Just a few months after San Miguel Corp. bought into the country’s first flag carrier, Philippine Airlines, last year, PAL immediately made the largest aircraft purchase in Philippine history.
The airline ordered 64 aircraft from European manufacturer Airbus SAS, which is the only remaining competitor of US-based Boeing Commercial Airplanes, with the two forming a world duopoly in commercial aircraft making.
Earlier, before San Miguel invested in PAL some $500 million, the airline was dying to go into what it called “comprehensive fleet upgrading program.”
This means that, in the highly competitive airline business in Asia Pacific, PAL is still in the catching-up phase.
PAL has ordered six Boeing 777, or Triple Seven, which are intended for its long-haul routes, particularly flights between the Philippines and the United States.
Still, PAL saw a much bigger volume in its domestic and regional routes. At the same time, the airline planned to resume flights to the Middle East. It decided it would need a flexible aircraft model.
With the entry of San Miguel, PAL placed the 64-aircraft order with Airbus for delivery in the next six years, or until 2019, amounting to $9.5 billion (about P400 billion).
Perhaps the ambitious fleet upgrading program was the main reason why San Miguel reportedly had “preliminary” talks with Japanese airline All Nippon Airways for a possible partnership in PAL.
In upgrading its fleet, it seems PAL put all its chips on European firm Airbus.
Its press statements confirmed that PAL ordered 44 units of the smaller A-320 family, plus 20 units of Airbus A-330-300, which is known as the direct competitor of the Boeing Triple Seven and Boeing 787 series.
Remember—PAL already ordered six of the long-range wide-body Triple Seven, said to be the new aircraft design to replace the existing wide-body fleets of all the airlines in the world.
From what I heard, PAL wanted to use its Triple Sevens for its Philippines-US routes, including Vancouver and Toronto in Canada, which it recognized as its most profitable routes.
Moreover, PAL received a bit of encouragement from the US ambassador in Manila at that time, Ambassador Kristie Kenney, who was assigned in Manila from 2006 to 2009.
From what I gathered, Kenney herself endorsed with PAL the executives from Boeing who came to Manila for a sales call with the airline. It seemed that Boeing pitched the Triple Seven as the perfect aircraft for PAL’s trans-Pacific route.
But the heartbreak came for PAL when, after it placed the order for the Triple Seven, the US Federal Aviation Authority, or FAA, maintained that PAL could still not use its new aircraft for US flights.
In 2008, the FAA downgraded the Philippines to “Category 2,” as it claimed that the Philippine government had failed to comply with “safety standards” in overseeing air carriers here.
This meant that Philippine-based airlines could not change the aircraft model they use for US flights. In other words, the Philippine authorities committed the sin, but the penalty fell on private airlines like PAL.
Two years after, the whole of Europe followed suit and issued “significant safety concern” on the Philippines, imposing a ban on Philippine carriers.
Competition between the European Airbus and the US Boeing was heating up then and it seemed that PAL had planned for its acquisition of Boeing Triple Seven to work in its favor in the lifting of the Category 2 by the FAA.
From what I gathered, when the upgrade to Category 1 for the Philippines did not happen, PAL pursued its fleet expansion program by going to Airbus, which the airline had wanted all along.
After all, the Airbus A-330 family, as the direct competitor of the Boeing new 787 series, plus even the Triple Seven, seems to be the most favored model by airlines in Asia-Pacific, with which PAL of course must compete.
According to Alizee Genilloud, media relation manager of Airbus, the A-330 is suited to the need of airlines in Asia-Pacific, owing to its versatility, as the model can do between 30-minute and 14-hour flights.
That is why Airbus has pending orders or more than 1,200 units of the A-330 family from 96 airlines, more than a third of which came from airlines in Asia-Pacific, particularly PAL competitors Cathay Pacific, Thai Airways, Garuda Indonesia and all the Middle East airlines.
In the meantime, PAL SVP for operations Ismael Augusto Gozon said PAL was the first airline in Southeast Asia to use Airbus aircraft some 35 years ago, when its bought the A-300 only four years after the model went into commercial production.
At that time, “only a few airlines considered it good business to do so,” Gozon said in his speech during the ceremonial delivery of the first A330-300 HGW (high gross weight), held last month at the Airbus head office in Blagnac, France.
Aside from what PAL and Airbus termed as their “long standing partnership,” PAL insiders say that the biggest factor behind the decision to go for Airbus (instead of Boeing) is the acquisition price of the aircraft. After all, PAL was not just buying tomato or something.
It is common knowledge in the airline business that Airbus aircraft is priced much lower than the equivalent Boeing model. Another Philippine flag carrier, Cebu Pacific, also ordered more than 70 aircraft from Airbus.
Question: How could Airbus offer much lower price than Boeing? In its press statements, Airbus points at its production efficiency. In 2007, Airbus was producing seven A-330s a month. Today it is producing more than 10 A-330s.
In other words, efficient production translates to lower costs, which Airbus presumably passes on to its customers. No wonder, the A-330 family outsold its closest competitor—all three wide-body types of the cost advantage of the Airbus A-330 is estimated at about $245,000 a month. All of PAL’s competitors in the region have such an advantage. They are using A-330 and they continue to place big orders of the aircraft.
This is the region that is seen to become the fast-growing market for air traffic in the next 20 years. By year 2031, it is said that Asia-Pacific will account for 34 percent of the world’s airline market, much bigger than the US and Europe.
In fact, there is a demand in the region for almost 11,000 new aircraft in the next 20 years. No wonder, PAL thinks that it has a lot of catching up to do.