DEMAND AND SUPPLY By Boo Chanco (The Philippine Star) Updated December 17, 2010 12:00 AM
Don’t greet airline executives a Happy New Year. They are even now wishing they could put the next year on fast forward and get it over with. Fuel prices are again on an upswing and there are some analysts who are talking $100 a barrel oil. And even as mergers and alliances are starting to have some positive impact on the bottom line, the threat of a double dip recession could nip rising passenger numbers all too soon.
Domestically, two more things are major concerns. It is certain that 2011 will bring about open skies and increased competition. Despite the usual noise against it from the usual suspects, I don’t think open skies or the “pocket” open skies version can be stopped. I understand the Aquino administration strongly believes in it and is committed to implement it as soon as it can next year.
I am not going into the pros and cons of open skies because this is one topic that had been discussed widely and for some years now. From a business perspective, the local airlines should spend more effort now planning to live with it rather than trying to stop it. The rules of the game are changing and it is take it or leave it.
Stiff competition is the other major headache in the local airline industry. The smaller airlines are beefing up their fleet and teaming up with larger foreign airlines to give the predominant players, PAL and Cebu Pacific a run for market share.
As earlier reported in this column, SEAir is leasing Airbus 320s from Singapore’s Tiger Airways and will thus be in a better position of mounting flights to key domestic destinations too. Tonyboy Cojuangco is teaming up with Air Asia’s Tony Fernandes on a new airline with a 60/40 ownership structure that will also enable it to compete in the domestic market. Zest Air is also beefing up its fleet.
We are now seeing a stiff competition among the airlines not just for passengers but for the services of trained and certified pilots. The flight operations of some of the airlines, including the established ones, may be disrupted next year as pilots are continually being poached by local and foreign competitors.
This early, the President of Philippine Airlines is warning that the domestic market may not be that big and ruinous competition may result. That is probably true. It also complicates an already difficult market for the country’s premier flag carrier.
As I had explained here in some past columns, the big problem of PAL is that it is overstaffed and cannot be as nimble as the budget carriers like Cebu Pacific. PAL has some 7000 employees compared with Cebu Pacific’s 2,500 and at least in the domestic and comparable international regional routes, Cebu Pacific had been flying more passengers already.
This is why even the Department of Labor saw the importance of allowing PAL management to do what it should to improve the competitiveness of the airline. There is no choice for PAL but to try to approximate the efficiency of Cebu Pacific and the host of new and existing budget airlines in order to survive.
The order from Malacañang for both management and labor union to hold their horses will only delay the inevitable. There is no way they can escape addressing the need to make PAL’s structure and business model more in tune with competitive requirements in today’s airline market.
The officers of the employee labor union are doing their members a great disservice by refusing to see the futility of the status quo. The employees union should learn from the example of the American automotive unions. When it became clear that GM, Ford and Chrysler would go belly up unless the unions worked with management and government to save the car companies, the United Auto Workers or UAW decided that cooperation was the better deal.
It was a painful decision for the tough American automotive union who had to give up years of hard won benefits. But the union leaders realized that if they want to truly protect the economic interest of the workers, they will have to save their respective car companies first. It is the same thing with PAL. It is crunch time and every stakeholder must decide if they want to save the airline or bury it for good.
For the Lucio Tan haters, what Lucio Tan is or is not is irrelevant. The key problem now is how to make the airline competitive. The alternative is to let the airline die and allow the new airlines to take its market share. There is something Darwinian in the capitalist system. Weak corporations should be allowed to die.
If PAL dies because it was not allowed by its staff to reorganize to meet competition, the surviving airlines will take over PAL’s market share, routes and even its planes and other assets at no cost to the taxpayers. PAL should not be considered too big to fail.
Even if it wants to, it would be extremely difficult for the government to bail out PAL now. Government has a serious fiscal deficit problem. It is also not good policy to use the money of 90 million taxpayers to save 2,500 jobs, jobs which aren’t going to be there in the long term anyway.
What happens next in PAL is also going to be an important test for the Aquino administration. Will it just do the politically expedient alternative and capitulate? Will it exercise leadership and allow the airline to reconfigure its business model to help it survive today’s new business environment?
PAL employees should learn an important lesson from the pilots who went on strike some years ago. It turned out that the pilots’ union was ill-advised and the pilots lost everything after their strike had been held illegal by the courts.
But pilots have one great thing in their favor that the ordinary airline employees don’t have. Pilots have world class skills that are in high demand in the world market. In fact, retaining and hiring enough pilots will be a major headache for the local airlines next year. What money the airlines have will be used to keep and hire the pilots first.
A PAL strike during the holidays will be a disaster for the airline… but a life changing calamity for the affected employees and their families. It would be better for them to take the million pesos or so offered and then take their chances on a new career. The union leaders are taking on the responsibility for the lives of their members and their families. For their own sakes, I hope everyone will be reasonable.
Almendras
I was disappointed to learn that the Commission on Appointments failed to act on the confirmation of Secretary Almendras because one congressman raised issues about things that happened in the energy sector in 2006 and another in 2008. Almendras was not around at that time so the only thing he could promise was to look into it and have it investigated.
In the meantime, I got this reaction from a noted economist to my column last Wednesday.
Excellent column; amen on everything you said about Sec Almendras. I am especially glad to read that Secretary Rene appreciates the pitfalls of premature embrace of expensive Renewable Energy technology (solar, wind, biomass) especially for a poor country with high cost of power, facing tightness in power supply in near to medium term and with already adequate sourcing of power from current more cost effective green sources (hydro, geothermal at over 40 percent). Solar costs over P20 per kwh, wind around P10, versus grid rate now of about P4.50. These costs will go down over time, no advantage to the country in signing up long term contracts for these.
I hope he is able to resist strong supplier lobby for these expensive sources. Even the ADB has announced over a month ago, a $1-billion loan for the Philippines primarily to support such. This is something that Filipino taxpayers have to pay for down the road. This is on top of the increase in power rates arising from the high feed in tariffs.
From what I heard, they are talking of an initial fifteen centavos add on to the average tariff. This looks small until one calculates that this is about P10-billion ANNUAL public subsidy to inefficient foreign suppliers with immature technology, which can certainly be better used for other public purposes by a poor country like ours. That’s like being early adaptor to the first expensive cell phones costing P50 thousand for a minimum wage earner!
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