MANILA, Philippines -- Flag carrier Philippine Airlines (PAL) may lower its growth targets for this year as a result of a recent decision by the US Federal Aviation Administration (FAA) to downgrade the country's air safety rating, which thwarts PAL's plans to expand its routes in the US.

"We are working on revising our projections this year because of the FAA decision," PAL president Jaime Bautista told Thomson Financial.

PAL is 84.7 percent owned by PAL Holdings Inc, which is controlled by tycoon Lucio Tan, whose assets also include banks, hotels, real estate, a cigarette company and a brewery.

The FAA reduced the Philippines' international air safety rating to Category 2 from Category 1 after inspections showed the government's Air Transportation Office (ATO) failed to meet international safety standards.

Last year, PAL increased its load factor by 77 percent and carried 7.4 million passengers, overshooting its target by more than 500,000 passengers. So far this year, PAL's load factor has risen to 80 percent, said Bautista.

PAL said previously that its US operations account for 30 percent of its revenue, and it projected that this would increase to 40 percent with its planned new services.

"That FAA downgrade, however, means our capacity to operate will be limited. Our existing US flights are not affected, but our planned flight expansions may need to be delayed. Even with new planes, we cannot fly these to the US."

The FAA decision prohibits PAL from increasing its flights to the US from 33 a week and from changing the type or increasing the number of aircraft used on these services.

Bautista said PAL is scheduled to take delivery of five Airbus 320 aircraft this year, while six new Boeing 777-300ERs are to be delivered between 2009 and 2011.

PAL is planning to use the smaller Airbus planes to increase its flight frequencies to US territories in the Pacific -- Guam, Palau and Saipan -- and use the wide-bodied Boeings to expand its routes to the US to include destinations such as Honolulu.

At present PAL flies direct to San Francisco and Los Angeles.

The airline is planning to open new services to San Diego, Chicago and New York, where a large number of Filipinos live and work.

PAL has been urging the ATO to "rectify the assessed deficiencies in its air safety oversight functions so the country can revert to Category 1."

"Our expansion plans, if this matter is not resolved soonest, are being put in peril. The only option that we want is for the country to go back to Category 1. Boeing is even helping us with this, but hopefully, the government will do its homework," said Bautista.

STILL BULLISH

Despite the FAA restrictions, PAL remains bullish about its long-term prospects and sees the downgrade as a temporary setback.

"We are still taking delivery of the planes we have purchased. We are committed to buy these planes and we have contractual obligations to pay for these planes," said Bautista.

PAL will complete this year its purchase of a fleet of 21 A320s together costing $1.2 billion.

Bautista disclosed that PAL is considering leasing or buying outright another five A320s worth $300 million.

"We have sent proposals to financiers and are awaiting a response from them," he said.

The airline will complete its purchase of a fleet of six 777-300ERs together costing $1.5 billion in 2011.

While working with the ATO and the FAA on restoring the country's air safety rating to Category 1, PAL will continue to pursue increases in its flight entitlements.

"Currently we are either number one or number two in all of the markets where we operate. The travel market is growing and we intend to raise our frequencies not just in the US and in US territories, but in other profitable routes such as China and Japan," Bautista said.

Last year PAL secured regulatory approval to exit its landmark eight-year rehabilitation program, and it intends to be debt-free by 2012.

PAL, Asia's first airline, succumbed to mounting debts and was forced into receivership in 1998.

"Our outstanding debt has gone down considerably from $2.2 billion to just $800 million. We have secured all our creditors' approval for a restructuring of our loans and we are on track to complete payments by 2012," said Bautista.

Shares of PAL Holdings closed down 20 centavos or 3.5 percent at P5.60 today.

($1 = P40.69)