PAL expects to rebound from two years of losses

The Philippine Star
By Mary Ann LL. Reyes
October 01, 2010

MANILA, Philippines - Flag carrier Philippine Airlines (PAL) has expressed optimism it will be able to rebound from two years of losses and break even, or generate profits, by the end of its current fiscal year.

PAL president Jaime Bautista said they expect revenues in dollar terms for the fiscal year ending March 31, 2011 to be slightly higher compared to the previous year and the same, in peso terms, as the company adopts a “survival plan” aimed not only at increased revenues but also at reducing costs.

At the sidelines of yesterday’s stockholders’ meeting of its parent PAL Holdings, Bautista said while they were originally projecting huge losses due to the crisis, “we should break even because of the survival plan.”

“But we want to be profitable this year,” he emphasized

In terms of traffic, he revealed that they will probably be flying around 10 million passengers for the current fiscal year, about the same as last year.

PAL is actively pursuing the implementation of the survival plan that will allow the company to generate more revenues and incur less costs, in the light of its failure to attract new investors to put in more money for the company. “We have to be profitable and depend on our existing resources to do this,” Bautista said.

PAL’s chief executive said so far, they have been successful in generating more revenues. It is the cost-cutting measures that is encountering problems, especially after the company’s employees questioned the spin-off of three non-core units.

“We needed investors because if a crisis happens again and we do not have enough equity, we will be having cash flow problems,” Bautista explained, citing the recent global financial crisis that resulted in massive losses for the world airline industry.



PAL shareholders just last month gave the so-signal for management to implement a quasi-reorganization that will allow the company to raise as much as P4 billion in new money.

The quasi-reorganization calls for an increase in PAL’s authorized capital from P16 billion to P20 billion, a reduction in the par value of the company’s shares from 80 centavos per share to 20 centavos, and an increase in the number of shares from 20 billion to 100 billion. It will allow the company to invite new investors and raise funds that will be used to support PAL’s programs, and improve liquidity and working capital.

But before implementing the reorganization, Bautista said they first need to find an investor who can put in at least P1 billion, or 25 percent of the P4 billion increase in authorized capital.

He explained that a reduction in the par value was needed to better reflect the book value of PAL’s shares and therefore make it more attractive to new investors. From a high of P4 per share, the book value went down to around 80 centavos about two years ago due to the losses the company had been experiencing. In 2008, the par value was reduced to 80 centavos per share.

However, he revealed yesterday there are no parties willing to invest in PAL at this time. “Those we are in talks with have adopted a ‘wait and see attitude’ and are awaiting developments, including if PAL can implement its outsourcing program. And of course, they want to see a resolution of the labor issue,” he added.

Bautista said that the airline industry is currently recuperating. “The economy is getting revitalized and the demand for air travel is gradually getting better. PAL is cautiously optimistic that it will be able to rebound this fiscal year,” he said.

But he warned that the company still has to surmount a lot of challenges before it can reach profitability.

“The competition with other carriers still continues to impact its market share, load factors, revenues, and yields. In addition, fuel prices are once again on the rise averaging at $88.48 per barrel as of the end of August compared to $65.07 per barrel for the same period last year. Hence, continued efforts in  reducing costs and implementing revenue enhancement programs are needed for the company to ensure recovery,” he told stockholders.

Bautista explained that PAL is now registering profits from operations. “But remember that we have to pay non-operation expenses like interests, and foreign exchange losses,” he said.

He pointed out that PAL remains the largest airline in the country in terms of available seat kilometers, which is measured in terms of the total number of kilometers flown multiplied by the number of seats.

“If we measure capacity in terms of available seat kilometers, then we are three times bigger than our closest competitor,” he said.

Bautista also revealed that they are pushing through with the acquisition of new B777-300s between 2012 and 2013. Next year, PAL is also retiring three older Airbus 300s. “We were supposed to renew the lease but because of the lack of pilots, we decided not to. But as the market renews, we can lease additional aircraft,” he said.

From 39 aircraft, PAL’s fleet will be down to 36 by next year.

PAL is also flying to India soon and is looking at possibility of operating from Bangkok to New Delhi.

The company reported a total comprehensive income of $31.6 million for the first quarter of the current fiscal year, down 11 percent from that earned in same period last year.

Revenues amounted to $426.7 million an improvement of 30 percent over the $327.7 million generated last year.

PAL Holdings directly owns 81.57 percent and indirectly, 3.8 percent of PAL.

“PAL remains focused on continuing efforts to generate more revenues and control costs. Moving forward, PAL must ‘swallow bitter pills’ and handle its labor issues with ‘utmost care’ if the airline will survive amidst the difficult and cut-throat operating environment,” Bautista added.

During the first three months of its current fiscal year, company officials said the airline benefited from improvements in passenger traffic as well as cargo, reflecting signs of economic recovery worldwide. Higher yields generated per seat offering also complemented growth in passenger demand.

During its last fiscal year ending March 2010, PAL reported a net comprehensive loss of $14.4 million despite of a $35.5 million profit during the first quarter.

PAL earlier emphasized that the move to spin-off some of its non-core units was necessary to allow the flag carrier to survive amidst several factors that have made it difficult for it to compete.

It cited the massive losses suffered by the company in the last two years totaling $312 million due to the global recession as well as the high fuel costs as some of the reasons why it had to save on costs.

It also blamed the decision of the US Federal Aviation Administration (FAA) to downgrade the Philippines from Category 1 to 2, disallowing PAL from mounting additional flights to the US or to even use brand new and more fuel efficient aircraft, and the significant safety concerns raised against Philippine civil aviation authorities that led to the European Union’s ban of all Philippine carriers.

In addition, PAL said global pandemics like SARS and avian flu, as well as cut-throat competition from budget carriers had made the business environment more difficult.

 “Taken together, all these factors have made it very difficult for PAL to compete. It must save on costs in order to survive, hence the decision to spin off,” Bautista emphasized.