing near-double digit
demand for air transport close to zero and could lay off economic growth. Airlines should expect a bounce-back in
some of their staff temporarily. passenger travel (similar to post SARS) after COVID-19
but they should also be prepared to experience prolonged
Grounding of largest aircraft
financial damage due to the current macroeconomic
• Most airlines have decided or are in the process of situation.
grounding their largest widebodies aircraft to deal with
• Alternate usage: Some airlines could start to use
the fallout of the crisis.
passenger aircraft for cargo as a temporary means to
Managing liquidity mitigate shortage in belly-hold capacity.
• All airlines should focus on how to sustain and increase • Aircraft deliveries: Considering the COVID-19 situation,
their liquidity to withstand the COVID-19 pandemic. Airlines face difficult choices regarding upcoming aircraft
Cutting Capex deliveries. Some airlines may seek to defer deliveries, and
• The airlines have to take immediate measures, including the larger ones, in particular, have the bargaining power
cutting their Capex forecasts, reducing schedules by at to negotiate with aircraft manufacturers.
least 70% to 80%, cutting dividends and distributions and, • Government aid: See next slide.
in some cases, adjusting their operating fleets.

Aid from the Government – Global
In addition to confidence building and stimulus measures, the anticipated slow recovery also adds urgency to the need for
emergency financial relief measures. IATA estimates that some 25 million jobs in aviation and its related value-chains,
including the tourism sector, are at risk in the current crisis. Passenger revenues are expected to be $314 billion below
2019 (-55%) and airlines will burn through about $61 billion in liquidity in the second quarter alone as demand plummets
by 80% or more.
Some governments have stepped up. Examples of relief measures over include:
• The Airlines for America (A4A) has asked Congress and • Colombia added significant tax relief for airline tickets, jet
the White House for a $58 billion emergency package of fuel and tourism to their already comprehensive package
federal aid to combat the anemic demand caused by the of relief measures.
COVID-19 pandemic. • Hong Kong provided another HK$2 billion in relief,
• The 41 Eurocontrol states and their air navigation service including purchasing 500,000 tickets in advance from
providers (ANSPs) delayed EUR1.1 billion in air Hong Kong based carriers to inject liquidity into the
navigation service charges for February-May until airlines.
November and through to 2021. Last week a further 13 • Senegal announced US$128 million in relief for the
states and ANSPs also delayed terminal charges, totaling Tourism and Air Transport sector.
over EUR190 million, for a similar period. • Seychelles has waived all landing and parking fees for
April to December 2020.

Aid from the Philippine Government
Bayanihan Act Air Carriers Association of the Philippines (ACAP) - March 25 Letter
• Ensure the availability of credit to the – Appeal to the government
productive sectors of the economy by Emergency Line or Credit and Long-term or Guarantee Facility
lowering the lending interest rates and • Access to emergency lines of credit to fund six months of operations
reserve requirements of lending of airlines and other aviation-related companies in order for the
institutions industry to remain viable until overall demand recovers*
• Direct all banks and other financial • Long-term facility or a guarantee facility to allow the airline
institutions to implement a 30-day grace companies to restructure debt at manageable levels and secure
period for payments of loans and credit better terms from aircraft lessors, bankers and creditors
card bills, which shall be extended if the
Waiver of Navigational and Airport Charges
ECQ period is extended
• Full waiver of all navigational and airport charges, including airport
• No documentary stamp taxes (DST) shall
office rentals and land leases until end of the year
be imposed as a consequence of the
relief granted and for credit extensions Uniformity in Transport Regulations
and credit restructuring during the ECQ • Uniformity in aviation transport regulations should be implemented
• Accrued interest for the 30-day grace in the entire country, and that LGUs should be mandated to align
period may be paid by the borrower on with National Government ton ensure quick resumption of domestic
staggered basis over the remaining life of operations
the loan
no documentary stamp taxes (DST) shall be * Banks already tightened credit and cut off access to undrawn lines even
imposed without defaults on payments.
Low Cost Carriers (LCCs)

What is a low-cost carrier?
The 'Classic' characteristics of LCCs

Short-haul, point-to-point flights, often with secondary airport operation
Single-aisle fleet standardization preference
Single-class, higher-density airplane preference
Higher utilization and quick turnaround
Lower yield but higher volume concept
Low fares, including very low promotional fares
No (free) frills

LCC | Advantages and Disadvantages
Advantages Disadvantages
Cheap Possible delays from turnaround

Quick and convenient to book online Restricted baggage allowance
You only pay for what you want No transfer between flights - point to point
only
Frequent special fares with virtually free
flights Minimal compensation if canceled
Price benefits No seat allocation
Hidden fees
Difficulty on keeping cost advantage
Source: ICAO, IATA, OAG

LCC Global

Global | LCC
Regional Operation Worldwide as of February 28, 2019
Low Cost Carriers’ Seats from 2009 to 2019

Global | LCC Market Share
Low Cost Carriers’ Worldwide Market Share from 2007 to 2019
Source: www.statista.com

Global | Best LCC Airlines (2019)
World’s Best Low-Cost Airlines World’s Best Long Haul Low-Cost Airlines
1. AirAsia 1. Norwegian
2. EasyJet 2. AirAsia X
3. Norwegian 3. Jetstar Airways
4. Southwest Airlines 4. WestJet
5. AirAsia X 5. Eurowings

LCC Asia Pacific

Asia Pacific| Top 10 Airline Groups
Ranked By Widebody Operators as of June 2020
Number of widebody
Rank Airline Group Code In service Parked aircraft
1 AirAsia X D7 1 22 23
2 Scoot Tigerair Pte Ltd (Singapore) TR 6 14 20
3 Jetstar Airways (Australia) JQ 0 11 11
4 Beijing Capital Airlines (China) JD 5 6 11
5 Cebu Pacific (Philippines) 5J 6 2 8
6 Thai AirAsia X (Thailand) XJ 0 14 14
7 NokScoot (Thailand) XW 0 5 5
8 Lion Air (Indonesia) JT 1 9 10
9 Jin Air (South Korea) LJ 3 1 4
10 Thai Lion Air (Thailand) SL 11 17 28
Source: https://www.planespotters.net/airline

Asia Pacific | Best LCC Airlines (2019)
Best Low-Cost Airlines in Asia

1. AirAsia
2. AirAsia X
3. IndiGo
4. Scoot
5. Jetstar Asia
6. PAL Express
7. Peach
8. Citilink
9. West Air
10. Spring Airlines

LCC PHILIPPINES

Philippines | LCC Airlines
Airline Name ICAO* Code IATA** Code Start of Operations
Cebgo SRQ DG 1995

Cebu Pacific Air CEB 5J 1996
PAL Express GAP 2P 2008
Philippines AirAsia EZD Z2 2010
SEAir International SGD XO 2012
*International Civil Aviation Organization

