Against All Odds

Philippine Airlines has already taken off since its major crisis in J998. With 9/JJ, the
Iraq war, and SARS, its momentum has slowed down. But its turnaround is proving
to be unswerving. Now, it's poised to fly higher.
By Heinz Bulos
April 2004

ou probably remember watching
on teleision and reading in the
dailies the headline-grabbing
troubles o the country`s lag carrier,
Philippine Airlines ,PAL,. \ou probably
remember its current President and Chie
Lxecutie Oicer, Aelino Zapanta,
coolly answering the bombardment o
questions rom the press.

\ou probably remember what happened:
PAL, one o the largest companies in the
country, shut down its operations or to
two weeks. It was a rude awakening rom
top to bottom,` recalls Zapanta.

llashback two to three years earlier:
business taipan Lucio 1an, who took oer
the reigns o the airline in 1992, launched
an ambitious releeting program, with the
aim o making PAL a truly global airline.
1an ordered, under a capital lease
arrangement, 36 brand new aircrat or a
staggering sum o >4 billion.

1he timing couldn`t hae been worst. As
the aircrat were being deliered in 199,
the Asian inancial crisis hit. 1he company
had a brand new leet but there was no
traic. By this time, PAL was heaily in
debt, some >2.2 billion, owed mostly to
aircrat manuacturers. By the end o iscal
year 1998, PAL reported its largest annual
loss eer o P8.1 billion. Management
initiated cost-cutting measures that
included a large-scale retrenchment plan,
which proed to be unpopular with the
employees.

PAL pilots, thinking the company had
deep pockets with the massie releeting
program, opposed the measures and made
their own demands. lor 22 days that
began in June 1998, they held a strike,
paralyzing PAL`s domestic and
international operations. 1he strike was
later declared illegal. 1hen, the ground
crew ollowed suit with its own strike.
1hey were playing games,` says Zapanta,
and they were trying to orce the
situation.` \hat they didn`t know was
that PAL was in real inancial trouble.
1he only choice was to close down the
company,` Zapanta explains.

PAL earlier iled a petition with the
Philippine Securities and Lxchange
Commission ,SLC, or the approal o a
rehabilitation plan and or the
appointment o a rehabilitation receier.
1he plan was rejected by its creditors and
by the SLC. A ew months later, an
amended and restated rehabilitation plan
was approed. But the new plan required
resh capital inusion o >200 million,
which 1an, not inding any takers, later,
along with new inestors, had to cough
up.

1an earlier was so dismayed by the whole
situation that he was ready to gie the
company up to oreign interests. Ater
talks o a 50 buy-in deal with Cathay
Paciic bogged down, 1an hired key
executies rom Cathay, which ormed
Regent Star Serices, a management
adisory group that signed a ie-year
contract with PAL. By this time, around
lebruary 1999, Zapanta, who was then
senior ice-president or sales and
serices, chose to retire. I didn`t like the
\
prospect o PAL being run by oreigners,`
he says.

But 1an quickly terminated its contract
with Regent Star, which criticized PAL`s
management. le recalled Zapanta,
appointing him President in April 1999.

PAL had to shed much o its size. It cut
down the number o operating diisions
into three: commercial group, inance, and
operations. It laid o thousands o
employees. It reduced its leet rom 56
aircrat to 22, cut down its international
routes to those with the highest load
actors, and encouraged oluntary sta
retirements.

1he irst year o the ten-year
rehabilitation, PAL posted a tiny income
o P44 million, ending six straight years o
massie losses. 1he second year, the
company reported P419 million, securing
one o the dramatic turnaround stories in
Philippine business. Prospects were so
optimistic that it was thought that PAL
would be out o receiership by then.

In the third year, the airline would hae
been in the black had it not been or the
debilitating impact o 9,11. It registered a
P1.6 billion net loss, with a dip in cargo
reenues and a spike in operating
expenses. But or iscal year 2002-2003,
PAL was back in the game, with net
income o P295 million, albeit much less
than the original target o a billion pesos,
due to the outbreak o the Iraq war and
the SARS scare.

liscal year 2003-2004 is another tough
year or the airline, as SARS adersely
aected its peak summer months o April
and May o 2003. Losses went up to P1.6
billion up to Noember. lortunately, the
company did extremely well in December
and January, recoering about two-thirds
o the losses, leaing just around P592
million to coer. 1he original estimated
net loss or the iscal year is P00 million
but Zapanta expresses optimism that with
the remaining two months o lebruary
and March ,as o press time,, there`s the
possibility that we can oerhaul it.` 1he
worst case scenario is minimal losses. Best
case is breakeen or a small, tidy proit.

