PAL faces ‘unforeseen expenses’

MANILA, Philippines – It has been just under a year since diversified conglomerate San Miguel Corp. bought a majority stake in Philippine Airlines (PAL), and the legacy carrier is still working its way from red to black.

Ramon Ang, president of both San Miguel and PAL, said the airline is still dealing with unforeseen expenses such as maintenance costs amounting to $70 million in the last 12 months.

“We have expected in the reorganizing of the company the improvements of all the equipment of PAL but, you know, there are unforeseen expenses that came up, including maintenance expenses. There were a lot of machines and equipment that are due for overhauling or ones that are broken after a bird hits it. That’s why there were a lot of maintenance costs that we have spent this year,” said Ang speaking at the PAL stockholders’ meeting on Friday, March 15.

San Miguel acquired PAL at a time of financial woe. Upon acquiring the carrier, San Miguel spent a large amount of money beefing up its fleet and launching an aggressive expansion plan.

After two quarters of losses, PAL is finally seeing the end at the tunnel. It is looking to return to profitability in 2014 on the back of new its new fuel-efficient aircraft, and the impending lifting of flying restrictions to the United States and European Union countries.

The deal

San Miguel’s $500-million investment for 49% stakes in PAL and its budget arm Airphil meant the entry of a much-needed new investor with deep pockets to finance the airlines’ 5-year re-fleeting and modernization program.

PAL was wholly controlled by tycoon Lucio Tan. Tan acquired the airline in 1995 when PAL, a state-owned monopoly, was put up for privatization.

In 2011, still under Tan, the airline suffered huge losses due to labor issues, rising fuel costs, an increasingly competitive playing field. PAL was also hit by the downgrade of the Philippines to Category 2 by the Federation Aviation Administration (FAA), which restricted local carriers from flying to its most lucrative markets in the US and Europe.

PAL Holdings Inc. the parent company of PAL was able to cut its losses in the first 9 months of the fiscal year 2012 by 24%. The figure dropped to P2.74 billion from P3.59 billion on the back of a stronger peso. The company also reported a total revenue increase of 2.45% to P55.68 billion from P54.38 billion.

Going from red to black 

PAL plans to acquire nearly 100 new aircraft for its major re-fleeting program. It has entered into a $10-billion deal with Airbus for the acquisition of 64 new aircraft. The new airplanes will be delivered over the next 3 years.

PAL is also set to receive 16 wide-bodied A330 aircraft by the last quarter of 2013. The airplanes will be used for long-haul operations.

“With the arrival of our new aircraft, we are very confident that it will keep Philippine Airlines very competitive, one of the lowest cost per seat mile in the region because our new aircrafts are very competitive and the costs at which we bought the aircrafts are very cheap,” said Ang

PAL also expects to make profit through its new routes following the imminent lifting of the EU flight ban. It is planning new flights to European destinations such as London, Paris, Frankfurt, Netherland, Spain, and Italy. PAL said recently it is also looking to launch new international routes to Cambodia, Turkey and Kuwait in 2013 and has already filed application with the Civil Aeronautics Board for the allocation entitlements.

According to Ang, FAA will start reviewing the Philippines’ safety status in April, which means it may lift the ban in the “next couple of months or before the end of the year.”

“I think with ICAO lifting the significant safety concerns, I think the EU will lift the ban on our carriers really soon. So the arrival of our planes is in perfect timing,” said Ang.

But with the removal of a monopoly on flight entitlements, competitors are not far behind. Cebu Pacific is now competing directly with PAL on its UAE routes. Other local airlines — Air Asia and Zest Air and Tiger Airways and Seair — have recently formed regional partnerships, giving them more financing to increase their fleets and route map.

Ang said one way of remaining competitive is through the promotions he is planning to launch with PAL. “All the business classes will be ‘buy one take one’ except to select countries. That includes Singapore, Hong Kong and other neighboring countries. In Toronto we also have buy one take one for the economy. So we really have a lot of promos to offer,” he said. – Rappler.com