**International Air Transport Association
Source: https://www.icao.int/sustainability/Documents/LCC-List.pdf

Philippines | Fleet size and average age
as of July 2020
Narrowbody Widebody
A321 A320 DHC 8-Dash 8 ATR 42/72 A330 Total
Airline
Count Age Count Age Count Age Count Age Count Age Count
PAL Express - - 8 10.2 14 4.6 - - - - 22
Cebu Pacific 13 1.6 34 6.5 - - 20 5.8 8 5.8 75
Air Asia Philippines
- - 24 12.3 - - - - - - 24
Source: https://www.planespotters.net/airline/PAL-Express
https://www.planespotters.net/airline/CEBU-Pacific-Air
https://www.planespotters.net/airline/Philippines-AirAsia?refresh=1

Airline Market Share in the Philippines
Domestic International

COVID-19 Impact
on LCC

COVID-19 Impact on LLC
Unprecedented decline in flight and passenger traffic in history
Table 1: Decline in
passenger traffic due to
COVID-19
Source: ICAO
Table 2: Estimated impact

on domestic passenger
traffic and revenues by
region for 2020
Source: ICAO

Unprecedented decline in flight and passenger traffic in history
NAIA Terminals 1 to 4 – Flight and passenger volume Source: www.miaa.gov.ph

Expected poor 2020 financial performance
► Travel restrictions and flight cancellations both international and domestic will result to expected significant losses for airline
companies
Q2 2020 financial results of Philippines’ airline companies (in millions):
Passenger Revenue Net Income (loss)
June 2020 June 2019 Decrease December June 2020 June 2019 Decrease December
2019 2019
Cebu Air, Inc. 11,507.32 33,352.07 21,844.75 61,682.32 (9,141.53) 7,144.97 16.286.5 9,122.95
Air Asia
PAL Express Inc. 4,227.98 5,111.31 883.33 9,524.57 99.26 179.59 80.33 108.31
► Varying restriction rules imposed by local authorities will impact airline companies’ restart plan (e.g. requirement for negative
COVID-19 test)
► Additional costs incurred to maintain airworthiness of grounded aircraft
► Additional costs incurred to comply with social distancing policies of the Government
► Employee lay-off (pilots and cabin crew)
► Defer delivery of aircraft ordered prior to COVID-19 pandemic

Airline companies’ liquidity and solvency are being challenged
► Discussion with financial institutions to obtain additional loans and/or defer loan repayments
► Discussion with investors for capital infusion
► Seek Government assistance including waiver of airport charges and securing credit guarantees
► International airline companies who filed for bankruptcy due to COVID-19

The new normal

LCC Trends | Recovery and New Normal
LCC will have an early recovery since the point to point destination, which is
the advantage of LCC, are more likely to be a preference flight for
passengers.
Contraction of the airline industry leave many older planes on the market
and empty gates at the airport , resulting to a lower startup costs for new
low-cost carriers

LCC Trends | Recovery and New Normal
Cebu Pacific PAL Express Philippine Air Asia

• All pilots and cabin crew will undergo • All PAL crew members will be wearing full • Mandatory social distancing
rapid antibody tests before they are Personal Protective Equipment, including • All crew to don personal
assigned to operate flights. All masks, face shields and specially designed protective equipment
operating crew will don Personal PPE uniforms • Health checks and
Protective Equipment (PPE) while on • Passengers will likewise be required to screening before the flight
duty. keep their face masks/coverings on during
• Guests are required to keep masks on, the flight, and observe hand hygiene
from airport entrance until arrival. practices
Bag drop counters will close one hour • Inflight meals are prepared following
before flights, to allow enough time strict Hazard Analysis Critical Control
for staggered boarding procedures. Point (HACCP) procedures. Reading
Physical distancing markers must be material will no longer be distributed
followed. during the flight
• Hand sanitizers will be provided for
guest and staff use, at the airport and
inside the aircraft.

Philippine Economic Update
Macroeconomic Update

The Philippine economy grew over 6.0% a year in 2015-2019
before contracting by 9.0% in 2020 S1
Real GDP growth in %, 2015-2020S1
►A low-middle-income economy:
8.0
GDP/capita of USD3,485 in 2019, 6.0
6.9 6.7
GNI/capita of USD3,850 and 4.0
2.0
6.1 6.3 6.0
GDP/capita (PPP) of USD9,980. 0.0
► More households spending on

-2.0
-4.0
more discretionary goods and -6.0
-9.0
services.
-8.0
-10.0
2015 2016 2017 2018 2019 2020S1
Source: PSA National Accounts August 2020

Real GDP growth, %
Real GDP growth among selected Asian peers, %
Agency 2020F 2021F 2020F 2021F
8.0
GOP DBCC (5.5) 6.5 – 7.5 6.0
6.2 6.5 6.5 4.1 6.8
7.4
4.0 5.0 5.3
1.8
ADB (3.8) 6.5 2.0
0.1
0.0
World Bank (1.9) 6.2 -2.0

-4.0
-1.0
-4.0 -4.0 -3.8

IMF (3.8) 6.8
-6.0
Developing Asia India Indonesia Malaysia Philippines Vietnam China
Sources: DBCC 2020; ADB ADO June 2020; WB Economic Source: Asian Development Outlook Supplement June
Update June 2020, IMF WEO June 2020 2020
Page 54 24 August 2020 Airline Industry Briefing

Key economic growth drivers
Consumer spending, remittances and FDI flows dropped, BPOs slowed down
Consumer spending Overseas remittances Offshoring revenues FDI Inflows
(in trillion PhP) (in billion USD) (in billion USD) (in billion USD)
6.8
7.6% 14.6 4.2% 1.3% 4.8 32.1%
2.9
6.2 2.0
14.0 4.5
2019 S1 2020 S1 2019 S1 2020 S1 2019 Q1 2020 Q1 2019 Jan- Apr 2020 Jan- Apr
► Grew 9% a year to PhP14.3 ► Grew 4.1% to USD30.1 ► Increased 4.7% to USD22.4 ► Reached USD7.6 billion in
trillion or USD268 billion in billion in 2019. billion in 2019. 2019, or 23.2% decrease
2019, or three-fourths of ► Fell 4.2% to USD14.0 billion ► Grew 1.3% to USD4.8 billion from 2018.
GDP. in 2020 Sem 1 from in 2020 Q1 from USD4.5 ► Contracted by 32.1% to
► Contracted 7.6% to PhP6.2 USD14.6 billion in 2019 billion in 2019 Q1. USD2.0 billion in Jan-Apr
trillion in 2020 Sem1 from Sem 1. ► BPO (workers) struggling 2020 from USD2.9 billion in
PhP6.8 trillion in 2019 ► 300K OFWs expected to from work-from-home (WFH) the same period in 2019.
Sem1. return in the next 3 months arrangements.
► Inflation 2.5% for 2019,
which was maintained for
Jan-July 2020.
Sources: BSP, IBPAP, PSA websites