1here`s something admirable about a
company that has weathered so many
crises year ater year. Granted, the ormer
monopoly and still dominant airline has
the built-in adantages o being the
incumbent player ,long history, strong
brand, entrenched routes, massie size,
existing inrastructure,, but it is now
operating in a dierent enironment that
is still highly regulated yet more
competitie.

Despite all these, PAL is pushing orward.
A lot o lessons can be learned about how
the company managed through tough
times and surie one crisis ater another.

Unite the company. 1he most important
actor, Zapanta explains, which led to
PAL`s turnaround and tenacity is the act
that the organization ater our ery sad
years o 1998 had united and started to
really work together as a team.`

A critical shit in the negotiations with
labor happened when the biggest union
was persuaded, with the help o Lstrada, a
long-time riend o 1an, to accept
management`s oer o equity in the
company and representation in the
airline`s board o directors in return or a
10-year reeze on strikes and the collectie
bargaining agreement.

Open the lines of communication.
Zapanta was able to get the entire PAL
organization to work together partly
because o the communication process he
started way back in 1999, something that
no administration in the past undertook.
Zapanta dubbed it Ugnayan`, which is all
about reaching out to the workorce.

Zapanta says, I still do it now, where I
talk to the workorce in their
workstations. \e hae ten major
workstations and I go there eery month
and talk to the people. I dialogue with
them, brie them about the perormance
o the company or each month-how we
did in terms o inancial perormance and
operational perormance. \e discuss
about our concerns, our industry
problems, how we can work together in
order to oercome the threats that are
coming out like SARS, the Iraq war, and
9,11. It`s really a marked improement in
the work attitude o the PAL people
because when they started to gel together
as an organization, we`e been able to
delier the goods.`

Larn their trust. Remember how the
relationship between management and
labor was so adersarial beore the
rehabilitation It was a diicult time to
regain mutual trust but openness and
transparency were keys to changing the
culture o the company.

Len union leaders were at irst skeptical
about Zapanta`s appointment, according
to an article in Asiaweek. But apparently,
he has 1an`s ull conidence. \ith PAL
perorming better than originally
projected at the beginning o its
receiership, well, the numbers speak or
themseles. Now, it seems he has gained
the support o the employees.

It helped that Zapanta rose rom the
ranks. le started with PAL 3 years ago
as a marketing clerk handling cargo.
Almost eery year, he got promoted to
arious leels in the company. I came
rom there, Zapanta points out. I started
as a rank and ile mysel. I know the
people, I worked with them. 1hey take
pride in the act that someone rom the
ranks hae been able to go up the ladder
o the hierarchy o the company. I think
that has a motiating eect on the
workorce.`

Management has also been true to its
word. Zapanta says they hang on to the
commitment o 1an that i operations
were proitable, the proits were to be
shared with the people. lor the past ie
years, the company has proided salary
adjustments een in tough times.

Create the right working environment.
PAL built on that trust by letting its
people do their jobs. Instead o micro-
managing, Zapanta gies his top
executies leeway o handle their respectie
areas o responsibility to delier what
they hae to delier.`

All I hae to do is gie them the working
enironment under industrial peace and
harmony with the workorce,` he
explains.

Zapanta credits his team-lenry So Uy,
Lxecutie Vice President - Commercial
Group, Julio lernandez, Senior Vice
President - Operations, and Andrew
luang, Senior Vice President & Chie
linancial Oicer-or deliering the kind
o perormance the airline needed to take
o.

Iocus on your market. PAL also
capitalized on its currently most proitable
market segments instead o experimenting
on new markets. 1hus, een as it pulled
out o the so-called missionary routes-
now sericed by secondary airlines such as
Asian Spirit and Sea Air-it continued to
expand in its primary markets.

