San Miguel Corporation Denies Overloading Philippine Airlines with Aircraft

After enduring heavy criticism from returning Philippine Airlines President Jaime Bautista and the Centre for Asia Pacific Aviation over the purchase of too many aircraft, which is becoming a financial burden on the national flag carrier, San Miguel Corporation is fighting back claiming that it had the resources and plan to utilise all of the new aircraft.

Copyright Photo: Angelo Agcamaran/PPSG
According to an executive of San Miguel Corporation, the reason that Philippine Airlines cannot use its new aircraft to further expand the carrier is because the Tan Group lacks sufficient capital in order to support new route expansion after investing heavily to regain control of the carrier. 

The Centre for Asia Pacific Aviation recently released a report suggesting that San Miguel Corporation had made major errors in fleet planning at Philippine Airlines. It referred to the order placed with Airbus in 2012 as "overambitious" and criticized the decision to acquire used four-engined Airbus A340 aircraft for long-haul flights, citing that the aircraft type has been avoided by virtually every other airline group.

The report suggests that the over ambition of San Miguel Corporation has placed the new Philippine Airlines management in a difficult position and that it is believed that the carrier will now end the year with a loss, with additional losses expected into 2015 if the airline cannot resolve the surplus aircraft issue, which is impacting utilisation rates.

However, the anonymous executive at San Miguel Corporation, claims that the refleeting program was initiated because the diversified conglomerate had the necessary capital to support the investment in new aircraft and the massive route expansion simultaneously. The executive believes that the Lucio Tan Group cannot find routes for the new aircraft because it does not have the financial muscle to support expansion. 

The massive investment to reacquire Philippine Airlines is the reason that the Lucio Tan Group does not have the capital to fund expansion, according to the San Miguel executive. He suggested that the Tan Group should quit blaming San Miguel Corporation for the surplus aircraft as the order was "appropriate" at the time of purchase with the diversified conglomerate at the helm.

Jaime Bautista, the new President of Philippine Airlines, recently conducted an interview where he indicated that the massive Airbus order "lacked deliberation." He added that plans previously established by Ramon Ang to expand service would be shelved in the short-term with the exception of New York. 

"We want to focus on profitable routes, and the US is a very promising route for Philippine Airlines, especially now that we are out of Category 2 and we are operating our new Boeing 777-300ER, which will result in very efficient operations in terms of fuel consumption and maintenance," said Bautista.

Meanwhile, another report surfaced indicating what San Miguel Corporation was planning for its large number of surplus aircraft. A source of the Philippine Daily Inquirer revealed that the carrier was planning to launch a hub at Tokyo Haneda International Airport. The hub would have served as a transfer point for passengers bound for Europe and the United States, while permitting the national flag carrier to expand, as the Ninoy Aquino International Airport in Manila is already too congested to effectively support expansion.

In addition, San Miguel Corporation intended to use the opportunity to capture a much larger share of Japanese passenger traffic, which would have helped to enhance profitability at the carrier as Japan is a much less price sensitive market. With Philippine Airlines launching direct flights to Tokyo Haneda earlier this year and recently signing a code-share agreement with All Nippon Airways, the plan had merit.

Unfortunately, it is believed that the plans are dead with the return of the Tan led management. The recent cooperation agreement signed in October between Philippine Airlines and All Nippon Airways currently provides both carriers with a combined 67 percent share of the Japan-Philippines market. The agreement covers code-sharing, marketing, sales, loyalty programs, airport operations, and airport lounges. 

Had the Tokyo Haneda hub pushed through along with this cooperative arrangement between the two carriers, it could have represented the early stages of a possible deeper partnership in the future that might have seen All Nippon Airways become a strategic partner of Philippine Airlines, which would even pave the way for the entry of PAL into Star Alliance. A report released earlier this year by the Centre for Asia Pacific Aviation highlighted the need for Philippine Airlines to form additional partnerships and to enter strategic alliances. 

PAL President Jaime Bautista said that the new agreement with All Nippon Airways is the first step in Philippine Airlines further building its global network. "By harmonizing our products, we get to offer our passengers wider and better travel options while boosting economic activity through trade and tourism," said Bautista.

Meanwhile, Philippine Airlines must still identify a solution for the surplus aircraft that it is currently plagued with. Some have suggested to sell a stake in Philippine Airlines to a Middle Eastern carrier that could easily absorb the new aircraft that PAL has committed to purchase but cannot use. Industry rumours suggest that Michael Tan is currently brokering a deal with a Middle Eastern carrier, which could be announced before year end.

