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CONTENTS BUSINESS NATION WORLD TECHNOLOGY
San Miguel
Comes to the Aid
of an Ailing PAL
The aggressive
conglomerate is confdent
it can turn around its newly
acquired airline
By Pia Rufno
In
April, business giants San Miguel
Corporation and the Lucio Tan
group, signed an investment agreement
that gives San Miguel minority stake in
nuLIonuI ug currIer Philippine Airlines
(PA) und PA's uIhIIuLe Iow-cosL uIrIIne Air
Philippines Corporation (Airphil Express).
In a disclosure to the Philippine Stock
Exchange, Sun MIgueI conhrmed u news
reporL LIuL IL ucquIred u qq% sLuke In boLI
carriers for US$500 million.
With the buy-in, San Miguel took over
management control of PALs parent
company PAL Holdings, with San Miguel
president Ramon Ang named PAL Holdings
new presIdenL und cIIeI operuLIng oIhcer,
replacing long-time president Jaime Bautista
on April 20.
For his part, Bautista said, in a statement,
that San Miguels investment will help
LIe ug currIer In ILs re-eeLIng und muke
the airline more viable and competitive,
even as he assured the public that it would
be business as usual for PAL, which would
conLInue ILs roIe us LIe counLry`s ug currIer.
PAL Iuces lubor, nunciul issoes.
Angs ability to turn a problematic company
uround wIII dehnILeIy be puL Lo LIe LesL us
PAL is still experiencing stress from labor
und hnuncIuI probIems.
In September, PAL announced it would
outsource three of its non-core units
effective in October, laying off over 2,600
empIoyees IundIIng In-IgIL cuLerIng, curgo
handling, and call-center reservations as
part of a cost-saving program to remain
competitive and ensure long-term survival.
STRATEGY POINTS
San MigueI Corporation is condent it can
revive Philippine Airlines which is burdened
with Iabor and nanciaI woes with an infusion of
US$500 million
PALs budget arm, AirPhil Express, has a better
outlook than PAL, since its focus is on the faster
growing budget end of the market
High fuel prices, uncertain demand in mature
economies, and intense competition between
budget and network carriers are constant
struggles facing airline business, so capacity
discipline and tight cost control might still be
the best strategy
BUSINESS
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:NKcenSEI8KVUXZ - June 4-10, 2012
San Miguel comes to the aid of an ailing PAL
In reaction to the impending layoffs, PAL's
ground-crew union, the Philippine Airlines
Employees Association (PALEA), staged
protest actions against the announced
mass layoffs, which led to the suspension
of airport operations and the cancellation
oI IgILs IeuvIng LIousunds oI PA
passengers stranded at the airport, as
summarized by PAL in a September 2011
statement condemning PALEA's actions.
Following the San Miguel buy-in,
PAEA hIed u munIIesLuLIon wILI
the Court of Appeals saying it was
open to new mediation talks to settle
the labor dispute, as it urged the new
management to reinstate some 2,600
workers who were laid off last year, as
reported in the Inquirer.
The new management of PAL
should recognize that the solution to the
ug currIer`s woes InvoIves noL onIy LIe
re-eeLIng oI ILs ugIng uIrcruIL buL more
so the reinstatement of its skilled regular
workers, according to the
union's manifestation.
The disruption in its service brought about
by the labor strike, along with rising fuel
costs, were blamed in PAL's net loss of
$33.5 million from October to December
last year, a reversal of its net income of
US$15.1 million over the same period
in 2010. Its revenues dropped to $386
mIIIIon, u .8% decIIne Irom $q; mIIIIon
In zo1o, due Lo sIow pussenger LruIhc us
well as weak cargo operations, according
to the abs-cbnnews.com report.
(In a November Inquirer column,
economist and TV commentator Solita
Collas Monsod offers an interesting take
on the matter, including a capsule history
that puts PAL's labor issues in some
perspective. For example, the outsourcing
plan had actually been originally
presenLed In AugusL zooq, IoIIowIng u
10-year suspension of the company's
collective bargaining agreement and a
10-year moratorium on strikes. In this
column, Monsod also examines PAL's
latest outsourcing plan in light of previous
downsizing campaigns.)