PAL pursued more aggressie marketing,
ocusing on its core markets o the US,
north and south Asia. As ar as we`re
concerned, it`s a recoering market, not a
down market,` clariies Zapanta. Len in
our periods o diiculty, we are expanding
gradually.` lor instance, PAL has
introduced lights to Okinawa, Japan and
Malaysia.

1he US remains a major market or the
simple reason we haen`t really tapped the
general American market.` 1he company
is introducing more lights to the US, the
latest being Las Vegas. It recently acquired
a Boeing 4-400, its ith in its leet, to
add more capacity in this market.

China is another growth area. lrom three
lights, PAL is now lying daily to
Shanghai, as well as to Xiamen and long
Kong. Japan and Korea are also big
sources o traic, though growth has not
been great gien that it has already used
up its traic rights and the two countries
are not too keen on securing PAL more as
they haen`t used up their reciprocal
rights.

In all these destinations, the lilipino
market makes up the bulk-eighty
percent-o its passengers. Zapanta says,
1here`s something going or us that
other airlines in other countries don`t
hae-we hae this robust market o
oerseas lilipino workers and
who continue to trael despite all o these.
1hey hae to trael because that`s their
lielihood, they cannot be araid o SARS.
1he lilipino market is our most major
market. 1hat is why the ocal point o our
serice continues to be the and
Ol\s.`

Don't be trapped into a price war. It`s
tempting in a iercely competitie industry
to go head to head on price. Zapanta says
its local competitors, particularly its main
rial Cebu Paciic, hae always been
putting downward pricing pressure. Cebu
Paciic has positioned itsel as a low-cost
airline despite the act that they don`t it
the model o the low-cost airline
operations in the world,` says Zapanta.

Still, with the adantage o being a new
player, Cebu Paciic pursued low-cost
strategies, such as leasing a standardized
leet o only one aircrat that translated to
lower maintenance training expenses. PAL
has a mix o owned and under capital
lease as well as under operating lease o
arious Boeing and Airbus models.

1he dierence in ares is around P300
one way, P500-P600 roundtrip. Zapanta
claims, \e continue to be dominant
despite our higher ares,` which goes to
show that PAL has a dedicated and loyal
clientele, he adds.

Load actors on domestic lights hae
aeraged more than 0 per cent. And the
airline signiicantly improed its on-time
perormance to 90 percent punctuality.
Despite old jokes about its acronym being
PAL Always Late, many lilipinos still
preer PAL, which is perceied to oer
better serice and higher saety record.

Zapanta says the local competition didn`t
really eat up into their pie but actually
expanded it. \ith the low ares they
introduced especially at the start o their
operations, they were able to expand the
market.` Zapanta explains they attracted
the boat people` to ly instead. I won`t
be surprised i some o these same boat
people are now lying PAL. le also
welcomes the entry o the smaller airlines
that ly the secondary or missionary
routes, otherwise, the pressure will be on
us` to sere these markets.

In the international routes, the pressure is
rom the so-called six-reedom carriers,
such as Korean Air, Asiana, and China
Airlines, which are tapping markets rom
the Philippines to the US and carrying
them ia their hubs in Seoul or Narita.

1his is the so-called iller market, with
their aircrat already ull rom, say, Seoul
to the US. Zapanta explains, Because o
our modern computerized reseration
system, we`re able to open up a certain
portion o the seats or the iller market so
they can oer ery low ares to this iller
market. On our part, we`re pricing our
Manila-US traic as our bread-and-butter
market. 1hese are higher because we
cannot price the same way as Korean Air
is pricing the iller market. In the same
way, they`re pricing their Korean market
at a ery high leel - >800->1,000. But
they`re giing the lilipino market going to
the US ia Korea as low as >500->600.`

le adds, I we price at >400->500 our
Manila-US straight light, were would that
bring us \e would be losing! So we are
pricing like Korea is pricing their major
market. I we do otherwise, we would die
as an airline. Once we die, you think
Korean Airlines will continue to its price
o >400->500 No way. 1hat`s the thing
that we`re trying to get the lilipinos to
understand. Some are enamored o the
low ares o Korean Air and Asiana, but
they don`t know the long-term
repercussions. I that situation kills the
local carrier, then eentually they`ll be at
the mercy o the oreign carriers.`