COVID-19 trends and impact to Philippines
Unabated rise in COVID-19 cases disrupts community mobility
► Global cases: 21.5 million Community Mobility Changes Report, in %

Deaths: 772 thousand
PHIL NCR C Visayas Calabarzon
► Philippines cases: 161 thousand
Deaths: 2,665 Retail and
-54 -66 -50 -52
Recreation
Grocery -26 -32 -25 -24
► The Philippines ranks 22nd
out of 188
countries affected by the COVID-19 Parks -31 -60 -39 -27
► Ranks 1st in the WHO Western Pacific
Transit Stations -66 -82 -62 -55
region (ahead of China).
Workplaces -44 -58 -47 -44
► Most affected regions (Cases): Residential +27 +33 +28 +28

National Capital Region 90.1 K
Calabarzon 21.9 K Source: Philippine Mobility Report August 14 2020
Central Visayas 18.5 K

► The NCR and its cities’ high population densities and
Central Luzon 5.1 K
super spreading conditions contribute to attack rates
Sources:
Johns Hopkins Coronavirus Center, accessed Aug 17 2020 that are higher than in other cities.
WHO Western Pacific Region, accessed Aug 17 2020
Department of Health, accessed Aug 17 2020

GDP contracted by 9.0% in 2020 S1
Lockdowns shut down and disrupt business operations
► Agriculture sustained minimal growth.

► Industry declined with contractions in all four sub-sectors.
► Services suffered declines across sub-sectors except for communications, finance, and public administration.
GDP by industrial origin/sector GDP growth by industrial origin, %
PhP18.6 trillion
(in % share) in 2019 Industry/Sector 2019 S1 2020 S1
Utilities 3% Mining 1%
Agriculture 0.6 0.6
Mining 9.1 (22.9)
Publ Manufacturing 3.6 (12.5)
Transportation 6%
ic Construction 2.1 (20.3)
adm
in Utilities 5.9 (0.9)
5% Manufacturing 18%
Transport 6.4 (36.6)
Accommodation 5.5 (41.2)
Construction 8% Communications 7.6 5.9
Trade 7.8 (6.3)
Finance 9% Trade 19%
Finance 11.4 7.9
Professional services 2.2 (10.4)
Real estate 5.0 (11.5)
Agriculture 8% Public administration 11.5 7.1
Education 8.8 (6.3)
Real Estate 13% Health & social work 1.1 (5.9)
Other services
10% Other services 6.7 (37.0)
GDP 5.6 (9.0)

The COVID-19 Impact on Philippine business
Impact on firm sales, operations, financials, and the workers
Most Significant Financial Problems
during the COVID-19 Outbreak Workers Able to Work From Home
Business Condition after ECQ Bottlenecks in Supply Chain?
Repayment of Payments of 26%-50%
Open, More than
No loans invoices
limited Minor 50%
operations 6%-25%
bottlenecks Other
expenses
Open Rent
Temporarily 1%-5%
closed No specific
Severe problem Work from
Permanentl
bottlenecks home not
y closed Staff wages and social
possible for
security charges
any workers
► Two-thirds of firms immediately suspended business ► About two-thirds of firms are running out of cash to
activities, the rest cut their operations by half. Sales of cover operations. The more significant financial problems
firms declined sharply. are paying staff wages and social security charges,
► Over one-third of firms face product supply bottlenecks repayment of loans, rents, and payments of invoices.
due to slow customs clearance, fewer operating suppliers, Half of firms suspended wage payments - more
limited logistics trucks/drivers, checkpoints and border pronounced in microenterprises, the trade sector, & NCR.
shutdown, and international suppliers problems. ► Work-from-home not a feasible option for workers
in most firms - more pronounced in microenterprises, the
accommodation & food, manufacturing, agriculture,
construction, and trade sectors.
Source: ADB The COVID-19 Impact on Philippine Business, July 2020

Consumer spending decreased by 7.6% in 2020 S1
Lockdowns cut down jobs and livelihood activities, reducing purchasing power
► Slow downs in essential goods and services like food and beverages, housing and utilities, and communication
► Big drops in non-essential categories like restaurants and hotels, recreation, alcoholic beverages, clothing, and
furnishings.
Consumer spending by category
Growth of consumer spending by category, % PhP13.9 trillion
(in % share) in 2019
Category 2019 S1 2020 S1
Food & beverages 5.7 3.5
Clothing 1%
Housing & utilities 6.0 4.6 Alcoholic bev & Others 13%
tobacco 1%
Transport 4.4 (33.8)
Recreation 2%
Education 13.3 (6.1)
Communication 3%
Restaurants & hotels 5.7 (39.0)
Furnishings 4.0 (15.9) Health 3%
Food & non-
Communication 7.0 6.3 Furnishings 4%
alcoholic
beverages 42%
Health 5.0 (1.5) Resto & hotels 4%
Recreation 7.4 (31.9)

Education
Alcohol beverages, tobacco (2.6) (23.9) 4%
Clothing 4.8 (20.4) Transport 11%
Others 7.4 (3.8)

Housing & utilities
Total spending 5.9 (7.6) 12%

Poor, near poor, informal and skilled workers are very vulnerable
Government extended SAP to over 20M beneficiary households
2018 Household Final Consumption Expenditure (HFCE)
Misc goods & svcs
Restaurants & hotels
Education
Recreation & Culture
Communication
Transport
Health
Household furnishings
Housing & utilities

Clothing & footwear
Alco beverages, tobacco
Food & non-alcohol bev.
Ave. Income 97 123 143 168 192 224 263 316 406 760
per Household
(‘000)
Subsistence Poor Near poor Partly skilled Skilled Professional Middle Class
Source: HFCE 2018, Philippines Statistics Office

Philippine Program for Recovery with Equity and Solidarity (PH-PROGRESO)
Stages and Key Features of PH-PROGRESO
Emergency Stage Recovery Stage Resiliency Stage
Period March to May 2020 June to December 2020 2021 onwards
Issued or Proposed 2021 & 2022 GAAs and
Bayanihan I Bayanihan II
Measures Other Measures
• Budget and procurement
flexibility
• Budget and procurement flexibility • 2021 and 2022 budgets attuned to
• Subsidy to poor and • Better targeted and implemented actual needs
low-income households Bayanihan programs to raise income • Structural reforms to prepare for
• Support for small businesses and create jobs the new normal, including resilience
• Support to key sectors (e.g., • Reprioritization of 2020 budget to disasters and pandemics
Key Features agriculture and OFWs) • Resumption of Build, Build, Build • Support Balik Probinsya, Bagong
program priorities Pag-Asa program (decongestion of
• Health system, capacity • Liquidity and equity infusion, and major urban centers, balanced and
and insurance guarantee through the financial resilient regional development).
• Support to front liners. sector to support firms
• Targeted tax incentives.
Source: NEDA, President’s Penultimate Report to the People 2016-2020

