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By Darwin G. Amojelar, Reporter
THE Philippines’ leading airlines are
rethinking their expansion plans in the face of skyrocketing fuel
prices and a slowdown in the domestic economy.
Around the world, carriers have been shedding
routes and reducing frequencies to cope with record jet fuel costs.
In the US, airlines are exploring possible mergers, while at least
one Asian carrier went belly up a few months ago.
Up until the middle of this month, Philippine
Airlines (PAL) and Cebu Pacific have been scrambling to maintain
load factors by bidding down fares. The carriers are bracing for the
likely reduction in Filipinos’ travel plans as record inflation
eats into their discretionary spending.
Price increases accelerated to a nine-year high
of 9.6 percent last month, with food prices rising by double-digits.
A Bangko Sentral ng Pilipinas (BSP) survey showed that consumer
confidence is at its lowest in more than a year, with Filipinos
bearish about economic prospects in the next 12 months.
Last month, Cebu Pacific offered at least
half-a-million “free” seats in its domestic and international
routes, provided the traveler takes the flight in the second half of
this year.
On the heels of its rival’s announcement, PAL
launched discounted one-way fares for numerous destinations both
here and abroad starting at P88 also for the second semester.
A week later, Cebu Pacific took the price war
one notch higher, as it offered to subsidize customers’ fuel and
insurance surcharges. The move is seen to trim airfares by at least
a third for domestic routes.
Margin squeeze amid re-fleeting
While the price war would benefit consumers,
this would also put a squeeze on airlines’ margins at a time when
both carriers should start recovering huge investments made in
replacing their ageing aircraft. The present economic difficulties
couldn’t have come at a worse time, as both are amid their
respective re-fleeting programs.
Jaime J. Bautista, PAL president told The Manila
Times that the flag carrier will push through with the acquisition
of more aircraft this year.
“We have no plans to cancel or defer aircraft
orders this year. We want to operate more fuel efficient airplanes
in response to the rising fuel prices,” Bautista said.
For this year the Lucio Tan-owned airline will
take delivery of four Airbus 320s from July to November, as well as
four Q400s. From 2009 to 2011, the carrier will take delivery of six
Boeing 777-300 Extended Range aircraft.
Unit Air Philippines will also acquire up to six
Bombardier Q300 turbo-prop aircraft at a cost of $56 million to
serve its expanded route network. The carrier signed a firm order
with Bombardier Aerospace for three 50-seat aircraft, with
deliveries seen this year. Bautista had said that PAL will spend
about $1.4 billion for its acquisitions.
Cebu Pacific last year said it set aside $670
million to beef up its aircraft, unveiling what it claims to be
Asia’s youngest fleet. The Go-kongwei-owned carrier’s
re-fleeting includes the acquisition of fourteen ATR72-500 aircraft
at a cost of $250 million. These new units would be used for its
domestic expansion.
For this year, the company allotted about $300
million to fund the acquisition of Airbus 320 and ATR 72-500
aircraft.
Candice Iyog, Cebu Pacific’s vice president
for marketing and product, said the company is not canceling any
purchases. “All scheduled deliveries are on schedule. We have
completed our re-fleeting last year. We ended 2007 with 15 brand new
aircraft,” she said, adding that by the end of this year, Cebu
Pacific will have a fleet of 25.
Iyog said that of the 10 brand new aircraft,
four are A320s and six, ATRs. The carrier will take delivery of six
ATRs this year and four next year, as well as four A320s this year.
Carriers sought tax perks
It helps that both airlines have sought tax
perks and other incentives from the government for their re-fleeting
programs. Cebu Pacific secured such breaks from the Board of
Investments, while PAL is seeking similar incentives for its own
upgrade.
Both airlines maintain options to purchase
additional aircraft. Cebu Pacific has eight options to purchase ATRs,
with the airline eyeing a fleet of 50 composed of 32 A320s and 18
ATRs by the end of 2012 if the carrier converts its options into
firm orders.
For its part, PAL has two options to acquire
B77-300ER jets. Its unit Air Philippines also has three options for
the Q300s.
“We will exercise [our] option to buy more
aircraft. Actually we already converted our option[s] to firm
order[s],” Bautista told the Times.