Zapanta recalls a similar scenario in 1990
when PAL was down. Qantas and
Singapore Airlines, because they were the
only ones operating between Australia and
the Philippines, charged the ull, published
are. 1he passengers couldn`t do
anything. 1hey had the monopoly o the
market.`

Lmphasize your unique selling point.
Zapanta stresses, \e are still the choice
because we oer a good product-a non-
stop light, ery conenient, particularly
or elderly who do not want to
experience the hassle o connecting lights
in Seoul or Japan, waiting or hours. In
our light, it`s a no-hassle light. \ou sleep
it out all throughout. So we hae the bulk
o the market. As a matter o act, our
lights are ull.`

Buck trends if they don't make sense.
One major trend in the aiation industry is
the rise o the low-cost, no-rills airlines
such as Southwest Airlines. 1heir business
model goes against the established model
o the ull serice or legacy airlines, which
are losing money. 1hese newer airlines use
point-to-point instead o the hub-and-
spoke model. 1hey use smaller planes and
smaller airports. 1heir serice is sparse but
eicient. As such, they are able to operate
at low costs and charge accordingly.
Passengers hae also ound them more
conenient and secure, aside rom being
inexpensie.

\et, while PAL is closely watching this
trend happening in neighboring countries
such as Malaysia, with Air Asia, Zapanta
explains that the model simply doesn`t it
here. \hile domestic lights do take 1-2
hours and PAL has its own smaller
aircrat, there are really no secondary
airports to use. Plus, the high olume
required is not just there, unlike in the
case o Air Asia, which has millions o
crossings rom Malaysia and neighboring
Singapore. Besides, he says, domestic ares
are already the lowest in the world. low
much lower can we go without losing our
shirts` In the international market, which
is not completely deregulated, the model
also wouldn`t work, what with regulatory
authorities in close scrutiny.

PAL is also not part o a global alliance
like Star Alliance Sky1eam, or oneworld.
lor one, it`s by initation, and PAL is still
under rehabilitation. Still, Zapanta says,
\e hae certain areas o doubt as there
are those who went in and then went
out.` le cites the case o Mexicana, which
ater joining an alliance, ound out it was
at a losing end. Joining an alliance requires
heay inestment to come up to the same
standards o operations as the bigger
alliance members. Zapanta says local
passengers trael point-to-point and a
global alliance works best or connecting
passengers. Besides, he adds, the local
market is not yet that sophisticated or
elephant projects such as exclusie clubs.
In act, the global A market is
disappearing. \ou hae to adjust your
market to the type o market you are
sering,` he explains.

Watch your costs. luel and maintenance
make up the major expenses or PAL. In
this case, it`s hard to budget something
that`s beyond the company`s control. lor
instance, right beore the Iraq war,
speculations droe the price o oil to >40
per barrel, whereas PAL budgeted or just
>28 per barrel.

\hat it has done to cut costs in the area
o maintenance is to outsource its MRO
requirements to Luthansa 1echnik, the
largest MRO proider in the world, which
has set up operations in the country to
serice Luthansa`s and PAL`s aircrat.
PAL sold its maintenance and engineering
acilities to Luthansa 1echnik
Philippines-a joint enture with
MacroAsia Corporation, another 1an-
owned company.

It consolidated its domestic and
international operations at 1erminal 2 at
the Ninoy Aquino International Airport in
May 2000. 1he company has also
religiously complied with its debt
payments, which is now down to some
>1.4 billion. linancing charges wipe out
most o PAL`s operating income, which
runs in the billions ,iscal year 2003`s
operating income was P5.4 billion, oset
by inancing charges o P5.6 billion,.
Once the company pays o most o its
debt, it`s expected that PAL`s net income
would grow signiicantly and consistently.

Increase productivity. 1he best eidence
o the increased eiciency and
productiity o PAL is in the numbers.
Zapanta boasts, \e`re generating the
same leel o reenues that we were
generating in 1998 with less aircrat and
manpower.` lrom 56 planes, it`s down to
just 30. And it reduced manpower rom
14,000 by hal to around ,000. And
we`re producing the same leel o traic.
1hat`s productiity in its real sense,` he
adds.