References: Inquirer, CAPA, Inquirer

76 comments:

  1. The denial of too many airplanes seems to have some validity as is the statement of JB that there are in fact too many....Seems the real key is they may not have bought the correct airplane or configuration for the mission...

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  2. People work for Philippine Airlines are idiots.

    ReplyDelete
    Replies
    1. People like you are idiots for choosing Philippine Airlines.

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    2. Why use an alias?

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    3. Don't even bother writing if your statement is absurd

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    4. Me using an alias? This is the REAL Jaime Bautista. Better shut your mouth bitch!!

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  3. Why do you insist on writing articles about me?

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    Replies
    1. Becoz' we probide better serbice than you. Dah pilipino hospitality, the great pood, and non-stop plight to London is our best acheivement.

      So we buy Philippine Airlines pram you so we probide better serbicee

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    2. Fix your broke English Pamon Ang!!

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  4. Like any corporation, the decision to purchase the planes was made collectively by the board of PAL to which Lucio Tan was the chairman or the final approving authority. In the PAL board as co-decision makers were the sons of Lucio Tan who knew about the details and purpose of the new planes. If anybody will be to blame it will eventually be Lucio Tan.

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    1. Hmmm not sure about all of that. Ang had control of the board that is why the board changed when Tan got operating control back...Decision was made through the board yes, but contolled by Ang and his majority people on the board

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  5. How can Ang/SMC control the PAL board when they only had 49%. Majority or 51% was controlled by Lucio Tan that is why he was the Chairman of the Board of PAL and the chairman is the most powerful position in a company. Why did Lucio Tan and his sons or the Lucio Tan family cluster not use their power or authority in the board when there was a concern (purchase of planes for modernization) they were not agreeable to. Lucio Tan should just face the decisions he and his sons made and make the best out of the situation.

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    1. My understanding of the agreement is SMC had 49% and operating control of the airline and therefore with appointees board control and that is why at the turn over there was a completer board change. Tan had his percentage and that is correct but even now there is more than 10% of privately held stock. That is even mentioned on this site in a seperate article. Tan may have retained Chairman position but that does not mean he controls the board decisions.

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  6. I think the SMC/PAL board had 11 members where Lucio Tan was the chairman of the board. The Lucio Tan family cluster had 6 members altogether. SMC had 5 members. Obviously the Lucio Tan family cluster controls the decision making at the highest level. The decision to purchase the planes could not have been arrived at if Lucio Tan family had not approved of it.

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    1. Exactly right. They were all in it together and must have approved this. This is obviously a 'blame culture' and they need to find a scapegoat.......

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    2. I think you need to look at PAL Holdings Inc to define who had control of the Airline. Certainly the Tan group had some control but i do not believe Sir Ang would buy into a company that he could not fully control it's growth, expansion and acquisitions....

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  7. SMC is right they have the money and willing to expand. You spend first before you earn.

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  8. The fact still remains that PAL has more planes than markets not can deploy too. I would call the SMC expansion as haphazard. It was also the wrong mix of planes. Why didn't PAL acquire more 777s if SMC is boasting that it had lots of money? Why invest in very old lemons like the A340s? There's definitely something amiss about the 'expansion' SMC planned and it may prove difficult to get out of in the long run.

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    1. The choice of used A340's was due to the fact that these were acquired before the reclassification of CAT1 for the US flights. If they need expansion with the choice between B747 and A340, the latter was ideal.

      Now given that they were looking ahead for the CAT1 approval, the risk for these should have been balanced. SMC has deeper pockets and can gamble on these kind of expansions, as they play on a long term game.

      I agree with JJB that PAL now is overcrowded with LCC configured planes. They should have bought new and improved planes.

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    2. If PAL is now claiming it has the wrong mix of planes it simply has to take that problem to Lucio Tan because it was he who approved of the wrong plane mix. Maybe Lucio Tan can now make a decision to send the planes to the manufacturer to have the IFEs installed, at additional cost to Lucio Tan. But that cost to have IFEs installed will only offset the discount Lucio Tan received earlier. When problem is solved with the IFEs, Lucio Tan will still face the challenges of the times where only the fittest survive.

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    3. At the start of the decade or at around the time SMC launched its modernization, Cebu Pacific also ordered 40 new planes. In the Asia Pacific region, Indonesia Air ordered 230,
      Air Asia ordered 200, China Eastern 588, Air China 155, Thai Airways 40, etc.

      If RSA was one with these airlines in seeing demand for air travel, why is PAL now saying there is none? Something is wrong with PAL and I think it was not RSA.

