It’s Official, Philippine Airlines Orders 6 A350-900s

Philippine Airlines (PAL) has signed a Memorandum of Understanding (MOU) with Airbus for the order of six A350-900s, with another six purchase options. The news was announced today at the Singapore Airshow by Jaime J. Bautista, President & COO of Philippine Airlines and Fabrice Brégier, President & CEO of Airbus.

Philippine Airlines will configure its A350-900s with a premium three class layout and will operate the aircraft on non-stop flights from Manila to the US west coast and New York, as well as on services to new destinations in Europe. The aircraft will enable the carrier to operate non-stop service on the 8,000 nautical mile New York – Manila route all year round with a full passenger load.

“After a thorough commercial and technical evaluation, the A350 came out on top in meeting our demanding requirements,” said Jaime J. Bautista, President & COO of Philippine Airlines. “With the A350 we will be flying the world‘s most modern airliner, bringing greatly enhanced efficiency and superior passenger comfort. The A350’s range capability has been an important factor in our decision, enabling us to offer non-stop service on all our premium long haul routes.”

“We are pleased to welcome Philippine Airlines as the latest airline to select the all-new A350 XWB,” said Fabrice Brégier Airbus President & CEO. “The A350 XWB has set new standards, combining extra-long range capability with the lowest operating costs of any aircraft in the larger twin aisle category. Passengers flying with Philippine Airlines can look forward to the new levels of comfort offered by the aircraft, with a wider and quieter cabin, and more personal space for all.”

The A350 XWB is world’s latest generation airliner and the newest member of the Airbus widebody family. Featuring the most modern aerodynamic design, carbon fibre fuselage and wings, plus new fuel-efficient Rolls-Royce Trent XWB engines, the A350 XWB brings a 25 percent reduction in fuel burn and emissions, and significantly lower maintenance costs. For passengers the extra-wide cabin offers more personal space in all classes, including 18-inch wide seats as standard in economy class.

To date, Airbus has recorded 777 firm orders for the A350 XWB from 41 customers worldwide, already making it one of the most successful widebody aircraft ever.


CAPA Analysis: PAL Closes In On A350-900 HGW

The A340-300s are now slated to be phased out as new generation wide body aircraft are delivered. PAL is close to committing to at least six A350-900s for delivery from 2017. A formal announcement is expected by the end of 2015.

PAL is looking to acquire a new high gross weight (HGW) version of the A350-900 which is available from 2017 and will enable non-stop Manila-New York flights in both directions without payload limitations. Airbus has informed PAL that it does not need the recently launched A350-900ULR, which will be available from 2018 and has been ordered by Singapore Airlines for non-stops to the US.

Trans-Pacific flights from Manila are about three hours shorter than flights from Singapore. But flights from eastern North America to Manila are still slightly too long for the current version of the A350-900 or the 777-300ER.

PAL is also looking at using A350-900 HGW aircraft to potentially upgrade Toronto to non-stop and launch a fourth destination in the US. Chicago is the most likely new destination for the A350-900 HGW.

PAL has also been evaluating other potential US markets in both the east and west coasts. New destinations in the western US can be launched using the existing wide body fleet, potentially as early as late 2016 as the two additional 777-300ERs are delivered. PAL previously served Las Vegas and at one point was considering San Diego, which has a large Filipino community.

A fleet of eight 777-300ERs and six A350-900s will enable modest growth of the long-haul network with a focus on North America. Even if PAL ultimately opts for a few more A350s the long-haul growth should be manageable.

PAL is likely to remain for at least the medium-term the only non-stop operator between Philippines and continental North America, which has a large a loyal Filipino population. PAL is fortunate to only have to compete against North Asian carriers in the Philippines-North America market as one-stops via the Middle East is a much longer option.


CAPA Analysis: Philippine Airlines’ Int’l Expansion Continues with 5 New Destinations, A350-900 HGW Orders

(Image Source: P. Pigeyre / Master Films Copyright Airbus)

Philippine Airlines (PAL) is further expanding its international operation as it grows its fleet and improves utilization of its existing wide body aircraft. PAL’s international network will exceed 41 destinations in Jan-2016 compared to only 25 in Jan-2013.

PAL is adding five international destinations over the next two months, including two destinations in the Middle East and three in Australasia. Long-haul growth will resume in Mar-2016 with the launch of services from Cebu to Los Angeles, which will be PAL’s first wide body international route from Cebu.