PAL also has utilized technology in
proiding better serice and reducing
costs. Zapanta says the company has
inested heaily in technology since the
sixties when it acquired its computerized
reseration system. Its latest purchase is a
cruise scheduling system and a lrequent
llyer Program system or its Mabuhay
Miles program.

Indeed, PAL has come a long way rom
its deastating experience in 1998.
Zapanta says, \e`re not doing ery bad,
as a matter o act compared to others
that went down the tube, I think PAL has
done quite well. \e`re proud o what we
achieed.`

lis adice to executies who are
undergoing their own business crisis:
1here`s nothing like talking to the
people. \e always mouth the expression
that people are our greatest asset. More
than lip serice, make it a reality, because
once you`re able to enhance your people,
they will do wonders. 1he energy and the
synergy that you can derie rom your
organization are such that you can create
little miracles.`



|SIDLBAR|
1he Big Brouhaha Over Open Skies
PAL`s achieements are noteworthy. But
the biggest challenge is yet to come. One
o the thorniest issues is the so-called
open skies policy` that the US and the
Philippines committed to under a bilateral
aiation pact signed in 1982, which would
remoe requency, capacity, and
destination restrictions on each others`
carriers rom October 1, 2003.

1wo groups oppose open skies - the Sae
our Skies ,SOS, moement and the
Network o Independent 1rael Agencies
,NI1AS, - supporting instead a gradual,
phase-by-phase liberalization o air policy.
A study by the long Kong Lconomic
Association concluded that the country is
not yet ready or open skies until its
airlines become competitie. On the other
hand, the lreedom to lly Coalition ,llC,
is pushing or ull liberalization o the air
transport sector to spur tourism in the
country in the same way as 1hailand. A
study by a proessor rom the Asian
Institute o Management claimed that
under open skies, the Philippines can
attract at least ie million oreign tourists
by 2010 ,now, our share is just two
million, a ar cry rom, say, 1hailand`s ten
million,.

1he agreement is lopsided: US carriers are
accorded unlimited, unrestricted traic
rights to ly to any point in the Philippines
and through the Philippines to any point
beyond. Philippine carriers are limited to
nine points in the US and ie points
beyond, mostly in South America. 1he
United States is seeking complete open
skies on passengers, third-country-carrier
code sharing and,or same country carrier
code sharing, and an open skies policy on
cargo with seenth reedom rights.

Ater the goernment ailed to negotiate
with its US counterparts, pushing or a 15-
year deerment, the policy went into eect
October last year. Short-term, there won`t
be much o an impact as the US airlines
are still reeling rom their heay losses and
are too busy ending o the low-cost, no-
rills upstarts. PAL has been insisting, i
postponement is not easible, on true
open skies, with Philippine carriers
enjoying the same rights as US airlines.
Zapanta says this situation among US
airlines will probably go on or two or
three years. But then it`s possible the
troubled airlines will merge to orm
stronger companies or the US
goernment will again proide subsidies
to bail them out.

Long term, it`s a scary prospect. Many
think it will be the death knell or PAL
and other local airlines. Zapanta says the
agreement can still be renegotiated. It
takes political will to do that. 1he
Americans will say, 1he treaty`s there in
eect. \hy do you want to renegotiate it`
Now i the Americans are adamant and
reuse to sit down, what do you \ou
hae only one way to go, you hae to
abrogate. \ill our goernment hae the
wherewithal, the political will, to abrogate
a treaty with the US \e did that beore,
but I don`t know i this administration or
the next will hae the strength o will to
do it.`


|SIDLBAR|
Ireedoms of the Air
1he issues aecting the aiation industry
oten mention reedoms` in the skies.
\hat exactly are these

lirst reedom: the right o an airline o
one country to ly oer the territory o
another country without landing.
Second reedom: the right o an airline o
one country to land in another country or
purposes o reueling and maintenance
while en route to another country, but not
to pick up or disembark traic ,passenger,
cargo or mail,.
1hird reedom: the right o an airline o
one country to carry traic rom its
country o registration to another country.
lourth reedom: the right o an airline o
one country to carry traic rom another
country to its own country o registration.
lith reedom: the right o an airline o
one country to carry traic between two
countries outside o its own country o
registration as long as the light originates
or terminates in its own country o
registration.
Sixth reedom: the right o an airline o
one country to carry traic between two
oreign countries ia its own country o
registration.
Seenth reedom: the right o an airline o
one country to operate lights between
two other countries without the light
originating or terminating in its own
country o registration.
Lighth reedom: the right o an airline o
one country to carry traic between two
points within the territory o another
country ,or cabotage rights,.


|SIDLBAR: 1IMLLINL|
Highs in the History of PAL

Iebruary J94J
Philippine Airlines is ounded by a group
o businessmen led by Andres Soriano.

