REPORT BY NICHOLAS IONIDES IN MANILA
A little under four years ago, Philippine Airlines was forced into receivership. Today, while the carrier's troubles are still by no means over, work is very much in progress
Filipinos love the word "Mabuhay". It is used as a form of welcome, congratulations and thanks, among a host of other meanings. Philippine Airlines (PAL) even uses it as the name for its business class. The word itself, is from a verb meaning to live - ironic given that PAL itself barely survived the Asian economic downturn of 1997-1999.
A mere three-and-a-half years ago, PAL was forced into receivership after a strike by pilots and with a debt of more than $2.2 billion. Months later, after a strike by ground staff, it suspended all operations for nearly two weeks.
But PAL is now in a much stronger position. While it faces new challenges as the global industry reels from September's attacks in the USA, company president and chief operating officer Avelino Zapanta is confident the carrier is better placed than many to weather the storm. "We are confident that we will survive this crisis, although perhaps the targets we have set for ourselves may not be realised," he says.
The unassuming, down-to-earth father of six and grandfather of 11 is one who gave up on PAL at the height of its troubles, opting for early retirement in February 1999 after five former Cathay Pacific executives were brought in to try and save the carrier from liquidation.
Zapanta, then senior vice-president for sales and services, left PAL after 33 years. He had risen through the ranks, joining as a trainee in 1966 and working from 1967 as a freight clerk.
The ex-Cathay executives ran into opposition from PAL's chairman and majority owner Lucio Tan, a powerful local beer and tobacco tycoon. So Zapanta was recalled after just two months of retirement and offered the job of running the troubled carrier. He was the first PAL president to rise up from within, and this, employees say, enables him to speak with them at their level and understand their concerns. Partly because of his background, labour relations at the airline are now as good as they have ever been.
Zapanta believes in 60-year-old PAL and its future in the Philippine market, despite a new government that supports the carrier less than the administration of Joseph Estrada, former Philippines president and an ally of Tan. Estrada was thrown out of office earlier this year.
Zapanta also says he still expects PAL to post a profit for the year ending 31 March 2002, which would be its third in as many years. However, it will now be lower than first thought. "Our targets have been very ambitious" says Zapanta, with PAL looking for a bottom line of a billion pesos ($19 million) up from some 400 million pesos last year. "That will be affected, but I am confident we will end the year still positive, with a net profit. We have accepted that the dramatic bottom line we wanted is not going to happen," he adds.
After potential suitors, including Cathay, walked away from buy-in negotiations late in 1998, PAL avoided liquidation by winning approval from key creditors and the Philippine Securities and Exchange Commission for a rehabilitation plan that called for it to be out of receivership by 2004.
The scheme called for a sharply reduced fleet and route network, the sale of non-core assets, such as its engineering operation (which it sold to a group involving Lufthansa Technik) as well as a $200 million cash injection.
PAL's fleet was slashed to 22 aircraft from 54 as part of the rehabilitation plan, and its staff base of 7,000 is below half of what it was in mid-1998. But operational targets were beaten in 1999 and last year, and receivers allowed it to increase its fleet and aggressively reinstate international services. It now operates 32 aircraft and serves 20 international destinations, as well as a further six through codeshare agreements.
Flotation plans
Zapanta has said repeatedly since taking over as president that he hopes the carrier can be out of receivership as early as the end of next year. This will require an initial public offering (IPO) to raise cash for expansion and to help rework debt repayment schedules, bringing them back to pre-rehabilitation plan levels. PAL managed to extend debt repayment timetables when its rehabilitation plan was approved.
"Everything has been turned topsy-turvy with this situation," Zapanta says, adding that getting out of receivership early will be determined by whether PAL is able to post a third consecutive year of profitability. "We said we would like to do it in a most dramatic way so the airline would become an attractive outfit to invest in, and perhaps do an IPO.,"he says. "But, as we all know, the environment for the stock markets is way down all over the globe and it's telling us that now is not really time to do an IPO. But we're talking the latter part of 2002 or 2003, so we'll have to see how things go. But if things get worse than they are now, we may have to forego such a plan because it won't be viable, and won't attract any investors."
PAL has rationalised operations slightly since the September attacks, cutting some international services and dropping non-urgent spending plans. It is also considering cutting some domestic services to and from its second domestic hub at Cebu from March, leaving most flights into and out of the city to Air Philippines - also controlled by Tan - and arch-rival Cebu Pacific.
Causing concern, meanwhile, is a sharp drop-off in Japanese traffic since the government in Tokyo issued a blanket travel advisory on the Philippines in October, partly because of kidnappings of foreign nationals.
Middle East traffic is also not as strong as it used to be. PAL recently suspended operations to Ad Dammam, Saudi Arabia, and is mulling dropping its service to Riyadh, although talks are being held with Saudi Arabian Airlines about a codeshare agreement.
The carrier, however, does not foresee having to park aircraft because of route cuts, primarily because in October it boldly launched new services to Bangkok, Melbourne and Shanghai.
US traffic has also been holding up surprisingly well, Zapanta says, adding that load factors on key services to Honolulu, Los Angeles and San Francisco are at a break-even 60-65% level. "Filipinos travel during good times and bad times," he says. "So we're not very concerned about the US traffic."
The global industry downturn has, however, forced PAL to drop plans to lease additional Boeing 747-400s for transpacific services. It has also put on hold plans to make a return to Europe. It dropped all European operations after entering into receivership but had, since earlier this year, been in talks with Alitalia and KLM on codeshare arrangements. But the global drop in traffic seems to have put these plans on the back burner. "I guess now that is going to be a far-fetched thing because of what has happened," Zapanta says.
At the same time, PAL faces other challenges at home. A third passenger terminal is due to open at Manila's Ninoy Aquino International Airport (NAIA) late next year, and is meant only for international flights. This will force the carrier to split its domestic and overseas operations, which since late 1999 have been under one roof at NAIA's Terminal 2.
Terminal challenge
Zapanta says PAL saves millions by having operations under one roof - from reduced staffing to lower aircraft positioning charges. It also gives the carrier a marketing advantage, as more passengers are inclined to connect from PAL international flights to PAL domestic flights, rather than to other domestic airlines' flights operating out of Terminal 1.
Zapanta says PAL is not against the new terminal, which is being built by a consortium known as Philippine International Air Terminals (PIATCO) and includes Germany's Fraport Frankfurt Airport group as a 30% shareholder. The airline is opposed, however, to any move that would split its operations. Zapanta expects to reach an acceptable agreement with PIATCO before the opening, but is prepared to mount a legal challenge if necessary.
Despite the challenges facing PAL,59-year-old Zapanta says he is a relaxed man, who manages to spend time with his family while tackling day-to-day work issues. "I'm sleeping well at the moment because we feel that we will still be able to end the year with a positive bottom line," he says.
And if things do not work out, Zapanta has a fallback option. During his brief retirement in 1999, he began writing a book on 90 years of Philippine aviation. He managed to complete a few chapters and draw up a list of players in the local industry before putting the project on hold.
"I will eventually continue with it, because by then it's going to be 100 years of Philippine aviation," he jokes. "That's a better title than 90 years. Also, I suppose by then the book will have to end with me written into it."
Source: Airline Business
