Philippine Stock Exchange

February 2, 1998 PSE CIRCULAR FOR BROKERS NO. 023-98 January 30, 1998 Philippine Stock Exchange PSE Centre, Exchange Road Ortigas Center, Pasig, Metro Manila Attention : Mr . Jim Alabastro Compliance Analyst Ms . Grace de Guia Supervisor, Compliance Monitoring Gentlemen : This refers to your fax message received by us on January 28, 1998 concerning a news article captioned "Airline Defers Expansion Plans Due to Peso Woes" which appeared in the January 21, 1998 issue of the Manila Times. Please be informed that neither the Board of Directors of Air Philippines International Corporation (APIC) nor that of Air Philippines Corporation APC) has made any formal policy decision to defer the expansion plans of the airline company. We understand from the Management of APC that the possibility of a review of the expansion plan was premised on a supposition of an extremely much worse situation (than is obtaining at present), but it was understood that a final decision on the matter will have to be presented and approved by the Board of Directors of APC. LLjur We enclose a letter from Gen. Augustus C. Paiso, President of Air Philippines Corporation which is self-explanatory. Thank you. Yours very truly, AIR PHILIPPINES INTERNATIONAL CORPORATION By: (SGD.) ARTHUR R. PONSARAN Corporate Secretary January 30, 1997 ATTY. ARTURO PONSARAN Corporate Secretary Air Philippines This has reference to the attached news article captioned " Airline Defers Expansion Plans Due to peso Woes " published in the January 21, 1998 issue of the Manila Times. While the article says that Air Philippines is "temporarily putting on hold its plans to go international", we would like to clarify that this statement was based entirely on the writer's hypothetical question on the possibility of an unstoppable peso depreciation and worsening economic condition. Air Philippines may hold its plan to go international but this decision will be solely dependent on how the country's economy will prosper. At this point, our management is closely watching for further developments and a settlement regarding this issue has not yet been reached. We wish to assure you that you will be immediately informed on whatever decision will be made with regard to this matter. Very truly yours, (SGD.) AUGUSTUS C. PAISO President and Chief Executive Officer The Manila Times, January 21, 1998, Section B p. 13 Airline defers expansion plans due to peso woes BY IAN C. SAYSON Reporter AIR Philippines Inc., the airline company of businessman William Gatchalian, is temporarily putting on hold its plan to go international this year because of the bleak financial and economic outlook. Air Philippine president and chief executive officer Augustus C. Paiso said the airline is not going to pursue its expansion into international flights while the region's currency and financial markets are in turmoil. "We are not implementing the regional flights right away. We would like to ride out this present turmoil first because everything is so uncertain," Paiso said. The two-year old airline is supposed to launch regional flights to Hong Kong and other Asian capitals this year, which would serve as the corner stone for its international operations. "We think the operations (regional flights) can be run profitably but since this situation happened we are not anymore sure that its going to be that way," Paiso said. Paiso said that as a result of the peso's defacto devaluation "we are paying more for our spare parts and this is a major matter with respect to our plan." Spare parts, which have to be sourced overseas, comprise about 25 percent of what Air Philippines spend for its operations. Since the peso's depreciated in July, imports now cost 55 percent more. Air Philippines is also scaling back its projected fleet expansion to raise the company's number of aircraft from six to 12 Boeing 737 airplanes within they year. "Realistically, we might not be able to achieve that because of these developments so the expansion will just be for three more planes," Paiso said. "But even that is under jeopardy because we thought this depreciation will only be temporary and that the parity between the peso and the dollar will stabilize," Paiso added. Air Philippines already acquired the three additional B-737s last year. But it is not inclined to operate these immediately even after these are repaired because of an anticipated drop in domestic traffic. "We can expect that what follows from this crisis is for corporations to cut back on their own budgets and transportation expenses will be the first to go," Paiso said. "It would be an opportunity lost for the company to store these aircraft but what opportunity am I losing when the market is weak," Paiso added. Paiso said the effects of the peso's depreciation and the currency turmoil within the region on domestic traffic are already seen in the bookings for the first three weeks of the year. Paiso explained that although the industry's peak season is December and the early parts of January, the high volume of traffic normally continues up to the middle of February. "But based on the reports we have received so far there are lesser number of bookings now compared to last year. The data is only two to three weeks old but this is giving us a pattern that might go on for the rest of the year," Paiso said. To counter the potential drop in traffic, Air Philippines will cut expenses, open additional domestic routes at the same time divert some of its new flights to existing routes. "We are serving so many stations now that if we want to service other new stations it will be at the expense of those that are already existing," Paiso said. "For example, in Iloilo we have three flights servicing the area but because of the economic situation not many people from that area might be traveling to satisfy the profitability of the airplane so we may reduce one flight in Iloilo and divert it where it can do good service," Paiso explained. Air Philippines currently flies to Davao, Zamboanga, Cotabato, Cebu, Iloilo, Bacolod, Kalibo, Puerto Princesa, Subic, Legaspi, and Naga. It launched its General Santos flight last week and intends to start servicing Cagayan De Oro and Tacloban within the year. LLjur Air Philippines has 700 workers, a number suitable for a fleet of nine to 12 737s. But despite the potential slowdown in the air transport industry and the delay in the company's expansion the company has no plans of reducing this number. "We have not entertained the idea of cutting back because we consider it inhuman," Paiso said. "We employed people for a career, to belong to an organization like ours, and we would hate very much to let them go and with this environment where will they go?" "What we plan to do this year is to maintain the same number of people and if we have to add a little more it will just be operational in nature," Paiso added. "Its hard to say if we will end this year in the black but we do all we can to improve on our other achievements," Air Philippines chief finance officer Morris Pineda said.