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Fuel costs force PAL to drop magazines(Business World (Philippines) Via Thomson Dialog NewsEdge) Ever wondered why there is less reading material aboard Philippine Airlines (PAL) flights? Rising fuel costs have become such a concern, said PAL President and Chief Operating Officer Jaime J. Bautista, that Asia's oldest airline is no longer carrying ancillary materials such as magazines in an effort to bring down aircraft weight. A heavier aircraft consumes more fuel, he told BusinessWorld in a recent interview. The airline is also working with global industry group International Air Transport Association (IATA) to look for the shortest possible routes for every destination and identify the best way to take off using the least amount of fuel, he added. Jet fuel expenses account for the single largest share, a minimum of 37%, of every airline's total operating expenses. Just recently, the IATA released a global projection of total industry fuel bills reaching $112 billion by yearend at an average price of US$66 per barrel. According to the Civil Aeronautics Board (CAB), the price of jet fuel has ballooned to $2.14 per gallon from only $0.93 per gallon in January 2004. Taking into account the $0.53 per gallon price in December 2001, fuel prices have spiked. PAL said it consumes some five million barrels of jet fuel a year. "With our cost-cutting measures, I think we already registered savings of between four and five percent," Mr. Bautista said. PAL's fuel expenses for fiscal year 2005, ending March last year, climbed to P447 million from P133 million, bloating operating expenses to P46.86 billion from P39.24 billion previously. High-flying Cebu Pacific Air, Inc., meanwhile, has not been spared the impact of more expensive fuel. To soften the blow, Cebu Pacific said in an e-mail reply to BusinessWorld's questions that the focus now is to enhance operating efficiency through the use of technology and maximized aircraft utilization. It singled out its e-ticketing system as having helped cut costs. It estimated that processing an e-ticket costs Cebu Pacific just $1 as opposed to the $10 spent on a paper ticket. The equipment needed to jumpstart the process, however, is costly. Cebu Pacific said "more than 90%" of tickets from its wholly-owned 10 distribution centers nationwide are electronic tickets. The airline started to issue electronic tickets in 2004. In addition, the Gokongwei-owned airline said ensuring a maximum passenger load for every flight helps in recovering the additional fuel cost. With its fare discount scheme, Cebu Pacific said it is confident that passenger loads will not taper off. Interestingly, the IATA said in its latest advisory that the price of oil nor higher interest rates have not affected passenger numbers. However, this will not necessarily translate to higher income, it said. According to CAB data, the domestic airline industry's passenger load factor (PLF) rose to 67% in the first quarter, up slightly from the 65.8% in the same period last year. PAL's Mr. Bautista said rising jet fuel costs will not affect income projections, adding the impact will not be as severe as in other airlines. "It will not be that much because we already have a budget for that plus we have already implemented some measures to mitigate the impact," he said. PAL is keeping its target of $20 million in net income and $1.2 billion in revenues for fiscal year 2006 which ends March next year. PAL has secured contracts with jet fuel suppliers with various maturities up to March 2008, which the company described in a report to the Securities and Exchange Commission (SEC) as "taking advantage of market conditions and to minimize the cost of hedging." As of March 31 last year, PAL had total contracts equivalent to 6.2 million barrels or P1.63 billion. For Cebu Pacific, the company said it is presently reviewing the impact of higher fuel prices on its operation. "But [there are] no definite plans yet to reduce income target for 2006," Cebu Pacific said. The company did not disclose its income target. Its SEC filing showed 2004 fuel expenses - when jet fuel was still at $0.93 per gallon - as having more than doubled, at P35.09 million from the previous year's P16.18 million. Total operating expenses for 2004 was P7.2 billion from P6.06 billion previously. Operating revenues stood at P6.09 billion in 2003, rising to P7.4 billion the following year. Its net income was P6.77 million and P130.32 million for 2003 and 2004, respectively. Copyright 2006 BusinessWorld (Philippines). Source: Financial Times Information Limited - Asia Intelligence Wire. |