15...Mr. Kamal Afsar 65 5. Mr. S. Ali Raza 62 6. Mr. Mueen Afzal 10 7. Mr. Shahzad Husain 11 8. Maj. Gen. Mir Haider Ali, Additional Secretary, Ministry of Defence 1 1 * Both Mr. Asad

34 Annual Report 2006

PAKISTAN INTERNATIONAL AIRLINES CORPORATIONATTENDANCE OF DIRECTORS AT BOARD MEETING

During the Financial Year 2006, nine meetings of the Board of Directors were held and the number of Meetings attended by eachDirector is given hereunder:

S. No. Name of Board Member Meetings Held Meetings Attended

1 Mr. Tariq Kirmani 9 9Chairman & CEO

2 Mr. Kamal Afsar 9 5

3 Mr. Mueen Afzal *** 3 3

4 Syed Mohammad Fazal Agha ** 8 6

5 Mr. Nawid Ahsan ** 8 4Secretary General Finance

6 Maj. Gen Mir Haider Ali Khan **** 2 2Additional Secretary Defence

7 Air Marshal (Retd) Pervez Akhtar Nawaz * 5 2

8 Maj. Gen (Retd) Muhammad Ashraf Chaudhry ** 6 6

9 Dr. Sughra Junejo * 5 2

10 Mr. Shahzad M. Husain*** 3 3

11 Mr. M. Hidayatulla Khan Khaishgi** 8 6

12 Mr. Javed Saifullah Khan** 8 6

13 Mr. S. Ali Raza 9 6

14 Mr. Farooq Rehmatullah *** 3 2

* Relinquished Board Membership after expiry of term on 7th August 2006.

** Relinquished as a Board Member after expiry of term on 7th August 2006 and re-nominated on 14th October 2006.

*** Nominated as Board Member on 14th October 2006

**** Succeeded Major General (Retd) Muhammad Ashraf Chaudhry on 18th November 2006

During the financial year 2006, Six (6) Meetings of the Audit Committee were held and the number of Meetings attended by eachDirector is given hereunder:

S. No. Name of Board Member Meetings Held Meetings Attended

1. Mr. Asad Ali Khan* 3 3

2. Maj. Gen. (Retd) Muhammad Ashraf Chaudhry**Additional Secretary, Ministry of Defence 4 4

3. Mr. Javed Saifullah Khan* 3 3

4. Mr. Kamal Afsar 6 5

5. Mr. S. Ali Raza 6 2

6. Mr. Mueen Afzal 1 0

7. Mr. Shahzad Husain 1 1

8. Maj. Gen. Mir Haider Ali, Additional Secretary, Ministry of Defence 1 1

* Both Mr. Asad Ali Khan Mr. Javed Saifullah Khan completed their term as Members of the Audit Committee on 7th August2006 and were subsequently replaced by Mr. Mueen Afzal and Mr. Shahzad Husain.

** Maj. Gen. (Retd) Muhammad Ashraf Chaudhry relinquished his Directorship on his retirement as Additional Secretary,Ministry of Defence and was replaced by Maj. Gen. Mir Haider Ali.

ATTENDANCE OF DIRECTORS AT AUDIT COMMITTEE MEETINGS


Ford Rhodes Sidat Hyder & Co. Anjum Asim Shahid RahmanChartered Accountants Chartered Accountants6th Floor, Progressive Plaza 1st Floor, Modern Motors HouseBeaumont Road Beaumont RoadKarachi Karachi

REVIEW REPORT TO THE MEMBERS ON STATEMENT OF COMPLIANCEWITH BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE

We have reviewed the Statement of Compliance (the Statement) with the best practices contained in the Code ofCorporate Governance (the Code) prepared by the Board of Directors of Pakistan International Airlines Corporationto comply with the Listing Regulations No. 37 (Chapter XI), No. 43 (Chapter XIII) and No. 36 (Chapter XI) of theKarachi, Lahore and Islamabad Stock Exchanges respectively where the Corporation is listed.

The responsibility for compliance with the Code is that of the Board of Directors of the Corporation. Our responsibilityis to review, to the extent where such compliance can be objectively verified, whether the Statement reflects the statusof the Corporation’s compliance with the provisions of the Code and report if it does not. A review is limited primarilyto inquiries of the Corporation personnel and review of various documents prepared by the Corporation to comply withthe Code.

As part of our audit of financial statements we are required to obtain an understanding of the accounting and internalcontrol systems sufficient to plan the audit and develop an effective audit approach. We have not carried out anyspecial review of the internal control system to enable us to express an opinion as to whether the Board’s statementon internal control covers all controls and the effectiveness of such internal controls.

Based on our review, nothing has come to our attention which causes us to believe that the Statement does notappropriately reflect the Corporation’s compliance, in all material respects, with the best practices contained in theCode, as applicable to the Corporation for the year ended December 31, 2006.

Ford Rhodes Sidat Hyder & Co. Anjum Asim Shahid RahmanChartered Accountants Chartered Accountants

Karachi: March 29, 2007

36 Pakistan International Airlines Corporation

PAKISTAN INTERNATIONAL AIRLINES CORPORATIONSTATEMENT OF COMPLIANCE WITH BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE

The compliance with the best practices of Code of Corporate Governance provides comfort to the Board and theCorporation functionaries for all / any function(s) performed by it / them. Therefore, the Corporation during the yearended 31st December, 2006 being a listed Corporation on all three Stock Exchanges in Pakistan has complied withthe Code set out in their Listing Regulations, in the following manner:

1. According to Pakistan International Airlines Corporation Act, 1956 the Board of Directors consists of Chairmanand ten Directors. Chairman and eight Directors are nominated by the Federal Government and two Directorsare elected by the shareholders other than the Federal Government. Presently all the Directors are non-executive except for the Chairman who is the Chief Executive of the Corporation and his terms and conditionsare determined by the Government of Pakistan (GoP).

2. None of the Directors is serving on the Boards of more than ten listed companies, inclusive of the Corporation.

3. All the Directors are registered tax payers and none of them has defaulted in payment of any loan to a bankingcompany, a DFI or an NBFI or being a member of a Stock Exchange, has been declared as defaulter by thatStock Exchange.

4. No casual vacancy occurred in the Board during the year ended 31st December 2006.

5. The Corporation has developed a ‘Statement of Ethics and Business Practices’ and the statement has beensigned by directors and employees of the Corporation and is in the process of obtaining signatures by remainingemployees of the Corporation.

6. The Board has developed a Vision, Mission and Values Statements, overall corporate strategy and significantpolicies of the Corporation. A complete record of particulars of significant policies along with the dates on whichthese were approved or amended is available with relevant departments.

7. The Corporation will file a Secretarial Compliance Certificate and the requirement(s) of filing of annual returnwill be met within the permissible period after the Annual General Meeting of the shareholders.

8. The nominated / elected directors in addition to declaration of fidelity and secrecy as required under Section 19of PIAC Act, 1956 have given their consent to act as Directors and are aware of their duties and powers underPIAC Act, 1956; PIAC Rules & Regulations, 1958; and Listing Regulations of the Stock Exchanges.

9. The Corporation files periodic financial statements (quarterly, half yearly and annual) to Securities & ExchangeCommission of Pakistan (SECP) as required by the Companies Ordinance, 1984 and Listing Regulations andall material transactions are reported accordingly through these statements and circulation through print &electronic media. The Corporation intends to establish appropriate controls to communicate all materialtransactions to SECP and Stock Exchanges.

10. The Board exercised all powers and took decisions in the general direction and the administration of theCorporation and its affairs inclusive of material transactions in accordance with the PIAC Act, 1956 and PIACRules and Regulations, 1958.

11. The Meetings of the Board held during the Financial Year ended 31st December, 2006 were presided over bythe Chairman and the Board met at least once in every quarter. Written notices of the Board meetings, alongwith the agenda and working papers were circulated; the minutes of the meetings were appropriately recordedand signed by the Chairman.

12. The Directors are aware of their responsibilities and an orientation course was arranged in the past and willbe arranged, in future if so required.


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONSTATEMENT OF COMPLIANCE WITH BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE

13. The Board had approved the appointments, duties, remunerations, and terms and conditions of employment ofChief Financial Officer, Corporate Secretary and head of Internal Audit as determined by the CEO.

14. The Directors’ report for financial year 2006 has been prepared in compliance with the requirements of the Codeand fully describes the salient matters required to be disclosed.

15. The financial statements of the Corporation were presented to the Board by the CEO and the CFO dulyendorsed under their respective signatures.

16. The information regarding the extent of shareholdings of Chairman / Chief Executive Officer, Directors andSVPs and their interest in the shares of the Corporation have been included in the pattern of shareholding ason December 31, 2006. The Corporation will continue seeking a declaration for any subsequent changes in theshareholdings of these categories.

17. The Corporation has complied with all the Corporate and Financial reporting requirements of the Code.

18. The Board has constituted an Audit Committee comprising five non-executive directors including the Chairmanof the Committee.

19. The meetings of the Audit Committee were held to review quarterly, half-yearland annual financial statementsof the Corporation prior to its approval by the Board, as per requirement of the Code. The terms of referenceof the Committee have been formed and advised to the Committee for compliance.

20 The Corporation has an Internal Audit Division which carries out on a continuing basis audit of various HeadOffice / stations functions.

21. The statutory auditors of the Corporation have confirmed that they have been given a satisfactory rating underthe quality control review program of the Institute of Chartered Accountants of Pakistan (ICAP), and that theyor any of the partners of the firm, their spouses and minor children do not hold shares of the Corporation andthat the firm and all its partners are in compliance with International Federation of Accountants (IFAC)Guidelines with code of ethics as adopted by ICAP.

22. The statutory auditors or the persons associated with them have not been appointed to provide other servicesexcept in accordance with the listing regulations and the auditors have confirmed that they have observed IFACguidelines in this regard.

We confirm that all other material principles contained in the Code have been complied with.

For and on behalf of the Board

Tariq KirmaniChairman


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONPATTERN OF SHAREHOLDING AS AT DECEMBER 31, 2006

12284 1 100 269,405 13,10032652 101 500 9,466,397 9,6355328 501 1000 4,613,172 2,2425374 1001 5000 12,925,580 12,507848 5001 10000 6,415,602 0231 10001 15000 2,906,521 0157 15001 20000 2,857,884 0104 20001 25000 2,502,354 043 25001 30000 1,224,765 030 30001 35000 1,003,355 030 35001 40000 1,169,006 023 40001 45000 990,907 044 45001 50000 2,170,768 010 50001 55000 532,845 013 55001 60000 764,772 04 60001 65000 253,500 0

12 65001 70000 823,957 06 70001 75000 438,473 0

11 75001 80000 861,021 04 80001 85000 331,811 02 85001 90000 179,668 05 90001 95000 471,887 0

21 95001 100000 2,089,500 05 100001 105000 517,882 04 105001 110000 431,000 01 110001 115000 112,500 03 115001 120000 350,100 04 120001 125000 491,791 02 125001 130000 259,500 03 130001 135000 394,500 02 135001 140000 279,000 03 145001 150000 450,000 01 150001 155000 150,010 01 160001 165000 165,000 01 165001 170000 167,500 02 170001 175000 344,321 01 175001 180000 178,761 01 180001 185000 181,000 02 185001 190000 372,500 01 190001 195000 192,000 05 195001 200000 1,000,000 02 200001 205000 405,500 01 205001 210000 206,000 01 210001 215000 210,600 01 220001 225000 225,000 01 230001 235000 232,500 02 235001 240000 475,500 02 245001 250000 500,000 01 275001 280000 276,500 01 285001 290000 290,000 02 295001 300000 600,000 01 305001 310000 308,000 01 325001 330000 329,500 01 370001 375000 372,500 01 385001 390000 388,500 01 395001 400000 400,000 01 420001 425000 425,000 01 490001 495000 495,000 04 495001 500000 1,996,500 01 530001 535000 531,000 01 540001 545000 544,200 01 560001 565000 563,000 01 565001 570000 567,504 01 585001 590000 590,000 01 605001 610000 608,000 01 630001 635000 630,067 01 660001 665000 661,500 01 750001 755000 750,500 01 760001 765000 765,000 01 765001 770000 770,000 01 895001 900000 900,000 0

TOTAL SHARES

ORDINARY 'A' CLASS SHARES OF RS.10/- EACH

TOTAL SHARES

ORDINARY 'B' CLASS SHARES OF RS.5/- EACH

TOFROMNO. OF

SHAREHOLDERS

SHAREHOLDING


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONPATTERN OF SHAREHOLDING AS AT DECEMBER 31, 2006

1 905001 910000 907,500 01 995001 1000000 996,500 01 1045001 1050000 1,049,000 01 1225001 1230000 1,228,500 01 1245001 1250000 1,250,000 01 1275001 1280000 1,277,857 01 1340001 1345000 1,341,500 01 1365001 1370000 1,370,000 01 1490001 1495000 1,494,200 01 1520001 1525000 1,523,500 01 1595001 1600000 1,600,000 01 1730001 1735000 1,735,000 01 2220001 2225000 2,220,500 01 2260001 2265000 2,264,370 01 2495001 2500000 2,497,778 01 2820001 2825000 2,823,700 01 2930001 2935000 2,930,036 01 3240001 3245000 3,241,466 01 3325001 3330000 3,325,691 01 3555001 3560000 3,556,000 01 4025001 4030000 4,029,000 01 4830001 4835000 4,833,704 01 5495001 5500000 5,500,000 01 9550001 9555000 9,551,500 01 11620001 11625000 11,622,500 01 15745001 15750000 15,750,000 01 16875001 16880000 16,876,347 01 26035001 26040000 26,039,500 01 1736450001 1736460000 1,736,459,538 1,462,515

57,344 1,946,613,073 1,499,999

TOTAL SHARES

ORDINARY 'A' CLASS SHARES OF RS.10/- EACH

TOTAL SHARES

ORDINARY 'B' CLASS SHARES OF RS.5/- EACH

TOFROMNO. OF

SHAREHOLDERS

SHAREHOLDING

Number of Shares Held

Shareholders Category Number of Ordinary ‘A’ Ordinary ‘B’ PercentageShareholder Class Shares of Class Shares of

Rs.10/- Each Rs.5/- Each

Associated Companies, undertakings related parties --- --- --- ---

NIT and ICPNational Investment Trust 1 76,000 --- ---NBP Trustee Department 1 4,833,704 --- 00.25Investment Corporation of Pakistan 1 10,325 100 ---

Directors, CEO and their spouse and minor childrenSyed Ali Raza, Member PIA Board 1 1,100 --- ---Mr. Kamal Afsar, Member PIA Board 1 136 --- ---

Executives 21 2,846 --- ---

Public Sector Companies and Corporations --- --- ---

Banks, Development Finance Institutions,Non- Banking Finance Institutions,Insurance Companies, Modarabas and Mutual Funds 91 64,129,323 2,633 03.29

Shareholders holding 10% or more voting interest (Secretary-Ministry of Defence, Govt. of Pakistan) 1 1,736,459,538 1,462,515 89.21

Individuals 56,936 97,189,067 33,536 04.99

Others 290 43,911,034 1,215 02.26

TOTAL 57,344 1,946,613,073 1,499,999 100.00

The above two statements include 8,481 Shareholders holding 179,967,584 ‘A’ Class Ordinary Shares and 2,412 ‘B’ ClassOrdinary Shares through the Central Depository Company of Pakistan Limited (CDC).

