Republic of the Philippines

PHILIPPINE STATE COLLEGE OF AERONAUTICS

Piccio Garden, Villamor, Pasay City

INSTITUTE OF GRADUATE STUDIES

MASTER OF EDUCATION IN AERONAUTICAL MANAGEMENT

MEAM 613 – AVIATION BUSINESS AND AIRLINE FINANCIAL MANAGAMENT

2nd Trimester, A.Y. 2019-2020

Philippine Airline’s Financial Decline in the Aftermath of Airline Deregulation

Submitted by:
SHERWIN R. TRINIDAD

Submitted to:
Engr. Romnick Medina, MEAM
 Philippine Airline’s Financial Decline in the Aftermath of Airline Deregulation

Abstract

The study presents the data collated from various books regarding the evidences

of Philippine Airline’s (PAL) financial decline due to the Airline Deregulation Act. As the

hypotheses stated the study’s aim to create an overview for PAL’s financial crisis amidst

the aftermath of Low-Cost Operators inclusion in Air Traffic, the study will present

recommendations as well as to what should have been done to alter the outcome for the

country’s flag carrier.

Published books locally and abroad were utilized to scrutinize the actual state of

PAL. Moreover, several illustrations are presented which are inflicted by numerical

elements to ensure accuracy and precision in delivering comparative analysis as well as

correlations among variables in this study.

Introduction

Philippine Airlines almost had the complete dominion over the air transportation

industry during the 60s and 70s. With the regime of the one-airline policy originally

practiced by many countries including the Philippines as initiated by the United States

and the United Kingdom through Bermuda 1 in 1946, Philippine Airlines like all other flag

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carriers almost had the monopoly over the airline market according to Weisman (2012).

This special treat run out when in 1988, the former president Cory Aquino paved the way

for the development of other carriers via the Airline Deregulation following the trend that

started in the United States, initially known as the Deregulation Act of 1978. (Boquet,

2017)

In view of the latter event in the first paragraph, this study will present pieces of

information that will serve as evidences proving the financial plummet which was suffered

by the country’s flag carrier, the Philippine Airlines. Reminiscent of all the other flag

carriers that agonized after the advent of airline deregulation and also venturing at those

similar effects among the countries like Malaysia, Singapore and Thailand, the study aims

to present the policy reformation’s effect on Philippine Airlines structure which caused

financial struggles to progress in the aftermath of deregulation.

Hypotheses

The following null hypotheses was raised in the study:

1. There is indeed a decline in the financial performance of the Philippines’ Flag

Carrier.

2. There is a significant effect on the revenues generated by the flag carrier after the

deregulation act was promulgated.

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Methodology

This case study fed upon the bounty of evidences published through books and

articles in both local and international scenes. Data presented herein include analysis,

second hand information and numerical presentations collated by previous researchers

who embarked on the same study. Moreover, the method employed is simple and is

achieved through the presentation of various evidences purely based on readings and

readily available data due to the time constraint allotted by the professor on the case

study.

Since the research can be done individually, this case study can not just be

improved by other researchers but also by undergraduate students as both a co-curricular

requirement and out of personal quest for in-depth knowledge about deregulation.

Results

Philippine Airline dominated the air traffic for 22 years. However, the pressure for

the deregulation of the industry started to exist causing PAL’s service to become

inefficient. Consequently, financial losses intensified and brought the concern to the

administrative level. Hence, the supremacy of PAL was finally challenged with the

passing of Executive Order 219 in 1995 under the Ramos administration. It established

the domestic and international civil aviation liberalization policy of the country. The

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revolution in policy came in response to the government’s “thrust to expand investment

and trade, and increase access for Filipino as well as foreign passengers” and hence the

“need for the Philippines to improve air service availability, quality and efficiency through

exposure to foreign markets and competition” (EO 219, paragraph 3). The policy is also

in accordance with the 1987 constitutional mandate barring monopolies when the public

interest necessitates. (Austria, 2001)

Austria continued saying that “Restrictions on domestic routes and frequencies

were eliminated and so were government controls on rates and charges as follows: A

minimum of two operators in each route/link shall be encouraged. Routes/links presently

serviced by one operator shall be open for entry for additional operators (Section 2.1).

Operators are also free to leave unprofitable/uneconomical routes and Airfares shall be

deregulated for routes/links operated by more than one carrier. However, for routes/links

serviced by a single operator, airfares will continue to be regulated (Section 2.2).”