Opportunities to further growth the long-haul operation will come in late 2016 as PAL adds two more 777-300ERs. The expected acquisition of a new higher gross weight version of the A350-900 will be used to upgrade New York to non-stops in 2017 and potentially be deployed to upgrade Toronto to non-stop and launch a fourth US destination.


PHL-UAE Air Agreement: Filipino Consumers Win; Poses Threat To Local Airlines (1 of 3)


Rolando R. Zamora, 51, thinks about his family often. His work in Dubai as a site engineer is quite taxing, but it’s the only thing he can do to provide for his family.

He still remembers how hard it was to pack his bags that fateful Tuesday of July in 1992, when his youngest, then 9-month-old Nicole, was crying nonstop.

Zamora kept telling himself that leaving his family behind to seek greener pastures will allow his children to avoid the hardships he had to endure.

“It will be better,” he recalled saying to himself. “It will be better for all of us.”

“I didn’t want my kids to work behind counters at night just so they could finance their studies. I want them to have a good life,” the father of four said.

Despite his hesitation, Zamora left Manila for Dubai and has worked there ever since. He goes home to his family every year, bringing with him several boxes of gifts for his loved ones.

In 2003 he brought his family to Dubai and lived there for several years. But raising his kids in a foreign land—where his seemingly handsome salary according to Philippine standards was meager in the Middle East—proved to be harder than he thought.

So, after five years, Zamora and his family decided to go back to their home in Marikina City.

“It was a hard decision, but buying a plane ticket back to the Philippines and to Dubai is much cheaper than raising my family in the Middle East,” he said.

Zamora is just one of the thousands of overseas Filipino workers (OFWs) currently based in the Middle East who rely on cheap airline tickets to be with their loved ones in the Philippines as frequently as they want to.

Data from the Philippine Overseas Employment Administration showed that the Middle East remains as the top destination for OFWs in 2014. A total of 885,541 land-based workers were deployed to the Gulf last year. The figure is more than half of the 1.43 million overseas workers registered with the government.

“I get to save a lot of money from cheaper airline tickets. The few hundred riyals or so that I save from the fare, I use to buy more gifts for my family,” Zamora said.

Airline-ticket prices to the Middle East are expected to go down this year, thanks to the growing competition in the aviation market in the Philippines. Today, there are about seven local and international carriers flying directly to the Arab gulf.

Last month Manila and the United Arab Emirates (UAE) signed a new memorandum of agreement expanding the air-traffic rights between the two nations.

The parties agreed to increase the maximum number of flights per week for each country from the current 28 flights to 35, subject to the condition that the UAE carrier operating additional flights to Manila is bound to also operate separately to Clark or Cebu within one year from signing of the memorandum.

The conditional agreement, described by Civil Aeronautics Board Executive Director Carmelo L. Arcilla as “more or less fair” to both parties, aims to stimulate the traffic in developmental gateways outside Manila.

With the signing of the agreement, Filipino and Arab carriers may now expand their operations in the Gulf, intensifying the already-stiff competition in the said market. This will effectively lower the cost of fares to Gulf destinations.

Currently, a roundtrip ticket from Manila to Dubai costs about P53,130 in Philippine Airlines, P54,630 in Emirates and P31,029 in Cebu Pacific.

These rates could go down before the year ends, when Emirates and Etihad Airways are expected to mount more flights during the holidays.

“When you open the competition, it means that you will have more flights. The more flights you have, the more options you get, and the more choices you have, fares tend to go lower,” Arcilla said.

Lower fares are expected to be welcomed by both tourists and OFWs.

Tourism Secretary Ramon R. Jimenez Jr. said the increased capacity between the Philippines and the Arab gulf ultimately is “good news” for the country’s tourism sector.

“When you hear news that there are new seats, this is always good news. It just simply means that new people will come,” he said.

Jimenez characterized the Middle Eastern market as a huge market that is highly untapped by the Philippines.

“It is a gigantic market, yet few tourists visit the country. We’re marketing very heavily in these markets. We’re doing promotions and we are trying to encourage more seats,” Jimenez said.

During the first six months of the year, only 38,144 tourists from the Middle East visited the Philippines, contributing less than 2 percent to total visitor arrivals.

Also, the additional seat entitlements would mean better access to the Philippines for tourists from European markets, which go through Abu Dhabi and Dubai.

Emirates and Etihad are airlines that generally make use of the hub-and-spoke system, which is essentially a system of connections in which traffic moves along spokes connected to the hub at the center.

In the case of Emirates, the hub is the main airport in Dubai, and the spokes are scattered around the world like a chariot wheel.

