PAL joins the budget airline bandwagon

Posted at 05/01/2009 12:30 PM | Updated as of 05/04/2009 8:21 AM

As low cost airlines buck the global aviation trend of declining revenues, more Philippine airline companies are embracing the budget business model.

This seems to be the case even with Philippine Airlines (PAL), the country's and Asia’s oldest commercial aviation company.

Long considered a legacy airline—as opposed to a budget airline—PAL, however, is learning that embracing the new business model could be thorny.

In recent days, travelers have been flocking the offices of PAL after ticket buyers could not complete their flight bookings via the Internet. PAL has launched its “Real Deal” promotional fares where travelers could avail of prices slashed by more than half if they purchase the tickets online.

Cecil David, one of the many who wanted to avail of the promo, told ABS-CBN News while waiting at PAL’s Cubao office that she has been trying to book online since 1 a.m. on Monday. By Tuesday, she still could not complete the transaction on PAL’s site. “I could have saved a lot. Can you imagine, I could go to Sidney with a ticket that's only $318?”

PAL's one-way fares on economy class to other international destinations have been cut as well. A roundtrip flight from Manila to Los Angeles, San Francisco, Vancouver could be had for only $488 for travels made between May 16 and August 31 this year. Travels to Jakarta and Hong Kong could go as low as $48, and to Bangkok, $58.

While the promo fare rates exclude surcharges and fees, the savings have been attracting a throng of PAL website visitors, causing the site to bog down.

In a statement, the airline company said, “PAL is experiencing an unusual number of website visitors who want to avail of its Internet Promo Real Deal. PAL is implementing measures to get in touch with these customers to assist them in completing their transactions.”

Been there done that

These birthing pains are not new to Cebu Pacific, PAL’s fierce competitor.

Cebu Pacific, the first budget airline in the Philippines and Southeast Asia, also tapped the Internet to sell low-priced ticket to travelers destined for local and international destinations. Cutting on all possible costs on top of the fares, the Internet transactions was the low cost airline’s way to reduce add-on expenses traditionally given to middlemen, such as travel agents.

When Cebu Pacific introduced fares way below PAL’s rates both for local and regional destinations, its servers also bogged down when excited passengers visited the site. The company had to build up strong consumer service and corporate image groups to address numerous complaints.

Candice Iyog, Cebu Pacific’s spokesperson, had to constantly remind the public that the promotional fares are only applicable to limited number seats. She and the rest of the airline’s top officers hammered the message that passengers who would like to avail of the promotional fares have to book their tickets way before the flight date itself, otherwise the travelers would likely lose the lower-priced tickets to someone else.

This reinvented the Filipino’s previous mindset, which was shaped by legacy airlines like PAL.

Before, to avail of promotional fares from, say PAL, one could take his chances that the airline would place the tickets on sale a few days before or on the flight date itself. The logic would be that the airline has already sold enough seats in a particular flight to cover its operating costs and meet required margins. The tickets sold and considered under promo are just financial gravy.

Aviation expert Benjamin Solis gave an illustration: “If the seats normally cost P3,000, and the number of minimum seats worth P3,000 have already been sold, they can now afford to sell the extra seats at promo prices, say P1,000. If 8 people decide to avail of the P1,000 tickets, then the company earns an extra P8,000.”

Solis added, “To an airline, P8,000 is better than nothing at all." After all, an airline seat is considered a “perishable product."

Cash management

Budget airlines, however, have an entirely different mindset. Solis explained that the number of seats that a budget airline throw away for a promo has been pre-computed. "They know the historical performance of a flight, which is dependent on seasons, fiestas, graduations, holidays, name it, they have added those variables in their computation."

"They already know that, at a certain period of the year, a certain number of Filipinos will travel by air. So they know that if they have one million seats for that period, they could sell, say 650,000 seats without batting an eyelash. They could then afford to sell the 350,000 seats for, say P1. That’s still P350,000 additional funds for the company," he explained.

Why then would budget airlines want travelers to book ahead?

Solis said that as soon as the budget airline has come up with a good estimate of how many seats could be included in the promo, it immediately launches campaigns to entice travelers to book their tickets online. Again, the budget airline’s carrot for booking ahead is that someone else could buy the lower-priced fares ahead.

In other words, budget airlines are highly dependent on revenue management models—they compute how many seats could be sold for less—and the cash management team. The latter plays on the time value of money concept as applied to the cash paid by early bookers.

This means that since early bookers buy their tickets way ahead of the flight date—sometimes up to 3 months ahead of the flight—the company could invest the fares collected to earn extra.

Solis explained that since the budget airline also earns from the payment of the early bookers, by the time the flight date nears, it is not as desperate anymore to sell extra seats. In fact, most of the time, fares sold on the day of or a few days before the flight itself are even priced higher than the normal rates.

“This shows that the DNA of a budget airline is very different from a legacy airline,” Solis stressed. With Adrian Ayalin, ABS-CBN News