PAL Results a New Kind of Ugly

Madhu Unnikrishnan
June 14th, 2020 at 7:23 PM EDT

  • Philippine Airlines is no stranger to ugly financial results. But not this ugly. Battered by Covid’s wrath, the airline reported a negative 20% operating margin for the turbulent first quarter. That’s a giant reversal from positive 6% in the same quarter last year, as revenues dropped 18% but operating costs increased 5%. These numbers were heavily skewed by big hedge losses, which drove fuel costs up by 39%.

    As of today, PAL is operating a limited flight schedule covering most of its top international destinations, including overseas cities like Los Angeles, San Francisco, New York. Honolulu, Toronto, Vancouver, London, and Dubai. But most routes operate just once a week and in some cases will arrive in Cebu rather than Manila, when testing facilities at Manila airport are backed up. Passengers who land in Cebu will be tested for Covid there and forced into hotel quarantine until getting their test results (usually 24-to-48 hours). The point is, these are flights PAL is operating for emergency use only.

    Looking ahead, the Philippine government hopes to open selected Covid-free islands (like Boracay) for tourism, at first marketed to domestic travelers. It then hopes to have these islands join various prospective bilateral or multilateral travel bubbles, with Australia and New Zealand, for example, or with fellow countries in the ASEAN region. South Korea, as it happens, is the single most important source of tourists for the Philippines. Manila might take longer to see air travel normalize.

    A longer-term question for the capital is the fate of plans to develop a new airport — the current airport was grossly insufficient to handle pre-Covid levels of traffic. In the meantime, PAL itself is cutting costs in a bid to stay solvent. Selling a 10% stake to Japan’s All Nippon last year provided some new capital. PAL’s controlling shareholder has more recently injected new funds. It’s joined with rivals Cebu Pacific and AirAsia in asking for government relief but so far unsuccessfully.

Transat’s Summer Flight Plan Depends on Borders Reopening

  • Canada’s Transat was headed for its best winter results since 2009. Profits were up sharply y/y during its November-to-January quarter. February too, was more profitable this year than last. But then along came Covid, decimating demand from late March and causing Air Transat to ground all of its flights on April 1. Revenues for its February-to-April quarter thus plummeted 36% y/y, though the company did still manage a positive 4% operating margin ex special items (it doesn’t break out results for just the airline unit). Flights have remained grounded.

    But last week, the company announced a July 23 restart date, using mostly A321 LRs to reopen 28 routes. A few will be domestic, but as a primarily international airline, most will be to Europe. Some will be to U.S. and Caribbean sunshine destinations too, though peak season for these routes is winter, not summer. Where in Europe will it fly? Family-visit markets are a target, linking Montreal for example with several cities in France (Paris, Marseilles, Lyon, Bordeaux, Toulouse, and Nantes). Toronto will see a few reopened routes to the U.K. Also starting are flights to Portugal, Greece, and Italy, all welcoming international travelers already.

    Transat’s summer flight plan, however, depends on Canada itself reopening its borders by July 23. But that’s not the only thing Transat is talking to Canada’s government about. Unlike the U.S. and most European governments, Ottawa hasn’t provided any meaningful airline-specific aid, just subsidies to help pay airline workers. Transat hopes it can at least get some financing help to fortify its staying power until Q4, when it hopes to close a takeover deal with Air Canada.

    That deal, which still requires Canadian and European regulatory clearance, forbids Transat from borrowing more money before the deal is closed. Fortunately, its cash cushion is sufficient for now, thanks in part to various asset sales in recent years, and a decision to exit hotel development. Also helpful: Its refusal to issue any cash refunds, instead giving customers travel vouchers valid for the next two years (Ottawa has been helpful here, allowing such a policy). More than 85% of its workers are on temporary leave.

    Ancient A310s have been permanently retired. It’s negotiating to return all of its B737s as well. Three more A321 LRs by contrast, are still due to arrive in the coming months. What does it expect this summer? Bookings are starting to exceed cancellations. That’s good. But there’s still a lot of uncertainty, encapsulated by four key questions: 1) when will customers be allowed to travel? 2) Will they want to travel? 3) Will they be able to afford to travel? And 4) will they be afraid of catching the virus if they travel?

    Gradually, the company is reopening its travel agencies across Quebec and elsewhere in Canada, hoping to sell at least some tickets this summer, salvaging a bit of what’s typically its best season. But Transat thinks it will take several years before a return to 2019 traffic levels.     
Madhu Unnikrishnan
June 14th, 2020 at 7:23 PM EDT

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