Such a system has an exponential effect. It can connect Manila to more than 200 destinations around the world without having to have a direct connection to, say, a secluded city.

Tourism Promotions Board (TPB) Chief Operating Officer Domingo Ramon C. Enerio said his group expects to see development from the Scandinavian bloc and the Benelux countries, as well as traditional top visitor sources—the United Kingdom, Germany and France—thanks to the expanded seat capacity.

The European bloc contributed only 105,330 visitors to the 2.6 million tourist arrivals in the Philippines as of end-June. This means that the market contributed only 4.02 percent of total arrivals for the first six months of the year, way below the tourism department’s 10-percent to 15-percent target.

“It would be good to have this percentage grow exponentially in the next couple of years because they are a long-stay market, and they spend more. They’re a high-yield market,” Enerio said.

The tourism body expects to net P350 billion in tourism receipts this year.

Experts said, however, that while the tourism sector would benefit from the expansion of air-traffic rights between the Philippines and the UAE, this could pose a threat to Filipino carriers.

“The increase in frequency for UAE carriers generally favors tourism. It means more seats for foreign tourists no matter which airlines operate the capacity. That is why the travel and tour agencies, in contrast with the Philippine carriers, are rejoicing. The dilemma for the country is it might help improve tourism but at the expense of weakening its airlines,” Avelino L. Zapanta, an aviation expert, said.

Source: Lorenz Marasigan,

Philippine Airlines Studying Potential A340 Replacements

Philippine Airlines Boeing 777-300

Philippine Airlines (PR, Manila) president and Chief Operating Officer Jaime Bautista says his airline is studying the A350 and the B787 as potential replacements for its fleet of A340-300s.

Bautista told the Philippine Star newspaper in an interview this week that the airline would likely phase out its six A340s by 2020.

“We are in the process of preparing a long term fleet plan for PAL. What we have finalized is for domestic and regional only but for long haul, we have yet to finalize our fleet plan,” he said. “We will change the A340 over time because they are 12-year old airplanes. Maybe over the next five years.”

The type’s retirement was expected to occur much sooner but the recent slump in global petroleum prices has eased the pressure on the jets. The A340s, which collectively average 14.3 years of age, are currently used on flights to Bangkok Suvarnabhumi and Xiamen regionally as well as London Heathrow, Los Angeles Int’l, New York JFK, San Francisco, CA, and Vancouver Int’l internationally.

The Filipino carrier’s widebody fleet also includes six B777-300(ER)s and fifteen A330-300s.


Lufthansa Technik To Maintain Philippine Airlines Fleet

MANILA – The country’s flag carrier has tapped Lufthansa Technik Philippines Inc. (LTP) for the maintenance of its Airbus aircraft.

In a statement, Lucio Tan-led Philippine Airlines (PAL) awarded its two-year base maintenance service for its Airbus fleet to LTP.

LTP will handle all heavy maintenance visits for the A320s, A321s, A330s and A340s for calendar years 2015 and 2016. PAL didn’t disclose the value of the maintenance services contract. LTP is also the line maintenance service provider for PAL’s Boeing and Airbus aircraft.

At present, PAL has 73 aircraft, including six Airbus 330-300, six Boeing 777-300ER, 15 Airbus 321s, and several Airbus 320s.

Earlier, PAL president Jaime J. Bautista said it “agreed in principle” with Airbus to delay the delivery of aircraft orders up to 2024. PAL had sought delivery by 2020.

“This year, we should take delivery of 10 Airbus A321s, but we are working on a delivery of only five. So, the other 5 will be delivered sometime in 2020,” he said.

Of the five A321s, two would be delivered in March, another two in April and one in June.

The remaining 33 aircraft ordered from Airbus are scheduled for delivery until 2024.

From July to September last year, PAL Holdings Inc posted a comprehensive loss of P192.3 million, down by 82.5 percent from P1.09 billion in the same three months of the previous year. Revenue amounted to P25.03 billion, up by 38.9 percent from P18.02 billion previously.

Source: Darwin G. Amojelar,

Philippine Airlines: Deliveries of 38 Airbus Postponed


PHILIPPINE AIRLINES, Inc. (PAL) said on Thursday it would defer taking delivery of 38 Airbus jets, as it reviews operations after billionaire tycoon Lucio C. Tan resumed management control of the carrier, a senior company executive said.

The 38 Airbus planes — a mix of A320 single-aisle aircraft, A321 new engine option (NEO) and the wide body Airbus A330-300 — are the last of the planes the European aircraft manufacturer was supposed to deliver between 2014 and 2020 under a $7-billion purchase deal with PAL.

