Feb 2007 > Cover Story Back to latest issue

PAL pulls out all the stops

Tom Ballantyne 

Philippine Airlines (PAL) president, Jaime Bautista, has dragged the airline from the depths of bankruptcy to financial health and industry respectability. Its latest financial year, with net profits rising a hefty 63% to US$28.7 million, represents its best result in over a decade. TOM BALLANTYNE talked to Bautista about the next phase of the PAL revival story.


Philippine Airlines present Jaime Bautista: PAL is on the right track and now has something to build on

Officially, it will be 2012 before Philippine Airlines  is out of rehabilitation. That is when it hands over the final payment and clears the massive US$2.3 billion debt it had amassed by 1998, when it plunged into bankruptcy and closed its doors for 14 days. But, according to PAL president Jaime Bautista, now that the carrier has fought its way back to liquidity, that day has, in effect, already arrived.

“We are up to date with the payment of all our obligations,” said Bautista. “Out of the original $2.3 billion that we restructured, we have paid almost $1.3 billion. So, with half our debts already paid, we owe our creditors a little over a billion dollars and that will be paid over the next six years.”

Astute management and intensive reforms have transformed PAL into a nimbler, more efficient and customer-focused airline as it continues to overhaul its operations under the watchful eye of an official receiver. It has improved schedule reliability and on-time performance, slashed costs and dramatically improved its balance book.

Now it plans to modernize its fleet, further enhance service products and systems and push into new markets. “We are on the right track and we have something to build on going forward,” said 49-year-old Bautista.

One of Asia’s oldest airlines – founded on March 15, 1941 – PAL has had a roller-coaster ride since operating the first flight by an Asian carrier across the Pacific in 1946 and the first service to Europe by a Southeast Asian airline, in 1947.

PAL has plumbed the depths, now it is back revitalised and ready to tackle the future.

Reaching this point has not been easy, but Bautista is proud that he was able to keep a promise made to PAL majority shareholder, tobacco tycoon Lucio Tan, when the airline reached agreement with creditors on a rehabilitation plan in late 1998 when he was chief financial officer.

They insisted Tan inject $200 million to back it. Bautista told his boss the money would never be needed. And he was right.

“I am happy to say the $200 million has never been touched by Philippine Airlines,” he said. “In the first year of the rehabilitation plan we were expecting losses, but we reported a meagre income, a few million pesos. Since then there have only been two years when we have lost money; 2001 in the aftermath of 9/11 and 2003 because of SARS.”

Bautista splits his own involvement with PAL into three phases. “The first was post-privatization and pre-restructuring. That was from 1993, when I joined PAL, until 1999 when we were losing money. The next phase was post-restructuring, from 1999 to this year. The third phase? I would call it sustained growth and profitability and we are beginning that phase now.”

Among items on the agenda are fleet renewal and expansion, as well as a much-needed upgrading of inflight service offerings and entertainment systems. There will also be network expansion and, critically, a continuation of focus on corporate discipline, a relentless drive for efficiencies, attacking costs and further strengthening of the company’s financial position.

Last year’s healthy income – $28.7 million compared with the previous years’ $17.6 million came on revenues that grew 15% to $1.24 billion – was a turning point. Driven by strong performances by both passenger and cargo businesses, it was the best result since PAL last reported a surplus exceeding $20 million in 1993, when it booked $40.5 million.

Virtually all key performance indices, in the year ended March 31, including those measuring capacity, traffic carriage and load factor, improved year-on-year, buoyed by economic recovery in PAL’s biggest markets: the Philippines, the U.S. and Japan. It also made inroads in booming new markets, such as China. Last November, the carrier launched services to Beijing, its third point on the mainland after Guangzhou and Xiamen.

In the current year, Bautista expects to come close to matching the 2006 result. “It may be a little below because of increased fuel prices, but in terms of revenue it will be growth, to perhaps more than $1.2 billion.”

The only thing holding PAL back right now is lack of capacity. With its A340s flying 15 to 16 hours a day and its B747s nearly 14 hours, it has one of the highest aircraft utilization rates in the industry. It needs more aircraft to increase existing frequencies and add new destinations in the U.S., India and, probably, Europe.

Bautista has already moved to resolve the issue. Late in 2006, he signed a purchase agreement with Boeing for two B777-300ERs for delivery in 2010, with options on another two for delivery in 2011. In addition, he has signed a Letter of Intent with GECAS for the lease of two more B777-300ERs, to be delivered in 2009.

Currently PAL operates a fleet of 32 aircraft – five B747s, four A340s, eight A330s, 11 A320/A319s and four B737s. Another A319 will arrive in May. “We are looking at a fleet of around 40 in four or five years’ time. That takes into account retirements. We will have 20 A319 and A320s, eight A330s, four A340s, four B747s plus at least four B777s,” he said.


PAL plans a mixed Airbus and Boeing fleet totalling 40 aircraft within five years

The plan is to use the additional capacity to dramatically increase penetration in the North American market. Services to Los Angeles and San Francisco (currently nine and eight services a week respectively) will be raised to double daily. Flights to Vancouver will increase from four a week to daily. The Canadian service also operates through to Las Vegas, but Bautista wants the additional flights to continue to San Diego, adding another U.S. destination to the network.