Enabling legislative and reform measures
Enabling Legislative and Reform Measures
Measure Purpose
Bayanihan to Recover as One Act • Supplement the Bayanihan to Heal as One Act
(Bayanihan II) • Include PhP166.5-billion funding to address the COVID-19 pandemic
• Cut the corporate income levy to 25 percent

Corporate Recovery and Tax • Extend net operating loss carryover to to five years
Incentives for Enterprises • Provide a sunset provision of up to nine years for registered business activities enjoying the five
(CREATE) Act percent gross income earned incentive
• Afford more flexibility for the government to grant incentives
Rural Agricultural
• Remove the distinction between agrarian and agriculture to enhance the access of rural
and Fisheries Development
communities to private sector financing
Financing System Act
Source: NEDA and DOF, President’s Penultimate Report to the People 2016-2020

Enabling legislative and reform measures
Enabling Legislative and Reform Measures
Measure Purpose
Financial Institutions Strategic • Set mechanisms to allow banks and other financial institutions to dispose of non-performing
Transfer (FIST) Act loans and assets
Government Financial Institutions

• Provide financial assistance and access to distressed enterprises, including MSMEs and
Unified Initiatives to Distressed
strategically important companies
Enterprises for Economic (GUIDE)
• Allow the creation of a special holding company to assist strategically important companies.
Recovery Act
Source: NEDA and DOF, President’s Penultimate Report to the People 2016-2020

Towards the “New Normal” Philippine Development Plan (PDP) 2020 - 2022
Banner Programs
Food security Enhanced BBB Digital economy
Health systems and government
Balik-Probinsya
improvement

Airline Industry Update

The air transportation industry was gradually on the rise as the tourism
industry exhibited exemplary growth
1 All-time high international tourist arrivals in 2019
The Philippines' all-time high 8.2 million international tourist arrivals in 2019, contributed USD9.3 billion or PhP482.2 billion in visitor
8.2m
►
receipts, 20.8% higher than the 2018 figure of USD7.7 billion.
Record-high international ► The Philippines trails four of the 10 ASEAN member countries in terms of tourist arrivals, namely Indonesia, Malaysia, Thailand and Singapore.
tourist arrivals ► In 2019, international passenger traffic increased by 13.7% to 30.5 million, while domestic scheduled passenger traffic increased by 8.3% in
2019 at 29.5 million, as measured by the Civil Aeronautics Board.
2 Domestic tourism expenditure outgrowing inbound tourism expenditure

18.8%
5-year CAGR of
► Domestic tourism expenditure for 2019 was at PhP3.1 trillion, significantly higher than inbound tourism expenditure at PhP548.8
domestic tourism billion. Likewise, the 5-year CAGR of domestic tourism expenditure is higher at 18.8% compared to 15.4% for inbound tourism
expenditure expenditure.
3 Share of Air Transport to GDP is steady in 2019
0.58%
Share of Air Transport Value
► •In 2019, the contribution of Air Transport Value Added Output to the Philippine economy as measured by the Gross
Domestic Product (GDP), is estimated at 0.58%.
Added Output to GDP ► •The Air Transport Value Added Output amounted to PhP113.2 billion in 2019, slightly higher compared to PhP103.5 billion
in 2018, a growth of 0.013%.
4 Airlines are a large contributor to the Transport and Storage sector
15.0%
Contribution to total value
► The air transport industry group is the third largest contributor, accounting for 15.0% of the total value added
generated by the sector.
added ► Transportation and storage accounts for 3.9% of total GDP, seventh out of the eleven services.
5 Airline employees receive the highest compensation on average
PhP352.2k
Ave. annual compensation per paid
According to the latest survey by Annual Survey of Philippine Business and Industry (ASPBI) published in
July 2019, passenger air transport employees received the highest average annual compensation at
employee PhP352.2 thousand per paid employee in 2017, a 6% increase from the previous year.
Source: WEF, PSA, DOT, Fitch Solutions
Heavy co-dependence across various trading groups in the tourism industry
poses high exposure to disruption
Contraction in accommodation, food services, and
transportation in 2020 Q2 is mainly attributed to
Tourism Hotel suppliers Food & Beverage Local Government the travel ban and community quarantine
enforced as a response to the pandemic.
OTAs and other intermediaries COVID-19 restrictions on tourism sector*
Independent hotels
Tour operators hotels Hotel brands
Gross Value Added
Tour Growth Rates, at Constant 2018 prices
Operators
transfers 50.0
Airports 7.6 3.5
-
Tour Operators
Airlines Hotels
Coach transfer (50.0)
Independent Flight
Operators
TRAVEL ECO-SYSTEM business
(100.0) (73.4)
Accommodation Food Service
(64.9)
Flight and Airport Transfers/

Flight booking operators logistics Private car hire 2019 Q2 2020 Q2
intermediaries
Other
Gross Value Added in Transportation
ground
Oil/ jet Cruises/ other Growth Rates, at Constant 2018 prices
transport
fuel 50.0 11.8 17.7
prices 2.2
Tour operator cruises -
Large cruise business Bespoke holidays/
cruises (50.0)
(100.0) (65.6) (72.8)
(98.3)
$
(150.0)
Land Water Air
Fuel prices 2019 Q2 2020 Q2
Ship yards Nautical regulatory bodies
*Note: Statistics may be negatively impacted by the reversion to MECQ in NCR, Cavite, Laguna, Bulacan, and Rizal.
Source: EY, PSA

Due to the pandemic and heavy travel restrictions, the airline industry has been
experiencing a fall in demand leading to losses and layoffs
Inbound Travel Restrictions as of 16 August 2020
Filipinos allowed Filipinos living,

% Share of
to leave PH may working, or stranded in
visitor arrivals
(✓) or may not the following countries
Country by country of
(✘) enter the may (✓) or may not
residence in
following (✘) leave the following
2019
countries countries
Airline travel greatly Heavy losses in in revenue
APAC is showing tentative
declined in 1H 2020 due and demand put airlines in
signs of recovery Korea 24.1 ✓1,4 ✓1
to the pandemic need of cash
Philippine Airlines, Cebu An improvement in
China 21.1 ✘2,3,4 ✓1
► ► IATA projected the ►
Pacific, and Air Asia Philippines to lose demand is expected as USA 12.9 ✓1 ✓
carried only 800,000 USD4,481 million in some countries are Japan 8.3 ✘3,4,5 ✓1,4
passengers in Q2 2020, a revenue with a 47% dip in beginning to loosen Canada 2.9 ✘3 ✓
94% fall from the same passenger demand. restrictions and restore Australia 3.5 ✘3, 5 ✓1
period in 2018. their seat capacity.
► IATA projected a potential Taiwan 4.0 ✘2,3,4 ✓1
► Given the numerous travel loss of 548,300 due to ► Given the expectations for United
restrictions, the three layoffs by airlines. demand recovery, oil and 2.5 ✘3,4 ✓
Kingdom
biggest airlines incurred jet fuel prices rose further
losses of around PhP22
► The aviation sector is
alongside production cuts Germany 1.3 ✘3,4,5 ✓1, 2
leaning on the proposed Malaysia 1.7 ✓1,2,4,5 ✓1, 5
billion. from OPEC and Russia.
financial stimulus
The demand for air travel In May, Asia Pacific based
India 1.6 ✘3 ✓1
► packages for easier access ►
is affected by foreign to emergency loans. airlines registered an 83% Singapore 1.9 ✓4,5 ✓1, 5
tourists not being allowed y-o-y annual (Revenue 1Subject to flight availability and other special arrangements/commercial flights
► The weakened demand for
to enter the Philippines passenger kilometers) RPK
2Transit allowed
travel led to a drastic 3Except diplomatic and UN passport holders/citizens of destination country/individuals with work or residency
aside from Filipinos, and contraction, the most permits/those with special permission by the foreign government/and/or/for essential travel purposes
reduction in the number of
those that fit other specific resilient outcome among
4Subject to the country’s medical protocols on arriving and departing international passengers
flights, forcing airlines to 5Subject to approval from authorities/host government/destination country’s visa regulations at this time
circumstances. all regions. *See full list in this link: https://www.dfa.gov.ph/dfa-news/statements-and-advisoriesupdate/27305-public-

