Aviation think tank sees PAL booking losses this yr and next

MANILA, Philippines - Leading aviation think tank Centre for Asia Pacific Aviation (CAPA) expects the parent firm of national flag carrier Philippine Airlines Inc. (PAL) of taipan Lucio Tan to book losses this year and next year due to excess aircraft order under its ambitious fleet renewal program.

In its latest analysis entitled “PAL looks to slow fleet expansion by subleasing Airbus A330s and reducing A321 commitments,” CAPA said listed PAL Holdings Inc. is expected to book a net loss this year and more losses next year due to the massive refleeting involving the acquisition of 100 brand new aircraft undertaken by previous shareholder diversified conglomerate San Miguel Corp. (SMC).

“PAL Holdings, which includes PAL mainline but not PAL Express, also returned to the black in the first half of 2014. 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,” it added.

The Tan Group through Buona Sorte and Horizon Global Investments bought back the 49-percent interest of San Miguel Equity Investments Inc. of diversified conglomerate San Miguel Corp. (SMC) last Sept. 15 for a total consideration of $1.3 billion.

It would be recalled that SMC through San Miguel Equity Investments Inc. (SMEII) bought a 49-percent stake in Trustmark Holdings Corp. in April 2012 for a total consideration of $500 million. It embarked on an ambitious massive fleet renewal program involving the acquisition of 100 brand new aircraft.

Trustmark owns and controls 89.78 percent of the issued and outstanding shares of PAL Holdings that owns 98.27 percent of PAL.

SMC entered into two separate deals worth about $10 billion with the EADS Group for the acquisition of 65 brand new Airbus aircraft as part of the fleet renewal program.

CAPA said the “overambitious” order with Airbus, including A340 aircraft as well as the acquisition of Boeing 757 aircraft, has put PAL in a difficult position.

“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 utilization rates,” CAPA added.

It warned that PAL would 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.

The think tank said 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,” CAPA said.

It said PAL’s new executive and ownership team under President and chief operating officer Jaime Bautista is preparing a new business plan involving a slow down in international expansion and becoming a more rational competitor.

SMC’s business plan envisioned multiple new destinations in both the US and continental Europe. 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.