INTRODUCTION

In Asia, one of the first countries to embrace air transport is the Philippines.

Founded in February 26 1941, Philippine Airlines made Asia’s oldest carriers and

oldest operating under its current name. The airline’s first flight was made on

March 15, 1941 with a single Beech Model 18 NPC-54 aircraft, which started its

daily services between Manila and Baguio, later to expand with larger aircraft such

as the DC-3 and Vickers Viscount. Today, despite the numerous challenges faced,

the Philippine Airlines Industry still survives with more than 50 destinations within

the Philippines and around the world.

Philippine Airlines (PAL), is the flag carrier of the Philippines.

Headquartered at the PNB Financial Center in Pasay City. It is the first and the

oldest commercial airline in Asia operating under its original name. (PAL) deeply

involved itself in shaping the course of historic events and nation building. With its

every take off and touchdown, PAL planted the seed of growth.

PAL has become one of the most respected airlines around the world with

a young and modern fleet of 47 diverse aircraft and a route network that spans 31

foreign cities and 30 domestic points.

HISTORY AND MILESTONES

February 1941 – Philippine Airlines is founded by a group of businessmen led by

Andres Soriano, one of the country’s leading industrialists.

December 1946 – PAL starts regular service between Manila and San Francisco.

June 1962 – PAL enters the jet age with the introduction of DC-8 jetliners.

August 1, 1971 – Frankfurt is added to the European route as PAL continues to

expand its international services.

B727-200s, making PAL the first Asian carrier to fly into China. On the same day,

PAL began carrying Filipino contract workers to the Middle East with the

introduction of services to Bahrain.

September 18, 1992 – PAL is granted by a consortium of 18 local financial

institutions a record-setting US$122million financing package for the purchase of

10 new long-range aircraft.

July 6, 1993 - PAL's first female pilot, Ma. Aurora "Aimee" Carandang, flew for the

first time as a full-fledged captain on a Fokker 50 flight from Manila to Baguio.

July 6, 1993 - PAL flew its first million miler on a flight from Manila to Ho Chi Minh.

Businessman Friedrich E. W. Jahns had flown exactly 1,155,538 miles with PAL

when he was awarded an 18-karat million-miler pin.

August 26, 1993 - Jose Antonio Garcia, PAL consultant and former president and

COO of Asia Brewery, and Jose P. Magno, GSIS chairman, are elected to the PAL

board of directors while Carlos G. Dominguez retained the chairmanship and

presidency of the airline during the annual stockholders meeting.

January 1995 - Lucio C. Tan becomes Chairman and Chief Executive Officer.

August 2002 – PAL unveils a revamped and enhanced frequent flyer program,

Mabuhay Miles.

May 2004 – PAL launches E-ticketing where passengers could book, pay and get

a seat by phone or thru internet.

November 2009 – PAL takes delivery of the country’s first Boeing 777

March 2011 – Philippine Airlines celebrates its 70th year by commemorating its

storied past while charting a course for the future.

2
November 4, 2013 – PAL returns to Europe after 15 years with a five-times-

weekly, non-stop service to London Heathrow Airport. The new service comes just

four months after the European Union took PAL off the blacklist that prevented

Philippine carriers from operating to the continent.

January 17-19, 2015 – PAL reprises its role as “Shepherd One” – the official

carrier of the pope, leader of the universal Roman Catholic Church – during the

apostolic visit of Pope Francis to the Philippines. On January 17, a PAL A320

jetflies Pope Francis to and from Tacloban in inclement weather where he

commiserated with the survivors of November 2013’s super typhoon Yolanda. On

January 19, a PAL Airbus A340-300 flies the pontiff back to Rome at the conclusion

of his five-day visit. PAL president Jaime J. Bautista accompanies the pope on the

15-hour non-stop flight.

March 15, 2015 - On its 74th anniversary, PAL returns to New York after 18 years

with a four-times-weekly service from Manila to John F. Kennedy International

Airport via Vancouver. Airbus A340-300 aircraft are deployed on the route, the

longest in PAL’s network at 14,501 kilometers. Chairman Lucio C. Tan and

President Jaime J. Bautista are both on the inaugural flight, which is warmly

welcomed by the Filipino community on the U.S. East Coast. New York is PAL’s

fifth destination in the U.S.