undergo mass layoffs. advisory-dfa-reports-40-countries-have-relaxed-inbound-travel-restrictions

The air transport industry is projected to slowly recover from 2021 onwards
and will return to normal levels by 2024
Flights Revenue and Users Global passenger demand in 2019
(2018 – 2024) expected to be recovered by 2024
9,000 25
74.4% 69.6%
7.3%
7,000 20
63.8%
millions
5,000 15
USDm
APAC RPK y-o-y, APAC ASK y-o-y, APAC Passenger load

3,000 10 June 2020 June 2020 factor, June 2020
1,000 5
► In the International Air Transport Association’s (IATA) passenger survey
-1,000 0
2018 2019 2020f 2021f 2022f 2023f 2024f
conducted in June, around 55.0% of respondents expressed no intention to
travel in 2020 in fear of contracting the virus and the rising unemployment rates
Revenue, USDm Users, millions Revenue CAGR worldwide.
► Due to border closures, locally-imposed lockdowns, health concerns, and ► In the IATA projections published July 2020, global passenger traffic or revenue
rising economic uncertainty brought about by the COVID-19 pandemic, passenger kilometers (RPK) has decreased by 86.5% y-o-y as of June as opposed
revenue generated from commercial flights booked within the Philippines is to the decrease in Asia-Pacific (APAC) RPK by 74.4%. According to the study,
expected to decrease by 44.5% in 2020. global RPK will not return to pre-pandemic levels until 2024, which is a year later
than prior projections.
► From 2021 to 2024, revenue is expected to increase by an average of
26.9% y-o-y and by 2024, would total USD7.3 billion. ► Global available passenger capacity or available seat kilometers (ASK) declined
by 80.1% y-o-y in June and global passenger load factor, as a % of ASK, resulted
► Likewise, active paying customers are expected to decrease by 47.1% in
to 57.6%. This is slightly higher than resulting figures for APAC with ASK
2020 and expected to increase by an average of 21.9% y-o-y from 2021 to
declining by 69.6% over the same period and passenger load factor at 63.8%.
2024.
► The overall slower recovery is due to the slow virus containment in the United
Post-COVID, in order to effectively compete with neighboring countries, the States and many emerging economies that constitute around 40.0% of the global
Philippines will need to boost promotional efforts for both air transport and air travel market, decreased corporate travel due to budget reductions and
tourist destinations, and reinforce hotels investments, transport links and the travel restrictions, and ultimately, weak consumer confidence.
domestic security apparatus. ► However, recovery – although quite slower than previously expected – is
Note(s): Statistics on flights include air travel bookings made by users within the Philippines regardless of the purchase channel,
attributed to domestic travel as passengers prefer short haul travels given
and departure and arrival airports. Users represent the number of people who booked flights independent of the number of current circumstances including locally-imposed border restrictions.
travelers.
Source: Statista, IATA

Business sentiment and consumer confidence – vital to industry outlook
In mid-July, IATA surveyed airline CFOs and heads of cargo companies

