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PAL creates new low-fares unit for local routes

By Mary Ann Ll. Reyes
Wednesday, April 16, 2008 [ philstar.com ]

Flag carrier Philippine Airlines (PAL) has created a new, low-fares unit that will operate a fleet of turbo-propeller aircraft to mostly domestic island points under the brand name PAL Express.

The launch of PAL Express is considered a ground-breaking step for PAL, which is creating a sub-brand for the first time in its 67-year history.

PAL president and CEO Jaime Bautista said PAL Express will meet the growing demand of the traveling public for a high-quality carrier offering low fares.

“At the same time, it supports the government’s efforts to promote trade and tourism, particularly to our small islands, thus providing a much-needed lift to the local economy of these communities,” he added.

Industry observers view PAL’s latest move as a bid to compete heads-on with arch rival Cebu Pacific, which is positioned as a low-cost, no frills airline.

The creation of PAL Express is also aimed at expanding PAL’s network and protecting its market share.

According to Bautista, PAL Express will increase PAL’s profits by around P300 million a year, and revenues, by around P1 billion. Around one million passengers are expected to be added by PAL Express when its operation goes full blast next year.

During the fiscal year ending March 31, 2008, PAL carried a total of 7.5 million passengers, both domestic and international. Excluding PAL Express, the number of passengers carried is expected to increase by eight percent this fiscal year.

Meantime, PAL’s revenues reached $1.4 billion during the last fiscal year, compared to $1.2 billion during the previous fiscal year.

Bautista expects revenues to increase this fiscal year, but profits will be down mainly due to high cost of fuel.

PAL will acquire nine turbo-props, consisting of three Bombardier Q300s and six Q400s, to comprise PAL Express’ initial fleet which will be based mainly in Cebu.

Some flights will also operate out of Manila. Turbo props are ideal for short runways like those in Caticlan.

The cost of PAL Express’ initial fleet based on the list price of the nine turbo props is around $130 million. PAL is currently in talks with domestic banks to finance around $100 million of the cost of the new planes. The balance will be internally financed.

The new PAL unit will primarily fly intra-regional routes in Visayas and Mindanao from its Cebu hub, as well as secondary routes to small airports in island provinces that are not able to accommodate PAL’s regular jet aircraft.

“We will leverage on the strength of the PAL brand to make PAL Express the leader in the markets it serves. In turn, PAL benefits from the expansion of its network to areas it does not presently fly to, from where PAL Express aims to draw traffic to feed the main trunk routes,” Bautista said.

But the biggest beneficiary, he stressed, will be traveler, who is now able to tap into PAL’s extensive route network and enjoy seamless connections between erstwhile inaccessible provincial points and 43 destinations – and counting – across the Philippines, Asia, Australia, and North America.

The structure for PAL Express is similar to the setup found in several international airlines, where the “legacy” carrier establishes an operating division intended to serve a market niche distinct from the mainline operation.

The division, however, is still supervised by the parent airline, which also provides logistical and administrative support. Examples of this structure are those in American Airlines’ American Eagle, United Airlines’ United Express, Air Canada’s Jazz, and Lufthansa’s Lufthansa Cityline.

Bautista explained that PAL will continue to operate the trunk routes while the secondary routes will be operated by PAL Express. “There will be no competition between PAL and PAL Express since the latter will be operating mostly new routes,” he emphasized.

He added that PAL Express will also not compete with Air Philippines, the low-cost airline of the Lucio Tan Group. Air Philippines will transfer its Manila-Caticlan operations as well as flights originating from Cebu to PAL Express.

Because of this, Air Philippines will no longer proceed with plans to acquire Bombardier aircraft. This will now be undertaken by PAL Express.

PAL Express is scheduled to take off on May 5, 2008 with eight flights daily between Manila to Caticlan, gateway to Boracay. Fifty-seater Bombardier Q300 aircraft will be deployed on the route.

Services ramp up dramatically on May 19, when the new unit’s Cebu hub operations commences with flights between Cebu and five points in Visayas and Mindanao, namely Caticlan, Bacolod, Tacloban, Butuan and General Santos.

To introduce these new services, PAL Express is offering promotional fares of as low as P88 (excluding taxes and surcharges) for one-way flights between Cebu and Bacolod, Caticlan, Tacloban, Butuan, and General Santos.

Earlier, PAL announced that it would base its soon-to-be-acquired turbo-prop fleet mainly in Cebu, in order to better serve the growing intra-regional market in Visayas and Mindanao.

While some turbo-prop flights will also operate out of Manila, especially in the initial phase, Cebu will be the focal point of turbo-prop operations as PAL re-establishes the city as its main hub in southern Philippines.

PAL operated a bustling Cebu hub for most of its 67-year history, when it was the sole airline mandated to provide air services to far-flung rural communities. As such, turbo-props were an integral part of PAL’s fleet for decades.

When PAL entered receivership in 1999, however, its rehabilitation plan stipulated an all-jet fleet, forcing the airline to dispose of its then turbo-prop type, the Fokker 50, and close its Cebu hub.

With PAL’s successful emergence from rehabilitation late last year, Bautista said resuming turbo-prop operations became a key priority, in keeping with the national carrier’s historic mandate of serving outlying areas.

In this effort, the restored Cebu hub will play a central role, PAL added.

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