CATEGORIES OF SHAREHOLDERS AS ON DECEMBER 31, 2006


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONSIX-YEAR SUMMARY

OPERATION

Route Kilometers 446,570 343,525 354,664 290,129 257,858 265,643Revenue Kilometers Flown (000) 88,302 82,550 80,087 68,851 61,921 70,958Revenue Hours Flown 141,479 134,039 130,977 115,017 105,553 121,860Available Tonne Kilometers (000) 3,369,288 3,102,805 2,973,437 2,475,904 2,242,157 2,540,547Available Seat Kilometers (000) 22,092,475 20,816,469 20,353,863 17,259,080 15,775,960 17,755,558

TRAFFIC

Revenue Passengers Carried (000) 5,732 5,499 5,120 4,556 4,166 4,877Revenue Passengers Kilometers (000) 15,124,413 14,506,683 13,519,847 12,009,419 10,779,496 11,652,295Passenger Load Factor (%) 68.5 69.7 66.4 69.6 68.3 65.6Revenue Freight Tonne Kilometers (000) 427,006 410,991 402,359 350,713 346,944 371,304Kgs. of Excess Baggage & Cargo (000) 121,174 124,852 118,151 102,180 100,717 111,526Kgs. of Mail (000) 1,410 1,433 1,649 1,771 1,586 1,914Revenue Tonne Kilometers (000) 1,801,026 1,729,220 1,634,825 1,447,906 1,330,803 1,438,303Revenue Load Factor (%) 53.5 55.7 55.0 58.5 59.3 56.6Avg. Pax Stage Distance (Statute Kilometers) 2,639 2,638 2,641 2,636 2,587 2,389

FINANCIAL

Operating Revenue (Rs. in million) 70,587.15 64,074.47 57,788.08 47,951.82 43,673.97 43,608.37Operating Expenses (Rs. in million) 79,164.37 67,075.58 55,872.08 42,574.23 38,097.11 43,242.16Operating Profit/(loss) (Rs. in million) (8,577.22) (3,001.11) 1,916.00 5,377.59 5,576.86 366.21Profit/(loss) after tax (Rs. in million) (12,763.42) (4,411.66) 2,306.60 1,298.65 1,873.32 (2,205.53)Fixed Assets (Rs. in million) 79,062.44 51,376.33 49,604.39 29,724.14 23,782.66 23,636.95Current Assets (Rs. in million) 18,353.43 12,756.55 19,716.29 20,470.00 14,696.31 11,343.08Current Liabilities (Rs. in million) 41,025.29 21,237.10 18,990.09 23,197.88 30,905.08 28,483.77Long-Term Debts (Rs. in million) 62,650.89 38,099.18 42,517.85 22,033.73 8,921.13 760.99Net Worth (Rs. in million) (788.03) 10,446.30 13,441.19 6,673.50 569.99 (4,843.94)Jet Fuel Prices (Rs. per US Gallon) 123.55 102.05 71.68 51.86 45.27 51.88Cost per A. T. K. (Rs.) 23.49 21.62 18.79 17.19 16.99 17.02

RATIOS

Earnings per share (Rs.) (6.80) (2.55) 1.76 1.57 4.10 (5.91)Net assets per share (Rs.) 35.08 29.85 45.59 40.27 25.89 29.73Debt equity ratio NA 4.15 3.52 4.72 20.83 NACurrent ratio 0.45 0.60 1.04 0.97 0.48 0.40

SHARE PRICES (Rs. 10 Share)

High 16.30 14.65 26.70 23.30 12.75 7.50Low 7.05 6.50 9.90 7.30 2.95 2.45Closing 7.05 12.30 13.70 20.55 11.70 2.85

PERSONNEL

Average No. of Empolyees 18,282 19,263 19,634 18,570 16,689 17,170Revenue per Employee (Rs.) 3,861,019 3,326,298 2,943,266 2,582,220 2,616,932 2,539,800A. T. K. per Employee 184,295 161,076 151,443 133,328 134,349 147,964

2006 2005 2004 2003 2002 2001

FINANCIAL STATEMENTS

AUDITORS’ REPORT TO THE MEMBERS

We have audited the annexed balance sheet of Pakistan International Airlines Corporation (the Corporation) as atDecember 31, 2006 and the related profit and loss account, cash flow statement and statement of changes in equitytogether with the notes forming part thereof, for the year then ended and we state that we have obtained all theinformation and explanations which, to the best of our knowledge and belief, were necessary for the purposes of ouraudit.

It is the responsibility of the Corporation’s management to establish and maintain a system of internal control, andprepare and present the above said statements in conformity with the approved accounting standards and therequirements of the Pakistan International Airlines Corporation Act, 1956 and the Companies Ordinance, 1984. Ourresponsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the above said statements are freeof any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the above said statements. An audit also includes assessing the accounting policies and significantestimates made by management, as well as, evaluating the overall presentation of the above said statements. Webelieve that our audit provides a reasonable basis for our opinion and, after due verification, we report that:

a) in our opinion, proper books of account have been kept by the Corporation as required by the PakistanInternational Airlines Corporation Act, 1956 and the Companies Ordinance, 1984;

b) in our opinion:

i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformitywith the Pakistan International Airlines Corporation Act, 1956 and the Companies Ordinance, 1984, and are inagreement with the books of account and are further in accordance with accounting policies consistentlyapplied;

ii) the expenditure incurred during the year was for the purpose of the Corporation’s business; and

iii) the business conducted, investments made and the expenditure incurred during the year were in accordancewith the objects of the Corporation;

c) in our opinion and to the best of our information and according to the explanations given to us, the balancesheet, profit and loss account, cash flow statement and statement of changes in equity together with the notesforming part thereof conform with approved accounting standards as applicable in Pakistan, and, give theinformation required by the Pakistan International Airlines Corporation Act, 1956 and the Companies Ordinance,1984, in the manner so required and respectively give a true and fair view of the state of the Corporation’saffairs as at December 31, 2006 and of the loss, its cash flows and changes in equity for the year then ended;and

d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980.

Ford Rhodes Sidat Hyder & Co. Anjum Asim Shahid RahmanChartered Accountants Chartered Accountants6th Floor, Progressive Plaza 1st Floor, Modern Motors HouseBeaumont Road Beaumont RoadKarachi Karachi



Without qualifying our opinion, we draw attention to the following issues:

i) note 27.1 (a) to the financial statements, explaining the difference between the amount due as per theCorporation’s records and amounts claimed by Civil Aviation Authority for which a reconciliation and settlementexercise is in progress through Ministry of Defence.

ii) note 1.2 to the financial statements, which states that the Corporation during the year has incurred a net lossof Rs. 12,763 million which as at balance sheet date resulted in accumulated losses of Rs. 24,563 million,translating negative equity of Rs. 788 million. Further, as of that date the current liabilities exceed the currentassets by Rs. 22,672 million and its long term debt to equity ratio further deteriorated during the year. Themitigating factors relating to the above situation have been discussed in the said note. Accordingly thesefinancial statements have therefore been prepared on a going concern basis.

Ford Rhodes Sidat Hyder & Co. Anjum Asim Shahid RahmanChartered Accountants Chartered Accountants

Karachi: March 29, 2007

AUDITORS’ REPORT TO THE MEMBERS


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONBALANCE SHEET AS AT DECEMBER 31, 2006

Tariq KirmaniChairman / CEO

Kamal AfsarDirector

ASSETS

NON - CURRENT ASSETS

Fixed assets

Property, plant and equipment 3 78,964,162 51,263,914 1,297,259

Intangibles 4 98,275 112,421 1,615

79,062,437 51,376,335 1,298,874

Long term investments 5 4,528,198 310,015 74,391

Long term advances and other receivable 6 1,684,000 6,635,933 27,666

Long term deposits and prepayments 7 3,263,699 1,804,977 53,618

Total non - current assets 88,538,334 60,127,260 1,454,549

CURRENT ASSETS

Stores and spares 9 3,371,040 2,790,137 55,381

Trade debts 10 6,129,673 5,222,534 100,701

Advances 11 592,068 513,917 9,727

Trade deposits and prepayments 12 1,229,333 581,175 20,196

Accrued interest 51,010 39,708 838

Other receivables 13 865,255 481,449 14,215

Short term investments 14 421,394 377,545 6,923

Taxation - net 233,738 149,087 3,840

Cash and bank balances 15 5,459,924 2,614,691 89,698

Total current assets 18,353,435 12,770,243 301,519

Total assets 106,891,769 72,897,503 1,756,068

The annexed notes 1 to 45 form an integral part of these financial statements.

Note 2006 2005 2006(Rupees in thousand) (US$ in thousand)



EQUITY AND LIABILITIES

SHARE CAPITAL AND RESERVES

Share capital 16 19,473,631 17,980,659 319,922Reserves 17 4,280,712 4,280,712 70,326Unrealized gain / (loss) on

remeasurement of investments - net 21,013 (15,107) 345Accumulated losses (24,563,386) (11,799,966) (403,538)

Total equity (788,030) 10,446,298 (12,945)Surplus on revaluation of fixed assets - net 3.1.1 926,318 - 15,218

138,288 10,446,298 2,273

NON - CURRENT LIABILITIES

Long term financing 18 6,900,478 1,621,099 113,364 Term finance certificates 19 13,246,970 14,003,940 217,627 Liabilities against assets subject to finance lease 20 42,503,444 21,706,064 698,266 Long term murabaha 21 - 768,075 -Long term deposits 22 261,711 290,236 4,300Deferred liabilities 23 2,815,588 2,824,690 46,256

Total non - current liabilities 65,728,191 41,214,104 1,079,813

CURRENT LIABILITIES

Trade and other payables 24 16,617,024 14,983,921 272,992Accrued interest / mark-up / profit 25 812,278 607,769 13,344Short term borrowings 26 15,543,446 362,075 255,355Current portion of:

Long term financing 2,599,916 1,621,103 42,713Term finance certificates 756,970 756,970 12,436Liabilities against assets subject to finance lease 3,914,491 2,067,363 64,309Long term murabaha 781,165 837,900 12,833

8,052,542 5,283,336 132,291

Total current liabilities 41,025,290 21,237,101 673,982

CONTINGENCIES AND COMMITMENTS 27

106,891,769 72,897,503 1,756,068




Kamal AfsarDirector


PAKISTAN INTERNATOINAL AIRLINES CORPORATIONPROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2006

Turnover - net 28 70,587,146 64,074,470 1,159,638

Cost of services

Aircraft fuel 33,370,101 26,462,721 548,219

Others 29 36,512,116 32,478,115 599,838

69,882,217 58,940,836 1,148,057

Gross profit 704,929 5,133,634 11,581

Distribution costs 30 4,395,061 3,809,169 72,204

Administrative expenses 31 4,887,088 4,325,576 80,287

9,282,149 8,134,745 152,491

Loss from operations 8,577,220 3,001,111 140,910

Finance costs 32 4,768,436 2,787,399 78,338

Other provisions and adjustments - net 33 798,573 (33,605) 13,119

5,567,009 2,753,794 91,457

Other operating income 34 929,072 1,241,669 15,263

Loss before tax 13,215,157 4,513,236 217,104

Taxation 35 (451,737) (101,579) (7,421)

Loss for the year 12,763,420 4,411,657 209,683

(Rupees) (US$)

Loss per share 36

'A' class ordinary shares 6.80 2.55 0.11

'B' class ordinary shares 3.40 1.28 0.06




Kamal AfsarDirector


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONCASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2006

Cash flows from operating activities

Cash (used in) / generated from operations 37 (5,670,789) 1,717,794 (93,162)Profit on bank deposits received 201,938 189,354 3,318Deferred custom duty paid (71,101) (323,350) (1,168)Finance costs paid (4,563,927) (2,720,200) (74,978)Taxes paid (131,700) (272,760) (2,164)Dividend paid - (5,255) -Staff retirement benefits paid (694,860) (332,320) (11,415)Compensated absences paid (91,915) (80,000) (1,510)Payments made for construction of University Road (85,000) - (1,396)Long term deposits - net (1,487,247) (88,042) (24,433)

Net cash used in operating activities (12,594,601) (1,914,779) (206,908)

Cash flows from investing activities

Fixed capital expenditure (4,011,100) (5,895,913) (65,899)Proceeds from sale of fixed assets 267,158 790,685 4,389 Investments - net (3,938,488) 59,499 (64,703)Received from associated undertaking 4,573,385 902,896 75,134 Long term advances and other receivable 277,000 (49,000) 4,551

Net cash used in investing activities (2,832,045) (4,191,833) (46,528)