Jost u yeur to torn PAL uroond?
Despite the problems facing Asias
oldest airline, Ang, who has a decade of
experience running San Miguel, is
positive he can bring PAL back to
prohLubIIILy, even suyIng LIuL Ie onIy
needs a year to do this.
PAL will make turnaround a year from
the time we invested in the company.
We ure conhdenL LIuL PA wIII muke u
turnaround, Ang said in an interview
with ManilaStandardToday at the
sidelines of the annual stockholders
meeting of Ginebra San Miguel in May.
He further said the airline plans to
reduce cost by increasing the utilization
of aircraft to about 16 hours a day and
improve its ticketing system. Also, PAL
wIII y non-sLop Lo New York, ToronLo,
and Europe, he added.
Ang also told the Inquirer in an in-depth
interview on April 30 that the problems
IucIng PA ure so eusy Lo hx, suyIng LIuL
Ie Is no sLrunger Lo dIIhcuIL corporuLe
situations, having recently revitalized
LIe counLry`s IurgesL IueI rehner und
distributor, Petron Corp., which, according
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CONTENTS BUSINESS NATION WORLD TECHNOLOGY
to him, was on the brink of collapse when
San Miguel bought it.
According to Ang, among the reasons San
Miguel bought PAL is that it is a good
company with an excellent brand adding
that despite having so many problems over
20 years, the company has always been
above water.
Ang wants Airphil Express to take over
all domestic and the short-haul routes
using the low-cost-carrier (LCC) model,
while PAL focuses on long-haul routes like
regIonuI IgILs oI greuLer LIun LIree Iours`
duruLIon. Ang uIso reveuIed pIuns Lo ucquIre
up to 100 aircraft over the next half decade
and to develop a new international airport.
PAL will also help Philippine aviation
regain its Category 1 status, since it is
crucial for the airlines expansion, Ang said.
The U.S. Federal Aviation Administration
downgraded the country's civil aviation
safety status to Category 2 in Dec. 2007,
citing noncompliance with international
safety standards, which limits PALs
operations to and from the United States.
(For its part, the European Union in
April 2010 banned Philippine carriers
Irom yIng Lo uny oI ILs z; member-sLuLes,
after the Civil Aviation Authority of the
Philippines failed to address its concerns
over suIeLy, modern equIpmenL, und
technical personnel.)
High costs, declining pussenger
nombers. While it is trying to deal with
high cost levels, PAL also has yet
to increase its market share in the airline
industry. According to an April 11 analysis
of the Centre for Aviation (CAPA),
which provides analyses of developments
in the global airline industry, PAL is
umong LIe weukesL oI AsIu`s mujor ug
carriers, having seen its share of the
Philippine market steadily erode due to
competition from low-cost carriers, and
being in need of recapitalization.
According to CAPA, PAL has seen its share
of the domestic market fall by about 20%,
based on current capacity, while its share
of the international market has slipped to
about 25%. (See charts below)
CAPA further said: "PAL cannot compete
directly with the countrys fast-growing LCC
Cebu Pacic Air
Airphil Express
Philippine Airlines
Zest Air
SEAir
Cathay Pacic
Dragonair
Emirates
Other
0.0%
0.0%
0.0%
0.0%
0.7%
10.0%
20.4%
23.5%
45.4%
32.4%
2.6%
2.9%
3.0%
3.6%
PHILIPPINE CARRIERS DOMESTIC AND INTERNATIONAL C
Source: Philippine
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:NKcenSEI8KVUXZ - June 4-10, 2012
4.0%
7.6%
18.0%
25.8%
Singapore Airlines
Philippine Airlines
Emirates
Other
Cathay Pacic
Korean Air
Cebu Pacic Air
Asiana Airlines
Etihad Airways
sector given its higher unit costs and legacy
structure. It needs to differentiate the main
PAL brand from local competitors, which are
all LCCs and only offer economy class.
Bodget-brund expunsion, eet renewul,
globul ulliunce cun help PAL recover.
According to CAPAs analysis, with San
Miguels US$500-million investment, PAL
will be able to employ a strategy used by the
sImIIurIy sIzed ndonesIun ug currIer Garuda
Indonesia, which, as part of its 2011-2015
business plan, is investing in rapid expansion
oI ILs budgeL brund CILIIInk, eeL renewuI und
premium product enhancements.
