Philippine Airlines: Alliance or Atrophy?
Flag carrier Philippine Airlines has some fish to fry at present. Its future ownership hangs over its head. The refleeting program has not in all respects gone smoothly, with a number of aircraft sitting idle at Clark Airport about 80 kilometres from Metro Manila. PAL continues to face intense competition from domestic market leader Cebu Pacific and internationally from a host of other Asian and Middle Eastern carriers.
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| Copyright Photo: Kenny Li/PPSG |
That said, PAL's situation is not totally bleak. Unlike Garuda Indonesia that recently announced an alarming US$212 million quarterly loss, PAL turned in a rare quarter of profits, even if the figure was not earth shattering. Costs have been cut as PAL uses its fuel efficient six Boeing 777-300ER planes to the US and Canada, although passengers on the Manila - London, Melbourne and Sydney routes are now saddled with elderly, non-IFE equipped Airbus A340-300 aircraft in lieu.
Nonetheless, in a sea of south east Asian airlines, PAL remains an oddity. It remains the only major legacy airline in the region that is not a member of one of the three major airline alliances: Oneworld, SkyTeam or Star Alliance. Although PAL's history dating back to 1941 as Asia's first airline has earned the carrier a strong profile, making it better known in south east Asian than Star Alliance members such as Shenzen Airlines, or even on an international scale, better known than Slovenia's Adria Airways, the Philippine flag carrier could be forgiven for believing that it has missed an important opportunity considering that the majority of its competitors have all joined one of these alliances.
The three airline alliances jealously guard the cost of membership. All three claim that 'quality' is the number one determinant of membership, although one alliance let the cat out of the bag a little when it stated on its website that it would like to find suitable members in Brazil and India, suggesting that geographic spread is indeed important.
If PAL attempted to join one of these three airline alliances, it would face some hindrances. All presently have a good number of airlines flying to Philippines. SkyTeam has China Southern, Delta, KLM, Korean and Saudia that fly to the land of 7,107 islands. Oneworld has Cathay Pacific, Japan Air Lines, Malaysia Airlines, Qantas, and recent member, Qatar. Star Alliance arguably has the cream of the crop servicing the Philippines with Singapore Airlines, Asiana, United and Thai among others.
The only additional benefits that a Philippine Airlines membership could offer any of these alliances would be non-stop flights from Manila to locations such as London Heathrow and Melbourne, along with a reasonable number of domestic flights between Manila and other cities such as Cagayan de Oro, Cebu and Davao.
Membership in an airline alliance is no guarantee of commercial success for an airline and its shareholders. Defunct airline Mexicana has not flown since 2010 but is strangely listed on the Oneworld website as an 'inactive member.' Another Oneworld member, Qantas, is set to annonce an A$700 million to $1 billion loss later this week. Star Alliance member Singapore Airlines is reportedly declining, and profits are small.
Philippine Airlines has instead employed a recent strategy to enter into a commercial agreement with fast growing Etihad Airways of the Middle East. So far, it has been restricted to a limited number of international routes such as Manila - Abu Dhabi and around 20 Filipino routes, but the intention is that over time it will expand, as will Etihad's partnership network.
This seems the right strategy for PAL, although it has not explained the costs versus any positive revenue implications. Overall, though, PAL must get its own house in order before it tries to achieve greater status in its management's eyes by attempting to become a member of one of these alliances. As signs in Australian milk bars (old type convenience stores) used to say 'Please do not ask for credit. A refusal often offends.'
Nonetheless, in a sea of south east Asian airlines, PAL remains an oddity. It remains the only major legacy airline in the region that is not a member of one of the three major airline alliances: Oneworld, SkyTeam or Star Alliance. Although PAL's history dating back to 1941 as Asia's first airline has earned the carrier a strong profile, making it better known in south east Asian than Star Alliance members such as Shenzen Airlines, or even on an international scale, better known than Slovenia's Adria Airways, the Philippine flag carrier could be forgiven for believing that it has missed an important opportunity considering that the majority of its competitors have all joined one of these alliances.