Cash flows from financing activities

Proceeds from issue of share capital 1,492,972 1,450,733 24,527 Proceeds / (repayment) of long term financing 6,258,192 (810,567) 102,812 Redemption of term finance certificates (756,970) (378,635) (12,436)Repayment of obligations under finance lease (3,078,876) (1,911,468) (50,581)Repayment of long term murabaha (824,810) (829,733) (13,550)

Net cash generated from / (used in) financing activities 3,090,508 (2,479,670) 50,772

Decrease in cash and cash equivalents (12,336,138) (8,586,282) (202,664)

Cash and cash equivalents at the beginning of the year 2,252,616 10,838,898 37,007

Cash and cash equivalents at the end of the year (10,083,522) 2,252,616 (165,657)

CASH AND CASH EQUIVALENTS

Cash and bank balances 15 5,459,924 2,614,691 89,698 Short term borrowings 26 (15,543,446) (362,075) (255,355)

(10,083,522) 2,252,616 (165,657)




Kamal AfsarDirector


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONSTATEMENT OF CHANGES IN EQUIT Y FOR THE YEAR ENDED DECEMBER 31, 2006

Balance as at

December 31, 2004 16,529,926 2,501,038 1,779,674 18,863 (7,388,309) 13,441,192

Issue of share capital

'A' class ordinary shares 1,450,733 - - - - 1,450,733

Unrealized loss on

re-measurement of

investments - - - (52,261) - (52,261)

Tax effect on unrealized

loss on re-measurement

of investments - - - 18,291 - 18,291

Loss for the year - - - - (4,411,657) (4,411,657)

Balance as at

December 31, 2005 17,980,659 2,501,038 1,779,674 (15,107) (11,799,966) 10,446,298

Issue of share capital

'A' class ordinary shares 1,492,972 - - - - 1,492,972

Unrealized gain on

re-measurement of

investments - - - 36,120 - 36,120

Loss for the year - - - - (12,763,420) (12,763,420)

Balance as at

December 31, 2006 19,473,631 2,501,038 1,779,674 21,013 (24,563,386) (788,030)


Share Capital Revenue Unrealized Accumulated Totalcapital reserves reserves gain / (loss) on losses equity

re-measurementof investments

(Rupees in thousand)


Kamal AfsarDirector


PAKISTAN INTERNATIONAL AIRLINES CORPORATIONNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006

1 STATUS AND ACTIVITY

1.1 Pakistan International Airlines Corporation (the Corporation) was incorporated in Pakistan on April 18, 1956under the Pakistan International Airlines Corporation Act, 1956 (PIAC Act) and its shares are quoted on all StockExchanges of Pakistan. The registered office is situated at Karachi Airport. Principal activity of the Corporationis to provide air transport services. Other activities of the Corporation include provision of engineering and otherallied services.

1.2 During the year the Corporation has incurred a net loss of Rs.12,763 million, resulting in accumulated losses ofRs.24,563 million as of the balance sheet date. Further, as of that date the current liabilities of the Corporationexceeded its current assets by Rs. 22,672 million. The management has initiated corrective measures toimprove operating results of the Corporation. Further, the Ministry of Finance has extended its support byapproving a financial restructuring package which is currently in the process of implementation.

The Government of Pakistan (GoP) as a majority shareholder has committed to ensure the going concern statusof the Corporation at all times. Also, historically support of the GoP is available to the Corporation as GoP hasalready issued guarantees to secure certain long term finance and Term Finance Certificates (TFCs) of theCorporation. The GoP had agreed to provide equity contribution to the Corporation equivalent to accumulatedloss of the Corporation as at December 31, 2000, to cover interest / profit payments on long term finances andTFCs. As part of the financial package, an amount of Rs.6,923 million (2005: Rs.5,430 million) has beenprovided to the Corporation up to December 31, 2006 against which 692,306,294 (2005: 543,009,081) ‘A’ classordinary shares of Rs.10 each were issued to GoP up to that date. Hence, the Corporation expects continuedfinancial support of GoP in future as well. In view of the above, the Corporation has prepared these financialstatements on a going concern basis.

In addition, GoP had approved a fleet replacement plan as a result of which the Corporation entered into anagreement for purchase of eight new Boeing 777 aircraft. GoP had provided funding of US$ 150 million(Rs.8,816 million) in the form of equity and guarantees for acquisition of the said aircraft up to December 31,2006.

Subsequent to the balance sheet date, the Corporation has been advised by the European Union (EU) thatsome of its aircraft are temporarily restrained from flying to various countries in Europe. The Corporation hasinitiated steps to address the issues raised by the EU. Meanwhile, the Corporation has readjusted its flightschedule and rationalized the route network to ensure schedule integrity and maintain market share in theregion.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.1 Basis of preparation

These financial statements are the separate financial statements of the Corporation and have been prepared inaccordance with the requirements of the PIAC Act, relevant provisions of the Companies Ordinance, 1984 andapproved accounting standards as applicable in Pakistan. Approved accounting standards comprise suchInternational Accounting Standards (IAS) as notified under the provisions of the Companies Ordinance, 1984.Where the requirements of the PIAC Act, the Companies Ordinance, 1984 or directives issued by the Securitiesand Exchange Commission of Pakistan (SECP) differ with the requirements of these standards, therequirements of the PIAC Act, the Companies Ordinance, 1984 or the requirements of the said directives takeprecedence.

These financial statements have been prepared on accrual basis of accounting except for cash flow statement.

2.2 Accounting convention

These financial statements have been prepared under the historical cost convention except the following:


PAKISTAN INTERNATOINAL AIRLINES CORPORATIONNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006

� Corporation’s aircraft fleet is stated at revalued amounts less accumulated depreciation and impairment, ifany, as referred to in notes 3.1.1 and 3.1.2;

� Available for sale investments are stated at fair values in accordance with requirements of IAS - 39“Financial Instruments: Recognition and Measurement” as referred to in notes 5.4.1 and 14; and

� Employee benefits are stated at present value as referred to in notes 6.2 and 23.2.

2.3 Critical accounting estimates and judgements

The preparation of financial statements in conformity with approved accounting standards requires the use ofcertain critical accounting estimates. It also requires the management to exercise its judgement in the processof applying the Corporation’s accounting policies. The Corporation makes estimates and assumptionsconcerning the future. The areas involving a higher degree of judgement or complexity, or areas whereassumptions and estimates are significant to the financial statements are as follows:

� Provision for taxes and deferred taxation� Provision for slow moving stores and spares� Estimates made for revaluation / impairment of property, plant and equipment� Assumption and estimations in determining the residual values and useful lives of property, plant and

equipment� Provision for employee benefits� Unearned and earned revenue� Provision for frequent flyer programme

Estimates and judgements are continually evaluated and are based on historical experience and other factors,including expectation of future events that are believed to be reasonable under the circumstances.

2.4 Standards, interpretation and amendments to published approved accounting standards that are not yeteffective

IAS – 1 “Presentation of Financial Statements” effective from January 01, 2007- Capital Disclosures

Adoption of the above amendment may only impact the extent of disclosures presented in the financialstatements.

In addition to above, a new series of standards called “International Financial Reporting Standards (IFRSs)”have been introduced and seven IFRSs have been issued by the International Accounting Standard Board. Outof these, following four IFRSs have been adopted by the Institute of Chartered Accountants of Pakistan (ICAP)and have been approved by SECP, which are effective from January 01, 2007:

(i) IFRS-2 “Share-Based Payments”(ii) IFRS-3 “Business Combinations”(iii) IFRS-5 “Non Current Assets Held for Disposal and Discontinued Operations”(iv) IFRS-6 “Exploration for and Evaluation of Mineral Resources”

The Corporation expects that the adoption of these pronouncements mentioned above will have no significantimpact on the Corporation’s financial statements in the period of initial application.



2.5 Property, plant and equipment

2.5.1 Operating fixed assets and depreciation

OwnedLeasehold land is stated at cost. Aircraft fleet is stated at revalued amounts less accumulated depreciation andimpairment, if any. Other fixed assets are stated at cost less accumulated depreciation and impairment, if any.

Depreciation is calculated on straight-line method to write-off the cost or revalued amount of assets, less theirresidual values, over their expected useful lives. Remaining useful lives of significant assets and their residualvalues are reviewed periodically and changes in estimates arising from such review is accounted for in currentand future years. The rates of depreciation are stated in note 3.1.

For assets other than aircraft fleet, full year’s depreciation is charged on additions during first six monthswhereas six months’ depreciation is charged on additions during the second half of the year, and no depreciationis charged in the year of disposal. Proportionate depreciation on aircraft fleet is charged from the date ofacquisition till the date of disposal.

Repairs and maintenance costs are charged to income as and when incurred. Major renewals andimprovements are capitalized.

Gains and losses on disposal of fixed assets are dealt through profit and loss account.

LeasedThe assets under finance lease are recorded at an amount equal to fair value of the leased assets at inceptionof the lease or, if lower, at the present value of minimum lease payments. In calculating the present value of theminimum lease payments, the discount factor is the interest rate implicit in the lease or incremental borrowingrate of the Corporation, where appropriate.

Financial charges are allocated to accounting periods in a manner so as to provide a constant periodic rate ofcharge on outstanding liability.

Depreciation is charged to income applying the straight-line method on a basis similar to owned assets.

The fair value of aircraft signifies cost less manufacturers’ credits, if any.

2.5.2 Capital work-in-progress

These are stated at cost less impairment, if any. The assets are transferred to operating fixed assets when theyare available for use.

2.5.3 Surplus on revaluation of fixed assets

The surplus arising on revaluation of fixed assets is credited to the “Surplus on Revaluation of Fixed Assetsaccount” and it is shown in the balance sheet after share capital and reserves in accordance with therequirements of section 235 of the Companies Ordinance, 1984. A revaluation deficit is recognized in profit orloss, except that a deficit directly offsetting a previous surplus on the same asset in which case the deficit istaken to surplus on revaluation of fixed assets account. An annual transfer from the surplus on revaluation offixed assets account to retained earnings is made for the difference between depreciation based on the revaluedcarrying amount of the assets and the depreciation based on the assets' original cost. Additionally, accumulateddepreciation as at the revaluation date is eliminated against the gross carrying amount of the assets and the netamount is restated to revalued amount of the assets. Upon disposal, any revaluation reserve relating to theparticular assets being sold is transferred to retained earnings.



2.6 Impairment

The carrying amount of the Corporation’s assets is reviewed at each balance sheet date to determine whetherthere is any objective evidence that an asset or group of assets may be impaired. If any such evidence exists,the asset or group of assets’ recoverable amount is estimated. An impairment loss is recognized whenever thecarrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in profit andloss account immediately.

2.7 Intangibles

Costs that are directly associated with identifiable software products controlled by the Corporation and haveprobable economic benefit beyond one year are recognized as intangible assets.

Intangible assets are stated at cost less accumulated amortization and impairment, if any. Intangible assets withfinite lives are amortized on a straight line basis over their estimated useful lives as specified in note 4.

2.8 Investments

Subsidiaries, Associates and Joint VentureInvestments in subsidiaries, associates and joint venture are initially recognized at cost. At subsequent reportingdates, the recoverable amounts are estimated to determine the extent of impairment losses, if any, and carryingamounts of investments are adjusted accordingly. Impairment losses are recognized as expense. Whereimpairment losses subsequently reverse, the carrying amounts of the investments are increased to the revisedrecoverable amounts but limited to the extent of initial cost of investments. A reversal of impairment loss isrecognized in the profit and loss account.

Available for saleAll of the Corporation’s investments other than fixed maturity investments and investments in subsidiaries,associates and joint venture are classified as available for sale as the Corporation has no intention for thepurpose of generating a profit from short term fluctuations in prices or dealer’s margin. All investments classifiedas available for sale are initially recognized at cost inclusive of transaction costs and are subsequently markedto market using period end bid prices from stock exchange quotations and quotations from brokers and in caseof unquoted investments, at cost, less impairment. Any resultant gain / loss is recognized directly in equity untilthe investment is de-recognized. Any impairment loss including that had been recognized directly in equity isremoved from equity and recognized in profit and loss account for the year.

Held to maturityFinancial assets with fixed or determinable payments and fixed maturity for which the Corporation has ability tohold them till maturity are classified as held to maturity investments. These instruments are initially recognizedin the balance sheet at cost and subsequently measured at amortized cost using effective interest rate method.All financial assets categorized under held to maturity are subject to annual review for impairment.

2.9 Stores and spares

Capital sparesRotable and repairable stores are treated as operating fixed assets and are depreciated based on the averageuseful remaining life of the related aircraft. The average rate is stated in note 3.1.

Other stores and sparesThese are valued at lower of cost and net realizable value except goods-in-transit, which are valued at cost.Cost is determined as follows:

� Fuel and medical inventories first-in-first-out basis� Other stores and spares moving average cost

Net realizable value signifies the estimated selling price in the ordinary course of business less cost ofcompletion and cost necessary to be incurred in order to make the sale.



2.10 Trade debts and other receivables

Trade debts are recognized and carried at original invoice / ticket amount less provision for doubtful debts.Provision is made against the debts considered doubtful, as per the Corporation’s policy. Known bad debts arewritten-off, if any.

2.11 Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of cash flow statement,cash and cash equivalents comprise cash in hand, balances with banks and short term placements readilyconvertible to known amounts of cash and subject to insignificant risk of changes in value. Cash and cashequivalents also include bank overdrafts / short term borrowings that are repayable on demand and form anintegral part of the Corporation’s cash management.

2.12 Trade and other payables

Trade and other payables are stated at their cost, which is fair value of consideration received.

2.13 Interest / mark-up bearing loans and borrowings

All loans and borrowings are initially recognized at the fair value of the consideration received less directlyattributable transaction costs.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized costusing the effective interest method.

Gains and losses are recognized in profit and loss account when the liabilities are derecognized as well asthrough the amortization process.

2.14 Financial instruments

Financial assets and financial liabilities are recognized at the time when the Corporation becomes a party to thecontractual provisions of the instrument and assets and liabilities are stated at fair value and amortized costrespectively. Financial assets are de-recognized at the time when the Corporation loses control of thecontractual rights that comprise the financial assets. Financial liabilities are de-recognized at the time when theyare extinguished, that is, when the obligation specified in the contract is discharged, cancelled, or expired. Anygains or losses on de-recognition of the financial assets and financial liabilities are taken to the profit and lossaccount immediately.

