PHL airlines optimistic about recovery despite headwinds

By Arjay L. Balinbin, Senior Reporter

LOCAL AIRLINES expect the recovery momentum to continue next year, as the industry is better positioned to weather potential external headwinds.

“We are on track to restore our flights to 90% of pre-pandemic levels,” flag carrier Philippine Airlines (PAL) said in a statement to BusinessWorld.

PAL, which completed its voluntary Chapter 11 proceedings last year, saw its financial performance significantly improve. It posted a P6.8-billion attributable profit in the first nine months of 2022, a turnaround from the P21.8-billion net loss a year ago.

For 2023, PAL plans to reinforce its position as the Philippines’ only full-service network airline by restoring its network to mainland China, once it reopens to international travel. The flag carrier also plans to expand its code-sharing and interline partnerships with other airlines to give PAL passengers access to more overseas destinations and better connections.

PAL said it also aims to sustain and grow its cargo business in order to tap opportunities in the air freight market.

At the same time, the Lucio Tan-led airline targets to continue its digital transformation by introducing new products for customers and better in-house systems to boost efficiency.

The flag carrier noted that the Civil Aeronautics Board’s (CAB) move to lower the applicable fuel surcharge for domestic and international flights to Level 7 in January 2023, from Level 8 implemented in November and December, will “increase travel appetite and boost air travel.”

The CAB noted the drop in the average price of jet fuel to P41.50 per liter between Nov. 10 and Dec. 9, from the P42.87 per liter between Sept. 10 and Oct. 9.

Meanwhile, Cebu Pacific Chief Commercial Officer Xander Lao said separately that the budget carrier expects next year to be “much better” than 2022 in terms of passenger and cargo demand.

Mr. Lao described as “safe” the International Air Transport Association’s (IATA) global forecast of airlines returning to profitability in 2023.

The IATA earlier this month said it expects a net profit of $4.7 billion for the global airline industry next year, after losing billions of dollars in 2020 and 2021 amid the pandemic.

In the first nine months of the year, Cebu Pacific reduced its attributable net loss to P12.05 billion from the P21.1-billion loss posted a year ago. Revenues jumped to P37.53 billion from P9.15 billion in 2021, as more Filipinos booked more flights to domestic and international destinations.

“Fuel prices have come down recently. The world is opening up. At Cebu Pacific, we are starting to see a lot more traffic in the international sectors. Japan, Korea, Singapore, and Thailand have been doing quite well,” Mr. Lao said at a press briefing.

However, Mr. Lao noted that there is “still a lot of uncertainty looking forward.”

“But we are pretty confident that if we adhere to our low-cost model, we think it will be a good year for Cebu Pacific as well as the industry,” he said.

Meanwhile, AirAsia Philippines Chief Executive Officer Ricardo P. Isla said the low-cost carrier is establishing a more cost-efficient corporate structure as it aims for a full recovery from pandemic-related losses in 2023.

“AirAsia Philippines is on the path to full recovery in 2023. Our key goals in the coming year are the following: Growth of fleet and flight frequency to pre-pandemic levels, reactivation of hibernated international routes and launch of new ones, and the expansion of our domestic route network,” Mr. Isla said in a statement to BusinessWorld.

He also cited “strengthened collaboration with the private sector and investment in improved infrastructure” as contributing to the industry’s resurgence.

Sought for comment, Avelino D.L. Zapanta, aviation expert and former PAL president and chief executive officer, said most airlines will be in a growth mode in 2023, after nearly three years of the pandemic.

“They have virtually restored their pre-pandemic capacity. The main driver is revenge travel. The remaining pandemic-induced travel restrictions though, such as the continuing and new health regulations, might impede the growth to some extent. Many countries still impose certain requirements,” he said in an e-mail interview.

Asked how local airlines should deal with elevated fuel prices next year, Mr. Zapanta said: “They will just have to be better at their fuel hedging decisions to avoid the PAL disaster experienced in 2008 that led to the decision to sell 49% of shares to San Miguel.”

CHALLENGING YEAR
Meanwhile, Singapore-based aviation analyst and consultant Brendan Sobie said 2023 could become “quite challenging” for airlines given the looming recession, high fuel prices, and the geopolitical environment.

“Philippine Airlines has already been profitable in recent quarters, benefiting from a supply-demand imbalance in the long-haul market which has resulted in extremely high yields (airfares),” he said in an e-mail interview.

“Cebu Pacific has not yet been able to restore profitability but relies more heavily on the domestic market, which has been suffering from relatively low yields and too much rather than too little capacity,” he added.

He pointed out that Cebu Pacific also relies quite a lot on the regional international market, which is just starting to recover.

“While the rest of Southeast Asia has been open for several months, the reopening in North Asia is still in the early phases… North Asia is a big market for all Philippine carriers,” Mr. Sobie said.

AirAsia Philippines has been slow to restore capacity, and its financial situation is “rather weak compared to its two much larger competitors,” he noted.

“It will be interesting to see what happens to AirAsia Philippines as the AirAsia Group restructures,” he said.

Mr. Sobie said all three main local competitors should do quite well during the peak holiday season.

“However, it could be difficult to maintain any profitability that is achieved this month and (January). Capacity will continue to be gradually restored in 2023 — in the Philippines, including foreign airline capacity, as well as in the Asia-Pacific overall,” Mr. Sobie noted.

He advised airlines to be “nimble and flexible,” adding that “no one should be assuming profitability for Philippine carriers in 2023.”

Anthony Oundjian, managing director and senior partner at Boston Consulting Group, said the Asian airlines should see profitability next year.

“Our region is about six months ‘behind’ US/Europe, so the impact seen by European airlines this year will likely be felt by airlines in Asia next year,” he said in an e-mail interview.

Key drivers to profitability are the “very rapid, more than expected surge in demand combined with the limited capacity due to operational constraints and difficulty to restart,” he added.

“Because of these supply and demand factors, airlines should see much higher yields, helping them return to profitability,” Mr. Oundjian said.

He also said that China is also another potential driver, a global demand wildcard, to the industry.

“A reopening of China will increase direct flows of businessmen and tourists to the Philippines, and also indirectly increase services for US-Asia and Europe-Asia, making it easier for international tourists to visit the country,” Mr. Oundjian said.

China’s reopening is expected to boost air travel and the tourism sector, not just in the Philippines but the rest of Southeast Asia. China had accounted for 22% of visitor arrivals to Southeast Asian countries before the pandemic.

If oil prices remain elevated next year, airlines can pull a few levers.

“Of course, some cost has to be passed through. We have seen most airlines in America and Europe adding surcharges since July 2022, and these surcharges will remain a key part of impact mitigation strategies. Beyond fuel pass-throughs, airlines are also continuously improving their fuel efficiency, not only for cost containment but also for sustainability,” Mr. Oundjian said.

Inflation may affect travel demand next year. However, he noted consumers would still want to travel, but may make some trade-offs.

“[There will be] more shifts to low-cost carriers, more shifts to domestic over international travel, some make shorter trips, some tighten their belts on accommodation/meals,” he noted.

“For the Philippines, this could mean that local tourism will be favored more. The weakening of the Philippine peso can also help attract more international travelers, but it’s too early to see such an effect.”

Cebu Pacific’s Mr. Lao is hoping fuel prices will continue to drop and the peso continue to strengthen against the US dollar next year.

“Having said that, we need to focus on what we can actually control like the investments in fleet, having more efficient flight plans, and more efficient processes,” he said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the peso’s recent appreciation against the US dollar may help reduce airline ticket prices and air cargo rates next year.

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