“There is a clamour from the Filipino community for PAL to fly to San Diego,” he said. “Right now, passengers from there have to take maybe a small aircraft to Los Angeles, or a bus, to connect with our LA flight. There is a big Filipino community in San Diego.”

On the agenda as well are daily flights to Beijing and Xiamen, up from four and five weekly at present. Additional capacity into Australia is being considered, as well as new flights to India. “We don’t fly there now, but we have landing entitlements to seven destinations,” said Bautista. “Obviously, it is a huge growth market and right now there are no direct flights between Manila and India. People have to go via Singapore, Hong Kong or Bangkok.”

A possible return to Riyadh in Saudi Arabia is also being reviewed. Once a strong player in the Gulf region, PAL has reduced its presence in the last decade, dropping Dubai and Jeddah in 1998, then Dammam in 2001. Finally, in March 2006, it dropped Riyadh in the face of a massive oversupply of seats in the market. It now code-shares on routes to the Middle East with Qatar Airways, Emirates Airline and Gulf Air.

Flights to Europe remain under review. Bautista said the problem was not only lack of aircraft, but the cost of operations. Over the last four years, four European carriers operating direct flights between Manila and European capitals have either stopped or reduced services: British Airways in 2002, Swiss International in April 2004, Air France in November 2004 and Lufthansa German Airlines in April 2005. But it remains a tough route to service successfully.

'Our [domestic] competitors are offering very cheap fares. They are tryinhg to buy the market. In spite of that our passenger numbers keep on growing.'
Jaime Bautista

“There is a still lot of competition. Fares are very low and cost of operations is very high to Europe. If conditions improve and we were able to charge higher fares and if fuel prices go down, perhaps we can consider flying to Europe. Our preferred destinations would be London or Frankfurt, but right now we don’t really have additional capacity,” he said.

At least Bautista is no longer short of pilots. Last year, the PAL president complained that dozens of cockpit crew had left, poached by the fast growing operators of the Gulf region and India.

“The pilot shortage is no longer an issue,” he said. “We introduced a pilot retention programme. We have given them a good salary increase. We have given them better retirement benefits. That has stemmed the flow. I am getting feelers from pilots who left us that they want to come back, but right now we have enough.”

While all is well in the cockpit, back in the passenger cabin there is much work to do. The airline’s B747s are being reconfigured – at a cost of $12 million per aircraft – to a two-class layout, with first class being eliminated. There will be new seats in business and economy, with corporate travellers getting cocoon-style sleeper seats. Audio Video On Demand (AVOD) is being installed throughout. The number of seats will be reduced from 433 to 426, but there will be more in business class, increasing the higher yield component.

Like all airlines, staying significantly in the black has not been easy. PAL’s expenses jumped by $153 million, or 14%, to a total of $1.22 billion last year, due largely to the fuel costs, now 30% of the carrier’s expenses. PAL hedges around 60% of its fuel needs.

Despite this, the airline managed to keep outgoings in check by cutting costs and improving systems. For instance, its revenue management, reservations and ticketing systems are now configured to drive down distribution costs. Electronic ticketing is available on more than 70% of PAL flights, including all domestic routes.

Domestically, PAL has been facing tough competition, particularly from rivals like Cebu Pacific. “Passenger traffic has grown by almost 5% compared with last year although yields on domestic routes are going down because of competition,” said Bautista. “Our competitors are offering very cheap fares, as little as one peso, 10 pesos or 99 pesos. They are trying to buy the market. In spite of that our passenger numbers keep on growing”. And, no, he won’t match bargain basement fares.

What Bautista has done is move to revamp the domestic fleet. The first of 20 A320 and A319 aircraft, an $840 million order placed in December 2005, arrived in September, with two more joining the fleet by the end of 2006. Seven will be delivered in 2007 and five more in 2008, with the remainder coming through 2009 and beyond.

While some will be used for regional operations, the majority will operate in local skies. They allow PAL to offer business class on all its 18 domestic routes (only four previously had business). More importantly, PAL will be the sole carrier to offer business service in the domestic market, giving it a decided edge in the country’s corporate market.

 “We are a legacy carrier and many people will still prefer to fly more comfortably,” said Bautista.

Meanwhile, the PAL president argues that the carrier is already low-cost in terms of operations. “If you compare costs in terms of the LCCs we have the same maintenance costs, we spend the same on fuel and pay the same airport charges,” he said.

“Maybe they have an advantage in terms of manpower costs, but that is a very small percentage, considering our costs are already very low compared with foreign airlines. Their advantage is they don’t spend much on distribution, but we are also now pushing for sales through the Internet, so soon we will have the same cost of distribution.”

Bautista believes the key elements in PAL’s turnaround have included improvements in passenger service and instilling a “team feeling” among staff. “We have motivated our people so there is more participation and communication,” he said.

 As for the future, Bautista is far from over-ambitious. “We are not comparable to Singapore Airlines, Thai Airways, Cathay Pacific or Japan Airlines and ANA (All Nippon Airways). We are not looking to become a huge carrier,” he said. “We are looking to be a highly profitable middle-sized airline with 40 to 42 planes, an airline which will have the biggest share of the U.S. market from the Philippines and also an airline which will have a bigger share of the third and fourth freedom traffic from the other countries [in which] we operate”.  

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