2.15 Offsetting

Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet if theCorporation has a legally enforceable right to set off the recognized amounts and intends either to settle on anet basis, or to realize the asset and settle the liability simultaneously.

2.16 Equity instruments

Equity instruments issued by the Corporation are stated at their face value.

2.17 Taxation

Current taxationProvision for current taxation is based on taxable income at current rates of taxation after taking into accounttax credits and rebates available, if any, or one half percent of turnover, whichever is higher.



Deferred taxationDeferred tax is provided using the liability method, providing for all temporary differences between the carryingamounts of the assets and liabilities for financial reporting purposes and the amounts used for taxationpurposes. The amount of deferred tax provided is based on the expected manner of realization or settlement ofthe carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date. A deferred taxasset is recognized only to the extent that it is probable that future taxable profits will be available and the creditscan be utilized. Deferred tax assets are reduced to the extent that is no longer probable that the related taxbenefits will be realized.

2.18 Revenue recognition

Passenger and cargo revenuePassenger and cargo sales are recognized as revenue when the transportation is provided. The value ofunutilized tickets and airway bills is shown as an advance against transportation. However, in view of thelimitation of the Corporation’s revenue accounting system, the value of unutilized tickets and airway bills is notprovided by the system and is determined by the management on the basis of estimated number of days delaybetween the date of sale of tickets / air waybills and the date of actual travel / lift.

Engineering and other servicesRevenue of engineering and other services is recognized when services are rendered and invoices raised.

Interest / mark-up and dividend income� The Corporation recognizes interest income / mark-up on short term bank deposits and interest bearing

advances on time proportion basis.� Interest on held to maturity investments are recognized using the effective interest method.� Dividend income is recognized, when the right to receive dividend is established.

2.19 Borrowing costs

The Corporation recognizes the borrowing costs as an expense in the period in which these costs are incurred.

2.20 Provision for obligations

A provision is recognized in the balance sheet when:

� the Corporation has a legal or constructive obligation as a result of a past event,� it is probable that an outflow of resources embodying economic benefits will be required to settle the

obligation and� a reliable estimate can be made of the amount of obligation.

2.21 Foreign currency translation

Monetary assets and liabilities at the year end are translated at the rate as on balance sheet date based on thepreceding month’s average rate of exchange.

Foreign currency transactions are translated into local currency at the last week of the preceding month’saverage rate of exchange. All gains / losses on monetary items are dealt with in the profit and loss account.

2.22 Employee benefits

Provident FundThe Corporation operates a defined contribution provident fund scheme for all its permanent employees. Equalmonthly contributions are made to the Fund by the Corporation and the employees in accordance with theFund’s Rules.



Pension FundsThe Corporation operates a funded defined benefit pension scheme for all its permanent employees. Pensionscheme is a final salary pension scheme and is invested through three funds for both cockpit and non-cockpitemployees namely PALPA, FENA and Employees’ Pension Funds. Contributions are made to the scheme onthe basis of actuarial valuation that is carried out every year. Actuarial gains and losses are recognizedimmediately.

Post retirement medical benefitsThe Corporation operates an unfunded defined benefit medical scheme and provides medical allowances andfree hospitalization benefits to all its retired employees and their spouse in accordance with their serviceregulations. The post retirement medical benefit is accounted for on the basis of actuarial valuation that iscarried out every year. Actuarial gains and losses are recognized immediately.

Actuarial valuation of pension funds and post retirement medical benefit scheme was carried out at December31, 2006. The valuation has been carried out using projected unit credit method and the following significantfinancial assumptions have been used:

Discount rate 11.0 % p.a. 10.8% p.a.Expected long term rate of increase in salary level 8.9% p.a. 8.7% p.a.Expected rate of increase in pension cost 2.8% p.a. 2.6% p.a.Expected rate of medical cost trend 5.7% p.a. 5.5% p.a.Expected rate of return on plan assets 11.0% p.a. 10.8% p.a.

Compensated absences The Corporation accounts for all accumulated compensated absences when the employees render service thatincreases their entitlement to future compensated absences based on actuarial valuation.

Actuarial valuation of liability for compensated absences has been carried out at December 31, 2006. Thevaluation has been carried out using projected unit credit method and the following assumptions have beenused:

Discount rate 11.0 % p.a. 10.8% p.a.Expected long term rate of increase in salary level 8.9% p.a. 8.7% p.a.Utilization of leaves As leave prior to retirement

2.23 Frequent flyer programme

The airline operates an Award Plus frequent flyer programme. The incremental cost of providing travel inexchange for redemption of miles earned by members is accrued in the financial statements as an operatingcost and a future liability after allowing for miles which are not expected to be redeemed.

2.24 Transfer pricing and related parties

Related parties include the Corporation’s subsidiaries, associates, joint ventures, directors and the companiesunder common directorship, key management personnel and employee benefit funds. GoP despite being themajor shareholder is not treated as a related party. Transactions between the Corporation and its related partiesare carried out on arm’s length basis at prices determined under “Comparable Uncontrolled Price Method”. Therelated party transactions are disclosed in note 41.

2006 2005

2006 2005



3. PROPERTY, PLANT AND EQUIPMENT

Operating fixed assets (note 3.1) 72,326,396 41,024,467 Capital work-in-progress (note 3.2) 6,637,766 10,239,447

78,964,162 51,263,914

3.1 Operating fixed assets

2006 2005(Rupees in thousand)

Owned

Leasehold land 67,824 - - 66,821 - - - - 66,821 -(1,003) -

Buildings on leasehold land 909,766 120,459 - 1,030,225 304,666 34,609 - 339,275 690,950 2.5

Workshops and hangars 802,264 17,398 - 819,662 682,455 12,442 - 694,897 124,765 5

Renovation and improvements 448,374 38,306 - 485,094 382,991 31,101 - 412,506 72,588 20(1,586) - (1,586)

Aircraft fleet (note 3.1.1, 3.1.2 & 3.1.3) 24,445,800 2,215,722 908,437 27,362335 14,394,271 843,505 908,437 14,173,656 13,188,679 3.85 - 4.55(207,624) (207,624) (1,764,933)*

Operating ground equipment,catering, communication andmeteorological equipment 512,744 22,251 - 507,263 359,759 24,533 - 356,780 150,483 10

(27,732) - (27,512)

Engineering equipment and tools 989,059 54,098 - 1,043,157 835,669 34,049 - 869,718 173,439 10 - 20

Traffic equipment 1,594,216 137,271 - 1,703,811 1,127,937 63,737 - 1,166,790 537,021 10 - 20(27,676) - (24,884)

Furniture, fixture and fitting 605,919 54,073 - 655,196 516,424 20,434 - 532,070 123,126 10(4,796) - (4,788)

Motor transport 201,493 21,642 - 207,732 165,510 11,635 - 164,735 42,997 25(15,403) - (12,410)

Office equipment 76,372 2,040 - 77,382 64,007 3,443 - 66,441 10,941 15(1,030) - (1,009)

Computer and office automation 1,159,456 140,544 - 1,284,158 873,029 108,455 - 965,693 318,465 10 - 20(15,842) - (15,791)

Precision engineering equipment 820,031 55 - 809,297 783,041 23,415 - 795,687 13,610 10(10,789) - (10,769)

Printing press equipment 15,039 - - 15,039 11,942 688 - 12,630 2,409 20

Reservation equipment 12,619 - - 12,619 12,618 - - 12,618 1 10

Other equipment 378,512 70,915 - 438,734 357,921 12,091 - 359,324 79,410 10(10,693) - (10,688)

Capital spares 6,127,065 1,454,744 (706,892) 6,834,108 2,844,925 333,523 (644,555) 2,493,084 4,341,024 3.85 - 4.55(40,809) - (40,809)

39,166,553 4,349,518 201,545 43,352,633 23,717,165 1,557,660 263,882 23,415,904 19,936,729(364,983) (357,870) (1,764,933)*

Leased

Aircraft fleet (note 3.1.1, 3.1.2 & 3.1.3) 30,254,454 29,048,562 - 59,303,016 4,794,370 1,865,265 - 6,999,464 52,303,552 4.55- - 339,829*

Vehicles - MT 139,989 835 - 130,142 92,420 19,077 - 103,854 26,288 25(10,682) - (7,643)

Vehicles - TGS 84,430 - - 84,430 17,004 7,599 - 24,603 59,827 10 - 20

30,478,873 29,049,397 - 59,517,588 4,903,794 1,891,941 - 7,127,921 52,389,667(10,682) (7,643) 339,829* -

Total - 2006 69,645,426 33,398,915 201,545 102,870,221 28,620,959 3,449,601 263,882 30,543,825 72,326,396(375,665) (365,513) (1,425,104)*

COST / REVALUED AMOUNT DEPRECIATION Net book AnnualJanuary 1, Additions/ Transfers/ December 31, January 1, For the year/ Transfers / December 31, value at depreciation

2006 (disposals) Adjustment 2006 2006 (on disposals) Adjustment / 2006 December, rateRevaluation* 31, 2006

(Rupees in thousand) %



Operating fixed assets

Owned

Leasehold land 67,828 - - 67,824 - - - - 67,824 -(4) - - -

Buildings on leasehold land 769,498 140,268 - 909,766 280,904 23,762 - 304,666 605,100 2.5

Workshops and hangars 799,290 2,974 - 802,264 667,529 14,926 - 682,455 119,809 5

Renovation and improvements 402,103 46,271 - 448,374 349,558 33,433 - 382,991 65,383 20 - - - -

Aircraft fleet 29,952,223 71,220 - 24,445,800 19,993,150 1,578,337 (1,728,870) * 14,394,271 10,051,529 3.85 - 4.55(5,577,643) - (5,448,346) -

Operating ground equipment,catering, communication andmeteorological equipment 426,769 98,900 - 512,744 350,225 22,459 - 359,759 152,985 10

(12,925) - (12,925) -

Engineering equipment and tools 956,961 32,227 - 989,059 806,858 28,925 - 835,669 153,390 10 - 20(129) - (114) -

Traffic equipment 1,430,318 170,229 - 1,594,216 1,153,800 72,496 - 1,127,937 466,279 10 - 20(6,331) - (6,314) (92,045)

Furniture, fixture and fitting 585,233 23,097 - 605,919 500,472 18,027 - 516,424 89,495 10(2,411) - (2,075) -

Motor transport 201,258 19,197 96,268 201,493 186,625 13,203 37,307 165,510 35,983 25(115,230) - (55,300) (16,325)

Office equipment 73,044 3,508 - 76,372 60,742 3,445 - 64,007 12,365 15(180) - (180) -

Computer and office automation 1,107,089 54,432 - 1,159,456 777,234 96,300 - 873,029 286,427 10 - 20(505) (1,560) (505) -

Precision engineering equipment 815,671 4,360 - 820,031 759,575 23,466 - 783,041 36,990 10

Printing press equipment 11,599 3,440 - 15,039 11,598 344 - 11,942 3,097 20

Reservation equipment 12,619 - - 12,619 12,618 - - 12,618 1 10

Other equipment 402,711 3,842 - 378,512 381,819 4,134 - 357,921 20,591 10(28,041) - (28,032) -

Capital spares 5,421,106 615,925 136,298 6,127,065 2,609,541 587,512 - 2,844,925 3,282,140 3.85 - 4.55(46,264) - (46,264) (305,864)

43,435,320 1,289,890 232,566 39,166,553 28,902,248 2,520,769 37,307 23,717,165 15,449,388(5,789,663) (1,560) (5,600,055) (414,234)

(1,728,870) *

Leased

Aircraft fleet 30,254,454 - - 30,254,454 1,309,445 1,619,147 - 4,794,370 25,460,084 4.55- - - 1,865,778 *

Vehicles - MT 222,155 14,102 (96,268) 139,989 99,742 32,676 (37,307) 92,420 47,569 25- - - (2,691)

Vehicles - TGS 84,430 - - 84,430 8,561 8,443 - 17,004 67,426 10 - 20

30,561,039 14,102 (96,268) 30,478,873 1,417,748 1,660,266 (37,307) 4,903,794 25,575,079- - - (2,691)

1,865,778 *

Total - 2005 73,996,359 1,303,992 136,298 69,645,426 30,319,996 4,181,035 - 28,620,959 41,024,467(5,789,663) (1,560) (5,600,055) (416,925)

136,908 *

COST / REVALUED AMOUNT DEPRECIATION Net book AnnualJanuary 1, Additions/ Transfers/ December 31, January 1, For the year/ Transfers / December 31, value at depreciation

2005 (disposals) Adjustment 2005 2005 (on disposals) Adjustment / 2005 December, rateRevaluation* 31, 2005

(Rupees in thousand) %



3.1.1 During the year, aircraft fleet of the Corporation was valued by an independent valuer Airclaims Limited - UK onthe basis of professional assessment of current market values as of December 31, 2006. Current market valuerepresents the value that an aircraft could best achieve under today’s open market conditions and, therefore,takes into account a thorough review of recent market activity and known transactions involving the subjectaircraft covering new sales, new orders, the limited open market and financial activity that has occurred to date.It additionally considers the perceived demand for the type, its availability in the market and further takesaccount of the expressed views of informed industry sources.

The appraisal has taken into account the age, specification, accrued hours and cycles of the aircraft andproduced a Current Market Half-life Values (CMHLV). Half life or mid-time assumes the airframe, engine, gearsand all major components are half way between major overhauls. CMHLV has then been adjusted to accountfor the maintenance status of the aircraft in accordance with the information supplied. The determination of suchvalues involves a multiplicity of variables and some variation in perceived value must be expected. In this case,the appraiser considers that a tolerance of +/- 5% may reasonably apply to the calculated market value.

As a result of valuation made by the appraiser, net surplus of Rs.1,425 million (2005: Rs.137 million net deficit)on revaluation of aircraft fleet has arisen. Surplus on revaluation of fixed assets has been recorded at Rs.926million net of deferred tax of Rs. 499 million. However, in connection with this analysis, the valuer did notphysically inspect any of the aircraft and has relied on the information provided by the Corporation.