The three airline alliances jealously guard the cost of membership. All three claim that 'quality' is the number one determinant of membership, although one alliance let the cat out of the bag a little when it stated on its website that it would like to find suitable members in Brazil and India, suggesting that geographic spread is indeed important.
If PAL attempted to join one of these three airline alliances, it would face some hindrances. All presently have a good number of airlines flying to Philippines. SkyTeam has China Southern, Delta, KLM, Korean and Saudia that fly to the land of 7,107 islands. Oneworld has Cathay Pacific, Japan Air Lines, Malaysia Airlines, Qantas, and recent member, Qatar. Star Alliance arguably has the cream of the crop servicing the Philippines with Singapore Airlines, Asiana, United and Thai among others.
The only additional benefits that a Philippine Airlines membership could offer any of these alliances would be non-stop flights from Manila to locations such as London Heathrow and Melbourne, along with a reasonable number of domestic flights between Manila and other cities such as Cagayan de Oro, Cebu and Davao.
Membership in an airline alliance is no guarantee of commercial success for an airline and its shareholders. Defunct airline Mexicana has not flown since 2010 but is strangely listed on the Oneworld website as an 'inactive member.' Another Oneworld member, Qantas, is set to annonce an A$700 million to $1 billion loss later this week. Star Alliance member Singapore Airlines is reportedly declining, and profits are small.
Philippine Airlines has instead employed a recent strategy to enter into a commercial agreement with fast growing Etihad Airways of the Middle East. So far, it has been restricted to a limited number of international routes such as Manila - Abu Dhabi and around 20 Filipino routes, but the intention is that over time it will expand, as will Etihad's partnership network.
This seems the right strategy for PAL, although it has not explained the costs versus any positive revenue implications. Overall, though, PAL must get its own house in order before it tries to achieve greater status in its management's eyes by attempting to become a member of one of these alliances. As signs in Australian milk bars (old type convenience stores) used to say 'Please do not ask for credit. A refusal often offends.'
-Surface Traveller
PAL needs just a little bit more self-belief. It is potentially now in a position to elevate its status to one of the world's premier airlines. I worked with PAL in various roles during most of the 1980's, at a time when it was mired by political intrigue and effectively controlled by state leaders of questionable intent and purpose.
ReplyDeleteThe company now has a golden opportunity to capitalise on its renewed international credibility with re-established routes to Europe, USA, Australia. The present USP of having direct flights between Manila and London is a definite plus point, but there is a 'however' moment here. Europeans are generally more discerning passengers than their American counterparts, in part due to the presence of so many 'flag carriers' in Europe as opposed to 'shuttle bus service' airline companies in USA.
It is my honest opinion that utilising aged A340 equipment is a definite limiting factor in the desire to be the default choice of all potential passengers on MNL-LHR routes, many of whom will base their buying decision on the somewhat negative reviews seen online. The airline has always had the qualities to be the best, in part due to the cabin crew who have always excelled in making almost any flight a pleasant experience; once aboard you feel as if you have stepped into that friendly zone that epitomises the Filipino way.
Conversely, last July I flew DUB-AUH-MNL with Etihad and although reasonably efficient, there was no sense of occasion, I could probably best describe it as a rather 'antiseptic' experience, with it not being infused with any sense of atmosphere. In this respect, PAL has a positive quality that money just can't buy!
If PAL seriously wants to establish its presence in the European market, it should never have deployed those outdated A340-300s on the MNL-LHR route considering the competition amongst European, ME3 and Asian airlines.
DeleteIt takes time to build a plane. Who doesn't want new planes? Would PR rather wait for new planes, or lease existing planes to fulfill demand? The market will decide if PR survives. Apparently, it is earning money.
DeleteMatira ang matibay. Tignan na lang natin. :-)
Up until this time, PAL hasn't placed orders yet either for A350-900/B787-8/9 or more B777Ws to replace their ageing A340-300s. With the ongoing ownership tug-of-war between SMC and the LT Group, PAL will all the more lag behind other regional airlines.
DeletePAL's greatest asset is its people...FILIPINO Cabin Crew @ its best!
