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Monday, August 16, 2010

Crisis hits Asia’s oldest airline

IT’S déjà vu for Philippine Airlines (PAL), as the flag-carrier’s management and its labor unions once more have locked horns amid one of the worst global economic downturns in decades. Strikes by cabin crew and ground personnel loom, while a growing number of pilots have flown—literally—to greener pastures, as management resorts to government intervention to break the impasse.

It is a confluence of events that threaten to send Asia’s oldest airline back to where it was in the late 1990s.

In 1998, PAL terminated 5,000 of its employees, including more than 1,400 of its cabin crew belonging to the Flight Attendants and Stewards Association of the Philippines (FASAP).

The financially strapped carrier was implementing a $4 billion expansion and re-fleeting program when the Asian financial crisis hit the company.

Following a series of retrenchment in 1998, employees went on strike and paralyzed the airline’s operations.

Cast hasn’t changed
More than 10 years later, the cast of characters hasn’t changed, with PAL management on one side, FASAP and the PAL Employees Association (PALEA) on another, and the government desperately trying to patch their differences.

The PALEA and FASAP again have threatened to hold a strike that could paralyze the airline’s operations.

The threat came on the heels of a planned spin-off of PAL’s three non-core businesses, coupled with management’s failure to appease its flight crew, which has been demanding a pay hike and the removal of a compulsory retirement policy that the union dismissed as discriminatory.

The 69-year old airline will let go of at least 3,000 employees due to the spin-off of its in-flight catering services, airport services (including ground handling, cargo terminal/cargo handling, and ramp handling) and call center reservations.

The sudden exodus of 26 pilots exacerbated the situation, forcing the airline to reduce flight frequencies to several domestic destinations.

External crisis on a global scale
Like in 1998, PAL management insists its current predicament was borne out of a similar external crisis but on a global scale, which is trying to ground the flag-carrier yet again.

This was aggravated by the continued rise in jet fuel prices, the downgrade of the Philippines’ aviation safety rating to Category 2 status by the United States Federal Aviation Administration, the European blacklist of local carriers, and cut-throat competition.

Amid such challenges, Jaime Bautista, PAL president, said the airline’s rationalization program is its lifeline to the future.

Like most airlines around the world, the flag-carrier has been affected and continues to be affected by the global recession and slowdown in travel, the executive said.

“Because of the recession, people don’t like to travel. The demand has gone down,” he said.

Bautista said PAL’s predicament is unique among Philippine carriers, since the flag-carrier has the largest exposure to the international market.

Based on contribution by route, PAL’s international flights comprised about 75.2 percent of total revenues, with the trans-Pacific route accounting for 32.6 percent, and the Asia and Australia routes another 42.6 percent.

Domestic routes comprise only 24.8 percent of total revenues.

PAL’s international passenger traffic fell by 6.4 percent to 3.38 million last year from 3.61 million passengers in 2008, whereas domestic traffic increased to 4.91 million from 4.03 million over the same period.

In contrast, leading rival Cebu Pacific’s international passenger volume rose 22.72 percent to 1.62 million in 2009 from 1.32 million passengers the year before.

Its domestic traffice also went up to 5.35 million in 2009 from 4.46 million passengers in 2008.

Erroneous fuel hedge
Bautista said an inhospitable global environment turned for the worse when fuel prices shot up.

As early as 2008, airlines around the world bore the brunt of rising fuel prices, which hit records of $130 to $150 per barrel.

But an executive with another domestic carrier said PAL’s problems started when the flag-carrier made an erroneous fuel hedge.

“It’s a lesson learned, we should manage risk better,” Bautista admitted, adding that the hedging contract will end this December.

Fuel hedging is a contractual tool some carriers use to stabilize jet fuel costs. Fuel accounts for a third of an airline’s operating cost per passenger, and is the second-highest expense next to labor.

For the years 2008, 2009 and 2010, PAL’s fuel and oil expenses amounted to P20.64 billion, P38.84 billion, and P22.36 billion, respectively.

Consequently, PAL incurred a consolidated comprehensive loss of P862.9 million for its 2010 fiscal year. This was on top of P690.3 million in 2008, and another P12.08 billion in 2009.

Under recovery
While passenger volume for both domestic and international routes began improving in the first quarter, and pricing was 10 percent better, Jose Gabriel Olives, PAL chief financial officer, said fuel prices resumed their increase.

“Even if you have an improvement in the price it wasn’t sufficient because your cost already has gone up,” he said.

Data from the International Air Transport Association showed jet fuel prices went up by 4.3 percent to $92.40 a barrel on August 6 from a week ago.

The average price of jet fuel so far this year stood at $88.3 a barrel.

To offset the increase in the cost of fuel, PAL imposes a fuel surcharge on its passengers.

But the management officials insist the carrier was still incurring “under-recoveries.”

PAL said fuel prices surged 177.9 percent to $86.64 per barrel in July from its base reference of $31.18 per barrel in 2003.

The airline said fuel cost per passenger for its US and Canada flights amounted to $301.72, but it charged only $109 for or an under-recovery of $84.14 per passenger.

PAL’s under recovery in Australia stood at $.88 per passenger; Korea, $0.23; Guam, $35.77; Singapore, $7.90; Hong Kong, $0.55 and Thailand, $6.39

Posted via email from Aviation Professionals dot Org

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