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    4. The 340's were bought in part because of CAT 2 but mostly because they could be acquired super cheap and allow for possibly showing profit on passegers carried verse aiplane acqisition costs... Under CAT2 they could have kept there 747-4s or bought more used ones also cheap to buy but expensive to maintain. If you want to show profit you buy cheap airplanes and dont add the long term costs of maintence to the spreadsheet... yhis only makes later expansion harder....Example is SIA and no old planes just plans for future growth...and new purchases

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    5. PAL can never compare itself with SIA. They are miles apart in every aspect such as overall service and fleet quality. If PAL is now saying the used A340 was a bad choice, which would have been a better choice which Lucio Tan's pocket could have afforded at that time? A brand new B777? If so, why did Lucio Tan not insist on it being the 2nd richest man according to Forbes?

      Technically now, PAL does not have a single penny in the bank again, having declared it is back in the red. And the question crops up again, why is it that PAL is always losing money every time it is Lucio Tan taking charge of things. Isn't it about time that Lucio Tan give up PAL so that PAL can fly high again?

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    6. I doubt very much the findings of CAPA that the SMC modernization was ambitious because it is in direct opposition to the declaration of Boeing that there is demand for more aircrafts in Southeast Asia for years to come and therefore affirming the early moves of SMC. People in SMC are visionaries. They know the market well in advanced and Boeing coming to town just affirmed that the problem in PAL is not too many planes. CAPA is wrong

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    7. Whatever... CAPA is a respected think tank in the industry. SMC is a nobody... much like you... so really nobody cares that you think SMC is right.

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    8. Lucio Tan does not listen to that think tank CAPA nor does he listen to someone like you either. Lucio Tan only listens to his Feng Shui Master!

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    9. Feng Shui Master? You racist punk!
      Don't ever ride PAL or else i will sue you for that. Me and Jaime Bautista are doing a great job with PAL. RAMON ANG is stupid. That's why people say

      "PALPAK talaga ANG PAL" because of Ramon ANG.

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  9. whatever the reason was PAL never posted a profit under LT group since 1990 it is common knowlege that LT makes money around PAL and treats its employees like garbage TAIPAN with no money to infuse aster fleet expansion all exhausted after the buyback

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    1. That seems a bit short sighted... many conglomerates use there various business units for profits and loss. That is often driven by tax incentives or even in this case Flag Carrier status and government assistance... As for TAIPAN status not sure about that but employee treatment was not all the great under Ang either....

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  10. Even during SMC time, the number of aircraft (that was ordered) was already being reduced and the newly delivered planes were already being parked. http://www.philstar.com/business/2014/08/18/1358634/pal-further-tweaks-aircraft-order-airbus?nomobile=1

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    1. Maybe it is because RSA does not have the support of an excellent sales and marketing team in PAL and he could have been moving towards replacing all of the bad ones until Lucio Tan stepped into the picture. If the revenues are not coming in as fast as should be sales and marketing is under performing. If route expansion is being delayed people in route expansion are low achievers. Maybe it would have been better if RSA had replaced the entire bunch by giving them generous golden parachutes.

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    2. As early as 1st quarter of this year pala (even before LT offered to buy the shares back), SMC was already reducing the aircraft orders na.

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  11. Hindi SMC ang nag reduce ng order. Si Lucio Tan na ang nag reduce ng order . Transition time bago bumalik ang control kay Lucio Tan ay pinahinto ni Lucio Tan ang mga delivery.

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  12. LT is using his own money, RSA is using stockholder's money..

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    Replies
    1. Lucio Tan is using the money of BDO, China Bank. and Asian United Bank. Lucio Tan did not use his money that is why Lucio Tan borrowed. Whatever the case maybe, whose proper use of money between the two was profitable for PAL? It was the handling of RSA.

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    2. Actually he used a significant amount of his personal asset for this transaction. That's why this is such a huge make or break risk for him.

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  13. Hub in Haneda?...hahahahaha...stop playing computer game RSA.

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    1. What's funny about that decision? PAL seems to be doing fine with the Japanese Market as far as i know and with the codesharing with ANA, they should expect more Passengers. Plus, with all those planes, they could park them and have operations within Japan so the Planes can be used rather than being idle.

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    2. Maybe the idea was to use Haneda as a transit point to Europe with certain arrangements with Japanese airlines to harmonize with Japanese government restrictions.

      That is the good point of RSA, he thinks out of the box. Who knows, his idea would have worked had Lucio Tan not spoil things for PAL.

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    3. Haneda would also serve as a great Transit point to U.S. In fact, they could deploy their A330s to U.S without any stop overs.

      Lucio Tan needs to step down and let Ramon Ang or someone with a brain that actually knows how to run an Airline.

