Is PAL worth saving?

We can perhaps look at what’s happening at Philippine Airlines today as something like birth pain. Maybe all the unpleasantness happening are necessary so that a new Philippine Airlines can emerge that’s not only profitable but a worthy flag carrier of the Republic. But I am not that sure.

In all honesty, PAL is now a seriously damaged brand. Its passengers were used by management and labor as hostages in their continuing battle of wills. Sara Soliven de Guzman, my colleague on the Opinion side of this paper related how some passengers were kept inside an aircraft for two hours or so. It was evil of labor to allow such a thing to happen and it is shamefully inutile of management to have been unable to do anything about it for that long.

Then there are all those cancelled flights and transferred flights from one terminal to another and of course all those horrendous delays. Anyone on Twitter the past few days know how horrible the situation was. And as I wrote last Monday, it was unpardonable for PAL management to have failed to put contingency measures in place even days after the crisis began. It is par for the course for PAL. Some years ago, I was stranded in Los Angeles because PAL pilots walked out.

Assuming it is still possible to save PAL, is it still worth saving? I am not so sure that it is. I know investment bankers have been doing due diligence on behalf of prospective buyers of PAL despite their public denials. But if these buyers really want to own an airline, wouldn’t it be better for them to start from scratch instead of buying what remains of PAL?

I remember a conversation I had with John Gokongwei in his Shanghai residence some years ago about this. Mr. John made a bid for PAL together with the Lopezes when it was put up for privatization. They lost the bid and Mr. John told me that evening in Shanghai that he was so lucky that happened. Because he really wanted to get into the airline business, he started from scratch with Cebu Pacific. Now CebPac flies more passengers with less employees than PAL and is quite profitable using its budget airline business model.

What is the value of an airline to begin with? Surely an airline is valuable not only because of its fleet of aircrafts, many of which are leased and not owned by the airline. The value of an airline is its reputation for excellent service — on time departures and arrival, prompt courteous service at check-in and in-flight and of course, safety.

All those things that make an airline achieve a valued reputation are made possible by the people who work for the airline. After all the anguish of the past week, things will never be the same again for PAL, people wise. The rank and file workers of PALEA may be gone but the flight attendants are still there and their relationship with PAL management had been shaky. If it wasn’t, the flight attendants in the flight mentioned by Ms. de Guzman in her column would have been more helpful to the passengers.

The finances of PAL, while improving, are still not that great. It is very vulnerable to upward oil price movements. An Ateneo student, a child of PAL employees and who described herself as the illegitimate daughter of Lucio Tan because she owes her education to her parents’ job in PAL, wrote an emotional blog on the heartlessness of the PALEA layoffs. She cited PAL’s profitability of P5 billion as proof that there is no need to carry on the outsourcing strategy.

That’s the problem with the Philippine Peso. People see a billion pesos and they think that’s a lot of money. Well, it is for ordinary mortals like us but for an international airline, a billion pesos is nothing much. It could be just the amount of money PAL will lose if oil prices go up by $1 a barrel and we know by how much oil prices move up when it does move up these days.

I understand that when an A320 goes for a full tank of jet fuel, it costs about a million pesos to fill up 23,250 liters. A B747 with its 210,000 liters capacity will cost P9 million to fill up. So let us not get lost in the millions and billions in a business like the airline industry’s and make unwarranted conclusions about profitability.

PAL lost $10.6 million for the first quarter of this fiscal year, which ended June 30, compared with a net profit of $31.6 million a year earlier. It made $72.5 million in the 12 months up to March this year but lost $14.4 million the previous fiscal year. I understand PAL lost $312 million over two years and that’s P13.4 billion of losses right there at P43:$1.

PAL has also seen a gradual slowdown in traffic demand, especially for leisure travelers. Even if it has more seats, CebPac already flies more passengers. All of PAL’s competitors in the domestic and most competitors in the Asian regional markets are budget carriers (the latest one being Air Asia Philippines) with lower overhead, thanks to outsourcing. If it wants to be competitive, it has to adopt a business model like that of its competitors.

Should MVP and RSA or any prospective buyer be looking at PAL’s fleet of 36 aircrafts as reason enough to buy PAL? Probably not. The Asian Wall Street Journal reported that PAL’s fleet “needs to be replaced with newer technology and more fuel-efficient aircraft over the next few years as they reach the end of their economic lives.”

The most valuable assets of PAL now are its routes. But is it worth buying the whole airline, staff headaches and all? Probably not. If PAL is allowed to go under, its routes will have to be redistributed by government to those interested and capable like PAL’s current competitors or a new airline that will rise from its ashes.

From the perspective of Lucio Tan, I get the impression that the taipan has had it and is looking for a way out that is least painful. He probably regrets making the decision to take over PAL management from Tonyboy Cojuangco over some disagreement. He has lost more money on the airline than that initial investment. I am told he kept on putting in fresh capital to keep PAL flying because he could not bear the thought that he has failed to turn it around.

But the taipan is getting old and if he was able to suppress his ego enough to sell control of his tobacco company to Philip Morris, he has less emotional ties to Philippine Airlines than to Fortune Tobacco. Besides, he now has AirPhil Express, a new airline with the right business model that will keep him in the airline industry. Government, even if political pressure is exerted to take PAL over, does not have the resources to get the airline back.

Maybe PAL should just be allowed to fly into the sunset the same way that the proud PanAM, the international flag carrier of the United States for many years, was allowed to fade away when the economics of that airline no longer made sense. With its shaky finances and now, its damaged brand reputation due to labor problems, there may no other choice.

This is not heartless capitalism at work. This is just the reality of doing business... specially in today’s extremely competitive world. If this happens, thanks to PALEA, 7,000 instead of 2,000 jobs would have been lost. They should have learned from the American auto workers union that worked with management to save GM and Chrysler. It may be too late for PAL now.

Source: DEMAND AND SUPPLY By: Boo Chanco (The Philippine Star)