Airclaims Limited - UK reviewed the useful lives of the aircraft and these have been estimated as follows:

Airframes 30 25 25 25 25

Engines 35 30 25 35 30

Other component 30 25 25 25 25

3.1.2 Had there been no revaluation, the written down value of the revalued assets in the balance sheet would havebeen as follows:

Aircraft fleet - 2006 78,912,495 16,265,774 62,646,721

- 2005 52,243,279 12,911,023 39,332,256

3.1.3 Depreciation charge for the year has been allocated as under:

Cost of services (note 29) 3,252,078 3,621,290Distribution costs (note 30) 55,884 44,234Administrative expenses (note 31) 141,639 98,586

3,449,601 3,764,110

3.1.4 Included in "operating fixed assets" are four Fokker aircraft and other fixed assets costing Rs.331.880 millionand Rs.8,700.507 million respectively, which are fully depreciated.

BOEING AIRBUS737-300 747-200 747-300 777-200 A310-300

Years

Cost Accumulated Book valueDepreciation





Leasehold land Mr. Manzoor Hussain Through auction 33 - 33 81,000(Rawalpindi)M/s. Ambala Sweet & Nimco Through auction 269 - 269 50,667 M/s. Ambala Sweet & Nimco Through auction 702 - 702 6,667

Aircraft fleetDH-6(AP-BCG) M/s. F & M Aviation USA Through negotiation 16,695 16,695 - 39,385 DH-6(AP-BCH) M/s. F & M Aviation USA Through negotiation 16,695 16,695 - 39,385 F-27 (AP-BAL) National Insurance Insurance claim 56,925 56,925 12,122

CorporationF-27 (AP-BDQ) National Insurance Insurance claim 117,309 117,309 - 12,148

CorporationMotor vehiclesTo employeesHonda Civic (GA-9905) Mr. Jawed Khan As per Corporation's policy 1,237 619 618 - Honda Civic (GA-9906) Syed Farooq Hussain Shah As per Corporation's policy 1,238 619 619 - Honda City (GA-4810) Mr. Jamil Rauf As per Corporation's policy 735 661 74 - Honda City (GA-4742) Mr. Zafar Ahmed Khan As per Corporation's policy 735 661 74 - Honda City (GA-8499) Mr. Nadir Ali Shah As per Corporation's policy 735 661 74 - Honda City (GA-8506) Mr. Imran Maqsood As per Corporation's policy 735 662 73 - Toyota Corolla (GA-9451) Mr. AVM Jawed Iqbal As per Corporation's policy 939 587 352 586 Honda City (GA-4816) Mr. Dawood Nasir Paul As per Corporation's policy 735 661 74 - Honda City (GA-8762) Mr. Mureed Abbas Khan As per Corporation's policy 735 661 74 - Honda City (GA-8505) Mr. Mahmood Manzoor As per Corporation's policy 735 662 73 - Honda City (AJM-725) Mr. Talat A Malik As per Corporation's policy 835 104 731 803 Suzuki Margalla (GA-8899) Mrs. Farzana - W/O Asmatullah As per Corporation's policy 349 262 87 - Toyota Corolla (GA-8752) Mr. Rasheed -ul-Hassan As per Corporation's policy 939 822 117 - Toyota Corolla (AKT-460) Capt. Shahnawaz As per Corporation's policy 969 - 969 -

To othersHonda Civic (18-SRI-3702) Ms. TT Dealwis Through auction / negotiation 688 619 69 417 Toyota Camry (IR-JULA-186) Mr. Thong Through auction / negotiation 1,331 1,198 133 286 Nissan Sunny (BAAYAN-9618) Mr. Nirmal - K Quresh Through auction / negotiation 1,156 1,041 115 349 Mercedez - BENZ (PIA-9999) Mr. M. Ahmed Through auction / negotiation 3,084 2,776 308 185 Mazda 626 LX 899 (67373-AD) Ms. Nayyar Adeel Through auction / negotiation 590 531 59 110 Honda City (Sedan ) 2CH-7799 Mr. Siraj Ahmed Through auction / negotiation 810 729 81 177

Various * 19,596 17,274 2,322 395Aggregate value of items where

WDV is less than Rs.50,000 Various 128,131 126,079 2,052 22,476

Total 2006 375,665 365,513 10,152 267,158

2005 5,789,663 5,600,055 189,608 790,685

* This includes various operating fixed assets, having WDV above Rs.50,000. In view of large number of items, the management considers itimpracticable to disclose the particulars of all items.

Sale of fixed assets is made through disposal committee in accordance with the prescribed procedures.

3.2 Capital work-in-progress

Sale /Accumulated Net Insurance

Description Sold to Method of disposal Cost depreciation book value proceeds



Buildings 23,696 27,244 Other equipment 404,249 86,653 Renovation and improvements 115,542 80,135 Non-refundable advance against

purchase of aircraft and related equipments 24,899,773 10,119,877

25,443,260 10,313,909

Less: transfer to operating fixed assets 18,775,030 68,038charged off / adjustment 30,464 6,424

18,805,494 74,462

6,637,766 10,239,447

3.1.5 Following fixed assets were disposed off during the year:



Computer softwareCost (note 4.1) 199,601 182,741 Less: accumulated amortization (note 4.2) 101,326 70,320

98,275 112,421

4.1 CostOpening balance 182,741 111,228Add: additions during the year 16,860 71,513

Closing balance 199,601 182,741

4.2 Accumulated amortizationOpening balance 70,320 36,974 Amortization for the year 31,006 33,346

Closing balance 101,326 70,320

Useful life 5 - 10 years 5 - 10 years

5. LONG TERM INVESTMENTSInvestments in related parties - at costSubsidiaries (note 5.1) 4,415,712 213,902 Associates (note 5.2) 396 396 Joint venture (note 5.3) 1 -

4,416,109 214,298Other investments (note 5.4) 112,089 95,717

4,528,198 310,015

5.1 Subsidiaries - unquoted

PIA Investments Limited (PIAIL)792,000 (2005: 400,000) shares of

AED 100 each (note 5.1.1) 8,384,398 2,247,553 2,245,155 99,000 Advance against shares pending allotment 2,170,557 114,902

Percentage of shareholding - 99% (2005: 50%) 4,415,712 213,902

Sky Rooms (Private) Limited4,000,000 (2005: 4,000,000) shares

of Rs.10 each (63,941) (29,837) 40,000 40,000Percentage of shareholding - 100% (2005: 100%)

Midway House (Private) Limited(under winding-up)

2,960,000 (2005: 2,960,000) sharesof Rs.10 each (note 5.1.2) (134,565) (134,565) 28,520 28,520

Percentage of shareholding - 100% (2005: 100%)68,520 68,520

Less: provision for diminution invalue of investments 68,520 68,520

- -

4,415,712 213,902

4. INTANGIBLES


Break-up value2006 2005(Rupees in thousand)



5.1.1 During the year, the Corporation has acquired 392,000 shares of PIAIL and advance against equity of the othershareholder in PIAIL at a consideration of US$ 36 million and US$ 34 million (Rs.2,146 million and Rs.2,055million) respectively, thereby increasing its holding in PIAIL from 50% to 99%. The status of investment haschanged from associate to that of a subsidiary.

5.1.2 Audited financial statements for the year ended December 31, 2006 are not available, accordingly break-upvalue based on the audited financial statments for the year ended December 31, 2005 has been used.

5.1.3 All the subsidiaries are incorporated in Pakistan except PIAIL which is incorporated in Sharjah, United ArabEmirates and registered in British Virgin Islands.

5.2 Associates - unquoted

Minhal Incorporated - Sharjah1,600 (2005: 1,600) shares of AED 100 eachPercentage of shareholding - 40%

(2005: 40%) 113,664 113,664 396 396

Audited financial statements for the year ended December 31, 2006 are not available accordingly break-upvalue based of the audited financial statments for the year ended December 31, 2005 has been used.

5.3 Joint venture - unquoted

Abacus Distribution Systems Pakistan (Private) Limited89,310 (2005: nil) shares of Rs.100 eachPercentage of shareholding - 20% (2005: nil) (1,203) - 1 -

During the year, the Corporation acquired 20% equity participation at a cost of Re.0.01 per share. As per theJoint Venture Agreement, shareholding of the Corporation will increase to 75% during the period of 9 years. TheAbacus Distribution Systems Pakistan (Private) Limited is a joint venture between the Corporation and AbacusInternational Pte Limited, Singapore.

5.4 Other investments

Available for sale (note 5.4.1) 68,358 31,493 Held to maturity (note 5.4.2) 43,731 64,224

112,089 95,717 5.4.1 Available for sale

Quoted

Pakistan Services Limited172,913 (2005: 172,913) shares of Rs.10 each

having market value of Rs.393 (2005: Rs.180) each 67,989 31,124

Unquoted

Pakistan Tourism Development Corporation Limited10,000 (2005: 10,000) shares of Rs. 10 each 100 100

Duty Free Shops (Private) Limited - Pakistan *87,512 (2005: 87,512) shares of Rs.100 each 269 269 Percentage of shareholding - 11.31 % (2005: 26.95 %)

68,358 31,493

* During the year, the Corporation did not exercise option to acquire right shares issued by Duty Free Shops(Private) Limited, due to which the Corporation's percentage of holding in the company has decreased.

Break-up value2006 2005 2006 2005

(Rupees in thousand) (Rupees in thousand)



5.4.2 Held to maturity

Promissory notes issued by the Nigerian Government 61,570 77,914 Less: current maturity (note 14) 17,839 13,690

43,731 64,224

This represents two promissory notes issued by Nigerian Government on May 8, 1988 amounting to US$ 1.32million and US$ 2.94 million. These were issued in consideration of bank balance of the Corporation in CentralBank of Nigeria which was seized by the Nigerian Government at the time of coup and civil war in Nigeria. Thesenotes and interest thereon are redeemable in fixed quarterly installments of US$ 58,676 and US$ 26,325respectively during the period starting from April 5, 1990 to January 5, 2010.

6. LONG TERM ADVANCES AND OTHER RECEIVABLE

Long term advances (note 6.1) - 4,674,933 Other receivable - pension funds (note 6.2) 1,684,000 1,961,000

1,684,000 6,635,933

6.1 Long term advances - unsecured

Subsidiaries

PIA Investments Limited - considered good (note 5.1.1)Advance for working capital requirements (note 6.1.1) - 936,760 Accumulated interest on - advance for working capital requirements (note 6.1.1) - 2,890,637 - loan for renovation of Hotel (note 6.1.2) - 847,536

- 4,674,933 Considered doubtfulSky Rooms (Private) Limited 37,042 37,042 Midway House (Private) Limited (under winding up) 82,476 82,476

119,518 119,518 Less: provision for doubtful advances 119,518 119,518

- -

- 4,674,933

6.1.1 During the year, the Corporation has received an amount of US$ 18 million (Rs.1,093 million) from PIAIL in fullsettlement of advance for working capital requirements and also received US$ 51 million (Rs.3,092 million),which has resulted in full settlement of accumulated interest on advance for working capital requirements.

6.1.2 During the year, the Corporation has received an amount of US$ 9.75 million (Rs.585 million) from PIAIL andalso adjusted US$ 4.8 million (Rs.287 million) against acquisition of additional shares of PIAIL, which hasresulted in full settlement of accumulated interest on long term loan for hotel renovation due from PIAIL.

6.1.3 Maximum aggregate amount due from the subsidiaries at any month end was Rs.4,173 million (2005: Rs.4,675million).


6.2 Other receivable - pension funds

Asset recognized in the balance sheet

Present value of defined benefit obligation 9,466,000 8,930,000 Less: Fair value of plan assets 11,150,000 10,891,000

1,684,000 1,961,000

Expense recognized in profit and loss account

Current service cost 214,000 241,000 Interest cost 925,000 807,000 Settlement cost - 17,000 Expected return on plan assets (1,141,000) (993,000)Actuarial loss / (gain) recognized - net 377,000 (23,000)

375,000 49,000

Movement in asset during the year

Balance at the beginning of the year 1,961,000 1,912,000 Charge for the year (375,000) (49,000)Payments made during the year 98,000 98,000

Balance at the end of the year 1,684,000 1,961,000

Actual return on plan assets 890,000 827,000

Number of employees covered by the scheme as on December 31, 2006 was 12,116 (2005: 12,725).

The fair value of plan assets includes investments in the Corporation's shares amounting to Rs.4 million(2005: Rs.7 million).

7. LONG TERM DEPOSITS AND PREPAYMENTS

Deposits

Aircraft fleet lease deposits 1,564,544 854,203 Engine maintenance 215,695 226,205 Rent 35,320 33,871 Utilities 9,697 10,419 Aircraft fuel 6,591 6,444 Guarantee deposit 3,222 2,923 Others 67,956 65,098

1,903,025 1,199,163 Prepayments

Exposure fee to support financing (note 7.1) 1,509,793 675,837 Less: current portion (note 12.1) 149,119 70,023

1,360,674 605,814

3,263,699 1,804,977

7.1 This represents the payment made by the Corporation to Ex-Im Bank in consideration of 12 years' guaranteeissued by Ex-Im Bank. Accordingly, this exposure fee is being amortized over the period of lease term i.e.12years.






Deferred tax credits:

Accelerated tax depreciation 17,349,229 9,236,381 Surplus on revaluation of fixed assets 498,786 - Unrealized gain on re-measurement of investments 12,642 -

17,860,657 9,236,381

Deferred tax debits:

Unrealized loss on re-measurement of investments - (18,291)Unused tax losses (20,011,344) (7,356,877)Provisions for liabilities and to write down other assets (2,134,853) (2,333,238)

(22,146,197) (9,708,406)

(4,285,540) (472,025)

Deferred tax asset has not been recognized in these finacial statments in accordance with the accounting policystated in note 2.17.