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    4. I will never step down. I want to steal rebates and money

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  14. Whoever wrote this article, and the SMC executive, are both dreaming & ill-informed about. No foreign airline can start a hub in Japan. Haneda is extremely slot-restricted & is not evrn open to US carriers during the day time. That is a fact. DL had a NRT hub because of the history when Japan was under US administration. This is the problem with Philippine journalism. They have rabid mouths with no brains. And the uneducated public believes them! My goodness! Nakakahiya when foreigners read these!

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    1. Good. Philippine Airlines is palpak. That's why i want to make this the World's worst Airline. With me and Lucio Tan, we will make it the worst Airline and we blame RAMON ANG for everything. Pakyu lahat

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    2. Agreed Mr. Bautista. Pakyu lahat!!
      We know

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    3. Do not forget bilateral air agreement between the USA and Japan for Japan Airlines and Northwest Orient Airlines in the early 50's.
      Northwest (now Delta) dominated Narita as the biggest US carrier serving USA and Asia. I have flown NW and had seen Northwest's terminal (1985) and gates in Narita with more than a dozen 747's parked and waiting for their departure times. Japan was never under US jurisdiction or administration. Please review your history before you post a blog. Do not invent. You are right, though, in saying that a foreign airline like PAL can never establish a hub in Haneda and in a once super-rich country like Japan. What do you think of Japan, a charitable institution? Japan is premier in commerce and business, so it knows its business plans for the better, of course.

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    4. PAL already has a slot in Haneda thanks to RSA. Although PAL was previously landing in Narita, a far away airport from the city center Tokyo, it was RSA who got additional landing rights for PAL in Haneda. This is worth mentioning because it is difficult for an airline to get landing rights in Haneda airport because it is slot-restricted

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    5. And do not forget that PAL/ANA Air Agreement would only be limited to flights between Japan and the Philippines by either airline. Do not even dream of the Japanese government granting free rights for PAL to fly from Haneda to the four corners of the earth! Advantage: ANA - Japanese travelers are loyal to their product and Philippine travelers prefer a financially solid and 4-star airline like ANA. (Unless PAL "strategizes" the PISO fares all year round!). Too bad, PAL's financial existence is now close to the ravine as Cebu Pacific continues to dominate RP's domestic markets and starting its nice takeoff in the Asian international market. Next for CebuPac - North America and Europe. Hurray!

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    6. Quite true although RSA must have been thinking of an arrangement beyond code-sharing. It could have been a strategic partnership that would permit flights beyond the limitation of a code-share although that never came to fruition. As it is a different arrangement came to being and it looks like it won't even pack a punch.

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  15. It's very strong that they are deferring some future orders for their A321's why not convert them to A321-NEO's, A350-900's, A350-1000's or even the A330-NEO's to be able to have the mileage and efficiency of these twin-jets. I'm pretty sure the backlog for these planes will make it for them viable and timely for their expansion. I'm not just sure how will the engine deal with RR will pan out if this will be the case. A lot of carriers have converted their CEO to NEO's

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  16. We are waiting for Cebu Pacific to serve North America, the sooner, the better. In the meantime, we will fly CX, OZ, KE, SQ and ANA to the Philippines. Sorry PAL!

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    1. Cebu Pacific serving North America? LOL

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    2. Why not? CebuPac's A330s can fly MNL/HNL/LAX. A no-frills airline is what the FilAms and green card holders are clamoring now. They want low, low fares so they can go home to RP at least twice or thrice a year!

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    3. Cebu Pacific SUCKS. Bad food, Bad Service, Always delay/canceled, ugly plane. They better not come to America. Stay in the Philippines CEBU PACIFIC.

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    4. Cebu Pacific has new Airbus 330s. From USA to Europe and back, I've flown this type of aircraft's economy class a lot of times and it is wide, spacious, quiet and reliable. I always wanted to pay cheap air fares with reliable, solid airlines and I expect CebuPac to facilitate its application and other governmental formalities to fly to the USA. I want to vacation to my Philippines at least 4 times a year and see and enjoy all those places that I have not seen (when I was a young student there). I hope this is not a crime or boastfulness. Life is short, remember? Welcome to USA Cebu Pacific!

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    5. A healthy competition between airlines is always welcomed because it would foster innovations which is always good for the consumer. However I kinda doubt Cebu Pacific could do long haul flights well because a low cost / no frills airline operates differently than a long haul airline.

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  17. This is an international forum dealing with serious airline business. Those bloggers who just want to impress by their impolite and irrelevant remarks should do something else; go get a job or clean your own bathrooms. Do not show the business world about your lack of knowledge and irresponsible ideas/opinions. The world may think you are form a third world country! Seriously!!!