► Respondents were asked how profits in the 2nd quarter fared, 77% saw
on their outlook on various factors for the air transport industry.
a decrease in figures while, which is sustained by the strong demand
Profit levels in the next 12 months Traffic volume in the next 12 months for19% saw an improvement air cargo.
Cargo Passenger
► 68% of the same respondents believe that profit will either decrease or
see no improvement in the next 12 months. This is in line with the 81%
Increase
that believe it will take at least a year for the industry to recover to its
Increase
32%
2019 levels and is somewhat consistent with the updated IATA
Decrease
forecast stating that global passenger demand will only recover its
58%
No change 2019 levels by 2024. However, majority or 42% of the respondents do
No change believe that the Asia Pacific region will be the first to recover.
10%
► In terms of traffic volume and yield, majority believe that traffic volume
Decrease will increase for both passenger cargo while yield will decrease. This is
due to the sustained border restrictions, which caused several
Timing of recovery to 2019 levels 0 10 20 30 40 50 60 lockdowns worldwide. However, as several nations start to ease
6-12 months 12-24 months Over 24 months
% restrictions and increase economic activity, IATA forecasted demand to
recover at a slow pace starting 2021.
19% 39% 42% Yield in the next 12 months
► The slower-than-expected recovery, as aforementioned, is due to the
Cargo Passenger
continuing and rising concerns of consumers regarding health and
Region to recover first/last safety as COVID-19 figures have not slowed down to date.
Increase ► Economic shutdowns have forced companies to implement cost
First Last
50 reduction strategies, which includes workforce downsizing and has
40 caused global unemployment to rise exponentially and cause financial
30
No change unrest for both business and consumers.
This has caused business and consumer confidence in travel to remain
%
20 ►
10
weak and in turn, predict slow demand recovery. Companies are then
Decrease
challenged to increase such confidence in order to expect a faster
0
Africa APAC Europe Latin Middle North recovery.
America East America 0 10 20 30 40 50 60 70
Source: IATA %
The government has actively responded to mitigate the effects of the COVID-19
pandemic to the tourism and transportation industries
Policies Expected outcome
Accelerated Recovery and Investments Stimulus for the Economy (ARISE) Mitigate the impact of COVID-19
► Stimulus package that aims to protect Filipino families and jobs, assist workers and business 1
► ARISE and Bayanihan II will implement beneficial monetary policies (i.e.
ARISE entities impacted by COVID-19
providing displaced workers interest rate subsidies and temporary
► PhP70 billion is allocated to the transportation sector while PhP58 billion is allocated to
livelihood) and finance programs to aid tourism enterprises and critically-
fund the Tourism Response and Recovery Plan impacted businesses in the transportation industry
Bayanihan II ► ARISE will provide the transportation industry with grants to cover
► Provides assistance, subsidies and other socioeconomic relief while restoring public trust and necessary training, equipment, test kits, and other resources in order to
confidence in social economic institutions manage any potential health risks arising from infectious diseases
► PhP17 billion is allocated to transportation industry while PhP10 billion is allocated to the ► ARISE will allow affected tourism companies to utilize resources such as
tourism industry tourist tracking system for emergency response, IT resources for the
Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) improvement of tourism services and other resources to mitigate the
economic effects of COVID-19, which will likewise be beneficial to domestic
► Aims to aid the recovery of businesses negatively affected by the COVID-19 pandemic and airline carriers as it will increase confidence in resuming travel; thus,
enhance the ability of the Philippines to attract highly desirable investments increase travel demand
2017 Investment Priorities Plan ► Bayanihan II’s PhP10 billion allocation for the tourism industry is expected
► Amendments to the Modernization Policy and Specific Guidelines on tourism industry to generate around PhP35 billion in economic activity for the industry
► The implementation of ‘travel bubbles’ will jumpstart the tourism and
New normal strategies include establishing ‘travel bubbles’ transportation industries, specifically air transport, as global tourism adapts
► Department of Tourism Chief Romulo-Puyat said future policies may include ‘travel bubbles’ to the new normal
wherein tourists from countries with little to no COVID-19 cases would be able to fly directly ► The additional aid under study for the domestic airline companies will
into the Philippines, specifically COVID-free tourist destinations further assist recovery as, according to the Air Carriers Association of the
► Boracay may pioneer this initiative as it has already opened its borders to tourists from the Philippines, three major carriers alone would need roughly PhP8.6 billion a
Western Visayas region subject to safety and health protocols month to sustain operations
Aid specific to local airlines under study 2 Attract local and foreign investments
► Finance Secretary Dominguez III disclosed that the Department of Finance is still currently ► The 2017 Investment Priorities Plan will attract investments by giving an
looking into the condition of homegrown airline companies, including the various opportunity to be granted income tax holiday for a minimum of three years
approaches on how aid could be facilitated, as of July ► The CREATE bill will attract investors through the reduction of corporate
House Bill No. 78 amends ‘public utility’ definition of the Public Service Act income tax and grants of fiscal and non-fiscal incentives
► Last May, the House of Representatives has approved the final reading of House Bill No. 78, ► House Bill No. 78 will allow foreign investors tap into the transportation
which excludes the transportation and telecommunications sectors as part of what is sector, which was previously restricted to 40% foreign ownership
considered a ‘public utility’ thereby allowing full foreign ownership in the said sectors once
enacted 3 Effective utilization of resources
► Through the Investment Priorities Plan, unused resources could potentially
Source: DBM, Congress, DOF, DOT, PIA, PNA, Inquirer be productive due to the incentives given by the said plan
A resilient enterprise adopts a holistic framework for leading through
uncertainty and complexity
Promoting employee safety & well-being
Supply chain (SC) resilience Employee Public health Information (CDC, WHO)
Third-party service providers Supply chain
health and Support for impacted employees
and global
well-being
trade
Business interruption Employee relations

Insurance & Talent and
Supply chain claims financial Talent initiatives
workforce
Event cancellation recovery Business traveler
Safety-based customer experience

Leadership and
Technology Customer Direct to consumer and e-retail
Infrastructure framework communication safety and
and Packaging and delivery innovation
Cyber resilience information brand
Digital customer channels security protection
Disruption Tax strategies
Regulatory/disclosures
Investor trust
Financial
Geopolitical and country risks Government and Liquidity, credit and capital
and public investor
Regulatory changes
policy Enterprise risk planning
Leadership and public policy
engagement Risk identification
Risk
Scenario planning
Continuity and recovery
Response and monitoring
Source: EY
Players must look across the three horizons of the NOW, NEXT and BEYOND to
identify relevant positive actions
NOW NEXT BEYOND
Safeguard business continuity through Ignite recovery through business adaptation Deliver long-term value creation by
effective crisis response planning and stronger enterprise resilience reframing and transforming business
6 months 1 year and beyond
Impact diagnosis ► Revisit formulated social distancing measures in ► Automate physical assets, reduce dependence
NOW phase as demand trickles in and more of manual paperwork, and increase adoption of
► Operational continuity employees return to work RPA and blockchain technologies
► Customer cancellations and Implement cost reduction measures while
► ► Restructure fleet composition and evaluation
refunds maintaining quick demand response combination for transportation modes
► Workforce restructuring and Re-engineer supply chain for lower risk exposure
► ► Secure consistency and reduce variability in
retrenchment and greater flexibility prices of raw materials, including fuel, and
► Social distancing measures and ► Digitize operations across functions – have real- adopt hedging contracts
health and safety protocols time visibility into supply and demand, use ► Evaluate maintaining a balance between asset-
► Essential vs non-essential Robotics Process Automation to respond to flight light model and having resources to fulfill
spending (e.g. delay or cancel cancellations and the like, accelerate adoption of demand
major expenditures) digitalization of physical assets and remote- ► Re-evaluate lean principles and JIT to ensure
► Government policies under new control technologies (e.g. remote virtual air adequate surplus in meeting customer demand
normal traffic control towers)
► Liquidity and solvency pressure ► Avoid financial distress and use state aid if
► Availability of cash buffer needed, implement financial restructuring and
access to capital to avoid breach of debt
► Access to credit
covenants
► Collectability and recoverability
of receivables
► Obligations (i.e., salaries, loans)
Source: EY