CAPA said San Miguel will use PALs AirPhil
brand to grow both in the Philippines and in
the regional market. The growth at PAL will be
relatively limited, CAPA predicted, except in
NorLI AmerIcu, wIere sIgnIhcunL cupucILy wIII
be added once Category 2 restrictions are lifted.
AirPhil generally has a better outlook as
most of the growth in the Philippines is at
the lower end as it is a market dominated by
leisure, migrant worker and visiting friends
und reIuLIves LruIhc...WILI hnuncIuI supporL
from San Miguel, AirPhil is now in better shape
APACITY SHARE
Airlines and AirPhil outlook improves as new ownership cements
two-brand strategy," Center for Aviation, April 11, 2012
Low-cost carriers rule the market
A Manila Times story on domestic air carriers
in February cited Civil Aeronautics Board of the
Philippines data in reporting that there were 18.77
million domestic airline passengers in 2011, refecting a
growth of 13.3% from the year before.
Cebu Pacifc led the local airlines with 8.48 million
domestic passengers in 2011, a 6.4% improvement
over its fgure for 2010. PAL, for its part, experienced
a 18.83% drop, from 5.31 million passengers in 2010
to 4.31 million passengers in 2011. PAL's low-cost
affliate, Airphil Express, on the other hand, carried
3.69 million domestic passengers in 2011, almost
doubling the 1.85 million it carried the year before.
(See table below)
A BusinessMirror feature in February on the
competition among local low-cost carriers cited Civil
Aeronautics Board executive director Carmelo Arcilla
in reporting that the penetration rate of local low-cost
carriers is currently pegged at 85%, led by Cebu Pacifc
and Airphil Express.

Domestic carrier 2011
passengers
(millions)
2010
passengers
(millions)
Rate of
change
(%)
Cebu Pacifc 8.48 7.97 6.40
Philippine Airlines 4.31 5.31 -18.83
Airphil Express 3.69 1.85 99.46
Zest Airways 2.15 1.23 74.79
Southeast Asian
Airlines
.124 .193 -64.43
Total 18.754 16.553 13.30
Note: Figures in table did not add up to the aggregate mentioned
in the text probably because of rounding discrepancies
DOMESTIC AIRLINE PASSENGERS,
2010 AND 2011
Source: TCR compilation of data presented in "Domestic air travel
passengers up in 2011," by Darwin Amolejar, as published on
The Manila Times.net, Feb. 6, 2012
San Miguel comes to the aid of an ailing PAL
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CONTENTS BUSINESS NATION WORLD TECHNOLOGY
to withstand the war now being waged
between Philippine LCCs.
Launched in 2010, the budget carriers
LruIhc doubIed Lo jusL under .; mIIIIon
passengers last year.
Following Garudas model, CAPA said
joining a global alliance, upgrading IT
systems and adding more codeshare
purLners Ior sIurIng IgILs ure LIe possIbIe
vital components of PALs medium- to
long-term strategy.
Airline bosiness Iuces muny
chullenges. In his 2011 presentation, Paul
Stephen Dempsey Tomlinson, Professor of
Law and Director of Institute of Air & Space
Law McGill University in Canada said the
airline business is a tough one.
ProhL murgIns ure LIIn, hxed cosLs ure
high, capital expenditures are large,
government regulation has been unstable,
and taxation can be unmerciful. Demand
can be chilled by an outbreak of disease,
recession, war or terrorism, he said.
Lessons from a fellow legacy carrier
Garuda CEO Emirsyah Satar said the airlines fve-year business plan, dubbed Quantum Leap Program
for 2011-2015, is driven by seven elements, including competing in the LCC market through its budget arm
Citilink, he explained in an December 2011 interview with the International Air Transport Association, an
international trade body of 240 airlines.
These drivers are: domestic travel; international travel;
addressing low-cost travel through a subsidiary, Citilink;
expanding the feet; rejuvenating the brand; improving
our cost discipline; and getting greater productivity from
staff.
"By 2015, we aim to carry 35.2 million passengers, a
182% increase on 2010 fgures. Our capacity in terms
of available seat kilometers will increase 171% to 69.7
billion," Satar said.
