PHILIPPINE AIRLINES Microeconomics case problem

PHILIPPINE AIRLINES: What’s next?
Philippines airlines started its history on March 15, 1941 on a small twin-engine Beech Model 18 flying 212 of pure skies from Manila to Baguio with a full load of five passengers. Upon the outbreak of the pacific war, PAL’s two aircraft were pressed into service with the US army Air Corps.
Post-war operations began on February 14, 1946 with five ex-military Douglas DC-35. In July, the airline chartered DC-4s to carry American service men home to Oakland, making PAL the first airline to cross the Pacific. Regular DC-4s service to San Francisco began in December 1946. In May 1947, PAL opened a route to Europe. By 1952, the international route network covered two-thirds of the wold, and the government became the majority stockholder.
At present, PAL uses the most advance technology in the local airline industry. Technical centers were constructed to perform ground handling for other airlines and contract work for the states and Philippine Military services. Computerized reservations systems link most PAL sales outlets: 103 in the Philippines and 56 worldwide. The PAL Data Center at the Manila Domestic Airport is the core of the most extensive computer system in the Philippines today. A massive refleeting program was introduced to be able to cope with the standards of the industry. Indeed, this program paved the way for the problems they are facing right now.
Closure
Philippine Airlines (PAL) is facing its worst crisis. Foremost in the company’s mind is how can it possibly overcome problems created by the economic turmoil that has been bagging the Asian region since July 1997- a situation few quarters were able to predict. What do they do in times of decreasing demand for air travel, poor revenues, increasing operational cost, and when credit to cover financial obligations is almost non-existent?
The main reason why PAL suffered financial problems was because of the massive refleeting modernization program, which was funded through loans made from local and international creditors. It has reached a point where it can no longer keep up with its obligations. Then, the labor unrest come into force because of the need to downsize manpower as a solution to its financial problems. The pilots rejected a scheme to retire 200 colleagues using a provision in their CBA which would not give them enough monetary benefit that will compensate their year of service with the company. The ground employees protested the manner by which the management implemented a retrenchment program on their ranks as a result of the 22-day pilots strike. The downsizing was a bitter pill to swallow.

Chain of Events Prior to the Closure
June 1998
The 620 PAL pilots went on strike paralyzing PAL’s operations.
1,800 ground employees were retrenched.
July 1998
Philippine Air Lines Employee Association (PALEA) went on strike to demand the reinstatement of the retrenched members who they claimed were dismissed by violating their CBA provisions.
September 1998
Lucio Tan gave out a proposal to PALEA officers, the acceptance of which will ensure the survical of PAL.
PALEA officers accepted the proposal.
Members of PALEA rejected the proposal and demanded a retraction from the officers.
Officers retracted on a condition that a referendum is held on the proposals. Referendum under the sponsorship of DOLE was held. “NO” votes prevailed.
Closure becomes reality.
Management side (Interview) The closure was done because the company is on the brink of bankruptcy. It was due to the unforeseen economic crisis. There is no problem with the management and labor. The management then gave a proposal to avoid the closure of the company.
Labor side (source from Newspapers) They are afraid that the management can easily fire them without the CBA. They are also worried about the recognition of the labor union even if the CBA is suspended. Another referendum was made and the “YES” votes prevailed which means that they agreed to the proposal of Mr. Lucio Tan maybe because of limited options they have.
REACTION (Written by a PAL employee) The upheavals in PAL can best described as “Bad Luck”. After 57 years in existence, who would have say that management expertise is lacking, maybe inappropriate to the call of the times but never lacking. The labor unions have enjoyed the rights since day one of their foundation but again due to the call of the times, they have just ask for more. Each one has its own reasons for being so the collapse of the enterprise come to fore and closure was inevitable. The Yes or No vote. Both are evil but we chose the lesser evil- Why Yes?
1. Yes means reopening of the airline, a must for national interest as well as individual worker’s interest. The industry is vital to national trade and tourism. Its absence could slow down the Philippine economy further. While it’s true that there maybe other airlines, PAL has the edge in facilities, human resources, and worldwide recognition.
2. The suspension of CBA can still be questioned in court for its legality and can be pursued by the union.
3. There are labor laws to protect the workers.
Effects of the Closure in the Economy The economy then was in recession so the people did not consider air travel. Many PAL workers went home jobless. GNP drops because of low productivity. Business opportunities were cancelled or delayed due to lack of Air Transportation.
Re-opening
Pal opened its door when all the problems were partially solved. Owner Lucio Tan infused capital to the wingless airline, which was not enough for its continued survival. Selling of some assets were considered to pay creditors. It lessened flight destinations to be able to lower operation cost. A possible management turnover might happen for the survival.
Rehabilitation Plan The plan was mainly to infuse capital to PAL airlines. Possible investors were invited for the infusion of the capital. Selling percentage of ownership were also considered. Foreign investors such as Cathay Pacific, Northwest were thinking of possible investment to the said airline. A $150 million capital infusion was planned but the Securities and Exchange Commission (SEC) did not approve it last December 1998. Selling of shares worth $11.916 million in abacus international, one of the biggest international computer reservation systems in the world was considered to raise cash for operations. A new rehabilitation plan worth $200 million is set to be submitted on March 15, 1999 for the approval by the SEC.

Prepared by: Prof. Narciso Isidro Jr.,MBA