April 25, 2015 – PAL launches a three-times-weekly service to Quanzhou in Fujian

province, China, the ancestral homeland of most Filipino-Chinese families. Airbus

A320 aircraft are deployed on the route.

May 4, 2015 - PAL continues its financial turnaround with a total comprehensive

income of $85 million for the first quarter (January to March) of 2015. It reverses a

$20.7 million loss incurred in the same period of 2014. The profit is attributed to

the increase in passenger traffic following the opening of several domestic and

3
international destinations, as well as aggressive sales campaigns that resulted in

improved yields.

MARKET STRUCTURE

For 22 years, Philippine Airlines, being the first air transport company was

able to dominate the country’s domestic airline industry. The monopoly created

control over the domestic flight schedules, number of routes served, flight

frequencies and fare. Moreover, it also resulted inefficiency in the quality of

service, since it was not tailored to the demand. The airline was not concern to

keep its service to certain standards to keep and attract even more customers

since it knows that passengers had no alternatives. Left with no choice, travelers

have to contend themselves of what PAL has to offer.

Today, domestic air transport industry has evolved into oligopolistic

structure. The liberalization under Executive Order 219 signaled the entry of new

airlines in the industry. The bigger players, as defined by the size of their fleet and

aircrafts (Philippine Airlines, Cebu Pacific, and Air Philippines) are concentrating

on the major trunk lines where traffic demand is heavier while smaller airlines (Zest

Air and South East Asian Airlines) are flying the secondary or tertiary/ rural routes

where traffic demand is lighter.

The entry of new players resulted in intensive competition in the business.

Competition opens the air industry to travelers who previously could not afford to

travel by air by giving promotional and discounted fares. Furthermore, it provides

passengers a wide range of choices on departure schedules, facilities and service

quality.

4
THE INDUSTRY: THE PORTER’S FIVE FORCES

The growth in the domestic airline industry is fast but the competition has
been fierce for the last few years. The porters 5 forces model is a good
representation of our analysis because it stresses the risks of entry by potential
competitors, bargaining power of buyers, threats of substitutes, bargaining power
of suppliers, and the effects of rivalry within the industry.

Threats of New Entrants

Regulatory Barriers

The government does not allow foreign carrier to fly the country’s domestic

routes, thus limit the domestic market to domestic airlines

Brand Loyalty

In the airline industry, passengers are concerned about safety, reliability, service

and punctuality.

Economies of Traffic Density

Thus refers to the fall in average unit cost as the number of passengers

travelling on a particular route increases. This is achieved if an airline adds flight

in a route or seats on existing flights. If the incumbent airline is realizing economies

of density in a route, potential entrants are deterred from entry by the choices

available to them. That is, entry can be made either on a small scale but with a

significant cost disadvantage or on a large scale that is likely to depress airfares

significantly.

Incumbent airlines possess some advantages that would prevent potential

entrants from achieving economies of density. One, incumbent airlines generally

have established interlining agreements with other airlines that could feed

connecting traffic into the route at issue. There are significant reductions in transfer

costs available for passengers who prefer interline travel. Potential entrants would

therefore have difficulty attracting this kind of passengers without interlining

5
arrangements. But making interning arrangements could also prove difficult and

could put the potential entrants to either duplicate the incumbents existing

arrangement or hire existing airlines who can provide feeder services. Most

incumbent airline and hence, would only be willing to shift loyalty if offered a higher

price.

Frequent Flyer Program

The existing frequent flyer program of the major players in the airline industry

(Philippine Airlines: Mabuhay Miles) can also act as entry barrier to potential

entrants since these programs build passenger's loyalty to the airline offering them.

Study shows that travelers particularly business travelers always choose their

flights in order to acumulate FTP mileage points. These FTP points can eventually

be converted into free airline tickets or seat upgrade. Thus, potential entrants

would have difficulty pulling the existing clients who are already a member of the

carrier's FTP.

Use of CRS (Computer Reservation Systems)

The use of Computer Reservation Systems has also the potential to close out

potential players from the market of ticket sales. The CRS is a device that can be

used to save time and cost in handling the growing number of flight reservations.

With the existence of CSR, travel agencies can easily view the seat allocation as

well as the prices available of the certain airline. About 75 percent of flights mode

through CRS are made from the first screen page of the CRS (Hanlon, 1996).

