‘Excess’ planes seen to weigh on PAL bottom line

MANILA, Philippines–Philippine Airlines will continue to struggle to achieve profitability this year through 2015 as “excessive” plane orders weigh on the flag carrier’s bottom line, an aviation research company said.

In a Nov. 5 report, Capa-Center for Aviation acknowledged reforms implemented by San Miguel Corp. during its two-year management stint at PAL but noted that the conglomerate was also “overambitious” in ordering new planes.

SMC, upon assuming control of PAL in 2012, ordered 64 new planes from French manufacturer Airbus for an estimated $9.5 billion.

The order, coupled with the conglomerate’s role in helping the Philippines obtain aviation safety upgrades from European and United States regulators, was a crucial part of SMC’s strategy to restore the carrier’s profitability and prestige.

But some of the orders, including a number of long-range Airbus A330s, which can reach the Middle East and Australia, have come under scrutiny after tycoon Lucio Tan reacquired SMC’s 49-percent stake last September, consolidating his holdings in PAL.

PAL Holdings, the flag carrier’s listed operator, announced a return to profit in the first half of 2014, buoyed by the traditionally strong summer travel season and despite competition posed by aggressive budget carriers like Cebu Pacific Air.

However, Capa, an aviation information consultancy firm, noted in its report that PAL Holdings was “again expected to end 2014 in the red.”

“More losses are likely in 2015, particularly if PAL is not able to resolve the huge aircraft issues it now faces,” noted Capa as it cited the cost of carrying too many planes.

PAL may also take a one-time hit if it decides to sublease its extra aircraft, Capa said.

“The aircraft challenges that have been inherited by PAL’s new management team will likely impact the carrier’s profitability for at least the short term,” it said.

Capa data showed that PAL and PAL Express had a total fleet of 68 planes, about half of which were Airbus A320s and A321s. It will expand the fleet with 42 more planes on order, Capa data showed.

PAL has started to defer some aircraft orders due in September, October and November, Capa said, quoting PAL president Jaime Bautista as saying. Bautista returned to his old post in PAL last month.

Capa said PAL had seven to eight excess A330s and that utilization was currently low. It was also struggling with its fleet of Airbus A340 planes and some A320s, CAPA said.

The think tank noted that PAL   needed to increase its six Boeing 777-300ERs, which are being used for flights to the US East Coast and eventually, New York in March next year.

“PAL’s outlook is not all gloom as the Philippine market is now relatively strong, boosted by the reduction in the number of domestic competitors, the restoration of Category 1 and a relatively strong economy,” Capa said.

“But PAL first needs to adjust its fleet plan to a more rational level and get the right mix. This will not be an easy task,” it added.