That purchase — a landmark for PAL — was made in 2012 when San Miguel Corp. was still at the helm, but changes to the deal have since been made after the Tan group took back control in September last year.

PAL said yesterday the deliveries now have to be postponed to 2024.

“We are working with Airbus on the deferment of our 38 Airbus planes to 2024, which was originally in 2020,” PAL President Jaime J. Bautista told reporters on the sidelines of an event in Pasay City.

“We should take delivery of 10 this year, but only five will be delivered as we asked them to delay the other five sometime in 2020.”

PAL had first contemplated adjusting the planes’ delivery schedule in October last year, with Mr. Bautista at the time saying that “there were too many orders from Mr. (Ramon S.) Ang’s management… We really have to check if the market we’re servicing now requires all these planes.”

In August 2012, PAL signed two separate purchase agreements with Airbus for 44 Airbus A320 and options for 20 of the upgraded A321 NEO variant for delivery between 2014 and 2020.

The second agreement covered an order of 10 wide body Airbus A330-300 and options for 10 more for delivery between 2014 and 2016.

In March 2014, PAL and Airbus agreed to an amendment to reduce the A330 order from 20 to 15. PAL then converted orders for five A330s to eight additional A321 NEOs, to be counted as part of the 20-unit NEO option.

Of the 12 remaining NEO option aircraft, PAL did not exercise its right to purchase eight. The option for the remaining four will expire in 2017.

“As of this month, we only have 38 remaining Airbus orders now out of the orders made in 2012. I think PAL group has ordered over 64 planes last 2012. Now, Airbus is taking delivery of five A321 this year, instead of 10, as we asked them defer it to 2020,” Mr. Bautista said.

According to the PAL president, “two A321 will be delivered in March, two in April and one in June.”

PAL currently has a 73-strong fleet: six Boeing 777-300ER, six Airbus 330-300, 15 Airbus 321, while the rest are Airbus 320 planes, Mr. Bautista said.

Airbus and PAL, according to Mr. Bautista, have “agreed in principle” but no date has been set for the formal signing of the agreement for the new delivery schedule.

PAL has “no plans of adding more Europe routes,” Mr. Bautista said, pointing out that “competition is stiff there.”

The airline has resumed flying to London in November 2013, marking its return to European skies after 15 years, after European aviation regulators dropped it from an aviation safety blacklist.

But PAL plans to mount flights to “Papua New Guinea soon to accommodate the growing number of Filipinos there,” Mr. Bautista said.

When asked how PAL’s plan to get a strategic investor is progressing, Mr. Bautista said: “Not soon… You should present a very good business plan… which we have to finalize first. And the delivery of Airbus orders is part of the business plan so for the moment ‘no.’”

Source: Chrisee J. V. Dela Paz, Reporter,

Philippine Airlines Slows Expansion By Subleasing A330s & Reducing A321s Orders

Philippine Airlines’ new executive and ownership team is preparing a new business plan which should see the flag carrier slow down international expansion and become a more rational competitor. The Lucio Tan Group and former president Jaime Bautista are back in charge, ending a two and a half year stint with San Miguel and its president, Ramon Ang, in control.

PAL’s biggest short-term challenge is excess aircraft, the result of an overambitious order placed withAirbus in 2012 after San Miguel took control. PAL has several surplus newly delivered A330s which are now being under-utilised and could soon face a surplus of narrowbody aircraft as it is committed to taking 10 additional A321s in 2015.

If PAL does not succeed at finding new homes for excess A330s and is not able to defer or sublease future A320s it could be forced to pursue aggressive capacity expansion in both the domestic and international markets. Such expansion would make it difficult for PAL to be profitable and would also impact its competitors, particularly Cebu Pacific Air.

Lucio Tan retakes control of Philippine Airlines and PAL Express

Philippine conglomerate LT Group took back control of the flag carrier in late Oct-2014, completing a deal to buy back the 49% stakes in PAL and PAL Express which LT initially sold to Philippine conglomerate San Miguel in Apr-2012. LT had all along retained a majority stake but agreed to cede management control to San Miguel, resulting in the appointment of San Miguel president Ramon Ang as PAL president.

The original intent was for LT to later sell its remaining stakes in PAL and PAL Express to San Miguel and/or a new strategic investor which San Miguel was aiming to secure. But LT and San Miguel could never agree on a deal for the remaining stake while attempts to find a new strategic investor failed to bear fruit after talks with several foreign airline groups including All Nippon Airways. (There is still a possibility of a strategic stake sale materialising later.)