What will ultimately weigh on the carriers’
re-fleeting is how they intend to finance these acquisitions, as
financial markets remain volatile and higher inflation eating into
margins. Cebu Pacific already put off its planned initial public
offering due to the current market volatility, while Trustmark
Holdings Corp., which owns 97 percent of PAL Holdings Inc., likewise
deferred its planned sale of 1.56 billion shares, the proceeds of
which would be used for the airline’s re-fleeting.
Reduce unprofitable flights
Iyog said Cebu Pacific is looking at reducing
unprofitable flights to cope with rising costs.
“We are looking at routes that are
unprofitable or non-performing and see how we can either turn it
around or reduce the frequency or even suspend the flights,” she
said.
“We need to cut to make sure that our
operations are efficient,” she added.
PAL is also considering this option.
“In light of the current fuel crisis, we are
back in the drawing boards discussing our options. Most airlines in
Europe and America have instituted drastic measures to address this
concern. They cut back on their capacities and route network,”
Bautista said.
Recently, the flag carrier began limiting free
check-in baggage to 50 pounds per person on its North American
service. It’s budget brand, PAL Express, however, said it would
add five routes to its Cebu hub starting next month.
“Fuel cost is becoming a very big percentage
of our operations. We want to target a higher income, but with the
present increasing fuel, we might not be able to reach the target
because we cannot pass on everything to the passengers. But we will
still grow our revenue at least 8 percent to 10 percent,” Bautista
said.
“We only collect part of the fuel cost, part
of it really affects the bottom line of the airlines,” he said.
“We want the traveling public to afford the
fare. If we charge very high fares it also affects the appetite of
travelers to fly,” he added.
Fuel accounts for about 35 percent to 40 percent
of an airline’s operating cost per passenger, and is the
second-highest expense next to labor. Regulators allow carriers to
impose a fuel surcharge, which is a temporary relief to help
airlines recover losses they incur from higher jet fuel prices.
Both airlines likewise hedge their fuel
requirements. Rolando Estabillo, PAL vice president for corporate
communications said the flag carrier has realized gains in excess of
$32 million for the fiscal year 2006 to 2007 through its hedging
strategies. The carrier hedges, buys in advance at a fixed price,
almost 60 percent of its requirements.
Lance Gokongwei, Cebu Pacific president, had
said the airline hedged about 420,000 barrels of fuel this year at
prices below than current levels.
Rising jet fuel to cut profits
Both airlines nevertheless conceded that rising
jet fuel prices may cut profits this year.
“Of course there is an impact because [fuel
is] the largest component of our costs. But we’re managing it,”
Iyog said.
Indeed, Cebu Pacific reported a lower net income
of P389.23 million in the first quarter of the year from P559.85
million in the same period last year. Higher operations-related
expenses, particularly fuel costs, which recorded a 47.7-percent
increase to P1.48 billion from P1.01 billion last year, was
responsible for this reduction.
Rival PAL saw a net loss of $11.3 million in the
third quarter ending December owing to higher fuel expenses. The
airline’s fuel expense alone rose to $121.5 million as a result of
the increase in the average oil price from $79.19 a barrel in 2006
to $92.83 a barrel last year. The airline has yet to announce its
full year financial performance ending March.
The International Air Transport Association
trimmed significantly its financial forecast for this year to a loss
of $2.3 billion from the previous estimate of a profit of $4.5
billion. The forecast uses a consensus oil price of $106.5 per
barrel crude. The industry’s total fuel bill this year is expected
to amount to $176 billion, or about 34 percent of operating costs.
Last week, oil hit a fresh record above $140 per
barrel.
Porvenir Porciuncula, Civil Aeronautics Board
(CAB) deputy executive director and head of economic planning, said
domestic travel is projected to grow by 15 percent this year,
slowing down from 22.7 percent last year.
“We expect slower growth this year especially
that the price of basic commodities are higher,” he said, adding
that rising prices could take the itch out of Filipinos’ travel
bug.
In the first quarter of the year, domestic air
travel expanded 14 percent to 2.73 million from 2.39 million in the
same period last year.
CAB said the country’s five major carriers’
seat capacity went up by 7.3 percent to 3.37 million from last
year’s 3.15 million, resulting in an average passenger load factor
of 81 percent. A year ago, the industry’s load factor, which
measures the number of seats occupied during a flight, was 76
percent.
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