What Lies Ahead for PAL and Zest Air?

A strike now may just kill PAL

By Boo Chanco

March 28, 2011

I was afraid something like this will happen. As I watched the 70th anniversary presentation of Philippine Airlines that recalled memorable events in its corporate history, I felt a foreboding that this could be its last hurrah. Asia’s First Airline, like the country it proudly represents abroad, needs to do serious rethinking of where it stands, where it wants to go and how to get there.

Like the country, PAL was ahead of almost everybody in the region. But somewhere along the way the airline was, like the country, badly served by the politicians who led Asia’s first Republic. Not only did they abuse the airline to attain their jetsetter reputations, they forced the airline to hire their protégés to the point that it became, and still is, overstaffed and uncompetitive.

Today, the airline is already in trouble even without the strike threat. Fuel prices are going to the stratosphere. Competition is getting fiercer than it ever was. World economies are still under threat of a double dip recession. And it isn’t easy to have big overhead costs and try to recover increased operating costs in a very competitive environment.

When the pilots of PAL last had a strike, the airline still enjoyed a lion’s share of the domestic market. Because PAL was then still a near monopoly, the strike was a pain to the public. Government had to resort to extraordinary measures like allowing Cathay Pacific to operate domestic routes to minimize the strike’s negative impact on the economy. But today, PAL has very strong domestic competitors. In fact, Cebu Pacific, one of the many new local airlines, now carries more passengers between our islands than PAL.

There are other airlines too that will be ready to pick up the slack left by a Philippine Airlines grounded by a strike. I was just talking last week with Alfred Yao, the owner of Zest Air, and he impressed me as an entrepreneur with an aggressiveness that could make his airline a strong competitor for PAL not just in the domestic market but regionally as well.

Mr. Yao told me he was buying more Airbus 320s to serve local and international routes. He said he now has twice weekly flights on the Shanghai-Kalibo route, increasing to four weekly in June, opening Boracay to an increasingly prosperous Chinese market.

Zest Air also flies the Seoul-Kalibo route four times a week and increasing to daily by June, with planeloads of vacationing Korean tourists. Zest also flies Pusan-Kalibo twice a week now.

And he told me Zest Air will also fly between Beijing and Palawan starting late April, opening a new direct destination for Chinese tourists. Zest will also fly between Beijing and Kalibo by late June. Also by June, Zest Air will be flying to Singapore, joining PAL, Cebu Pacific, SEAir-Tiger Air and AirPhil Express in linking the city state with the Philippines.

Mr. Yao said he is not afraid of P-Noy’s pocket open skies even if he also shares the demand for reciprocity aired by his competitors. But instead of complaining about it, he is trying to move ahead of the foreign airlines who may decide to take advantage of the new E.O. That explains his decision to bring international passengers directly to Palawan.

Then there is AirAsia that will establish a local subsidiary with majority control under Tonyboy Cojuangco. SEAir, on the other hand, is tying up with Tiger Air, a Singaporean budget carrier designed for tough competition. And there is AirPhil Express, practically a sister airline of PAL but one whose business model and staff structure are geared to enable it to compete in today’s turbulent skies.

There is no doubt about how tough competition is these days. Let us listen to Alfred Yao of Zest Air. “We have very good service,” he said, emphasizing the airline’s so-called value proposition for its clients. “Our people are very friendly. Price-wise, we provide very affordable prices that are within reach of Filipinos. Despite stiff competition, we are doing pretty well.”

As for Cebu Pacific, it flew 10.5 million passengers last year. This year, it expects that figure to go up to 12 million, of which 10 million would be using the NAIA Terminal 3, almost using up the terminal’s rated capacity of 13 million.

Despite the brave words of its executives during their 70th anniversary celebration, Philippine Airlines is in serious crisis. It needs a new business model in order to survive. Like what happened to Japan Airlines, PAL needs to reorganize to make it more nimble in today’s environment. It can no longer afford to have three times the number of employees Cebu Pacific has.

The restructuring of PAL that its union is vigorously objecting to is a survival response. This is probably why P-Noy upheld the position of the Department of Labor allowing it to do so. As I had previously written here, the employees union should learn from the example of the American automotive unions. When it became clear that GM, Ford and Chrysler would go belly up unless the unions worked with management and government to save the car companies, the United Auto Workers or UAW decided that cooperation was the better deal.

The union may be overestimating the importance of the airline’s survival to its owners. I see a very strong incentive on the part of the owners to let the airline fold up if the strike materializes and successfully grounds its flights. Most of its aircrafts are on lease anyway, and the lease can be transferred to AirPhil Express as it takes over PAL’s old routes.

On the marketing side, the worse part of a strike threat is the reluctance of passengers to do advance booking, something that helps the airline plan better. A passenger will not risk buying a ticket for a flight two months or more ahead of time if there is any danger that a strike may strand him here or in a foreign port. That crank call on a San Francisco bound PAL flight, hopefully, isn’t related to the labor problems of the airline because pranks like that can ruin an airline’s reputation.

It is crunch time for PAL and every stakeholder must decide if they want to save the airline or bury it for good. Government should not be expected to save PAL in the mistaken notion that its survival is in the national interest. Unlike in the past, if PAL goes belly up, there are enough competitors to take over its market and provide the service almost as if nothing happened.

The world has changed drastically in recent years. Job security can no longer be guaranteed in a globalized world where stiff competition is the name of the game. PAL is still organized under the rules of a more genteel world that had long ago changed. The new rules of the game in today’s business world may not be for the better in humane terms but businesses can only play by the new rules or perish.

A strike at this time may kill the airline. That does not do the union members any good. And while the owners may get hurt as well, they are in a better position to bounce back quickly as their Plan B, Airphil Express, is already up and running.

About 2,600 rank and file employees will be retrenched under the plan but more than 4,000 will retain their jobs in an airline that is better equipped to compete. And for those who will be retrenched, they will get financial and other benefits and be first in line for jobs in the outsource company that will take over the functions. That sounds better than killing the airline and almost 7000 employees losing their jobs. If the airline keels over because of the strike, all 7000 employees fall in line with other creditors for any financial claims.

Hopefully reason rather than emotion prevails so that Asia’s First Airline can still proudly fly the national colors in all corners of the world. For the PAL union to strike now is like cutting their nose to spite their face. It just doesn’t work for their benefit or anyone else’s other than PAL’s competitors who will gladly divide among themselves the still formidable market share of Asia’s First.

Boo Chanco’s e-mail address is bchanco@gmail.com. He is also on Twitter@boochanco.

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