Thus, airlines displaying their seat availability on the first screen of the page can

be a vital source of competition.

Bargaining Power of Customers

Despite the Global crisis, the Airline Industry is trying to stay afloat and

profitable. The trend in the Domestic Airline industry has changed over the years.

The consumers demanded a more competitive industry by seeing lower prices.

6
This cause the airline to charge prices according to the current demand of the

passengers.

Threats of Substitute Goods

The source of competition in the airline industry is coming not only in the

industry itself but also from the alternative modes of transportation such as water

and land. The shipping industry is one of the major competitors of the air transport

industry im providing transport services in the southern part of the country.

Currently, shipping companies are also offering discounted and promotional.

Bargaining Power of Suppliers

Labor Cost

Labor is the largest single expense of the airline companies. The Airline

workers who belong to one of a dozen labor unions have strong power in

negotiation with the airlines since most of them belong to labor unions.

Fuel Cost

Next to labor, fuel Cost is the second highest expense in the airline

operations. Prices of fuel tend to fluctuate on a monthly basis. The increase in the

cost of jet fuel will also increase the operating cost. Thus, monitoring the prices of

fuel in the world market is crucial.

Competitive Rivalry Within An Industry

The airline industry in the Philippines is highly competitive. Though there

are only few players, all are basically offering the same product. As a result,

companies generally earn low returns because the cost of competition is high.

Currently, major airline companies namely Philippine Airlines and Cebu

Pacific are slowly dominating the secondary and tertiary routes. Last year, the two

airlines bought new smaller fleet to cater to demand of the growing market in the

7
cities with small airports. The entry of these airlines can serve as a major threat to

small players like Zest Air and Seair who are previously capturing majority of the

passengers. Moreover , since CEB and PAL have larger aircrafts, the spread of

cost is bigger. Hence, they have more ability to charge lower airfare compared to

the latter.

Aside from the domestic routes, Cebu Pacific and the Philippine Airlines are

competing head to head in the international destinations. Cebu Pacific is

increasing its passenger traffic in the international scene woth the launching of new

routes and buying the potential merger of Zest Air and Seair can strengthen the

competition within the industry. They plan to purchase additional aircraft to enter

into the international market and to streamline the redundant domestic destinations

to cut down the costs.

External Threats and Market Opportunities

External Threats

Fuel Price

The current threat in the airline industry is the fuel price. The increase in the

jet fuel cost makes the airline cut in the domestic passenger fares. At present, the

fuel surcharge being imposed to the travelers is a temporary relief granted to the

airlines to help them recover losses they incur from higher jet fuel prices.

Government Intervention

The implementation of open skies policy can have an adverse effect on the

operations of local airline companies. Under the open skies policy, national carrier

would have the right to fly over a country without landing, to stop in a country for

refueling or maintenance without transferring passengers or cargo, and to carry it

from one country to another and vice versa. There was no limitation on airline

designation, that even non-flag carriers can fly there from multiple designations.

8
Granting access rights to foreign airlines has no clear guarantee that governments

of the participating foreign carriers would also grant the same concessions.

Market opportunities

Low Fare Concept

The domestic airline industry faces imminent competition and price wars among

the domestic players. Passengers are slowly accepting the concept pf the low cost

carriers. To adapt to the demand of the travelling public which is low cost and high

quality airline, the industry players are continuously reducing its regular fares.

Passengers can now enjoy all year round discounted fare by planning and buying

their tickets ahead of time. The advance booking is a major boost for any airline as

it allows them to better forecast passenger volume and maximize revenues on a

per flight concept. More importantly, the new low fare concept will able to capture

a good fraction of the alternative sea transportation market, therefore, further

growing their base market.

Tourism as a Complimentary Industry

Complimentary industry like tourism will increase the demand for airline

service. A high volume of tourist arrivals means a high probability of tourists taking

the air as a mode of transportation to explore the available tourist spots in the

country. The increasing passenger traffic in cities like Busuanga and Caticlan can

be attributed to the growing number of tourists.

Airline companies locally are starting to build partnership with hotels and resorts

creating tour packages to cater to the demand of both local and foreign tourists.