Garuda was once a loss-generating company, the CEO
recounts in a 2009 interview with CNN. When he joined
the company in 2005, he learned that the airline only
made proft in three of the previous ten years.
"We got out of routes where we were losing money . it was ok if we reduced our market so we could
become proftable again," he added, noting that the airline was able to turn a proft two years after he came
on board.
In 2010, Garuda was named the winner of the Worlds most improved airline at the 2010 World Airline
Awards - the Passenger's Choice awards.

In the video above, Garuda CEO Emirsyah Satar

recaIIs how he brought Garuda back to protabiIity
CNN
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or Ayse Kucuk YIImuz, ussIsLunL proIessor
at the School of Civil Aviation in Anadolu
University in Turkey, risks are part of the
everyday business for airline companies.
In his 2008 study entitled The Corporate
Sustainability Model for Airline Business,
YIImuz suId LIe uIrIInes operuLe In un
extremely dynamic, and often highly
volatile, commercial environment.
The study cites a 2005 study from the US
entitled Powerful Solutions for Enterprise-
Wide Airline Management, which
enumerates the following pressures
facing airlines:
GIobuIIzuLIon und LIe Lrend L
oward mergers and alliances
requIre LIe exIbIIILy Lo
adjust accordingly
WorId hnuncIuI InsLubIIILy und
eroding yields make it more important
than ever to streamline processes,
reduce redundancies, and simplify
system architecture to lower costs
Becuuse LIe IndusLry Is so
competitive, airline operators must
analyze every aspect of their business,
und LIuL requIres IusL, exIbIe, und
focused access to information for
sound decision making
QuuIILy cusLomer servIce
differentiates one airline from the
Lessons from Southeast Asias rst Iow-cost airIine
Tony Fernandez, the CEO of Malaysias Air Asia, likewise has a story on how to turn around an ailing airline.
In a November 2010 BBC interview, he recounts buying Air Asia from a Malaysian government-owned
company when it was heavily indebted in 2001, and turning the airline into a short-haul, low-cost carrier,
making it the frst low-cost airline in the region.
His secret, according to the interview, is in being single-
minded about the operation and keeping it simple. The
company grew from two planes in 2002 to a feet of 86
aircraft fying 30 million people around the world. When
the company went into long-haul fights with Air Asia X,
it meant two separate companies, management teams,
and sets of crews, pilots and engineers.
Fernandez had no experience in the airline business,
having just stepped out of the music industry when he
bought the airline. For him, capital, effective marketing,
and good people are the key to start up a business. "It
really was a little bit of stick your fnger in the air and
hope for the best. But we were good marketing people from the music business. we just went out there and
felt the market and said if you halve the fare, there's a huge enormous untapped market," he told BBC.
Fernandez likewise stressed the importance of keeping the employees happy, saying that for him,
"employees come number one, customers come number two," explaining that "If you have a happy
workforce they'll look after your customers anyway," he said.

Air Asia Chief Tony Fernandez shares how he

turned aiIing Air Asia around by making it the rst
low-cost airline in the region BBC
San Miguel comes to the aid of an ailing PAL
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other and helps secure customer
loyalty. Accurate customer data is
essential for personalizing services
und muxImIzIng LIe benehL oI
marketing initiatives.
The study further said that the main
concerns of todays airlines are
optimization, improved capacity,
cosL suvIngs und LIe ubIIILy Lo reucL quIckIy
to changes while the solutions
for airline planning and control ranges
from network planning, codeshare
handling, and crew management, to
pricing, price distribution, and
revenue management.
Meanwhile, a February 2012 airline
economic analysis by global management
consuILIng hrm Oliver Wyman concludes
that throughout the airline industry,
some struggles are constants: high fuel
prices, uncertain demand in mature
economies, and intense competition
between value (low-cost) and network
(premium) carriers, in both domestic and
international markets.
The analysis, involving seven value
carriers and eight network carriers in the
U.S, said that airline executives, looking
back at their success in 2010, concluded
that capacity discipline, along with tight
cost control, remains the best strategy.
San Miguel comes to the aid of an ailing PAL
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