PAL remained the dominant carrier in the domestic air transport industry, having

an average market share of 63 percent of the total passenger traffic (Table 1) for the

period 1996-1999. Since PAL has the largest fleet and larger airplanes, it rendered the

largest seat capacity in the industry (Table 2). On the other hand, PAL suffered a

remarkable deterioration in market share as the new airlines creeped their way in the

industry and competed with PAL. The financial and labor complications of PAL in 1998

and the subsequent downsizing of the airline’s fleet from 54 to 24 aircrafts resulted to the

airline’s loss in market share. Simultaneously, the condition provided the new airlines the

opening to expand their fleet and increase their enplanements and hence, their share in

the market. For example, in 1999, Cebu Pacific and Air Philippines provided a combined

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share of 53 percent of the total seats (Table 2) and have captured almost 46 percent of

the passenger traffic (Table 1).

Table 1 Domestic passenger traffic, by airline, 1994-1999

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 Table 2 Seat capacity per airline, 1990, 1994-1999

In terms of revenues, Since PAL leads the air transport, it naturally would own the

bulk of the industry’s total revenue (Figure 3). Unfortunately, PAL has been recording a

net loss that is becoming bigger yearly (Table 3) despite its bigger passenger

enplanements. The losses are the indicator of the inadequacy of PAL brought about by

deregulation. PAL could have easily reduced its operating costs when it had financial

and labor problems but the government did not allow its restructuring and reengineering.

Hence, compared to other foreign and local airlines, PAL has more employees per

aircraft, a sure sign of inefficiency, low productivity and higher labor cost. Furthermore,

the debt burden of the airline, which was magnified by the depreciation of the peso during

the financial crisis in 1997, is also contributing to its losses.

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Figure 1 Market share in total revenue of airlines, 1995-1998, in percent (%)

Table 3 Revenue and income, by airline, 1995-1998 (Million pesos)

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Analysis

In terms of still being the flag carrier of the country, the opportunity as a pioneer in

the industry leading to the ownership of a wider range of fleet and the recipient of the

governments favor, PAL still holds a good deal of shares in the airline market. However

as presented by the preceding section of this study, it is evident that the financial

performance of PAL declined as the Low-Cost Carriers entered the competition after the

deregulation was proclaimed.

Another factor was the downsizing of the PAL fleet due to management issues

drawn by the pressure of having competitors which are offering affordable fares and also

due to the hindrance set about by the government itself about the restructuring of the

organization which led to working inefficiency and misused budget for employment fees.

Indeed, it’s apparent that there had been a loss on the market share in which PAL was a

former king.

Conclusions

This case study put a spot light on the chaos and mismanagement brought about

by the Deregulation Act and the government of the Philippines which was responsible for

PAL’s declining financial performance. Even though deregulation played an important role

in leading PAL into a plummet, financially speaking, the government should have at least

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made steps to salvage the flag carrier. Unfortunately, the government seemed to care

less.

Indeed, the administrative levels are always responsible for the organizations

underneath them. Deregulation may have opened the airline market for Low Cost Carriers

like Cebu Pacific and Air Asia, yet, if the government payed attention to the needs of PAL,

it could have been steered away from loss in both market share and financial declination.

References

Weisman, E. (2012). Trade in Services and Imperfect Competition: Application to

International Aviation. Dordrecht, Netherlands: Kluwer Academic Publishers.

Boquet, Y. (2017). The Philippine Archipelago. Cham, Switzerland: Springer.

Austria, M. S. (2001). The State of Competition and Market Structure of the Philippine Air

Transport Industry. Makati City, Philippines: PASCN.

Ison, S. (2017). Low Cost Carriers: Emergence, Expansion and Evolution. New York,

USA: Routledge.

Acknowledgements

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 Thanks be to God almighty for granting the researcher the wisdom and strength to

finish this case study in spite of the work loads and the pressure of the deadline.

Special thanks to Engr. Medina for giving his class an avenue for personal inquiry

which fueled the interest of the researcher for this study.

Thank you Dad, Mom, Kym and Nana!

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Appendix

Table 3 Domestic passenger traffic, by airline, 1994-1999

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Table 4 Seat capacity per airline, 1990, 1994-1999

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Figure 1 Market share in total revenue of airlines, 1995-1998, in percent (%)

Table 3 Revenue and income, by airline, 1995-1998 (Million pesos)

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