In Sep-2014 LT offered to buy back San Miguel’s share of PAL and PAL Express, which was previously known as AirPhil Express. The deal was completed in late Oct-2014 and Jaimie Bautista was appointed PAL’s new president, replacing Mr Ang.

LT now again owns 100% of PAL Express and about 89% of PAL Holdings. Individual shareholders account for the remaining 11% in PAL Holdings, which is listed on the Philippine Stock Exchange and is the parent of Philippine Airlines but not PAL Express.

Mr Bautista had been the president of PAL for several years prior to exiting in 2012 when LT ceded management control to San Miguel. He advised LT on the deal to regain control and initially returned to PAL in Sep-2014 as general manager.

PAL also appointed on 23-Oct-2014 several new board directors to take the seats that had been controlled by San Miguel. Several new executives including a new CFO were also appointed, replacing executives that had been seconded by San Miguel to PAL.

Other executives that were brought in under San Miguel’s tenure but were contracted directly by PAL (rather than on secondments from San Miguel) have stayed. This includes formerSpiceJet CEO Neil Mills, who joined PAL in 2013 as CEO advisor.

PAL to slow the pace of international expansion

The new executive team and board are now closely reviewing the previous business plan, which envisioned rapid growth of the fleet and international network. This review effectively began in Sep-2014 under Mr Bautista after San Miguel first agreed to sell back the stake to LT. Now that the deal is done and a new board is in place a new business plan can be prepared and implemented.

Under Mr Ang’s tenure, PAL added several medium/long-haul destinations and was planning to further expand the network in Europeand North America. PAL Holdings reported a 51% increase in passenger revenues in 2Q2014, driven mainly by the expansion of the international network. Monthly international passenger numbers were up between 15% and 39% the first seven months of 2014.

Most of the new medium/long-haul destinations that have already been launched are expected to be maintained including London, Toronto, Abu Dhabi, Dubai, Dammam and Riyadh. But PAL is expected to suspend plans for launching more new international destinations with the exception of New York and potentially Jeddah. PAL has already begun selling New York, which will be launched in Mar-2015 with four weekly flights via Vancouver.

San Miguel’s business plan envisioned multiple new destinations in both the US and continental Europe. None of the new destinations in the US after New York are expected to be pursued at least for the short to medium term.

In Europe the focus will be on improving the performance on the ManilaLondon Heathrow route, which is still unprofitable although load factor and yields have been on the rise after a dismal start. (The performance of London should also improve as PAL finally secured Russia overfly routes in late Oct-2014, enabling the carrier to significantly reduce the flight time to London. PAL however is still trying to secure betters slots from Heathrow which it needs to offer a full range of connections on the Manila end of the outbound leg.)

Philippine Airlines drops plan for 757s and Brisbane and Perth non-stops

Mr Bautista said in a recent meeting with CAPA that he expects PAL will also no longer pursue plans for further expansion in Australia. San Miguel had been planning to upgrade Brisbane to non-stop and re-launch Perth as a non-stop using a planned new fleet of 757s. San Miguel was also looking to upgrade Melbourne to daily. Sydney has already been upgraded to daily.

Melbourne is now served with three weekly widebody flights while Brisbane is currently served with three weekly A320 flights via Darwin. Manila-Darwin-Brisbane was launched in Jun-2013 along with Manila-Darwin-Perth, which was operated four times per week with A320s. Perth was quickly cut and Darwin and Brisbane could also now be suspended as the route has been unprofitable.

San Miguel planned to acquire 757s, which are able to operate non-stop from Manila to Perth – routes which were seen as too thin for A330s. Mr Bautista said San Miguel had put a down payment with Boeing for five ex-Shanghai Airlines 757s using its leasing subsidiary. (San Miguel set up a leasing company which now owns several of the Airbus aircraft that were added over the past two years. The leasing company had been 60% owned by San Miguel and 40% owned by PAL but the 60% stake has now been transferred to LT.)

Mr Bautista has been able to cancel the 757 deal with Boeing and get back the deposit. This was a sensible move as acquiring a new aircraft type for two likely marginal routes was extremely ambitious and risky.

Competition in the Philippines-Australia market has already intensified significantly as a result of Cebu Pacific’s Sep-2014 launch of flights to Sydney. Cebu Pacific is currently serving the route with four weekly flights, is adding a fifth frequency in Dec-2014 and is interested in securing more traffic rights to potentially increase Sydney to daily and launch Melbourne.