NOW - Major players worldwide continue to lay off employees as losses persist
COVID-19 slashes almost 3,000 jobs in the Airbus and Boeing revenues plummet
Philippine aviation industry by August
as air carriers delay/cancel aircraft orders
PAL, ► As border restrictions maintain and consumer confidence
Cebu Pacific remain weak amid the pandemic, the Air Carriers Association
► Airlines worldwide have either delayed or cancelled
903
& AirAsia aircraft orders from major manufacturers – Airbus and
of the Philippines (ACAP) – constituted by major carriers
Boeing – as part of cost reduction measures.
Philippine Airlines (“PAL”), Cebu Pacific, and Philippines
AirAsia (“AirAsia”) – has experienced a 94.0% decrease in ► As of July-end, Airbus has sustained 67 cancellations Cancellations as of
passengers for the 2nd quarter of 2020 from 13.5 million in for the first half of 2020 while Boeing has 836 lost July 2020
2019 to around 0.8 million in 2020. orders (i.e. cancellations and unlikely deliveries) both
► This caused total net losses for the three major carriers to driven by the decreasing demand amid the pandemic
total PhP22 billion for the 2nd quarter alone. and the 737 MAX incidents that took place in October
2018 and March 2019.
► As a result, local airlines have been restructuring their
workforce as part of cost reduction measures. ► This has caused revenues for the first half of 2020 to
decrease 39.0% y-o-y for Airbus and 26.0% for Boeing
94.0% ► PAL has retrenched 300 administrative and management staff
collectively costing the two manufacturers USD24.0
(24b)
in February while Cebu Pacific and its ground handling service
Passengers y-o-y, provider, 1Aviation Groundhandling Services Corporation billion* for the first half of the year alone.
2Q20
(“1Aviation”), would have retrenched a total of 2,350 jobs by ► As a result, the said companies have significantly
the end of August. This includes around 950 jobs from Cebu reduced their workforce to partially cope for losses. Decrease in revenue
Pacific – around 25.0% of their workforce – and over 1,400 Airbus has announced plans to cut 15,000 jobs by mid- y-o-y, 1H20
jobs from 1Aviation. 2021 as they forecast a 40.0% decrease in production
► AirAsia, on the other hand, has announced a 12.0% reduction for the next two years.
in their workforce as of June, which equates to around 260
employees. ► In April, Boeing stated their intentions to lay off 10.0%
PhP22b ► Other measures to stay afloat include delaying aircraft
of their global workforce, which estimates to around
16,000 jobs – 5,500 have voluntary accepted offered
Net losses, 2Q20 purchases, availing of extended government aid, and
31.0k
buyout packages while 6,800 were retrenched in May.
increasing consumer confidence to travel as restrictions
However, Boeing is currently looking into a deeper
permit through strict implementation of health and safety
workforce reduction.
protocols. Estimated people
laid off by 2021
Note: Decrease in revenue for Boeing converted from EUR to USD using an exchange rate of 1 EUR = 1.18 USD
Source: Inquirer, CNN, Manila Standard, Manila Bulletin, AUP, Airbus, Boeing

Polling Question 1

It will take 5 years to return to pre-pandemic level of passenger demand

Let’s be back after 10 minutes.

Polling Question 2

Results

Accounting and Auditing
Considerations
• COVID-19 Accounting Considerations
• Key Focus Areas and Auditing Considerations
• 2020 Relevant Tax Updates
• Financial risk management for airline industry

COVID-19 Accounting Considerations
Going Concern Aircraft delivery schedules

• Relevant for consents, comfort letters, disclosures • Ability to defer, purchase deposits
Investment valuations
Impairments
• Monitor investments in other airlines for losses
• Fleet
• Intangible assets (routes, slots)
Income taxes
• Goodwill • Realizability of deferred tax assets
• “Use it or lose it” provisions for slots and gates • Jurisdictional apportionment affected by change in flying
Liquidity and covenant compliance • Preservation of tax attributes in restructured/amended
agreements
• Credit card processing agreements
• What is the trigger for holdbacks? Government assistance
• Debt covenants • What is the form and how should we account for it?
• Evaluate material adverse change clauses • Direct payments, loans, tax deferrals
• Cross-default provisions
• Debt modification accounting required
if you get covenant waivers, etc.

COVID-19 Accounting Considerations
Credit loss considerations Hedge accounting

• Travel agency receivables • Risk of over-hedged positions
• Interline receivables • Credit valuation adjustments (airline and counterparties)
• Lessors holding maintenance deposits • Hedge collateral provisions
Frequent flyer program Performance-based employee stock awards

• Potential change in the value of a mile due to • No longer probable of achieving award levels?
anticipated reduction in fares
• Potential change in breakage as customer behavior changes Updated disclosures
• Going concern considerations
Pension accounting
• Enhanced debt covenant/credit card-processing
• Decreased return on investments in 2020 – compliance disclosures
higher liability and funding requirements in future years • Risk factors
Employee actions • CAMs/KAMs (forward looking item for year-end 2020)
• Severance pay, timing of accruals

Key Audit Matters
PAL Cebu Air Singapore Emirates Cathay

Holdings Air Asia Airlines Pacific
Going Concern X
Revenue recognition X X X X X
Accounting for frequent flyer program X X X
Accounting for aircraft leases X X X
Impairment of aircraft and intangibles X X X X
Accounting for repairs, maintenance and
X X X X X
ARO
Recoverability of deferred tax assets X X
Derivatives and hedge accounting X X X X X
Provisions and contingencies X
Based on CY2019/FY2020 financial statements

Going Concern
Accounting Challenges Auditing Considerations

Numerous going concern Review management’s assessment of company’s ability to
issues due to the pandemic continue as going concern and the supporting evidences.
Calculation of value-in-use to Test reasonableness of assumptions, including stress testing,
address indicators of back testing and sensitivity analysis used in company’s
impairment financial forecast.
Compliance with debt Review any potential impairment loss on financial and
covenants nonfinancial assets and review management’s impairment
assessment.
Review management’s assessment of compliance with debt
covenants and lease commitments. Examine against
supporting documentation.
Review financial statements disclosures for appropriateness
of management plans to improve the company’s financial
position and financial performance.

Revenue Recognition

Complex fare structure/rules Obtain an understanding of the revenue recognition process
Complexity of the IT and test the relevant controls on the company’s information
environment and accounting system.
Exchanges, refunds, reissuances Test the occurrence and completeness of capture and
and breakages reasonableness of recorded sales (UTR) and lifts (revenue)
Presence of interline agreements by performing cut-off testing and substantive analytical
procedures.
Capacity purchase agreements
Tickets/air way bills normally
sold in advance of the
transportation service
Proration of revenue
Multi-currency

Accounting for Frequent Flyer Program

Significant judgement and Assess management’s estimate of the deferred revenue
estimation involved in pertaining to the frequent flyer program by comparing the
determining the timing of expected redemption rate to company’s historical redemption
recognition of unused tickets experience.
and estimating the liability Analyze allocated unit fair value of miles with references to
the prices for third party frequent flyer miles sales and flight
redemption values.

Accounting For Aircraft Leases

Significant judgement and estimation in Review the aircraft purchase agreements, lease agreements and other
determining whether contract contains a pertinent agreements in relation to the acquisition of the aircraft in
lease, determining the lease term
order to obtain an understanding of the significant terms that are
Evaluation whether an entity is reasonable
relevant in accounting of the lease arrangements.
certain to exercise options to extend or
terminate the lease or to purchase the Review impact of amendments to the aircraft and engine purchase
purchase asset agreements.
Determining incremental borrowing rate Review appropriateness and adequacy of financial statements
Leasehold improvements disclosures.
Return conditions Review compliance with lease covenants and aircraft purchase
Maintenance deposits agreements.
Owned Property and Equipment

Accounting for purchase agreements with
firm and option deliveries
Aircraft modifications
Manufacturer’s incentives
Advanced delivery deposits and capitalized
interest

Accounting For Aircraft Leases (cont’d.)

Depreciation Obtain an understanding of the company’s process and controls
over estimation of the useful lives of aircraft.
Componentization of the aircraft
Compare the management’s estimates of the useful lives and
Estimated useful life and salvage value residual values with the company’s fleet plan, recent aircraft
Amortization of leasehold transactions, and contractual rights.
improvements Consider the developments in the airline industry and compared
the estimated useful lives used by the company with other
comparable airlines.