DeleteWhich people would be referring to exactly? It's incompetent management team that is destroying the PAL brand and cutting it down into a low-cost carrier, or perhaps its arrogant flight attendants that look down on their own overseas workers returning home, or could it be the flight crews that are too busy chatting amongst themselves behind the curtain to actually serve guests? Indeed, greatest asset. No wonder why the carrier is a complete disaster...
DeleteNo wonder PAL ranks 96th because their cabin crews are the best. Thanks but no thanks. Who are you kidding with?
DeleteCouldnt agree with you more. PAL FAs are the worst Asian FAs. They are only friendly to you if you are a Caucasian passenger. When it comes to their very own Filipino passengers they have the BIGGEST attitude particularly against OFWs.
DeleteSeems as if BIGGEST attitude is a two way street!
DeleteIn my 10 years of frequent traveller between yvr-mnl-yvr from the old aircraft of A340 to the new B777 from Aircrafts like AC ,CX, and KE i like PR most and i value PR's Cabin Crews Exellent service..a bounus point of its direct flight to MNL
ReplyDeleteits a shit airline that doesent deserve any alliance.. its 93 in the world of the worst airlines. im a frequent flyer with singapore and asiana. and who likes ro use t2 over t3 now when emirates fly there. love to stop by the gulf for cheap duty free and excellent IFE. pal has none of the above! 0 IFE. hope they go bankcrupt
ReplyDeleteMiddle Eastern airports such as Dubai are the pits.
DeleteHot, crowded places that arguably employ lots of Filipinas and others under relatively oppressive conditions (although this debate is difficult, as having a job can mean supporting family members back home).
These Middle Eastern airports are way inferior to a nonstop flight that PAL offers between Manila and London Heathrow, although I agree that it should use a B773ER not an old A343.
airports in philippines is hot humid and dirty compare to airports in middle east. they are crowded but clean and has alot of dining options and shopping. and the facilitiee for business class and first class is 5 star. and no thanks to a340... qatar 777 in 3x3x3 is much better
ReplyDeleteBack in 1997, PAL used to fly the A340-300s on the MNL-CDG route. After fifteen years of absence in the European Union, PAL is back with the same aircraft and European travellers must be saying to themselves "Lazarus is back from the dead bringing with him that same old coffin"
ReplyDeletevery funny.and really true.indeed !!! lol
DeleteHopefully, RSA won't let go of PAL, but instead buys out the LT grp, who almost drove the airline down the pits...with a guided vision and the right leadership, along side the staff who loves PAL the most, PHILIPPINE AIRLINES will soar high again...Asia's First will be Asia's Best!
ReplyDeleteHahahahaaaaaa! Thanks for the laugh!
DeleteLT drove the airline down? Did RSA have to deal with SARS, Asian Financial Crisis, 9/11, Global Economic Downturn, Category 2, European ban, etc, etc.....It's unfair to judge LT because against Ang because the market conditions were very different...but LT managed to keep PAL afloat while other carriers were filing for bankruptcy....his last greatest achievement: the B777 order with personal IFE. Ang delivered flying metal tubes with cheap upholstery and no entertainment. You might as well swim...
DeleteAsia's first will be Asia's best. Funniest joke ever!
DeleteMake no mistake about it, PAL is in a more favorable environment now because of the efforts of RSA.
DeleteAs for Lucio Tan, all you hear from his side are mere excuses why they failed in their 20 years of managing PAL. For the LT Group, they have been there and they have done that. Is there a need for a repeat of their lackluster performance?
people who travel with pal on long haul with their a340s wont come back.. and i can see why Etihad doesent want to invest in Pal. its amateurs who run the aviation sector in Phil beside Cebupac. and prices with middle eastern carriers are almost low cost.. their same price with Pal to Europe and has 100x more destinations.
