PAL after Tan

The current sharp drop in world crude oil prices should translate to some good news for Philippine Airlines after it had gone through a gamut of problems in recent months, including a labor dispute in the second half of 2011 that crippled its operations and resulted in crucial losses.

It’s a good break too for Ramon Ang’s San Miguel Corp. as the conglomerate continues its audit of the country’s flagship airline after taking over management control last April.

Before SMC came in with its $500-million purse, PAL was struggling and juggling to keep its international and domestic operations’ financial sheets in the black. Aside from rising crude prices, the entry of low-budget no-frills airlines both in the Philippines and abroad was challenging its profitable routes.

The advent of technology, particularly real-time Internet-based ticketing, also favored budget airlines which could mount guerilla pricing attacks targeting a large segment of flyers always on the lookout for cheap fares.

In the last quarter of 2011, PAL suffered a $33.5 million loss despite the fact that local rival Cebu Pacific had chalked a net income of $84.3 million for the full year.

Increasing competition

It will be interesting to see how the new SMC-led PAL management will ward off the pesky assaults of rivals, including several new ones, all looking at carving a healthy slice of the business that comes from Filipino migrant workers as well as perceived rise in tourists going to the Philippines.

Just recently, Malaysian-based AirAsia gained access to the local market by flying from Clark International Airport to Kuala Lumpur and three other local destinations. Next month, it will offer flights to Hong Kong and Macau.

Zest Airways, a local airline that started operations in 2008, has been making inroads in the local flying market by offering regular hefty discounts – sometimes cut by as much as two-thirds of PAL rates – for its growing number destinations both local and Asian.

And recently, it has made overtures with the Civil Aeronautics Board to allow its entry to the lucrative Middle East, second home to millions of working Filipinos abroad.

Of course, there is always the threat by Cebu Pacific Airlines, the original budget carrier in the country that had first challenged PAL’s monopoly hold on the local market, and eventually short flights to other countries in Asia.

This Gokongwei-led airline is also eyeing longer flights, starting first with the Middle East, and eventually to Australia, parts of Europe and also the United States. These are all revenue earning destinations for PAL because of the OFW traffic.

Going budget too

And so, with cash-rich SMC as a major shareholder, the 71-year old airline company has declared it will fight back with earnest – starting with an ambitious shopping spree that will bring in at least 100 new long-haul airplanes.

This will allow PAL to retire its old, fuel-inefficient planes to significantly trim down its operating costs. Rising fuel purchases have always figured in any airlines operations, and having planes that recklessly guzzle fuel during flights is a no-no.

Once in place, the new planes will allow PAL to fight neck-to-neck against the buggering budget airlines. An eye for an eye, according to a source. There’s really no need to invent new marketing schemes; if it works, why not copy?

Does this mean that PAL will also offer those crazy drop-down rates that more and more passengers have been looking for? If it is going to restore the Philippine airline company’s competitiveness, for sure!

Ace in the sleeve

So if PAL can do exactly what others are doing to maim it, can we expect that things to sort of even out in terms of profits and competitiveness in the near future? Sort of, and with some pluses.

PAL still holds on – and quite tightly – to its trump card. Having been the first to fly the country’s skies, and Asia’s for that matter, it also holds the sole and absolute right to fly to some of those highly profitable routes including the Middle East.

This about explains why PAL has been vehemently against open skies and allowing just any upstart airline company a chance to make inroads to those profitable routes that are keeping the flag carrier from going belly-under from the weight of all its investments through decades.

For the sake of the nation’s pride, though, is PAL worth saving? The company apparently is not in a financial crisis. More importantly, its two major shareholders are far from declaring bankruptcy, and in fact, are cash-rich from recent sales of other parts of their businesses.

Once PAL is able to resolve its safety issues with several international regulatory aviation agencies, it will be able to resume direct flights to major ports in the U.S., Canada and Europe. This will definitely good for the airline.

PAL is also thinking of investing in a new international-standard airport in the country that will allow 100 million passengers a year – just as it is poised to open an airport in Boracay, a favored tourist destination in the Philippines, by 2014.

As many analysts have pointed out, PAL simply needs a white knight in terms of investing power and managerial prowess. And it seems that Lucio Tan, who had decided to take a back seat in most of his businesses in recent years, is betting on Ramon Ang to bring PAL back to fighting form.

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