PAL to spin off 3 non-core business units

MANILA, Philippines – To prevent the company from bleeding further, Philippine Airlines (PAL) will implement the next phase of its restructuring program, starting with the spin-off of three non-core units, effective at the close of business hours on May 31, 2010.

The affected units are inflight catering services, airport services (including ground handling, cargo terminal/handling, and ramp handling), and call center reservations.

PAL explained that it was constrained to pursue the restructuring plan due to several factors beyond its control that include, among others the unabated liberalization of the commercial aviation industry to the detriment of local players like PAL, the worldwide economic recession that led to a crippling slowdown in passenger traffic, as well as the record-high oil prices in 2008-2009 and the continuing increase in the price of aviation fuel, which account for nearly half of PAL’s operating expenses.

Apart from a series of cost-cutting initiatives, PAL said it approached several investors but none were interested given the fact that in 2009 alone, more than 20 airlines went bankrupt. “We approached government for help but it, too, was in dire financial straits,” it added.

Officials also blamed the downgrade of the Philippine aviation sector to Category II by the United States that prevented PAL from using brand new long-range aircraft or increasing flights to the US, and the subsequent blacklisting of Philippine carriers by the European Union, ruining the reputation of even those airlines with outstanding safety records like PAL.

On Dec. 26, 2007, the US Federal Aviation Administration (FAA) informed the government that the Philippines is being downgraded from Category 1 to 2 due to serious concerns about the local Air Transportation Office’s oversight of air carrier operations. Category 2 indicates that the FAA has assessed the Philippines’ civil aviation authority as not being compliant with International Civil Aviation Organization (ICAO) safety standards for the oversight of Philippine air carrier operations.

While under Category 2, Philippine air carriers flying to the US or PAL in particular can continue current operations to the US but will be under heightened FAA surveillance. PAL likewise cannot add to its existing US operations.

A review of the Philippines’ categorization is scheduled soon. PAL has expressed hope that the Philippines will be returned to its Category 1 status.

PAL noted that its financial situation continued to deteriorate, with the company sustaining over $350 million (or more than P15-billion) in losses during the last two fiscal years. Its equity has also dropped precipitously to a little over $1.1 million as of February 2010.

To stave off failure and protect company assets, PAL said it had to act quickly. “Given this grim scenario, PAL has no choice but to restructure. It must also sell and/or cease operations of non-core businesses since no airline in Asia, or the world for that matter, continue to operate non-core businesses. Moreover, PAL has to meet its huge outstanding obligations as they fall due to prevent creditors from taking over the business,” it stressed.

“PAL did its best to adjust to the harsh operating environment. It implemented a series of cost-cutting initiatives, including a manpower rationalization program in September 2009 that affected more than 400 executives and administrative employees. In 2000, PAL restructured its organization and spun-off/sold its Maintenance and Engineering Department to Lufthansa Technik Philippines (LTP),” PAL said.

The spin-off of the three non-core units is being pursued in accordance with labor laws and the collective bargaining agreement between PAL and the Philippine Airlines Employees Association (PALEA), the airline emphasized.

PAL also assured its customers that there will be no disruptions to its operations during the implementation of the restructuring measures.

“All domestic and international flights are being operated according to published departure and arrival times. All PAL offices and facilities in the Philippines and overseas remain open to serve customers. And all accredited travel agents continue to sell and honor PAL tickets,” it said.

Difficult as the restructuring program may be, PAL asked its stakeholders, particularly the unions, partners in the travel trade, government and, especially, the flying public, to support the flag carrier as it reorganizes into a leaner, more efficient company.

PAL earlier said that expects the growth in its traffic volume to be almost flat, with total passengers carried expected to reach nine million by the end of its fiscal year on March 31, or almost the same as the 8.96 million passengers flow in the last fiscal year.

Last year was a growth year for PAL in terms of traffic, with the 8.96 million passengers flown during the April 1, 2008 to March 31, 2009 period 17.1 percent higher than the 2007-2008 period.

For the first nine months of the current fiscal year, PAL flew 7.5 million passengers, of which 37 percent are international, and the bulk, domestic.

PAL chief commercial group adviser Richard Miller said that from April 2009 to January 2010, the number of international passengers flown dropped six percent while those of domestic passengers grew 18 percent.

While international passengers account for only 37 percent of total passengers carried, PAL’s international business contributes 75 percent to total revenues.

In the meantime, Miller said that until the market improves, PAL will focus its expansion to adding more regional routes, such as India and China. “Fuel prices are still a concern, because they are still moving up,” he added.

PAL has announced that it has trimmed its net loss to $40.2 million in the first nine months of its fiscal year ending March 2010 from  the $330.2 million recorded the same period a year earlier.

It attributed the current loss to sagging revenues brought about by the global economic slowdown that continues to depress air traffic.

PAL registered total revenues of $1.08 billion in the period April to December 2009, down 15 percent owing to the decline in both passenger and cargo revenues of 26 percent  to $805 million and 14 percent to $73.5 million, respectively.

While PAL transported 7.02 million passengers during the first nine months of the current fiscal year or  7.3 percent more than the 6.54 million passengers carried a year earlier, revenue passenger kilometers (RPK), the industry yardstick for passenger sales volume, decreased by 3.2 percent to 12.96 billion RPKs, indicating sluggish sales.

Passenger load factor was 73.91 percent, further sliding from the 76.12 percent recorded in the same span in 2008.

Despite the improvement in prices, fuel still accounts for the bulk of PAL’s operating expenses, making the flag carrier vulnerable to the volatile price swings of the commodity in the world market. –Mary Ann LL. Reyes (The Philippine Star)