ReplyDeleteYou can fly whatever airlines you fancy.but passenger have reason why they choose pal and many of theme are freqent fliers including myself.to let you know,we treasure the benefits of direct flight.period. i used to fly with 4 or 5 star airlines but something unavoidable hassles happens,i was stranded for almost 2 days.i vowed never to fly on connection or transit again.never...its a matter of choice what you want.but remember,there must be reason why some choose to fly with pa,l many of their costumers are frequent fliers.did you know pal post profits this second quarter while their peers post losses!?
DeleteSometimes I use PAL because it offers nonstops from Melbourne, unlike any competitor. The hours and hassles at other airports from which I am saved is worth the travel on an old Airbus plane.
Deletei was on a full business class flight with pal to LAX and my seat didnt decline and i was sitting upward the whole flight on one of their old a340s. cabincrew didnt do anything. food was crap, and no IFE. thats my remembrence from the excellent airlines Pal. no wounders they are 93. And people are proud to have a shitty lowclass airline.
Deleteonce bkk flight was overbooked i was stranded 13 hours and no voucher for food was given or even lounge access. Thats how pal threats their customers.. and i,ve seen alot more worth to mention.
DeletePal is ok, but there is no class. its like a empty airline with nothing to offer. and their london flights are very empty. i prefer a380 of Emirates to london, wich is very spacious!!
DeleteFirst time i tried Qatar airways few months and i was impressed. i was always a frequent flyer with Pal, but now no more. the service is excellent and the cabincrew are very pretty and efficient compare to Pal. Their ife is good and seats is very comfortable. i used them from Europe to Incheon.
ReplyDeleteQatar, Singapore Airlines and Cx is at same level. but advantage with qatar is they fly to many destinations in Europe and u dont need to fly with any partner airline wich makes the ticket cheap. and i dont need to get luggage and checkin again.
ReplyDeleteQatar is ahead of cx and sq, i never seen such a beautiful lounge i.swimming pool , personal butler etc. Al Mourjan is another world than most 5 star airlines. Pals lounge is old adobo, 1 dish only.
Deletei saw the pictures of al mourjan lounge. its absolutely beautiful, samr with their lounge in Lhr.
DeleteLots of conflicting comments and experiences in response to my posting message on here. One observation...why are ALL of the replies ANONYMOUS?
ReplyDeleteFor me it's easier, choose "anonymous" > type the numbers and you're done. As for Philippine Airlines, I had a nice experience flying with them in 2007 from LAX to MNL and in 2014. Compared to Emirates and Delta FAs, I thought PAL FAs are very nice.
Delete..it's ,more for posting convenience rather than what you may suspect-hiding behind anonymous !!! I fly 4 or 5x the LAX-MNL-LAX and have all the priority boarding, etc, etc.. overall customer service is below average..yes the smiles, if you can catch them...are heart=softening, but quality of airplane accessories, upholstery, bathroom, etc...yes they do deserve to be in #93, plus the rundown NAIA airport is of no help either...
Deleteif i experienced the same customer service that you had, i wouldn't drag my flying to 4/5x, i'll choose another airline before i hit that mark.
DeleteRSA does not know how to run an airline period. All he is good at is issuing press releases when it comes to PAL. Oh about PAL making money? Baloney. Dont believe me? Take the last two years financial statement of PAL to your accountant and see that he says. If anyone bothered to really study the financial statements of PAL for the last two years you will find it strange PAL actually owns less planes compared to last year. Now where did they book those new planes under? They are not yet fully paid. RSA may be a good businessman but he is not perfect and with PAL he did a lousy job running the airline. Since he took over all ive seen is blah blah blah press releases. Nothing concrete he has done for PAL.
ReplyDeleteRSA is the best man between himself and LT.
ReplyDeleteIf LT knew what to do with PAL he would not have ceded management to RSA and could have navigated the troubled skies of PAL himself.
Now that PAL is in the black and is about to take off, this squabble started by LT is setting back all the gains made by RSA.
Accounting is actually the magic employed by businessman. You can interpret it either way to suit your purpose. Yet it is undeniable that PAL under RSA is about ready to soar high.
Very True. Hopefully RSA will stay. If they could just drive the price down in the US, surely many more OFWs will ride PAL. The key is to partner with a US airline. If PAL could do that, profits from the US will go to the next level.