Impairment of Aircraft and Intangibles

Significant judgment and estimation Review the potential indicators of impairment that would require the
on assumptions used in the impairment testing of cash generating units (CGUs).
impairment assessment Evaluate the key assumptions used to estimate the discounted cash
flows of the CGU, which include the forecasted revenues, operating
costs, capital expenditures and discount rates, based on our
understanding of the company’s business plan and compare these
assumptions to the relevant market data, as applicable. Perform
sensitivity analysis.
Assess the current year’s assumptions by comparing these
assumptions with the assumptions made in prior years as well as the
actual events during the year.

Accounting for Repairs, Maintenance and ARO

Expense recognition and completeness of Obtain an understanding of the repairs and maintenance program and test the
capture/accruals relevant key controls over repairs and maintenance.
Varied maintenance schemes (e.g. power- Select sample transactions of repairs, maintenance and overhauls, and inspect
by-the hour, flat and fixed rates) the underlying documentation.
Outsourcing maintenance Evaluate the classification of repairs, maintenance and overhauls based on
Spare parts their nature and by considering the company’s capitalization and expensing
policy.
Review the maintenance agreements with key maintenance service providers
and test the related open work orders to determine whether these are accrued
as of year-end.
Evaluate the methodology and compare the key assumptions used by
management in estimating the asset restoration obligation with the contract
terms with the operating lessors and repairs and maintenance experience of
the company.
Recalculate the amount of asset restoration obligation.
Inquire with the personnel of the aircraft engineering department about the
company’s planning and monitoring of the maintenance program, considering
therein the utilization pattern and the expected useful lives of the aircraft.

Recoverability of Deferred Income Tax Assets

Recoverability of deferred income Evaluate the management’s assumptions and estimates,
tax assets which include the forecasted revenues, operating costs and
reversal of temporary differences, in relation to the
likelihood of generating sufficient future taxable profits
based on our understanding of the company’s business plan
and compared these assumptions to the relevant market data,
as applicable.
Assess the current year’s assumptions by comparing these
assumptions with the assumptions made in prior years as well
as the actual events during the year.

Derivatives and Hedge Accounting

Accounting for fuel inventories Obtain understanding on the method and procedures in the
(e.g., burning and into-planes) valuation of fuel.
Fuel purchases/hedging Perform substantive analytical procedures on the fuel cost
using disaggregated data.
Derivative and hedging
transactions Observe fuel inventory count.
Review valuation of derivatives outstanding as of year-end.
Foreign currency forwards
Review appropriateness and adequacy of financial statements
disclosures

Other Auditing Considerations

Provision and Contingencies
Significant degree of judgement in Review of assumptions and critical judgements made by
interpreting various relevant rules, management
regulations and practices
Payroll Perform substantive analytical procedures on the payroll

Variety of employees/crew cost using disaggregated data.
compensation Review propriety of the movements in accrued retirement
Severance benefits liability and other employee benefits and the corresponding
Retirement benefits accounting treatment.
Review correctness of employee data and reasonableness of
Pilot retention programs
the assumptions used in the actuarial valuation.
Review appropriateness and adequacy of financial
statements disclosures.

Significant judgments and estimations
Going concern
Determination of functional currency
Estimation of the air transportation liability/unearned transportation
revenue
Revenue and deferred revenue on frequent flyer or affinity programs
Assumptions regarding life of aircraft, residual value, and related parts
Assumptions regarding impairment of long-lived assets
Classification of aircraft, engines and airport lease transactions as
operating or finance leases
Capitalization of borrowing costs on qualifying asset
Estimation of retirement/return obligations for leased assets

Significant judgments and estimations (cont’d.)
Accounts receivable allowances

Inventory allowances for obsolescence
Assumptions related to pension and other benefit obligations (e.g.,
compensated leaves, severance and retroactive wage accruals)
Property, casualty, workers’ compensation, and other insurance loss
reserves
Estimation of provisions and judgments on contingent liabilities
Classification of financial instruments
Derivative accounting and reporting transactions, including the application
of hedge accounting
Assumptions regarding recognition of deferred income tax assets

Tax Updates
Airline Industry
Briefing
Virtual Training – Tax Updates
24 August 2020

Financial risk management for airline industry
Financial risk management

and derivative accounting
2020 Airline Industry Briefing
24 August 2020
The SGV Purpose

Nurture leaders and enable businesses for a better Philippines. #SGVforABetterPhilippines

Questions, Comments
or Concerns?

Thank you!

SGV | Assurance | Tax | Transactions | Advisory
About SGV & Co.

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Philippines. We provide assurance, tax, transaction and
advisory services. In everything we do, we nurture leaders
and enable businesses for a better Philippines. This Purpose
is our aspirational reason for being that ignites positive
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services help empower businesses and the economy, while
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and a better working world. SGV & Co. is a member firm of
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2020 Airline Industry Briefing

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2020 Airline Industry Briefing

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Airline Industry Briefing

24 August 2020 Airline Industry Briefing #SGVforABetterPhilippines

To provide industry updates and developments

To understand the potential impact of the changes/developments in the accounting and

24 August 2020 Airline Industry Briefing #SGVforABetterPhilippines

Page 4 24 August 2020 Airline Industry Briefing #SGVforABetterPhilippines

Low cost carrier Point-to-point

Air Cargo carrier

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24 August 2020 Airline Industry Briefing #SGVforABetterPhilippines

Multiple distribution channel and Capacity, route and yield

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9 9 Key Labor shortages

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DHC 8-400 B777 ATR 72-500 ATR 72-600

A321 NEO A320 A321 CEO

* Based on the combined fleet of top three local airlines as of Q2 2020

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An Overview: Where Do Airlines Get Their Revenue?

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Sales/UTR Recognition Settlement

Airline Revenue &

Global Distribution System

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INTERNATIONAL AIRLINES LOCAL AIRLINES

Crew and staff costs

* December 31, 2019 data

Jet fuel price average

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Management Fuel Four aspects of the impact of COVID-19

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No. of passengers No. of seats

Yield Load Factor

Liquidity (cash, cash equivalents, short-term Cargo revenue ton miles

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Economists’ forecasts expect output loss twice as large

Airlines will run out of cash before recovery arrives.

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Industry-wide revenue passenger kilometers (RPKs) fell by a

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Industry-wide cargo tonne-kilometres (CTKs) declined by

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As of December 31, 2019

Astro Air 35,000

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As of December 31, 2019

Philippine Airlines Others

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24 August 2020 Airline Industry Briefing #SGVforABetterPhilippines

The 'Classic' characteristics of LCCs

Single-aisle fleet standardization preference

Single-class, higher-density airplane preference

Higher utilization and quick turnaround

Lower yield but higher volume concept

Low fares, including very low promotional fares

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Cheap Possible delays from turnaround