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    1. I agree. Many of the Lucio Tan haters/trolls here do not have a single iota of clue on how the airline business works.

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    2. If it is you or PAL who knows how the airline business works why is PAL:
      losing market share, can not sell enough tickets, has deteriorating service, too slow in opening new routes?

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  18. The Chinaman had the good sense of sending the monies behind the Great Walls of China when FVR was in hot pursuit of the crony monies some of which were funding coups during the time of Cory. Will some of it come back to keep a sinking ship afloat?

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  19. Once again, a article with Philippine Airlines always have a war in the comments.

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  20. I think SMC is right.. Tan doesn't have money for expansion that ia why they only say they will focus on US. Even before PAL wasn't sold to SMC Tan couldn't ever expand PALs network. It was during SMCs era that PAL expanded its global network.

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    1. Because the US route is the most profitable route. To operate a good business you can't overreach yourself. Step one would be to become profitable again. Then you develop other routes when the time comes.

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  21. The SMC group just demonstrated that it can turn PAL around. Some bumps and bruises here and there but it got the job done. It didn't have to make excuses when it bought into PAL. Let's see what happens with the LT group now back in control. Heard that a lot of "young once" personalities back in PAL.

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  22. A good way for PAL to expand would be to utilize Clark International Airport in Pampanga in the future.

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    1. Even use the CEB and DVO for regional flights.

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  23. LT group bought back the 49% to save their 51% ...

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    1. Actually, LT group bought back the 49% to save LT's subsidiaries already in the chopping board of SMC as some of these LT subsidiaries were identified to be excessively charging PAL and dragging down the profit of PAL.

      LT group is not in the business to make PAL profitable. LT group is in the business of making the LT subsidiaries profitable to the detriment of PAL.

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  24. SMC had no idea how to run an airline.
    They removed Business Class on domestic routes and replaced it with Premium Economy, thus denying the opportunity to sell expensive seats to the Philippines's increasingly affluent middle-class at exactly the time their affluence started to soar.
    PAL flooded tiny domestic Mabuhay Lounges with the Premium Economy passengers entitled to access.
    They bought A330s for domestic routes and started fitting 9-across seating which for anyone not suffering anorexia are ridiculously small and near humiliating.
    Then they started flying the same A330s (but with a Business Class with the narrowest seats I ever saw in any Business Class) on premium routes such as Manila <> Tokyo.
    Added to which they made the decision to expand from two daily flights to Tokyo (from Manila and Cebu) to now 7 (or is it more?). Added to the fact that Cebu Pacific started Tokyo flights and ANA added flights, the over-capacity on the Tokyo routes is enormous.
    Then they decided to stop flying 777s to London, arguably their premium route, and switched to old A340s with mostly broken seats in Economy, and Business Class seats, CRs, and catering equipment in deplorable condition (I sat watching the CR water creeping down the aisle through Business last Sunday).
    Added to that more half-empty planes than gates at NAIA to handle them and often a 20 minute wait for a shuttle to take you from the plane to the terminal after a long flight.....
    SMC may have had great ideals but they did long-lasting damage to PAL's brand.

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  25. These concerns could have been easily solved by SMC if they were allowed to continue their stewardship of PAL. Precisely SMC was on the verge of getting rid of the Lucio Tan subsidiaries handling PAL maintenance and catering because these Lucio Tan subsidiaries cannot fix the broken seats and comfort rooms are deplorable and so with the deplorable catering. The only reason PAL stinks is because of these underperforming LT subsidiaries not to mention PAL's own lack of talent to sell its tickets to fill up its planes.

    If LT/PAL thinks it can run PAL better than SMC then why was PAL slowly losing its market share if not always in the red in the last 20 years LT managed PAL?

    Obviously LT/PAL is overwhelmed with the enormity of the challenge. Maybe it is high time for LT/PAL to stop talking and start doing.

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    Replies
    1. What do you mean allowed to continue???? They sold their shares back to LT and prior to that offered to buy but at a lowball price...Sir Ang set him self up perfectly...have control of the airline, show profits, due things that are conter productive for the long run (A340's) or the 757 idea) and then get LT pissed off to the point he wants it all back or has the option of losing his 51%....

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  26. PAL needs to get rid of the A340 on the transpacific and london routes. In order to do so profitable the marketing and sales needs to change their ways and start doing something. The 777 is the best airplane for the airline to make money and the airplane people will want to fly on. unfortunately until you can sell at least 70% of the seat consistently costs and the red zone are ever looming...

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    Replies
    1. Well put!!!! And here here for Filipino thinking!

      Delete
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