DeleteYup magic alright you can hide the liabilites but that does not mean PAL is profitable. And as i said if PAL is that profitable why doesnt RSA buy out LT. All reports have indicated RSA wont buy out LT. Why is that so? Only a fool will believe RSA. His style has always been like Gordon Gekko, buy a trouble company and do some superficial make over and then sell the company with the false promise of the company is making money. Oh and i have friends in the auditing department of PAL. And you know what they told me? If PAL is really in the black they will work for free even for a month. What RSA has conveniently left out is the number of planes sitting idle in clark. It was a stupid move to buy too many planes without destinations for all of them. So what does he do? Hide the liabilities and announce the company is making money and try to sell back to LT at a profit. Smart move. But that still makes RSA an asshole in my book. No wonder SMC is over leveraged.
DeleteWe were recently pounded by news that in only as short as two years, RSA was able to turn around PAL from almost perennial losses to finally achieve a positive income of close to 1.5 Billion pesos. Many newsreaders and retail stock investors were surprised and believed the press release and this is what RSA is hoping to realize ---- media mileage (that he is a great & wise businessman), higher stock price (unskilled investors will pile up on PAL stocks), and ‘justification’ about the ‘sweetness’ of their marriage (between SMC and LT group). But, are all of these things really true? Is this just media hype? Don’t we have enough brilliant finance journalists around to check the real story?
DeleteWhen I heard the news, I was immediately skeptical because I remember that I had just read the financial report (September 2013) of PAL and it will take decades to unwound the financial problems besetting the airline. So rather than share my opinion, thereby risking putting my foot in the mouth, I waited until PAL officially released an unaudited latest financial report to the PSE. My opinion shared on this forum is my own interpretation and analysis to help online readers understand better how finance and accounting works in real case scenario. I also hope that hapless retail stock investors will take a quizzical look in my opinion to help them make a better decision before investing their hard earn money in an airline stock such as PAL.
First this confirmation, almost 1.5 billion operating income is partially true. Why partially true? In a 3-month period of 2014 compared to the 3-month period of 2013, PAL indeed made a paper income of 1.5 billion. But I believed this is a misleading picture of the company’s true income. If we will compare the 6-month period of 2014 (January to June) and the 6-month period of 2013, PAL’s income was reduce to 560 million pesos. Furthermore, total comprehensive income for the same 6-month period is only 361 million pesos (after a deduction in net changes in fair values of assets-for-sale and foreign exchange translation).
An income is still an income no matter how ‘insignificant’ the amount of 361 million pesos (total revenues of almost 49 billion pesos). Is it time to celebrate the success of RSA? Not quite, part of revenues (not from passengers and cargoes) represents almost 10% of total gross income equivalent to 4.4 billion pesos (classified as other income). What is this other income----- it was not explained clearly in the report, but I have a good guess ---- contained in the same report is a term (refund of aircraft pre-delivery payments) in the amount of 5.3 billion pesos. Can PAL explain this transaction openly? There was also a significant amount (521 million pesos) classified as income on manufacturer’s incentives that was deduced from operating income before working capital changes that needs an obvious explanation.
Another aspect is the press release that PAL acquired brand new planes and not just a few ones but in their report, their fleet is now 85 compared to December 2013 of 79 or a net addition of 6 planes. The September 2013 report stated 69 planes and the March 2013 report stated 64 planes. So if we will compare the March 2013 report versus the June 2014 report, there was a net addition of 21 planes in just a short 1 year and 3 month period. But, when we checked the reported total assets of PAL, there was a reduction of about 7.5 billion pesos (114 B to 106.65 B). 21 planes were added to the fleet and the assets were reduced? How did it happen?
Well, there were 3 types of plane acquisition classification smartly employed by PAL --- owned, finance lease, and operating lease. The bulk of planes were under operating lease (41 planes). Under operating lease, the assets and liabilities of plane ownership will not be reflected in PAL’s book. Is it a smart move, right? But we need to pause, does the ordinary investor fully knows that Fortunate Star Limited (FSL) is 40% owned by PAL itself? FSL happens to be the owner of the 41 planes
How critical is PAL’s finances right now?
