Think tank: PAL to book losses until 2015

Rappler.com

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Think tank: PAL to book losses until 2015
The parent firm of flag carrier Philippine Airlines will continue to book losses until 2015 due to its ambitious fleet renewal program, an aviation think tank says

MANILA, Philippines – The parent company of Philippine Airlines (PAL), the flag carrier that Lucio Tan bought back in September, is anticipated to book losses this year and in 2015 due to its excess aircraft order given its ambitious fleet renewal program.

The Sydney, Australia-based Centre for Asia Pacific Aviation (CAPA) said in its latest analysis, “PAL looks to slow fleet expansion by subleasing Airbus A330s and reducing A321 commitments.”

Listed PAL Holdings Inc is expected to book a net loss this 2014 and more losses next year due to the massive re-fleeting involving the acquisition of 100 brand new aircraft undertaken by former shareholder, diversified conglomerate San Miguel Corporation (SMC), CAPA added.

PAL Holdings, which includes PAL mainline (but not PAL Express), also returned to the black in the first half of 2014.

“But PAL Holdings is again expected to end 2014 in the red. More losses are likely in 2015, particularly if PAL is not able to resolve the huge aircraft issues it now faces,” CAPA stressed.

Tan’s group, through Buona Sorte and Horizon Global Investments, bought back the 49% interest of San Miguel Equity Investments Inc (SMEII) of SMC on September 15 for a total consideration of $1.3 billion.

SMC, through SMEII, bought a 49% stake in Trustmark Holdings Corporation in April 2012 for a total consideration of $500 million.

Trustmark owns and controls 89.78% of the issued and outstanding shares of PAL Holdings that owns 98.27% of PAL.

The diversified conglomerate then embarked on an ambitious massive fleet renewal program involving the acquisition of 100 brand new aircraft.

SMC entered into two separate deals worth about $10 billion with the EADS Group to acquire 65 brand new Airbus aircraft as part of the fleet renewal program.

CAPA said the “overambitious” order with Airbus, including A340 aircraft, plus the acquisition of Boeing 757 aircraft, have put PAL in a difficult position.

“The aircraft challenges that have been inherited by PAL’s new management team will likely impact the carrier’s profitability for at least the short-term. The group is already saddled with the cost of carrying excess aircraft, which is impacting utilization rates,” CAPA added.

CAPA also warned that PAL would take substantial one-time hits if it subleases excess A330s and A320s and if it reduces or phases out its newly acquired A340-300 fleet.

Adjust PAL’s fleet plan

It’s not all gloom for PAL though, the think tank said, as it cited the relatively strong Philippine market, boosted by a reduction in the number of domestic competitors, the restoration of Category 1 status, and a relatively strong economy.

“But PAL first needs to adjust its fleet plan to a more rational level and get the right mix. This will not be an easy task,” CAPA said.

CAPA said PAL’s new executive and ownership team led by president and chief operating officer Jaime Bautista is preparing a new business plan involving a slowdown in international expansion and becoming a more rational competitor.

For instance, PAL is expected to suspend plans for launching more new international destinations, with the exception of New York and potentially Jeddah.

But PAL’s biggest short-term challenge is excess aircraft, “the result of an overambitious order placed with Airbus in 2012 after San Miguel took control,” the think tank stressed.

CAPA said PAL has several surplus, newly delivered A330s that are now being under-utilized and could soon face a surplus of narrow-body aircraft as it is taking 10 additional A321s in 2015.

“If PAL does not succeed at finding new homes for excess A330s and is not able to defer or sublease future A320s, it could be forced to pursue aggressive capacity expansion in both the domestic and international markets. Such expansion would make it difficult for PAL to be profitable,” CAPA warned.

In an interview with Rappler in October, Bautista said, “This year should be a good year only if we’re not burdened by the overcapacity of our planes. That’s the problem that we [are dealing with].” (READ: Clipping PAL’s ‘too many wings’) – Rappler.com

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