San Miguel long-haul expansion was more strategic than rational


San Miguel’s plan for rapid expansion in Australia was seen as an aggressive response to Cebu Pacific entering the market. Under San Miguel, PAL also quickly launched services to several cities in the Middle East which were being targeted by Cebu’s new long-haul operation.

Dubai, which was launched by PAL in Nov-2013 using A330s in single-class 414-seat configuration operated by PAL Express, has been highly unprofitable. Yields and load factors have been under pressure from the beginning as Cebu Pacific also launched Dubai in Oct-2013.

Cebu Pacific’s long-haul unit in Oct-2014 added services to Dammam and Riyadh, routes that PAL launched in late 2013 using A330s in all-economy configuration. For these routes, PAL mainline operates the aircraft.

The intensifying competition between the Philippines and the Middle East and PAL’s options for this market, including an enhanced partnership with Etihad (both PAL and Etihad now operate the Abu Dhabi-Manila route) will be examined in a later installment in this series of reports.

PAL ordered too many A330s

PAL’s fleet currently consist of 11 A330-300s while PAL Express has two A330-300s. All 13 aircraft have been delivered since Sep-2013 – a remarkably quick spool up period for a widebody fleet – and are part of the 64 aircraft deal that was forged with Airbus in 2012.

Philippine Airlines fleet summary: as of 5-Nov-2014

PAL Express fleet summary: as of 5-Nov-2014

Both PAL Express aircraft and six of the PAL A330-300s are in 414-seat configuration. The other five PAL aircraft are in two-class 368-seat configuration. PAL is slated to take two more 368-seat A330-300s by the end of Nov-2014, marking an end to the A330 portion of the 2012 order.

(Both A330 configurations have the same economy class product including extra legroom seats at the front three rows, which are sold as premium economy. The dual-cabin aircraft include 18 lie flat business class seats. Wireless IFE is provided, requiring economy passengers to bring their own tablets, instead of seatback monitors.)

The new A330-300s have been used partially to replace six older generation A330s, which were phased out earlier this year. But most of the aircraft were ordered for growth, with San Miguel opting to take eight aircraft in single class configuration in response to Cebu’s decision to launch a long-haul operation. The San Miguel aircraft order was clearly overambitious.

PAL initially ordered a more realistic 10 A330s but only a month later ordered another 10 A330s, lifting the total commitment to 20 aircraft. The San Miguel management team recognised in early 2014 that 20 A330s were too many and converted the last five of the A330-300 orders, slated to be delivered in 2015, to eight additional A321neo orders. (This lifted PAL’s A321neo commitment from 10 to 18 aircraft.)

But it was too late to potentially get out of any of the other 15 A330-300 commitments. Mr Bautista told CAPA that the best he could do upon rejoining PAL was to defer the Sep-2014 delivery to Oct-2014 and the two Oct-2014 deliveries to Nov-2014.

PAL has seven to eight excess A330s as utilisation rates are extremely low

PAL at this point has no use for the last two A330s but has to take the aircraft to meet its contractual commitment with Airbus. As it is the 13 current aircraft are being under-utilised, particularly the eight aircraft in single-class 414-seat configuration. Mr Bautista said these aircraft are only being used on the Dubai (daily), Dammam (three times per week) and Riyadh (four times per week) routes as well as on some Bangkok flights.

As a result the eight single class A330-300s are only being used about 330 hours per week, resulting in an average individual utilisation rate of less than six hours per day. This is a dismal figure for a fleet which has an average age of less than one year, particularly given that these aircraft are designed to compete against LCCs.

The utilisation rate of the five 368-seat A330s is slightly higher as these aircraft are currently being used to Abu Dhabi, Osaka and some flights to Hong Kong, Seoul and Tokyo Narita. But the rate will dip as the final two aircraft are added to the fleet.

The average utilisation rate for the 414-seat A330s will also likely dip further as PAL is planning to switch to the 368-seat two-class A330s on Manila-Bangkok as there is demand for a premium product on this route. PAL currently serves Manila-Bangkok with one daily A321 flight and one daily A330 flight.

Mr Bautista acknowledges the current PAL schedule only requires seven or eight A330s. PAL has been looking to sell or sublease the surplus aircraft. It prefers to offload the single-class aircraft as it sees a potential need for using most or all of the dual-class A330s. But the pool of potential buyers for the single-class aircraft is very limited as few airlines operate A330s in single-class configuration.