DeleteWell, nothing changes compared to previous reports, only that the liabilities was hidden somewhere (FSL?). Current asset is only about 20 billion pesos while current liability was still a gargantuan 65 billion pesos. Whoever owns PAL needs to chalk up the difference to avoid bankruptcy.
For short term stock traders of PAL ---- let me give you a computation of PAL’s tangible book asset value. Latest total net equity is 3.2 billion pesos and divided it to total number of common outstanding shares equivalent to 24.8 billion shares. How much is the latest tangible book value? It’s 0.129 CENTAVOS. Can anyone please tell me the current market per share price of PAL?
There is a list of issues that I still wanted to raise in terms of PAL’s finances but I do not think PAL will care to respond precisely because there is an ownership struggle besetting the airline. We all know that LT group was unhappy with the ‘marriage’ but they find it hard to split because of a large ‘separation pay’ that they need to be cough up with SMC.
you ask why does LT want to buy back PAL? Ill give you two reasons and it has nothing to do with the lie being peddled that PAL is in the black.
DeleteNumber 1 reason:
LT Group is afraid that at the end of the day, being the majority owner, LT Group's finances might be compromise due to the VERY AGGRESSIVE DEBT OVERLOAD in acquiring a large fleet of new planes.
Do you notice that there was a late breaking news story that PAL will "modify" the terms of the new planes to be delivered? The planned new orders will be reduce in volume.
Number 2 reason:
LT Group wanted to SAVE the VALUE of their 51% stake as early as now with the long term view that if they do not act now, the value of their shares will DIMINISH in the near future.
Remember that LT Group made a whisper to RSA to sell all their remaining stakes but RSA wisely replied that 49% is ENOUGH for SMC and LT group is free to sell it to other interested parties.
Who will buy the 51% stake of LT group if the management control belongs to SMC?
Bottom line ---- LT group wanted to AVOID financial catastrophe and SAVE their stake.
This is a very interesting financial perspective of the current state of Philippine Airlines. We have also been sceptical of the financial statements, but do not have any capable financial reporters that can competently analyse the results. Would you be interested in submitting a complete analysis and evaluation based on what you have posted above and we will publish it as an article? You may remain anonymous. Kindly please e-mail us at info@philippineflightnetwork.com if you are interested.
DeleteIn the interest of fairness, the financial statements under RSA and all the financial statements under LT should be scrutinized side by side. Then let the informed community make the judgment without bias.
DeleteAren't those liabilities supposed to be replaced and scrapped/sold anyway?
DeleteA kuripot airline with no forward thinking !
ReplyDeleteOn the other hand, if PAL is not making money isn’t it a little bit surprising that Lucio Tan should want it back? Why would a smart businessman like Tan want an “unprofitable business” ?
ReplyDeleteThe number of planes reported sitting in Clark could be the retireable, ancient, high-maintenance planes with high fuel consumption resulting to high operating costs and which could be the personal planes of Lucio Tan being phased out by SMC to modernize PAL. Are they saying that Lucio Tan wants again to bring his ancient planes back because even if they have high fuel consumption his ancient planes have ancient IFEs and therefore his other business Lufthansa can keep on repairing these ancient and malfunctioning IFEs over and over again? Can Tan not realize that he cannot keep on driving his ancient Cadillac in EDSA because there is now the modern VIOS. Times are changing and changes are happening fast.
Thus, it is more believable that Tan wants PAL back because the businesses of his family linked to PAL are badly affected by the modernization moves of SMC. If Tan is really in fear that his 51% stake will be in peril then the right thing for Tan to do is to actually sell at present value while PAL is making money and not to buy back PAL. The sad part is while SMC is open and forthright with its future plans for PAL, Tan is very silent on his.
Will Tan undo the SMC plan of modernization and again bring back PAL to the medieval age? Let’s wait and see.
Awesome and interesting post. Great things you’ve always shared with us. Thanks.
ReplyDelete