March J94J
PAL starts operations with a single Beech
Model 18 aircrat making one light daily
between Manila and Baguio.

September J94J
Goernment inests in PAL, paing the
way or the airline's nationalization.

Iebruary J946
PAL resumes post-\orld \ar II
operations with serices to 15 domestic
points.

July J946x
A chartered DC-4 erries 40 American
sericemen rom Manila to Oakland,
Caliornia, making PAL the irst Asian
airline to cross the Paciic.

December J946
PAL starts regular serice between Manila
and San lrancisco.

May J947
PAL opens a route to Lurope with the
acquisition o DC-4s.

April J9S3
PAL starts serices to long Kong,
Bangkok and 1aipei using Conair 340s.

June J962
PAL enters the jet age with the
introduction o DC-8 jetliners.

January J96S
Goernment relinquishes control o PAL.
Benigno 1oda, Jr., board chairman since
1962, acquires majority stake in the airline.

May J966
1win-engine BAC1-11 serices to Cebu,
Bacolod and Daao commence.

July J974
PAL adances into the widebody era with
the acquisition o its irst DC-10.

November J977
Goernment reassumes control o PAL
with the Goernment Serice Insurance
System holding majority shares.

July J979
Boeing 2 trijet joins the PAL leet.

December J979
PAL`s irst super-widebody Boeing 4-
200 arries.

December J979
1he Loe Bus,` PAL`s irst Airbus
A300-B4, goes into serice on a light to
Singapore.

November J982
PAL commences lights to Paris rom
Manila ia Zurich.

May J987
PAL launches a massie modernization o
its domestic operations. 1he Shorts
SD360 turboprop joins the domestic leet.

August J988
PAL acquires the lokker 50 turboprop.

August J989
1he Boeing 3-300 jet joins the PAL
leet.

January J992
Goernment priatizes PAL. Local
consortium PR loldings acquires a 6
stake.

January J99S
Lucio C. 1an, majority stockholder o PR
loldings, becomes Chairman and Chie
Lxecutie Oicer.

October J999
PAL consolidates its domestic and
international operations in one hub or
the irst time in its history, at the Ninoy
Aquino International Airport Centennial
1erminal 2.

March 2000
PAL declares a net income o P44.2
million or the iscal year 1999-2000, its
irst year under rehabilitation.

July 2000
PAL and Luthansa 1echnik Philippines
,L1P, sign two landmark agreements
transerring ownership o PAL`s
maintenance and engineering unit to L1P.

March 200J
PAL reports a proit o P419 million at
the end o iscal year 2000-2001, its
second year under rehabilitation.

April 200J
PAL launches an Internet booking serice
that allows customers to book a light
and buy tickets online, and receie instant
conirmation.

April 200J
Philippine Airlines returns to Canada ater
an absence o three years when it starts a
direct serice between Manila and
Vancouer, British Columbia.

July 200J
PAL resumes lights to lo Chi Minh City,
Vietnam ater a gap o three years.

October 200J
PAL starts regular operations to three new
Asia Paciic destinations - Bangkok,
Shanghai and Melbourne as part o its
modest network expansion.

April 2002
1he cargo product RlUSl ,Rapid
landling o Urgent Shipments, was
relaunched.

August 2002
1he company's website,
www.philippineairlines.com was
relaunched. 1he \orld 1racer or Online
Baggage 1racing and Cargo 1racking was
introduced. PAL uneiled its new
requent-lyer program ,llP,, Mabuhay
Miles.

March 2003
PAL registers a net income o P295
million or iscal year 2002-2003.

June 2003
PAL introduces a new booking engine.
PAL adds on to its worldwide network
Okinawa, Japan adding up to a total o 28
international and 19 domestic
destinations.

October 2003
PAL returns to Kuala Lumpur, Malaysia
ater a 5-year absence.