These aircraft are also now used, making it more difficult to place. Ironically one of the few operators of single-class A330s is Cebu Pacific, which is seeking to lease two additional A330-300s. But Cebu Pacific has rejected offers from PAL as it does not like the product that PAL uses and prefers to take new aircraft which it can configure with its own product.

A partial reconfiguration by adding business seats while keeping the economy cabin is one of several options being considered. Mr Bautista said that PAL could potentially use more than seven two-class A330s if the airline starts to use the type to Melbourne, Sydney and Honolulu. These routes are currently operated with A340-300s and require two to three aircraft, potentially reducing PAL’s requirement for offloading A330-300s to about five aircraft.

PAL struggles with newly acquired A340-300 fleet

PAL currently operates six A340-300s. These are ex-Iberia aircraft that were acquired under San Miguel’s tenure, with four being added in 2013 and two earlier this year.

San Miguel purchased the A340s to support accelerated expansion of the long-haul network as the A330 does not have the range to operate to Europe or North America non-stop. In addition to the three medium-haul routes (Melbourne, Sydney and Honolulu) the A340s are now used on PAL’s five weekly flights to London and two of its nine weekly flights to Los Angeles. The A340 is also scheduled to be used on the new route to New York via Vancouver when it is launched in Mar-2015. (In addition, the A340 will be used for three weekly additional seasonal frequencies to San Francisco from mid-Dec-2014 to mid-Jan-2015.)

Using the new A330-300 fleet on Sydney, Melbourne and Honolulu is sensible as they are significantly more efficient than the A340. But it would require PAL to under-utilise or cut its newly acquired A340-300 fleet.

The new management team would be keen to phase out the A340-300s as soon as possible and acquire additional 777-300ERs to support the long-haul network while using the A330s to take over medium-haul missions. But PAL would have to take a big hit to phase out A340-300s. PAL only acquired the aircraft over the last 18 months and is now investing further in the A340 fleet by installing the OnAir system. (There is no seatback IFE in the economy cabin.)

Another complication is a lack of availability for near-term 777-300ER delivery slots. Mr Bautista said so far PAL has been told the earliest slot is 2016.

PAL needs more 777-300ERs

PAL’s six 777-300ERs are now being used to operate daily flights to Los Angeles, San Francisco and Vancouver (with three of the Vancouver flights continuing on to Toronto). The 777-300ER fleet is not big enough to support the entire long-haul operation.

One intriguing option on the table is to swap with a leasing company its excess A330s for 777-300ERs. But this would be a difficult deal to complete as 777-300ERs are in high demand and leasing companies may not be interested in PAL’s A330s as they are no longer new and perhaps in a difficult configuration to remarket.

A widebody fleet consisting of just two types, A330s and 777-300ERs, is the ideal scenario for the LT Group and would allow PAL to complete the renewal of its fleet. PAL already phased out earlier this year its 747-400s fleet as well as older model A340s. These aircraft had been used on the US routes until the US FAA upgraded the Philippines to Category 1.

Under Category 2, PAL was unable to change aircraft gauge or expand in the US market, forcing it to retain ageing aircraft types. The decision to acquire 777-300ERs was initially made by Mr Bautista back in 2006, with the aircraft envisioned for US routes. The Philippineswas subsequently downgraded to Category 2 in 2008, forcing PAL to find alternative routes for the 777-300ERs as they were delivered. Category 1 was finally restored in Apr-2014.

PAL faces excess narrowbody issue as well

Unfortunately the fleet challenges PAL currently is grappling with are not limited to widebody aircraft. Mr Bautista said PAL is committed to taking in 2015 10 A321ceos from its narrowbody order. These are all growth aircraft as PAL does not have any A320 leases expiring until 2016.

PAL has so far taken delivery of 12 of the 34 A321ceos it ordered in 2012. The final 10 aircraft from this order are slated to be delivered in 2016.

The 2016 aircraft do not pose as much of a problem as 2015 aircraft because about half of the 2016 aircraft are earmarked as replacements. In 2017 PAL will start taking delivery of the 18 A321neos it now has on order but this also does not pose a challenge as these are intended mainly as replacement for current generation A320 family aircraft.

PAL is now looking at alternatives for deferring, cancelling or subleasing several of the A320s slated for delivery in 2015. The commitment for 10 growth aircraft in a single year is another example of overambitious expansion under the business plan that was prepared by San Miguel. PAL at this point only has a need for two or three of these aircraft.

The group currently has 34 A320 family aircraft in its active fleet. The 12 A321s, which have all been delivered since mid-2013, are all operated by PAL mainline. PAL earlier this year phased out its remaining A319s.

