THE decline in jet fuel prices that contributed to stabilizing the financial health of legacy carrier Philippine Airlines (PAL) is a breather that the aviation company must take to allow its rapid international capacity expansion to settle in, an aviation think tank said.
Since 2012 the full-service carrier has undertaken a rapid expansion of its international capacity with its total share in the international market in the Philippines now at 27.7 percent as of the first half of 2015, 4.1 points higher than the 23.6-percent share three years prior.
It now operates a fleet of 59 aircraft across an international network of 36 destinations. These figures are set to increase to 66 planes and more than 40 foreign destinations next year.
Jaime J. Bautista, the company’s president and CEO, said his airline is set to acquire seven new planes from Airbus and Boeing. The $700-million transaction involves the purchase of five Airbus A321s and two Boeing 777s.
“We will invest half-a-billion dollars in new aircraft next year. We are expecting seven planes: five Airbus A321s and two Boeing 777s,” he said.
The airline is also in talks with both companies for the purchase of high-capacity, long-range aircraft. Bautista said the decision on whether to purchase either Airbus A350s or Boeing 787s should come out soon.
“We are working on it. We are talking to them, we are trying to get the best deal,” he said. “When you buy an airplane you consider the technical and commercial aspects.”
According to the Centre for Asia-Pacific Aviation (Capa), the purchase of six Airbus A350s will put the airline on the right track for capacity expansion, as it plans to retire its fleet of Airbus A340s.
“PAL is on the right track with the acquisition of six A350-900s to replace its A340-300s and avoiding the temptation to expand the widebody fleet beyond 30 aircraft,” the think tank said.
The carrier is also expanding its international route network to include two new destinations in the Middle East and three in Australasia.
Next month the carrier will add services to Port Moresby, Cairns and Auckland. A month later the airline will launch flights to Jeddah and Kuwait.
Capa said the carrier will be heavily dependent on sixth freedom traffic for its Cairns and Auckland operations, and will likely lord over the said routes as it faces little to no competition at all.
“PAL will rely heavily on sixth freedom traffic in both these markets, as well as fifth freedom traffic on the Cairns-Auckland sector. Port Moresby offers high-yielding business traffic, while Cairns is primarily a leisure market,” the think tank said in a report.
But the carrier must hold its horses in expanding both its fleet and route, at least according to the research body, as a breather will allow the carrier to see gains from its rapid expansion trickle in to its bottomline.
“The international expansion PAL has pursued over the couple of years was extremely ambitious. It is rare to see such an established flag carrier—PAL is over 70 years old—increase the size of its international network by 70 percent in three years,” Capa said.
“Low fuel prices and improved profitability give PAL an opportunity to take a pause to let all the international capacity added in recent years be fully absorbed,” it added. “Now is the time to pursue relatively modest expansion and plan for a possible future with higher oil prices.”
Fuel prices have been dropping as the Organization of Petroleum Exporting Countries decided to maintain current production levels despite a glut in the market with an estimated oversupply of 1.5 million to 2 million barrels daily.
Following a period of relative stability of above $100 per barrel, oil prices have plunged since mid-2014, falling by more than $40 per barrel to five-year lows.
Fuel accounts for as much as 60 percent of an airline’s operating cost per passenger, and is the second-highest expense next to labor.
Data from the International Air Transport Association (Iata) showed jet fuel cost was at $57 per barrel as of November 20, down by 4.4 percent from the preceding month and 41.1-percent less than the year-ago price.
“PAL is extremely fortunate to have oil prices plummeted just as it was expanding rapidly, particularly given its acquisition of A340s. But PAL cannot bank on oil prices remaining at its current level,” Capa said.
PAL Holdings Inc. saw profits ballooning to P6.55 billion in the first nine months of the year, significantly higher than the P169.1 million net income the year prior, thanks to favourable performance of its passenger segment.