February 09, 2012

PAL needs more cash for refleeting program

FLAG carrier Philippine Airlines believes 2012 will be crucial and will determine whether it could carry out a strong refleeting program, expand its routes, and return to better fiscal health.

Airline President Jaime Bautista said in an interview with select reporters on Wednesday evening that “from a management point of view, we need higher capital” to pursue a refleeting program and keep the carrier competitive.

But he said he could not determine how much new capital would be needed because this would all depend on whether the planes would be purchased or leased.

“Refleeting is a challenge. Wide-bodied aircraft are needed. You need to pay delivery fees [about 15 percent to 20 percent of plane cost], that’s where the cash is needed,” he said. This is why “management welcomes new investors,” he said.

Businessmen Ramon Ang of San Miguel Corp. and Manuel V. Pangilinan of the First Pacific Group are reportedly both keen on investing in PAL and help it carry out its refleeting and modernization effort. PAL is 94-percent owned by PAL Holdings Inc. which is led by taipan Lucio Tan.

Of the 36 aircraft currently in the PAL fleet, it has five Boeing 747-400s that were purchased during the carrier’s first refleeting program as a privatized company. “These five B747s are aging. By 2015 they have to be replaced as they will be 21 years old already. They’re still good airplanes, but the maintenance costs are higher.”

Bautista said while the carrier could, on its own, push its refleeting program, “our capacity to compete [with other carriers] would be limited.” Delivery of new aircraft takes about two or more years after ordering so PAL’s new refleeting program needs to be finalized in the new fiscal year, which begins on April 2012 and ends in March 2013.

Other than the five B747s, PAL’s fleet also includes two B777-300ER, four Airbus 340-300, eight A330-300, 13 A320-200, and four A320-319.

The carrier is also counting on the US Federal Aviation Authority to upgrade the country’s safety status Category 1 status by November, which will enable it to expand its routes in the United States.

“We will back to Category 1 [status] Timing nalang. Maayos na,” the PAL president said. “Many of the needed reforms have been instituted by relevant government agencies. PAL itself will be undergoing a technical review then a technical audit by the FAA.”

A team from the FAA will be in town next week to assess the safety measures and equipment installed by the Civil Aviation Authority of the Philippines (which replaced the Air Transportation Office). The Aquino administration has predicted an upgrade in the country’s safety status to Category 1 by June.

Bautista said the carrier is considering an expansion in routes to San Diego, California; Seattle, Washington State; and New York, which hopefully can be mounted within the year. He added that once the country is back to Category 1 status, PAL can also resume its services to Europe, using its Boeing 777-300ER. The carrier will be taking delivery of two more Triple 7s and four Airbus A320s are arriving this year.

Following the FAA downgrade in 2008, the European Union had also banned Philippine carriers from flying there.

Bautista predicted a loss in fiscal year 2011 (April 1, 2011-March 31, 2012), a reversal of the $72.5-million profit recorded in FY 2010.

Bautista said the loss was due to the higher fuel costs, the labor strike, and lower passenger revenues from the Japan earthquake and tsunami as well as the floods in Thailand. The carrier reported a loss of $39.4 million from July to September 2011.

He said the carrier’s operations were “back to normal,” after flight disruptions were felt initially after it implemented its much-needed but controversial outsourcing program in October 2011. About 2,400 employees were affected by the outsourcing program.

(My piece was published on Jan. 20, 2012 in the BusinessMirror.)

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