PAA Upgrades Fleet

Takes A321neo to Address Growth

22 November 2019



Philippines AirAsia, Inc.(PAA) is acquiring Airbus A321neos to upgrade its existing fleet of Airbus A320s beginning next year, the Company official said yesterday.

“We continue to achieve our operational goals with our existing 24 A320s. Investing in newer additional aircraft will be advantageous for any airline in a slot-constrained environment,” Philippines AirAsia Chief Executive Officer Ricky P. Isla said in Hmaburg Thursday.

Isla said the PAA fleet of thirty (30) A321neos is already included by the AirAsia Group orders for 353 planes from Airbus.

“In fact, the delivery of this particular model is part of AirAsia’s plan to move from its existing fleet of A320neo aircraft to the larger A321neo”, says Isla.

AirAsia Berhad revealed the order for the A321neo at the Paris Air Show this year and announced the conversion of 253 A320neos to the larger A321neos types. This will make AirAsia the largest A321neo operator in the world.

The larger A321neo offers 50 seats more over the current A320neos. The existing fleet of A320s seats 180 passengers. It also provides 40% more cargo space for services to routes they currently operates.

“Eventually, majority of our aircraft will be A321neos and this is across the whole fleet,” AirAsia Group Aircraft Planning & Evaluation Head Matthew Glaus said at the delivery Center.

PAA said the new aircraft will be use for destinations in Hong Kong, China, Korea, Japan, and Malaysia. It will also service Cebu, Davao, Iloilo, and Bacolod from Manila.

Limited airport slots, particularly in Manila’s Ninoy Aquino International Airport, are a consideration in tapping these A321neos as PAA growth stagnate for lack of capacity increase.

“Eventually, the standard will be the A321neo aircraft across our fleet including the Philippines,” Mr. Glaus said.

AirAsia’s current fleet consists of 194 A320CEOs (68 fitted with Sharklets), 40 A320Neos, 36 A330s, and two A330Neos. It has backlog orders for 13 A320Neos, 352 A321Neos, 30 A321XLRs, and 78 A330-900Neos intended for Malaysia, Indonesia, Thailand, Philippines, Japan and India. The A333neos are intended for Air Asia X in Malaysia, Thailand, Indonesia, and the Philippines.
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PR113 Mayday

22 November 2019












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Decoding PAL Losses

Actual Losses and Paper Losses



18 November 2019

PAL Holdings disclosed Thursday through regulatory filing that Philippine Airlines (PAL) losses widen at the end of the third quarter to to ₱8.5 billion from last year’s ₱3.92 billion, as interest expenses and financing charges increased.

PAL said losses came after adopting new accounting rules effective January 1, 2019 on leased planes previously not reflected on the balance sheet.

The new accounting rules is "The Philippine Financial Reporting Standard (PFRS)" 16, which requires lessees to recognize all leases, whether operating lease or a finance lease, on their balance sheet except for relatively small-value assets and leases with terms of 12 months or less.

The lessee is required to recognize a right-to-use asset and a lease liability, measured at the discounted value of the future lease payments in the balance sheet. A depreciation expense of the right-to-use asset and the interest charged on the outstanding lease liability are then recognized in the Income Statement. Any lease payment is treated as a reduction from the lease liability.

Unlike Cebu Pacific which leases all their planes under operating leases, Philippine Airlines has both finance leases and operating leases.

Philippine Airlines Fleet 2019
AIRCRAFTFINANCE LEASEOPERATING LEASE
B77W46
A35906
A333510
A321N7                   0
A321915
A320910
DH485
DH340
TOTAL4652


According to BIR in its new Revenue Regulations (RR) No. 19-86, Finance lease or full payout lease as “a contract involving payment over an obligatory period (also called primary or basic period) of specified rental amounts for the use of a lessor’s property, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessor’s borrowing costs and profits.”

Operating lease on the other hand is “a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset of the [sic] primary lease period.”

To put it very simple, finance lease is like buying a new car on bank mortgage and operating lease is renting a car for a certain period of time.

To identify the characteristics that distinguished a capital lease from an operating lease, are the following four criteria under the generally accepted accounting principles (GAAP):

1. A lease that transfers ownership of the leased asset to the lessee at the end of the lease term
2. A lease containing an option allowing the lessee to purchase the leased asset at a bargain price at the end of lease term
3. A lease term greater than or equal to 75% of the asset’s economic life
4. A lease where the present value of the minimum lease payments (including any required lessee guarantee of residual value of the leased asset to the lessor at the end of the lease term) was greater than or equal to 90% of the fair value of the leased asset at the inception of the lease.

If any single criterion was met, a lease was deemed to be a capital lease for the lessee, requiring the leased asset and the related lease liability to be listed on the balance sheet. For the lessor, it was deemed either a sales-type lease or a direct financing lease, to be reflected on the balance sheet as a lease receivable. Leases not meeting any of the four criteria were considered operating leases for both lessees and lessors.

With PAL, most of their brand new fleet comprises operating leases. Meaning, the owners of the aircraft are aircraft lessors such as GE Capital Aviation Services (GECAS), a financial institutions whose rules are subject to regulations that allowed them to keep leased assets on their books only briefly, not long-term. They favored treatment as sales-type or direct financing leases.

This is the same reason GECAS created subsidiary PK AirFinance and Tamweel Aviation Finance to deal with lease payments roughly equivalent to 12 years typical for wide body planes or 75% of the assets economic life.

It doesn't mean operating lease payments wasn't paid before. Its just that its not reported in the balance sheet, for a reason. Operating leases are counted as off-balance sheet financing to keep the ratio of debt to equity low.

Historically, operating leases have enabled American firms to keep billions of dollars of assets and liabilities from being recorded on their balance sheets which resulted to corporate fraud starting from ENRON accounting scandal 18 years ago prompting the United States to adopt the Sarbanes-Oxley (SOX) Act to protect investors from corporate fraud.

With the new financial system, it will provide investors with greater transparency and higher quality financial reports.And that also makes PAL non-operating expense huge.

For income tax purposes, as has been the longstanding tax treatment, only the periodic lease payments are treated as deductible expenses given that the substance of the transaction does not change but only the accounting disclosure, which in effect translate to mere paper losses and not actual losses of the airline.

As the famous Enron accountant and Finance Chief Andrew Fastow remarks,"Accounting isn't straightforward - 10% is black and white and 90% is in the grey area.

So, was there money losses or just paper losses? Lets check the financial report submitted to PSE.

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DHL Express Opens Cebu

13 November 2019

Flies Hongkong-Cebu



DHL Express has officially inaugurated its first Airbus A300-600 freight aircraft dedicated to servicing Air Cargo operations in the Philippines.

The inbound aircraft traverses the Hong Kong-Manila-Cebu route and vice versa which arrived Manila and Cebu at dawn, allowing urgent delivery of parcels to their recipients.

Meanwhile, it’s outbound aircraft departs in the evening, provides overnight connections to key Asian countries, and next-day delivery to other parts of the globe.

The A300 aircraft, which is co-owned by Air Hong Kong Limited and Cathay Pacific, carries a maximum of 54 tons of cargo.

Eight A300-600 freighters were bought by DHL from Air Hong Kong and leased back to the carrier as part of their 15-year carriage agreement — a move to support DHL’s rapid growth in the Asia Pacific region.

Nurhayati Abdullah, DHL Express country manager, said that through their new cargo aircraft, DHL could service more customers in key VisMin areas and those at MEPZ (Mactan Export Processing Zone) in Cebu which comprises 60 percent of their customer base in Visayas and Mindanao.

DHL Express operates two flights in Manila and Cebu to Hongkong everyday. 


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