By Arjay L. Balinbin, Reporter

On June 6, a healthy baby boy named Pali was born on a Philippine Airlines (PAL) flight between Dubai and Manila.

“The name combines PAL and Ali, which means ‘most esteemed’ in Arabic,” PAL Spokesperson Cielo C. Villaluna said on her Facebook page.

It’s a rare bit of good news for airlines everywhere, which have been devastated by the pandemic as borders close and fearful travelers cancel their plans. The lockdown in the Philippines also focused on Luzon, which had most of the country’s international gateways and its largest pool of travelers — devastating domestic tourism as well.

The list of international industry titans that required bailouts is sobering, led by Singapore Airlines Ltd.’s $13 billion. Deutsche Lufthansa AG’s package from the German government is about $10.1 billion. Hong Kong’s Cathay Pacific Airways Ltd. secured a $5 billion bailout.

It’s not yet clear how much the airline industry in the Philippines will receive, but the size of the ask is staggering — P8.6 billion a month, according to an industry proposal before Congress.

Air Carriers Association of the Philippines Executive Director Roberto C. O. Lim told the Senate in May that the industry could lose up to $4.9 billion in 2020, with 500,000 workers at risk of displacement, he added, citing estimates from the International Air Transport Association (IATA).

ACAP’s members are PAL, Cebu Air, Inc. (Cebu Pacific), Philippines AirAsia, Inc., Air Philippines Corp. (PAL Express), and Cebgo, Inc.

“This is unprecedented for the commercial aviation industry. Its impact will last until an effective vaccine is discovered,” Avelino D.L. Zapanta, a Philippine aviation industry expert, said.

He noted the industry had survived crises before but the current one is a perfect storm, and estimated that it may take about five years for passenger demand to return to 50% of pre-pandemic levels, assuming a vaccine is available within the next two years.

ASSISTANCE
ACAP’s Mr. Lim said the industry’s bailout proposal breaks down into P1.3 billion for wage subsidies, P500 million for fees to be foregone by the government, and P6.8 billion for working capital.

He noted that airlines might be able to sustain 20-30% of their pre-outbreak network due to “lack of consumer confidence” and restrictions on domestic travel set by local government units.

Mr. Zapanta added that as it is with schools, the key to restoring confidence in air travel is a vaccine.

“Remember, that is also the apprehension of parents in allowing their children back to school. Some are saying no vaccine, no school,” he said.

Airlines started operating commercial flights in early June after quarantine restrictions were eased.

On June 4, the House of Representatives approved on third and final reading a P1.3-trillion stimulus package called ARISE (Accelerated Recovery and Investments Stimulus for the Economy) bill, the new name for what had been called the proposed Philippine Economic Stimulus Act (PESA).

Under the measure, this year the transportation industry will receive P70 billion this year, while the tourism sector will receive P58 billion.

The Transportation department said the transportation industry’s share of the package “will cover the needed assistance in the recovery of the aviation sector” including wages, fees due to governments, and working capital.

Is the rescue package enough? Mr. Zapanta said: “Any industry is dependent on demand. If the demand is not there, the rescue package will be for naught.”

He noted that the government’s intention over the short term is “to keep the industry alive by coming up with measures to protect the airlines from bankruptcy.”

Airlines also sought government credit guarantees, access to emergency lines of credit for six months of operations, and long-term facilities at below-market rates or guarantees to allow them to restructure their debt and obtain better terms from aircraft leasing companies and creditors.

They likewise sought a full waiver on all navigational and airport charges, which include airport office rentals and land leases, until the end of 2020.

Mr. Zapanta said substantial financial assistance “will be needed and more meaningful” in the medium term. “That’s five to seven years from now, when demand will return and heavy re-investment in fleet expansion is needed,” he added.

STRONGEST
Mr. Zapanta noted that both PAL and Cebu Pacific are exposed because of recent fleet expansion, suggesting they were carrying “huge liabilities” when the pandemic hit.

“Both have equity holders with deep pockets based on popular perceptions. Cebu Pacific is reported to have unloaded some aircraft already,” Mr. Zapanta said.

In a disclosure to the stock exchange on May 18, Cebu Pacific said it was undertaking an overall review of its long-term fleet plan, “notwithstanding that it already has a very conservative fleet growth plan compared to other low-cost carriers in the industry, with a five-year estimated growth of only 8-9%.”

“Cebu Pacific has begun discussions with suppliers on this overall fleet plan and schedule, to establish flexibility to adapt to current events,” the budget carrier said.

As for Philippines AirAsia, Mr. Zapanta said the low-cost airline’s future will depend on the mood of the minority shareholders, the founders of AirAsia Bhd. of Malaysia, which first developed the AirAsia brand. The Philippine arm is majority-owned by the family of Representative Michael L. Romero.

He believes PAL will have the “strongest staying power based on experience and ownership commitment.”

Asked whether low-cost product offerings can be sustained, Mr. Zapanta said: “The low-cost business model will be one of the biggest victims of the pandemic. The ability to offer low fares was based on reduced operating costs, sustained by huge demand generated by low fares. Without the demand, the low-cost carrier (LCC) equation is drastically skewed. The LCC cannot sustain low fares without low operating costs. Absence of demand makes low fares unsustainable.”

He added: “The yield per passenger from very few passengers must be able to sustain the operating cost. That means increased fares. The full-service airlines will be in better position after the pandemic.”

Mr. Zapanta said operations over the short term will be some form of full service, focused on safety.

“Once conditions normalize, the LCC might stage a comeback,” he said.

RIGHT-SIZING
PAL cut about 300 jobs in February to help it recover from its 2019 losses, which worsened in the first two months of 2020 due to the coronavirus outbreak.

PAL Holdings, Inc., the listed operator of PAL, reported a net loss of P10.31 billion last year, more than double the year-earlier loss.

PAL President and Chief Operating Officer Gilbert F. Santa Maria said in a television interview in May that the company was not in immediate danger of bankruptcy as its shareholders had injected around P15.2 billion into the flag carrier to keep it afloat.

Mr. Santa Maria said a “good chunk” of the losses last year were caused by the new lease accounting standard, PFRS 16.

Since 2017, PAL has lost a total of P17.6 billion.

In the first quarter , PAL’s net loss was P9.38 billion, more than 10 times the year-earlier level, as travel restrictions caused by the pandemic grounded its aircraft.

In March, budget carrier Cebu Pacific, operated by Cebu Air, Inc., announced that it would let go of its more than 150 cabin crew, as fewer flight staff were needed.

Cebu Pacific senior management officials also took a pay cut that month.

The budget carrier reported a net profit of P9.12 billion in 2019, sharply higher from the 2018 level, mainly driven by the passenger business , which accounted for revenue of P61.68 billion, up 13.7%.

The company registered a net loss of P1.18 billion in the first quarter.

Unlisted low-cost airline Philippines AirAsia, Inc. cut 12% of staff in June, while senior management also took pay cuts.

AirAsia said the moves will help the company ride out a prolonged period of “extremely low travel demand” while minimizing the impact on its employees in junior posts.

ACAP’s Mr. Lim said in April that airlines were losing P7 billion per lockdown month and have had to issue ticket refunds of P4 billion.

“If you aggregate the amounts for the members of ACAP, if you look at the average, the fixed cost that they incur… this is the cost that they have to pay even if they are not flying, around P7 billion a month,” he said.

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