9. STORES AND SPARES

Stores 828,560 659,612 Spares 3,387,842 3,924,807

4,216,402 4,584,419

Less: provision for slow moving stores andspares (note 9.1) 1,604,338 2,427,229

2,612,064 2,157,190

Inventory held for disposal (note 9.2) 2,266,825 1,253,852 Less: adjustment to write down

surplus inventory to net realizable value 1,935,827 1,012,936

330,998 240,916

Goods-in-transit 427,978 392,031

3,371,040 2,790,137

9.1 Movement in provision is as follows:

Balance at the beginning of the year 2,427,229 2,645,730 Transferred to inventory held for disposal (922,891) -Provision made during the year (note 33) 100,000 (218,501)


The provision against slow moving stores and spares is being made in a manner whereby the book value ofstores and spares at the end of each year is charged to the profit and loss account. Such provision is made inproportion to estimated average useful lives of the relevant category of the aircraft attained up to the balancesheet date.

9.2 It includes inventory held with foreign third party for sale in the open market.

8. DEFERRED TAXATION




Considered good 6,129,673 5,222,534

Considered doubtful 455,000 407,888 Less: provision for doubtful debts (note 10.1) 455,000 407,888

- -

6,129,673 5,222,534


Balance at the beginning of the year 407,888 587,853 Written off during the year (198) (13,612)Provision / (Reversal) made during the year (note 33) 47,310 (166,353)

Balance at the end of the year 455,000 407,888

10.2 Trade debts include debts due from Government agencies, other airlines and International Air TransportAssociation's (IATA) approved agents. Certain portion of trade debts is secured by bank guarantees receivedfrom agents but due to very large number of agents all over the world the amount of secured debts is notdeterminable.

11. ADVANCES

Considered good

SubsidiariesPIA Investments Limited (note 11.2) - 16,704 Sky Rooms (Private) Limited (note 11.2) 62,915 129,122

62,915 145,826Others

Executives (note 11.3) 54,942 22,752 Employees 85,534 97,075 Suppliers 383,070 241,872 Others 5,607 6,392

529,153 368,091

Considered doubtful 28,985 25,048 Less: provision for doubtful advances (note 11.1) 28,985 25,048

- -

592,068 513,917


Balance at the beginning of the year 25,048 20,777 Provision made during the year (note 33) 3,937 4,271


11.2 Maximum aggregate amount due from the subsidiaries at any month end was Rs.165 million (2005:Rs.146 million).

11.3 This represents due from executives in respect of advances for expenses and furniture etc. in accordance withthe terms of employment. The maximum aggregate amount of advances due from executives at the end of anymonth during the year was Rs.54.94 million (2005: Rs.22.75 million).

10. TRADE DEBTS




Trade deposits 280,954 37,640 Prepayments (note 12.1) 948,379 543,535

1,229,333 581,175

12.1 Prepayments

Current portion of long term prepayment (note 7) 149,119 70,023 Commission 425,367 348,495 Interest on leased aircraft 284,190 47,047 Insurance 78,824 66,602 Rent 6,043 10,652 Others 4,836 716

948,379 543,535

13. OTHER RECEIVABLES

Considered good

Insurance and other claims 283,899 154,063 Excise duty [note 27.1 (b)] 100,000 100,000 Sales tax receivable 121,521 190,983 Receivables against manufacturers' credits 166,312 -Others 193,523 36,403

865,255 481,449

Considered doubtful 37,442 30,257 Less: provision for doubtful receivables 37,442 30,257

- -

865,255 481,449

14. SHORT TERM INVESTMENTS

Held to maturityCurrent portion of long term investment (note 5.4.2) 17,839 13,690

Available for sale

Quoted

France Telecom, France (note 14.1)232,791 shares (2005: 232,791) 390,556 351,073

having market value of 20.95 Euro (2005: 20.99 Euro) each

Unquoted

SITA INC N.V. (note 14.2) 19,220 19,220 325,491 shares (2005: 325,491 shares)Less: provision for diminution in value of investment (note 14.3) 6,221 6,438

12,999 12,782

421,394 377,545

14.1 These shares are currently in the custody of Citibank N.A, London.

14.2 These shares are held by SITA INC. N.V. on behalf of the Corporation and are transferable subject to certainspecified conditions.

12. TRADE DEPOSITS AND PREPAYMENTS




Authorized capitalOrdinary share capital

2,949,250,000 2,949,250,000 'A' class shares of Rs.10 each 29,492,500 29,492,5001,500,000 1,500,000 'B' class shares of Rs.5 each 7,500 7,500

2,950,750,000 2,950,750,000 29,500,000 29,500,000 Preference share capital

50,000,000 50,000,000 Preference shares of Rs.10 each 500,000 500,000

3,000,750,000 3,000,750,000 30,000,000 30,000,000

Issued, subscribed and paid up share capitalOrdinary share capital

'A' class shares of Rs.10 each1,711,747,563 1,562,450,349 Issued for consideration in cash (note 16.1) 17,117,476 15,624,504

Issued for consideration other than cash931,028 931,028 for acquisition of shares 9,310 9,310

233,934,482 233,934,482 Issued as bonus shares 2,339,345 2,339,345

1,946,613,073 1,797,315,859 19,466,131 17,973,159

'B' class shares of Rs.5 each1,003,374 1,003,374 Issued for consideration in cash 5,017 5,017

Issued for consideration other than cash2,625 2,625 for acquisition of shares 13 13

494,000 494,000 Issued as bonus shares 2,470 2,470

1,499,999 1,499,999 7,500 7,500

19,473,631 17,980,659


2006 2005 2006 2005No. of shares (Rupees in thousand)


Balance at the beginning of the year 6,438 7,667 Reversal made during the year (217) (1,229)


15. CASH AND BANK BALANCES

With banksIn current accounts

Collection (note 15.1) 3,360,993 1,623,249 Overdrawn bank balances (684,597) (633,608)

2,676,396 989,641 In short term deposit accounts 2,682,287 1,516,805

5,358,683 2,506,446 In hand 4,467 8,035 In transit 96,774 100,210

5,459,924 2,614,691

15.1 Includes Rs.1.7 million (2005: Rs.1.3 million) held in the Corporation's bank account with a Libyan bank whichis not currently repatriable due to Foreign Government's restrictions.

16. SHARE CAPITAL



16.1 Under the terms of financial package as stated in note 1.2, an amount of Rs.1,493 million (2005: Rs.1,451million) has been received from GoP as equity contribution. Accordingly, 149,297,214 ordinary shares of Rs.10each (2005:145,073,203 ordinary shares of Rs.10 each) have been issued to GoP during the year.

16.2 At December 31, 2006 GoP held 1,736,459,539 and 1,462,515 'A' class ordinary shares and 'B' class ordinaryshares respectively (2005: 1,587,162,325 and 1,462,515 'A' class ordinary shares and 'B' class ordinary sharesrespectively).

17. RESERVES


Capital reserves

Reserve for replacement of fixed assets (note 17.1) 1,966,779 1,966,779 Capital redemption reserve fund 250,000 250,000 Others 284,259 284,259

2,501,038 2,501,038Revenue reserves 1,779,674 1,779,674

4,280,712 4,280,712

17.1 Up to June 1988, depreciation on fully depreciated aircraft was charged and credited to the reserve forreplacement of fixed assets and excess of sale proceeds over cost of fixed assets disposed off was alsocredited to the aforesaid account. With effect from 1989 - 90, the Corporation changed this policy to comply withthe IASs and the excess proceeds over cost of relevant assets are credited to the profit and loss account.

18. LONG TERM FINANCING - secured

From Banking Companies

United Bank Limited Syndicate 1,045 2004 - 2006 6 Six months - 348,327Half-yearly T-Bills+2.5%

Habib Bank Limited Demand 2,135 2004 - 2006 6 Six months - 711,667Finance Half-yearly T-Bills+2.5%

National Bank of Pakistan Demand 1,683 2004 - 2006 6 Six months - 561,110 Finance Half-yearly T-Bills+2.5%

United Bank Limited 18.1 Syndicate 1,650 2005 - 2009 12 Six months 1,621,098 1,621,098& 18.2 Finance Half-yearly KIBOR+0.79%

Citibank / DVB Bank 18.3 Syndicate 6,603 2006 - 2008 note 18.4 One month 3,491,443 -& 18.4 Finance LIBOR+0.77%

Habib Bank Limited 18.5 Demand 530 2006 - 2009 36 One month 456,389 -Finance Monthly KIBOR+1.50%

Citibank, N.A. 18.6 Demand 4,985 2006 - 2016 20 5.28% 2,180,178 -& 18.7 Finance Half-yearly

Habib Bank Limited 18.8 Demand 200 2006 - 2009 36 One month 194,444 -Finance Monthly KIBOR+1.75%

ABN Amro Bank 18.9 Demand 3,538 2009 - 2013 19 Three months 1,556,842 -Finance Quarterly LIBOR+1.60%

9,500,394 3,242,202Less: current portion 2,599,916 1,621,103

6,900,478 1,621,099

Limit Number ofType of (Rupees in Repayment installments / Mark-up 2006 2005

Financier Note Facility million) Period mode % (Rupees in thousand)



18.1 Following are the participating banks:

United Bank LimitedNational Bank of PakistanHabib Bank Limited

18.2 The finance is secured by way of hypothecation of capital spares and traffic equipment.

18.3 Following are the mandated lead arrangers:

CitigroupDVB Bank AG (DVB)

18.4 The finance is secured by way of first charge in the assignment of the purchase contracts relating to three newB 777 aircraft. Repayment is to be made at the time of delivery of each aircraft.

18.5 The finance is secured by way of hypothecation charge lien on receivables of Peshawar, Islamabad andRawalpindi booking offices and sinking fund account amounting to Rs.267 million.

18.6 Following are the lenders:

Citibank International Plc. - ParisCitibank, N.A. - London

18.7 The Corporation entered into financing agreement of US$ 81.90 million for acquiring seven ATR aircraft andinitial spares package, out of which three aircraft have been delivered during the year and the remaining fouraircraft will be delivered in first half of year 2007. The finance is secured by way of mortgage over each aircraft.

18.8 The finance is secured by way of first charge hypothecation over all present and future receivables / book debtsfrom various travel agents and booking offices in respect of ticket sales from Peshawar, Islamabad andRawalpindi.

18.9 The Corporation has entered into an arrangement with the bank to finance 15% of the Corporation's sharetowards cost of the aircraft to the Boeing Company in respect of B 777-300 aircraft. This finance is securedagainst GoP guarantee.

18.10 All the aforementioned charges are un-registered.

19. TERM FINANCE CERTIFICATES

TFCs - secured (non participatory) 14,003,940 14,760,910 Less: current portion 756,970 756,970

13,246,970 14,003,940

During the year 2003 the Corporation, through private placement, issued 151,400 fully paid scrips of TFCshaving a denomination of Rs.100,000 each. The salient features of the TFCs are as follows:

Installment payable: Semi - annually in arrearsRepayment period: 2003-2011Rate of profit: 50 basis points above the base rate* with a floor of 8% and a cap of 12.50% per

annum. Average rate prevailed during the year is 9.75% (2005: 8.5%) per annum.

*Base rate is the State Bank of Pakistan (SBP) discount rate prevailing at twoworking days before the commencement of the period for which the profit rate isbeing computed.




The issue of TFCs is secured by a guarantee given by the GoP. In order to protect the interest of the TFCholders, United Bank Limited has been appointed as the Trustee under the trust deed. In case the Corporationdefaults on any of its obligations, the Trustee may enforce the Corporation’s obligations in accordance with theterms of the trust deed. The proceeds of any such enforcements shall be distributed to the TFC holders at thattime on a pari passu basis in proportion to the amounts owed to them pursuant to the TFCs.

The TFCs have an embedded call option for early redemption exercisable by the Corporation at 24 and 48months from the date of issue with a 60 days notice period. The TFCs will be redeemed at a premium, whichwill be calculated at a flat rate on 0.25% of the outstanding amount at the time of the exercise of call option.

The above TFCs have been obtained as part of financial package of Rs.20 billion approved by GoP and aresecured against guarantees issued by GoP. An amount equal to mark up on TFCs is provided by GoP as itsequity contribution.

20. LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE

Present value of future rental obligations - aircraft fleetA-310 (note 20.2) 5,665,539 5,782,248 B-777 (note 20.3 - 20.5) 40,658,496 17,852,601

46,324,035 23,634,849Present value of future rental obligations - vehicles (note 20.6) 93,900 138,578

46,417,935 23,773,427Less: current portion 3,914,491 2,067,363

42,503,444 21,706,064

20.1 The amount of future payments and the year in which they will become due are:


Not later than one year 6,223,436 2,308,945 3,914,491 2,553,748 486,385 2,067,363

Later than one year andnot later than five years 24,420,386 7,120,824 17,299,562 10,552,925 1,485,890 9,067,035

Later than five years 29,028,598 3,824,716 25,203,882 13,077,091 438,062 12,639,029

59,672,420 13,254,485 46,417,935 26,183,764 2,410,337 23,773,427

20.2 In 2003, the Corporation entered into aircraft lease agreement with Airbus Leasing Inc. USA, to acquire sixA310-300 aircraft. The salient features of the lease are as follows:

Discount rate 5.2% 5.2%Lease period 144 months 144 monthsSecurity deposit (Rupees in thousand) 197,219 193,914

2006 2005

2006 2005Minimum Present Minimum Present

lease Finance value of lease Finance value ofpayment cost minimum payment cost minimum

lease leasepayments payments


2006 2005




2006 2005

Discount rate - two aircraft 4.65% 4.65% Discount rate - one aircraft and spare engines Three month Three month

LIBOR LIBOR

Lease period - aircraft 144 months 144 monthsLease period - spare engines 96 months 96 monthsSecurity deposit (Rupees in thousand) 577,315 567,641

20.4 During the year, the Corporation has arranged an Ex-Im Bank guaranteed financing of US$ 266 million toacquire two Boeing B 777-200 LR aircraft and one propulsor from Taxila - 2 Limited, a special purpose entityincorporated in Cayman Islands. The guaranteed lender is Citibank N.A. The salient features of the lease areas follows:

Discount rate - aircraft and propulsor Three month -LIBOR - 0.02%

Lease period - aircraft 144 months -Lease period - propulsor 96 months -Security deposit (Rupees in thousand) 466,009 -

20.5 During the year, the Corporation has arranged an Ex-Im Bank guaranteed financing of US$ 472 million toacquire three Boeing B 777-300 ER aircraft from White Crescent Limited, a special purpose entity incorporatedin Amsterdam, Netherlands. The guaranteed lender is ABN Amro Bank. Salient features of the lease are asunder:

Discount rate - aircraft Three month -LIBOR - 0.04%

Lease period - aircraft 144 months -Lease period - engine 96 months -Security deposit (Rupees in thousand) 319,568 -

20.6 The salient features of other lease arrangements are as follows:Discount rate 7.71% - 13.32% 7.71% - 13.32%Lease period 48 to 60 months 48 to 60 months

20.7 The ownership of all these assets will be transferred to the Corporation by the end of lease term.

21. LONG TERM MURABAHA - secured

National Bank of Pakistan Syndicated 70 2002-2007 Monthly One month 781,165 1,605,975Habib Bank Limited, Bahrain murabaha for LIBOR+ 2.70%United Bank Limited, UAE purchase of

(facility agent) six B747-300aircraft and

spares

Less: current portion 781,165 837,900

- 768,075

Type and FacilityFinancier purpose of amount Repayment Installment Markup

facility in million period period %US Dollar

20.3 In 2004, the Corporation had arranged an Ex-Im Bank guaranteed financing of US$ 345 million to acquire threeBoeing 777-200 aircraft and spare engines, from Taxila Limited, a special purpose entity incorporated inCayman Islands. The guaranteed lender is Citibank N.A. Salient features of the lease are as follows:



The facility is secured by way of first ranking charge over present and future receivables of the Corporation frompassenger and cargo sales agents in UAE and lien over United Bank Limited collection account which isspecified for the related receipts. The facility is also secured by first ranking pari passu charge by way ofhypothecation of stores and spares. The aforementioned charges are un-registered.

22. LONG TERM DEPOSITS


Deposits from agents 112,500 109,000 Retention money 149,211 181,236

261,711 290,236

23. DEFERRED LIABILITIES

Deferred custom duties 178,588 249,690 Obligation for compensated absences (note 23.1) 1,284,000 1,364,000 Post retirement medical benefits (note 23.2) 1,353,000 1,211,000

2,815,588 2,824,690

23.1 Obligation for compensated absences

Liability recognized in the balance sheet

Balance at beginning of the year 1,364,000 1,461,000 Charge for the year 11,915 (17,000)

1,375,915 1,444,000Less: payments made during the year (91,915) (80,000)

Balance at end of the year 1,284,000 1,364,000

23.2 Post retirement medical benefits

Liability recognized in the balance sheet

Present value of defined benefit obligation 1,353,000 1,211,000

Movement in liability during the year

Balance at the beginning of the year 1,211,000 925,000 Charge for the year 218,000 343,000 Less: payments made during the year (76,000) (57,000)


Expense recognized in profit and loss account

Current service cost 22,000 20,000 Interest cost 127,000 85,000 Settlement cost - 18,000 Net actuarial loss recognized 69,000 220,000

218,000 343,000

Number of employees covered by the scheme as at December 31, 2006 was 12,116 (2005: 12,725).

Trade creditors

Goods 2,809,858 2,305,947 Services 2,170,524 1,459,791 Airport related charges 626,551 629,747

5,606,933 4,395,485Accrued liabilities 2,125,058 2,031,198

Advance against transportation (unearned revenue)

Normal 5,290,835 4,686,980Hajj 1,222,732 1,476,107

6,513,567 6,163,087Advance from customers 268,192 390,521 Payable to employees' provident fund 136,796 91,052 Unclaimed dividend - Preference shares 3,297 3,297 Collection on behalf of others 827,416 785,719 Custom and central excise duty 578,826 777,045 Capital value tax 51,855 47,225 Stamp duties 5 8,841 Income tax deducted at source 43,681 34,532 Provision for frequent flyer programme (note 24.1) 61,664 -Provision for construction of University Road, Karachi (note 24.2) 215,000 100,000 Short term deposit 166,044 137,229 Liabilities acquired from subsidiaries - net (note 24.3) 18,690 18,690

16,617,024 14,983,921

24.1 Provision for frequent flyer programme

Balance at the beginning of the year - -Charge for the year 61,664 -

61,664 -Benefits utilized during the year - -

Balance at the end of the year 61,664 -

24.2 Provision for construction of University Road, Karachi

Balance at the beginning of the year 100,000 -Charge for the year 200,000 100,000

300,000 100,000Payments made during the year (85,000) -


24.3 The subsidiaries of Corporation, PIA Holdings (Private) Limited, PIA Shaver Poultry Breeding Farms (Private)Limited and PIA Hotels Limited, had applied under the 'Easy Exit Scheme' announced by the SECP for voluntarywinding up. Assets and liabilities of these subsidiaries were taken over by the Corporation.

25. ACCRUED INTEREST / MARK-UP / PROFIT

On long term financing 48,361 56,024 On term finance certificates 484,767 511,255 On murabaha 3,493 5,979 On short term borrowings 275,657 34,511

812,278 607,769

24. TRADE AND OTHER PAYABLES






Short term loans (note 26.1) 10,580,640 362,075Running finance under mark-up arrangements (note 26.2) 4,962,806 -

15,543,446 362,075

26.1 Short term loans - secured

26. SHORT TERM BORROWINGS - secured




United Bank Limited - Dubai First pari passu charge 1 Year One month - 362,075over present and future LIBOR+2.00%

current assets

Citibank - Karachi * GoP Guarantee 3 months One month 2,000,000 -KIBOR+0.25%

United Bank Limited - Dubai UAE Receivables 1 Year One month 58,840 -LIBOR+2.00%

National Bank of Pakistan - Bahrain -GoP Guarantee 1 Year One month 4,260,900

Habib Bank Limited - Export Processing Zone LIBOR+0.60%

Standard Chartered Bank - Dubai GoP Guarantee 1 Year One month 3,043,500 -LIBOR+0.50%

Standard Chartered Bank - Dubai * GoP Guarantee 3 months Three months 1,217,400 -LIBOR+1.325%

10,580,640 362,075

* The Corporation intents to restructure these facilities as long term loans.

26.2 Running finance under mark-up arrangements - secured


United Bank Limited - Karachi First pari passu 1 Year One month 365,372 -hypothecation charge KIBOR+1.50%

over stock & trade debts

National Bank of Pakistan - Karachi First pari passu 1 Year One month 50,000 -hypothecation charge KIBOR+1.25%

over stock & trade debts

Habib Allied International Bank Limited Receivables in Europe 1 Year One month 547,830 -- London LIBOR+2.25%

Habib Bank Limited - Karachi Lien over US$ 20 6 months One month 1,000,000 -million deposited with KIBOR+0.50%

Habib Allied InternationalBank Limited - London

Standard Chartered Bank - Karachi GoP Guarantee 6 months Six months 2,999,604 -KIBOR+0.75%

4,962,806 -

The facilities for short term running finances from banks amounted to Rs.6,380 million (2005: nil). The re-purchase prices are repayable on various dates, during the year.

The rate of mark-up ranges between 5.50% and 11.50% (2005: nil) per annum, payable monthly, quarterly orsemi-annually.

Facilities amounting to Rs.1,417 million (2005: nil) remained un-utilized as of the balance sheet date.

RepaymentFinancier Security period Markup



27. CONTINGENCIES AND COMMITMENTS

27.1 Contingencies

a) Civil Aviation Authority (CAA), Pakistan has claimed additional amounts aggregating to Rs.4,135 million (2005:Rs.3,819 million) in respect of rent and allied charges, landing and housing charges, aviation security and baycharges, interest / surcharge etc. The matter has been referred to Ministry of Defence through which areconciliation and settlement exercise is currently in progress. The management considers that no additionalliability of material amount is likely to arise as a result of such exercise. Accordingly, no provision in this respecthas been made in these financial statements.

b) The Collector Central Excise had raised demand of Rs.1,046 million (2005: Rs.1,126 million) in respect of dutieslevied on tickets provided by the Corporation to its staff either free of charge or at concessional rates, repair /replacement of re-imported aircraft engines, non-availability of invoices, import related to miscellaneousconsignments, printed material sent at its various stations abroad for utilization, late / short payment of sales taxand central excise duty and excess baggage tickets. On protest by the Collector Central Excise, the Corporationhas already paid an amount of Rs.100 million (note 13) which is considered fully recoverable by themanagement. The Corporation has filed appeals with the Customs, Central Excise & Sales Tax Tribunal whichare pending adjudication. Management is confident that the decision would be made in Corporation's favour.Consequently, no provision has been made in these financial statements.

c) The Corporation is contesting litigations relating to suits filed against it on dispute over throughput chargesaggregating to Rs.125 million (2005: Rs.125 million) against which it has filed appeals with the Honourable HighCourt of Sindh, Karachi and District Court which are pending. The management is of the view that ultimateoutcome would be in favour of the Corporation. Accordingly, no provision in this respect has been made in thesefinancial statements.

d) The Corporation is contesting several litigations mainly relating to suits filed against it for unlawful terminationof contracts, breach of contractual rights and obligations, non-performance of servicing stipulations due tonegligence or otherwise. The Corporation's management is of the view that these cases have no sound legalfooting and it does not expect these contingencies to materialize. Accordingly no provision has been made inthese financial statements against these claims amounting to Rs.2,549 million (2005: Rs.1,392 million).

e) Various ex-employees of the Corporation have lodged claims against the Corporation for their dues specificallyrelating to their re-instatements. However, the liability that may arise in these cases cannot be determined andconsequently, no provision has been made in these financial statements.

f) Contingencies relating to income tax matters are referred in note 35.1.

g) Contingencies in respect of the tax matters relating to the Corporation’s subsidiaries, PIA Holdings (Private)Limited and PIA Shaver Poultry Breeding Farms (Private) Limited amounted to Rs.11.2 million (2005: Rs.11.2million).

27.2 Commitments

a) Commitments for purchase of aircraft amounted to Rs.23,842 million (2005: Rs.60,613 million).

b) Commitments for capital expenditure amounted to Rs.10.6 million (2005: Rs.1.1 million).

c) Outstanding letters of credit amounted to Rs.141 million (2005: Rs.127 million).

d) Outstanding letters of guarantee amounted to Rs.141 million (2005: Rs.145 million).

e) Rentals under operating lease commitments amounted to Rs.962.7 million (2005: Rs.758.89 million).



Passenger 60,901,468 55,019,895 Cargo 5,741,014 4,914,588 Excess baggage 808,259 833,173 Charter 388,272 664,064 Engineering services 1,043,635 845,515 Handling and related services 634,143 635,034 Mail 305,552 302,785 Others 764,803 859,416

70,587,146 64,074,470

29. COST OF SERVICES - others

Salaries, wages and allowances 5,788,545 5,352,545 Welfare and social security costs 64,735 46,229Retirement benefits 331,545 299,569 Compensated absences 7,149 (8,030)Mandatory retirement (note 31.4) 30,988 234,624 Legal and professional charges 10,378 9,105 Stores and spares consumed 2,193,063 2,409,663 Maintenance and overhaul 6,377,874 4,821,345 Flight equipment rental 3,431,059 2,530,872 Landing and handling 8,343,403 7,249,119 Passenger services 2,838,218 2,270,619 Crew layover 2,011,703 1,730,719 Staff training 87,157 80,784 Utilities 4,067 3,015 Communication 63,311 60,001 Insurance 1,039,338 1,240,655 Rent, rates and taxes 302,783 315,225 Printing and stationery 108,964 98,686 Amortization 2,568 3,061 Depreciation (note 3.1.3) 3,252,078 3,621,290 Others 223,190 109,019

36,512,116 32,478,115

30. DISTRIBUTION COSTS

Salaries, wages and allowances 1,370,247 1,321,765 Welfare and social security costs 167,512 155,829 Retirement benefits 170,092 111,918 Compensated absences 2,264 (3,122)Mandatory retirement (note 31.4) 9,813 57,669 Distribution and advertising expenses 1,737,797 1,309,953 Legal and professional charges 19,632 16,467 Repairs and maintenance 51,586 41,299 Insurance 12,279 13,543 Printing and stationery 28,820 36,058 Communication 356,137 309,535 Staff training 45,693 35,448 Rent, rates and taxes 258,191 244,319 Utilities 25,737 23,037 Amortization 2,203 1,470 Depreciation (note 3.1.3) 55,884 44,234 Others 81,174 89,747

4,395,061 3,809,169

28. TURNOVER - net




Salaries, wages and allowances 1,511,838 1,456,059Welfare and social security costs 659,211 594,861Retirement benefits 335,223 206,832 Compensated absences 2,502 (5,848)Mandatory retirement (note 31.4) 10,846 194,396 Legal and professional charges 381,510 203,226 Repairs and maintenance 224,954 142,112 Insurance 16,067 58,326 Printing and stationery 65,842 41,745 Staff training 64,933 39,807 Rent, rates and taxes 315,231 264,154 Utilities 380,110 350,661 Auditors' remuneration (note 31.1 & 31.2) 12,415 8,204 Communication 427,417 445,496 Amortization 26,234 28,815 Depreciation (note 3.1.3) 141,639 98,586 Donations (note 31.3) 3,825 14,954 Others 307,291 183,190

4,887,088 4,325,576

31.1 Auditors' remuneration

Audit fee 6,726 5,850 Fee for review of interim financial statements 2,016 1,754 Consolidation 1,000 -Other certification 2,000 300 Out of pocket expenses 673 300

12,415 8,204

31.2 Auditors' remuneration is equally shared by the two firms of auditors.

31.3 Directors including Chairman / CEO and their spouse do not have any interest in the donee.

31.4 The Corporation implemented a mandatory retirement scheme for certain category of employees. Theseemployees are entitled to all the benefits as per Corporation's rules.

