Soaring costs, ‘open skies’ threaten PAL profitability

Philippine Airlines (PAL) faces a slew of tough challenges in its operating environment over the short term as the flag carrier continues its build-up after exiting receivership a year ago, the airline’s top two executives said.

 “Once again, a pall of dark clouds hovers over our industry,” PAL chairman Lucio Tan and president Jaime Bautista warned in a joint letter to stockholders gathered for their annual meeting.

PAL had earlier announced a profit of $30.6 million for its financial year to March 31, 2008, its fourth consecutive annual surplus and first since successfully graduating from receivership in September 2007.

But the outlook for the next 12 months was anything but rosy as “sharp oil price spikes” will be a recurring challenge in the short to medium term, Tan and Bautista said.

Both executives recounted the swift reversal of fortunes for carriers worldwide on account of the record-high increases in oil prices earlier this year.

 “Until the recent tempest caused by the unprecedented upsurge in fuel prices, the airline industry appeared to be one of the best-performing businesses. … A few weeks of sustained increases in fuel prices were all it took to show how shallow the reservoir of stability was,” they noted.

The implementation of an “open skies” regime among member states of the Association of Southeast Asian Nations (ASEAN) in December 2008 was another looming challenge, the PAL officials also said.

This would lead to a “potential increase in the number of carriers plying our regional routes, further intensifying competition,” Tan and Bautista cautioned.

Also, the downgrade of the Philippine civil aviation system to Category 2 by the United States had “increased the severity of the hurdles we face,” they added.

Under Category 2, Philippine carriers like PAL are barred from expanding services to the US, preventing the airline from deploying its soon-to-be-acquired long-range flagship, the Boeing 777-300ER, on the vital trans-Pacific routes.

The first of six firm orders of the aircraft is due for delivery in September 2009.

“We may be unable to use these new planes on our flights to the US, and the cost advantages offered by the aircraft may only be realized by implementing our alternative plan for deployment,” Tan and Bautista conceded.

Despite the many tests, PAL remains focused on four strategies aimed at enhancing its core competencies, they said. These are the continuous investment in human resource development and technologies that improve service to customers, operating efficiencies and revenues; prudence in the choice of routes, a rigorous watch over route performance and regular culling of under-performing, non-strategic routes; vigilance about customer service; and particular attention to efficiency measurement.

The flag carrier has also launched initiatives to counter the impact of volatile oil price movements. Among these are the creation of a fuel-conservation watchdog within the company and the already-announced reduction of free baggage allowance on the trans-Pacific routes.

PAL estimates these initiatives will generate benefits of up to $20 million a year at current fuel prices, Tan and Bautista said.

 “We will continue to put our resources behind improving our products and the way we deliver them. Our aim: a better product, higher brand loyalty, higher margins,” said the two PAL officials.