9
 Strengths and Challenges

Experience

With more than 60 years of industry experience, PAL has the capability to

adapt to any situation or any circumstances that they may face

Market Leadership

Philippine Airlines has long been the market leader of the industry.

However, since the deregulation of the industry, it has lost its leadership in the

domestic market but it has remained to be the country & apposes leader in

international flights. This might be short-lived as its local competitors are now

eyeing the international routes.

Fare and Quality of Service

Fierce competition has left PAL to improve on its services and slash fares

to keep up with other local airlines. It began to embrace the electronic business by

improving its website and adding new features such as online booking.

Mabuhay Miles

Mabuhay miles is the Philippine Airlines frequent flyer program. It was

established in 2002 by merging all existing PAL frequent flyer programs namely,

PAL smiles, the Mabuhay Club and the Flying Sportsman. In line with this,

Mabuhay Miles members earn miles that can be redeemed at face value on most

Philippine Airlines-operated flights, as well as on code-shared routes of partner

airlines. With this Mabuhay Miles program, members can enjoy free tips, travel

award ticket or service class upgrade award.

10
 SWOT ANALYSIS (Internet Source)

STRENGTHS

 Air Travel

 Population Growth

 Safety Record

 Fast and Safe way to travel

 Highly Trained and Experienced personnel

 Different levels of services

 Associated pricing differentiation

WEAKNESSES

 High Spoilage Rate

 Empty seat and non – revenue producing

 Requires huge capital outpace

 Bad Weather

THREATS

 Airline Market Growth

 Technology Advances

OPPORTUNITIES

 Global economic downturn

 Price of fuel

 Plague/ terrorist attack

 Gov’t intervention

11
 SWOT ANALYSIS (Group Analysis)
STRENGTHS

 Patriotism on their business name

 Well trained staff and employees

 Internationalizations

 Good Food and Services

 Knows to compensate

 Community involvement

WEAKNESSES

 Incomplete Passengers

 Expensive Fare

 High Maintenance

 Discrepancy on their systems

OPPORTUNITIES

 Growth of the Philippine Tourism

 Well-groomed Staffs and Employees

 Holiday Seasons

 Sponsorships and Advertisements

 Long line of Service

THREATS

 Other existing competitors

 Weather Disturbances

 Air Traffic

 Rundown Facilities

 Reported minor accidents

 Lower pricing strategy of other competitors.

12
 VISION

To be the most preferred airline in Asia

MISSION

To meet the needs of the public for moving people, goods and information

and in particular for safe and reliable travel, transport, communications,

distribution and related services (Presidents Flight, transportation and

cargo services)

To offer rich services of reasonable competitive prices and at the highest

level of quality consistent with such prices;

To provide satisfying careers for employees;

To provide adequate return to its stockholders; and

To represent the best of the Philippines and the Filipino around the world.

RECOMMENDATIONS

Though it is apparent that the Airline industry is continually growing, the

Philippine Airline companies as well as the government should always think of

ways to improve and sustain the industry. Philippines as we all know is an

archipelago and the most efficient way to travel by air, domestically and especially

internationally. They may benchmark this with other countries with the same

archipelagic setting. Improving the Airline industry would entail growth to other

economic areas more importantly on tourism.

Competition between the Airline companies is also a way to make

improvements to the industry in which the government has the major role to

facilitate competition. Of course, if there is competition, these companies would

13
not be complacent and would constantly think of ways to improve their services in

order to continue being profitable. Airlines could invest heavily in the quality of

service that they offer, both on the ground and in the air. They can enhance their

ticketless travel, new interactive entertainment systems, and more comfortable

seating. When these Airline companies are able to make outstanding services and

product enhancements, these will attract foreign investments, trade and tourism.

On the International setting, improvements to the Airline industry could be

in way of tourism, since it is only by air transportation that foreigners can come

efficiently to the Philippines. The government should advertise well the country in

order to catch attention of tourists.

On the domestic side, there are areas in the Philippines where travel by Air

is still not viable, through necessary. Airline companies do not venture to these

locations due to financial constraints. The government should act upon this to

enable growth to that location. They may provide incentives to encourage these

companies to fly to that location, like reduced taxes. However, if the government

will provide incentives, the policy of that should be designed not to reduce

competition and efficiency. Again, the policies should always be for the benefit of

the travelers.

14