PAL must downsize to be competitive

Philippine Star
DEMAND AND SUPPLY
By Boo Chanco
September 25, 2009

At last, Philippine Airlines is recognizing the realities of the times by preparing to downsize its staff. The labor union is up in arms and is threatening legal action but even the Supreme Court cannot overturn the new rules of airline finances.The International Air Transport Association (IATA) is predicting an $11 billion loss for world airlines in 2009 and most of these losses would be borne by so called legacy airlines like Philippine Airlines.

It happened to the American car industry just a few months ago. General Motors and Chrysler had to file for bankruptcy and get government financial assistance because their labor costs are no longer competitive to the Japanese brands who are also manufacturing cars in union-free operations in some Southern states.

In the case of the car companies, the labor union had to become extremely reasonable. GM’s Bob Lutz called Ron Gettlefinger, the UAW president, a labor statesman. Indeed, the UAW agreed to a lot of demands that meant cuts on such legacy costs as lifetime health care and pensions for retired workers, massive lay offs and changes in shop rules to bring down labor costs to competitive levels with Toyota, Honda and Hyundai, among other foreign brands. Being intransigent was not an option because that would mean closure and total job losses.

In the airline industry, the same thing is starting to happen. Recently, British Airlines got into trouble with its unions because of plans to trim operations and staff in line with a drastically reduced demand for airline passenger seats. The unions are acting tough but it is likely that they will have to give in sooner than later.

In addition to tough economic times, British Airlines also faced fierce competition. The budget airlines such as Ryan Air, Easy Jet and Virgin are attracting the more budget conscious passengers these days. And let us not forget the pummeling the airline finances got from soaring fuel prices.

In Asia, the situation is the same. The mighty Singapore Airlines was forced to mothball a considerable number of planes in its fleet for lack of passengers. It is also cutting down on unprofitable routes and all these steps mean they are laying-off staff too. Malaysian Airways, Thai International and even Cathay Pacific are all in the same predicament.

Japan Airlines, the flag carrier of the country with the world’s second biggest economy is in danger of going under. JAL is desperately negotiating with American and other foreign airlines for assistance in exchange for equity stake and a large say in management. It is thus not surprising that Philippine Airlines, a legacy airline, is now saying they have serious financial problems that need drastic solutions.

“The bottom line of this crisis ... is larger than the impact of 9/11,” said Giovanni Bisignani, IATA’s director general and CEO. Industry losses for 2001-2002 were $24.3 billion. IATA attributed the worse ever loss to declining demand, rising fuel prices and exceptionally weak yields. Passenger traffic is expected to decline by four percent and cargo by 14 percent for 2009. Yields are expected to fall 12 percent for passenger and 15 percent for cargo.

Though “the global economic storm may be abating,” Bisignani warned that airlines “have not found safe harbor” and that “the crisis continues.” IATA predicted that the industry would post a loss of $3.8 billion in 2010. Industry revenues in 2009 are expected to be $80 billion less than 2008.

Bisignani predicted that “revenues are not likely to return to 2008 levels until 2012 at the earliest.” Asia-Pacific carriers will likely post a loss of $3.6 billion, roughly in line with the previous forecast of $3.3 billion.

Here at home, Philippine Airlines has finally snapped out of its state of denial. Among other things, they are now admitting their old business model is no longer viable. They have too much staff at 8,000 compared with Cebu Pacific at just 2,000. And to top it all, Cebu Pacific is now flying more domestic passengers than Philippine Airlines and presumably presents a better bottom line as well.

For PAL to be more competitive, it has to adopt the same business model of Cebu Pacific. It must have less full time staff. They need younger staff that is paid less and more fuel efficient planes. They have to get rid of other legacy costs that make the airline less nimble. PAL has acquired newer and more fuel efficient planes but is hamstrung to act decisively on the staffing problem.

The other negative of PAL these days is the threat of a labor strike. I got stranded in Los Angeles the last time they had a strike. Now that there is a threat of a strike, I am having second thoughts buying a PAL ticket for use two or three months forward. I don’t want the problems of being stranded.

Frankly, if I had my rathers, I would rather fly PAL than Cebu Pacific because PAL has better seats. For short flights, I can suffer the seats at Cebu Pacific. But for a flight of over two hours, I would choose PAL. Many others, it seems, don’t mind some discomfort in exchange for the cheap fares of Cebu Pacific.

The way it looks to me, the plan of PAL to rationalize its staffing is not a legal issue that the courts can decide. It is very much an economic issue. No court can force Lucio Tan to bleed still more money in PAL if he decides that he has lost enough in the airline through the years. There are easier ways of making money for the taipan. He doesn’t need the headaches of another labor tussle like the last one.

It is entirely possible that the labor union can win its case before the courts as it did the last time. But their victory will be pyrrhic if the airline goes out of business anyway. PAL’s labor union must study what the UAW did in the case of the American car companies and help management save PAL from its current financial troubles. They have to take the long view… the big picture. Or they will lose their airline and their jobs and there is nothing the Supreme Court can do about it.