PAL drops three non-core units

To pay $46 million maturing debts

April 19, 2010

Lean and Mean

Philippine Airlines (PAL) has announced Saturday that it will spin-off three non-core units effective June 1, 2010 to generate fresh cash as it reorganizes into a leaner, more efficient company.

PAL CCO Richard Miller, Standing second from left.

The affected units are in-flight catering services, airport services ( which include ground handling, cargo terminal/handling, and ramp handling), and call center reservations. All affected regular positions will be deemed abolished from PAL’s table of organization effective at the close of business hours on May 31.

“Given this grim scenario, PAL has no choice but to restructure. It must also sell and/or cease operations of non-core businesses since no airline in Asia, or the world for that matter, continue to operate non-core businesses” says PAL chief commercial group adviser Richard Miller in a press briefing.

The selling price was not however disclosed but the airline said it will be used to pay maturing debts.

The airline justified its restructuring plan due to adverse operating factors beyond its control which in fact plagued the airline industry worldwide. Among the problems raised by PAL includes liberalization of the commercial aviation industry, worldwide economic recession slowing passenger traffic movements which also was preceded by record-high oil prices in 2008-2009 period.

Debt Payments

The cost-cutting measures are designed for the survival of the national carrier which failed to generate new capital investments from new and existing stockholders particularly from the Tan Group which refused to raised fresh capital. The government is also not inclined to bail out the airline considering its current financial state.

“PAL has to meet its huge outstanding obligations as they fall due to prevent creditors from taking over the business,” Miller stressed.

PAL reported $350 million in losses during the last two fiscal years. Its remaining equity has also dropped to over $1.1 million as of February 2010 making investments in the airline almost worthless to generate confidence from new investors.

PAL already trimmed its net loss to $40.2 million in the first nine months of its fiscal year ending March 2010 from $330.2 million recorded the same period a year earlier. The company expects to break-even this year.

“PAL did its best to adjust to the harsh operating environment. It implemented a series of cost-cutting initiatives, including a manpower rationalization program in September 2009 that affected more than 400 executives and administrative employees.” Miller said.

In 2000, PAL sold its Maintenance and Engineering Department to Lufthansa Technik Philippines (LTP) as part of the company's rehabilitation plan.

Flat International Growth

PAL expects the growth projection this year to be almost flat, with total passengers carried expected to reach nine million by the end of its fiscal year on March 31, or almost the same as the 8.96 million passengers flow in the last fiscal year, mainly fueled by the domestic market which only account almost 25% of its gross revenue.

In 2009, the airline carried 8.96 million passengers, up 17.1 percent higher than what it carried in 2008. Currently,it flew 7.5 million passengers ending December 31, 37 percent of which are international passengers while the rest are domestic traffic.

Richard Miller said that from April 2009 to January 2010, the number of international passengers flown dropped six percent while those of domestic passengers grew 18 percent.

While international passengers account for only 37 percent of total passengers carried, PAL’s international business contributes 75 percent to total revenues.

Miller said that PAL will focus its expansion in Asia as it adds new regional routes to India and more China destinations.

3,000 jobs to be delisted from PAL's payroll

Some 3,000 workers are set to lose their jobs by end-May when the country’s flag carrier implements its spinoff-outsourcing plans, President Jaime Bautista’s letter to the union said.

The next phase of the restructuring program will affect PAL’s medical, information technology unit, and some human resource and administrative positions, added Bautista. But details of the next phase of the restrucurting program have yet to be finalized.

Palea president Gerardo Rivera said on Sunday that they were slightly caught by surprise with the content of Bautista’s April 16, 2010, letter “since he didn’t raise this during our meeting with him on April 8.”

He said Bautista even assured the Palea leaders that the ills of PAL—a $46.5-million obligation maturing by June 2010, among others—wouldn’t affect the manpower.

“Sure, there were what I call pocket outsourcing, with some jobs being outsourced, but not at this scale and imminence.”

In his letter, Bautista said the company has “implemented a manpower rationalization program affecting more than 400 executives and administrative employees” since September last year.

Rivera said the union “will not take this issue sitting down as the welfare of the families of those affected are at stake.”

He added that beginning Monday, the union would try to sit down with the management to find alternative options to this decision as they will try to exhaust legal means to respond to this issue.

He said only a thousand of the estimated total 4,000 PAL employees will not be affected by the layoff if it pushes through, mostly comprising the pilots and flight crews.