32. FINANCE COSTS

Mark-up on long term financing 472,914 312,918 Profit on term finance certificates 1,357,869 1,284,118 Interest on liabilities against assets subject to finance lease 1,942,027 947,187 Mark-up on long term murabaha 117,067 121,662 Mark-up on short-term borrowings 780,058 3,199 Interest to pension / provident funds - 659 Arrangement, agency and commitment fee 56,341 80,163 Bank charges, guarantee commission and other related charges 42,160 37,493

4,768,436 2,787,399

31. ADMINISTRATIVE EXPENSES




Provision / (reversal) for slow moving stores and spares (note 9.1) 100,000 (218,501)Provision / (reversal) of provision for doubtful debts (note 10.1) 47,310 (166,353)Deficit on revaluation of aircraft fleet - net - 136,908 Provision for the construction of University Road, Karachi 200,000 100,000 Provision for doubtful advances (note 11.1) 3,937 4,271 Exchange loss - net 504,300 110,070 Reversal of liabilities no longer payable (56,974) -

798,573 (33,605)

34. OTHER OPERATING INCOME

Income from financial assetsProfit on bank deposits 213,240 182,554 Interest income on advance to pension and provident funds 13,568 10,445

Income from subsidiaryInterest income on advances 185,876 292,915

Income from investmentInterest income on held to maturity investment 3,708 6,288 Gain on disposal of short term investments - 1,946

Income from assets other than financial assetsGain on disposal of fixed assets 257,006 601,077 Insurance claims 255,674 146,444

929,072 1,241,669

35. TAXATION

Current (note 35.1) 352,936 320,372 Prior (305,887) -Deferred (note 8) (498,786) (421,951)

(451,737) (101,579)

35.1 Current

In view of available tax losses for the year, provision for minimum taxation has been made at 0.5% of turnoverunder section 113 of the Income Tax Ordinance, 2001. No numeric tax rate reconciliation is given as theCorporation is liable for turnover tax.

Returns for the tax years 2003 to 2006 have been deemed to be finalised under the provisions of the IncomeTax Ordinance, 2001.

The minimum tax liability under section 80D of the repealed Ordinance has been levied by the department upto the assessment years 2002-03 after adding 10% of net turnover on estimated basis. The Corporation hadfiled appeals against the above orders for the assessment years 1991-92, 1992-93 and 1997-1998 to 2002-2003. CIT (Appeal) has deleted this enhancement vide Orders No. 4 to 8 dated October 10, 2006 for assesmentyears 1991-92, 1992-93 and 1997-98 to 1999-2000, while appeals for remaining assessment years are pendingfor adjudication. The Corporation had made a representation to Secretary - Ministry of Law, GoP and alsoapplied to the Central Board of Revenue to constitute a committee under Section 134A of the Income TaxOrdinance, 2001 for the resolution of above hardship and dispute.

33. OTHER PROVISIONS AND ADJUSTMENTS - net




36. LOSS PER SHARE

2006 2005

Loss for the year (Rupees in thousand) 12,763,420 4,411,657

Weighted average number of ordinary shares outstanding 1,877,566,277 1,730,658,315

Loss per share

‘A’ class ordinary share (Rupees) 6.80 2.55

‘B’ class ordinary share (Rupees) 3.40 1.28

36.1 Loss per share have no dilution effect.

37. CASH (USED IN) / GENERATED FROM OPERATIONS

Loss before tax (13,215,157) (4,513,236)

Adjustments for:Depreciation 3,449,601 3,764,110 Deficit on revaluation of aircraft fleet - 136,908 Gain on disposal of fixed assets (257,006) (601,077)Amortization 31,006 33,346 Provision / (reversal) for slow moving stores and spares 100,000 (218,501)Provision / (reversal) for doubtful debts 47,112 (166,353)Provision for doubtful advances and other receivable 11,122 4,271 Provision for the construction of University Road, Karachi 200,000 100,000 Provision for employees' benefits 848,775 601,319 Finance cost 4,768,436 2,787,399 Interest income on advances to an associated company (185,876) (292,915)Profit on bank deposits (213,240) (182,554)Interest income on advance to pension and provident funds (13,568) (10,445)Interest income on held to maturity investment (3,708) (6,288)Reversal of liabilities no longer payable (56,974) -

(4,489,477) 1,435,984

Working capital changes

(Increase) in stores and spares (680,906) (155,346)(Increase) in trade debts (954,250) (1,058,423)(Increase) / decrease in advances (82,087) 161,583 (Increase) in trade deposits and prepayments (648,156) (31,721)(Increase) / decrease in other receivables (390,991) 130,998 Increase in trade and other payables 1,575,078 1,234,719

(1,181,312) 281,810

Cash (used in) / generated from operations (5,670,789) 1,717,794




Managerial remuneration 7,896 4,615 937,256 86,624 Corporation's contribution to provident fund 396 223 35,686 4,608 Other perquisites 282 219 390,855 70,419

8,574 5,057 1,363,797 161,651

Number 1 1 641 104

Directors other than Chairman / CEO are non-executive directors. Aggregate amount charged in the financialstatements for fee to directors was Rs.0.18 million (2005: Rs.0.21 million). Chairman / CEO, SVPs and certainexecutives are also provided with the Corporation maintained cars and facilities as per the Corporation's rules.

39. GEOGRAPHICAL SEGMENTS

38. REMUNERATION OF CHAIRMAN / CEO AND EXECUTIVES

Chairman / CEO Executives

2006 2005 2006 2005


Revenue analysis

USA / Canada 7,712,345 6,755,682 Europe 15,424,690 14,543,885 Middle East / Africa 11,017,636 10,191,566 Asia (excluding Pakistan) 3,305,291 3,153,225 Pakistan 33,127,184 29,430,112

70,587,146 64,074,470

The analysis of turnover by origin is derived by allocating revenue to the area in which the sale was made.

Analysis of net assets

The major revenue earning assets comprise the aircraft fleet, all of which are registered in Pakistan. Since thefleet of the Corporation is employed flexibly across its worldwide route network, there is no suitable basis ofallocating such assets and related liabilities to geographical segments.


2006Interest / mark-up bearing Non-Interest / mark-up bearing

Maturity Maturity Maturity Maturity Maturity MaturityUp to one One year to Five years Sub Total Up to one One year to Five years Sub Total Total

year five years and above year five years and above




40. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES

40.1 Financial assets and liabilities

Financial AssetsInvestments 17,839 43,731 - 61,570 403,555 - 68,358 471,913 533,483Advances and other receivables - 1,684,000 - 1,684,000 1,235,802 - - 1,235,802 2,919,802Deposits - - 1,362,212 1,362,212 50,574 771,192 821,766 2,183,978Trade debts - - - - 6,129,673 - - 6,129,673 6,129,673Accrued interest - - - - 51,010 - - 51,010 51,010Cash and bank balances 2,682,287 - - 2,682,287 2,777,637 - - 2,777,637 5,459,924

2,700,126 1,727,731 1,362,212 5,790,069 10,648,251 771,192 68,358 11,487,801 17,277,870

Financial LiabilitiesLong term financing 2,599,916 5,190,869 1,709,608 9,500,393 - - - - 9,500,393Term finance certificates 756,970 13,246,970 - 14,003,940 - - - - 14,003,940

Liabilities against assetssubject to finance lease 3,914,491 17,299,562 25,203,882 46,417,935 - - - - 46,417,935

Murabaha 781,165 - - 781,165 - - - - 781,165Deposits - - - - - 261,711 - 261,711 261,711Deferred liabilities - - - - - 2,637,000 - 2,637,000 2,637,000Trade and other payables - - - - 8,461,581 - - 8,461,581 8,461,581Accrued interest / markup/profit 812,278 - - 812,278 - - - - 812,278Borrowings 15,543,446 - - 15,543,446 - - - - 15,543,446

24,408,266 35,737,401 26,913,490 87,059,157 8,461,581 2,898,711 - 11,360,292 98,419,449

Net financial (liabilities) / assets (21,708,140) (34,009,670) (25,551,278) (81,269,088) 2,186,670 (2,127,519) 68,358 127,509 (81,141,579)

Financial AssetsInvestments 16,657 61,257 - 77,914 363,855 - 31,224 395,079 472,993 Advances and other receivables - 6,635,933 - 6,635,933 336,272 - - 336,272 6,972,205 Deposits - - - - 37,640 - 867,545 905,185 905,185 Trade debts - - - - 5,222,534 - - 5,222,534 5,222,534 Accrued interest - - - - 39,708 - - 39,708 39,708 Cash and bank balances 1,516,805 - - 1,516,805 1,097,886 - - 1,097,886 2,614,691

1,533,462 6,697,190 - 8,230,652 7,097,895 - 898,769 7,996,664 16,227,316

Financial LiabilitiesLong term financing 1,621,103 1,621,099 - 3,242,202 - - - - 3,242,202 Term finance certificates 756,970 11,859,192 2,144,748 14,760,910 - - - - 14,760,910

Liabilities against assetssubject to finance lease 2,067,363 9,067,035 12,639,029 23,773,427 - - - - 23,773,427

Murabaha 837,900 768,075 - 1,605,975 - - - - 1,605,975 Deposits - - - - - 290,236 - 290,236 290,236 Deferred liabilities - 2,575,000 - 2,575,000 - - - - 2,575,000 Trade and other payables - - - - 6,776,951 - - 6,776,951 6,776,951 Accrued interest / markup / profit - - - - 607,769 - - 607,769 607,769 Borrowings 362,075 - - 362,075 - - - - 362,075

5,645,411 25,890,401 14,783,777 46,319,589 7,384,720 290,236 - 7,674,956 53,994,545

Net financial (liabilities) / assets (4,111,949) (19,193,211) (14,783,777) (38,088,937) (286,825) (290,236) 898,769 321,708 (37,767,229)

Effective interest rates (a) Percentage Effective interest rates (b) PercentageInvestments 5.20 Long term financing 5.28 - 11.33Advances 2.78 -11.00 Term finance certificates 9.75 - 10.00Deposits 4.00 - 5.00 Murabaha 7.06 - 8.02Cash and bank balances 3.00 - 4.00 Liabilities against assets subject to finance lease 5.25 - 11.00

Markup / interest accrued on loans 5.28 - 11.33

2005Interest / mark-up bearing Non-Interest / mark-up bearing

Maturity Maturity Maturity Maturity Maturity MaturityUp to one One year to Five years Sub Total Up to one One year to Five years Sub Total Total

year five years and above year five years and above




40.2 Risk management

a) Concentration of credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the

other party to incur a financial loss. All financial assets except cash in hand are subject to credit risk. The

Corporation minimizes the credit risk by diversifying business with (IATA) approved agents and by obtaining

bank guarantees from other agents.

b) Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange

rates. Foreign currency risk arises on receivable and payable transactions at foreign stations and on foreign

currency loans. The Corporation manages its currency risk by effectively utilizing its foreign currency receipts to

satisfy its foreign currency obligations.

c) Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest

rates. The Corporation is exposed to interest rate risk in respect of borrowings and bank balances.

d) Liquidity risk

Liquidity risk, also referred to as funding risk, is the risk that an enterprise will encounter difficulty in raising funds

to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a

financial asset quickly at close to its fair value. The Corporation manages its liquidity risk by maintaining

sufficient cash and cash equivalents and through support of GoP to meet its liabilities when due, through a

financial package, whereby GoP has issued guarantees to secure long-term finances and TFCs. Further, GoP

has agreed to provide equity contribution as mentioned in note 1.2.

e) Fuel price risk

Fuel price risk is the risk attributable to fluctuation in the international oil prices arising from external factors.

The Corporation plans to manage this issue to the extent possible by taking certain measures including hedging

of fuel prices.

40.3 Fair value of financial instruments

The carrying values of all financial assets and liabilities reflected in the financial statements approximate to their

fair value except for investment held to maturity which is carried at amortized cost.



The Corporation has related party relationships with the following undertakings:

- Sky Rooms (Private) Limited Subsidiary Subsidiary

- Midway House (Private) Limited (under winding-up) Subsidiary Subsidiary

- PIA Investments Limited (PIAIL) Subsidiary Associate

- Abacus Distribution Systems Pakistan (Pvt) Ltd. Joint Venture -

- Minhal Incorporated - Sharjah Associate Associate

- Duty Free Shops (Private) Limited - Associate

43. CORRESPONDING FIGURES

Prior year's figures have been reclassified for better presentation.

Balance sheet Held to maturity Long term Short term 13,690investment investments investments

2006 2005

Reclassification ReclassificationStatement Components from to 2005


41. TRANSACTIONS WITH RELATED PARTY

The transactions with related parties, other than those relating to issuance of tickets at concessional rates toemployees and directors according to terms of employment / regulations and those not mentioned elsewhere inthese financial statements are as follows:

PIA Investments Limited

Recovery of advances 5,055,045 921,690

Recovery of interest on advances 185,876 292,915

Sky Rooms (Private) Limited

Catering services 31,497 43,434

Retirement funds

Contribution 689,590 323,036

Interest on advances 24,013 10,445

The Corporation's sales of transportation services to subsidiaries and associates are not determinable.

42. RELATED PARTY RELATIONSHIP




44. AUTHORIZATION OF FINANCIAL STATEMENTS

These financial statements were authorized for issue in the Board of Directors meeting held on March 29, 2007.

45. GENERAL

45.1 The information as to the available capacity and utilization thereof during the year has been disclosed in thestatistics on six year summary page no. 40.

45.2 The US$ amounts in balance sheet, profit and loss account and cash flow statement have been translated intoUS$ at the rate of Rs.60.87 = US$1 solely for convenience purposes.

45.3 Number of the Corporation's employees as at December 31, 2006 were 18,282 (2005: 18,647).

45.4 Figures have been rounded off to the nearest thousand rupee.


Kamal AfsarDirector

Documents

15...Mr. Kamal Afsar 65 5. Mr. S. Ali Raza 62 6. Mr. Mueen Afzal 10 7. Mr. Shahzad Husain 11 8. Maj. Gen. Mir Haider Ali, Additional Secretary, Ministry of Defence 1 1 * Both Mr. Asad