Of the 22 A320s, 12 are currently flown by PAL Express and 10 at PAL mainline. All the PAL Express aircraft are in the domestic market while virtually all PAL narrowbody flights are in the regional international market. All of the PAL A320s are in two-class configuration while some of the A320s at PAL Express are in single class configuration. These are the aircraft originally operated by AirPhil, which followed the budget carrier model before rebranding as PAL Express in early 2012 and transitioning to the full-service regional model.

PAL Express may pursue domestic expansion in 2015

LT at least at this point does not see the need to return to its old multi-brand strategy with AirPhil operating alongside PAL and focusing on the bottom end of the market. But Mr Bautista says the preferred configuration for the domestic market is all-economy aircraft with extra legroom seats at the front. PAL Express – which offers frills including snacks, drinks and checked bags – now sells a premium economy product, which provides extra legroom seats on the all-economy A320s while on the dual-class A320s an actual business class seat is provided for the same price.

If PAL is unable to find new homes for the A321s it is committed to taking in 2015, the fallback plan is to add capacity, primarily in the domestic market. PAL Express, which has taken over almost all of the group’s domestic flights, would likely be the operator of the additional aircraft.

The prospect of the PAL group adding capacity in the domestic market is a concern as the domestic market has returned to profitability in 2014. The domestic market previously suffered from overcapacity and irrational competition. Consolidation and capacity reductions have ushered in much more favourable market conditions.

Cebu Pacific reported record profits in 2Q2014 driven primarily by the improvement in the domestic market. Mr Bautista said PAL Express also has been profitable in the domestic market. (PAL Express’ overall profitability was dragged down by its only international route, Dubai.)

Aircraft challenges will make it difficult for PAL to be profitable in short to medium term

PAL Holdings, which includes PAL mainline but not PAL Express, also returned to the black in 1H2014. But PAL Holdings is 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.

San Miguel deserves credit for several improvements under its watch and investing significantly in PAL’s product. But San Miguel made some big mistakes with the fleet.

The overambitious order with Airbus has put PAL in a dificult position. The decision to acquire used four engined A340s, an aircraft type avoided by virtually every other airline group, was also rash. Thankfully at least the even more shortsighted decision to acquire 757s has been undone.

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. The group is already saddled with the cost of carrying excess aircraft, which is impacting utilisation rates. It may have to take substantial one-time hits if it subleases excess A330s and A320s and if it reduces or phases out its newly acquired A340-300 fleet.

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


Philippine Airlines Considers Delaying Airbus Deliveries

Brand new RP-C8760, cn 1510.
Brand new RP-C8760, cn 1510.

MANILA (Reuters) – Philippine Airlines (PAL) is considering delaying delivery of Airbus (AIR.PA) planes it has on order as it reviews operations after billionaire tycoon Lucio Tan resumed management control of the carrier last month, a senior official said.

The airline is currently scheduled to take delivery of its 30th Airbus jet in November under a $7 billion (£4.36 billion) deal to buy 44 new A320 and 20 new A330 aircraft signed in 2012, including firm orders and options for more purchases.

It is scheduled to take 10 more aircraft in 2015 and another 10 in 2016. In August, the airline decided not to exercise an option to purchase eight Airbus A321 NEOs.

“We have to discuss with Airbus,” PAL general manager Jaime Bautista told reporters at an event in Manila late on Tuesday. “It can be deferred, but of course that entails cost if you defer delivery.”

Asia’s first airline has decided to indefinitely defer the planned opening of new routes in Europe, instead focusing on profitable routes in North America amid a shortage of aircraft for long-haul flights in its fleet, Bautista said.

The airline would review its current routes as it had a surplus of short- and medium-haul aircraft.

“We really have to check whether the market requires all these airplanes,” Bautista said.

PAL is working on a plan to return to profitability after two consecutive years in the red, with a view to potentially attracting a “strategic partner”, Bautista said.

“It’s more challenging now because this is an airline with more airplanes and there is more competition,” he said.

The review comes after the Tan group last month bought out its partner in PAL, diversified conglomerate San Miguel Corp (SMC.PS), in a $1.3 billion deal.

PAL currently has codeshare agreements with carriers like Emirates Airline EMIRA.UL, Etihad Airways, All Nippon Airways and Cathay Pacific (0293.HK).

Shares in PAL Holdings had slipped 0.5 percent, in step with the broader market index’s (.PSI) 0.5 percent decline as of 0634 BST.

(Reporting by Neil Jerome Morales; Editing by Stephen Coates)