PAL intends to lease a few Boeing planes

UNCLAS SECTION 01 OF 02 MANILA 001135 SIPDIS Sensitive SIPDIS STATE FOR EAP/MTS TREASURY FOR OASIA TRANSPORTATION FOR FAA SINGAPORE AND TOKYO FOR FAA COMMERCE FOR BISBEE E.O. 12958: N/A TAGS: EAIR ETRD BEXP RP SUBJECT: PAL intends to lease a few Boeing planes Sensitive but Unclassified - Not for Internet - Protect Accordingly. REF: A) 05 MANILA 5937 B) 05 STATE 199212 C) 05 MANILA 5276 -------------- Summary -------------- ¶1. (SBU) Philippine Airlines (PAL) CEO Lucio Tan recently told the Charge that he intends to lease two or three wide body Boeing planes. He said that he wants to test them out before making a decision on re-fleeting for his North American routes, citing reservations over the safety of the twin engine aircraft. He showed interest in the Cape Town Treaty, which could give the Philippines preferential EXIM Bank financing for any aircraft purchases or leases, and said he would encourage GRP ratification. He also said that PAL is struggling to retain its pilots and has cut routes to stay competitive. His comments suggest that PAL is struggling financially and may be considering more profitable long-range routes. End Summary. -------------- PAL to 'try' twin engine -------------- ¶2. (SBU) Tan told the Charge that he intends to lease two or three wide body Boeing 777-300ER planes based on his positive experiences with the older 737 and 747 models and would consider purchasing more in the future if the first few proved effective. Tan appreciated the fuel efficiency and large baggage compartment of these planes but still questioned the safety of extended twin engine operations (ETOPS). He was eyeing GE Commercial Aviation Services (GECAS) for the lease because it could offer earlier delivery positions than Boeing could offer, although Boeing sales representative Ray Lau told econoff, "I know exactly what Lucio Tan's itches are and Boeing is prepared to deal with them." Tan showed interest in the preferential financing terms that could follow Philippine ratification of the Cape Town convention and said he would urge GRP officials to sign it (refs A,B). ¶3. (SBU) Tan mentioned the need for PAL to acquire a 777 flight simulator to orient pilots to the new planes. He said that his pilots either fly Airbus or Boeing and many are accustomed to the Boeing planes. FCS Counselor followed up by introducing PAL President Jaime Bautista to American flight simulator company representatives at the Asian Aerospace trade show in Singapore February 21-26. -------------- Leaving on a jet plane? -------------- ¶4. (U) Tan talked about PAL's struggles to maintain employees and to stay competitive. He said that other airlines are poaching PAL's pilots and mechanics, enticing them away with more competitive salaries that are unencumbered by income taxes. He mentioned that PAL pays pilots 300,000 pesos ($5770) per month gross and only 200,000 pesos ($3850) net after taxes, while Middle Eastern companies offer 500,000 pesos ($9615) tax-free. He also said that airlines from other countries mandated no less than six months' resignation notice as a way to mitigate attrition. According to Tan, the Board of Investments (BOI) is studying how to offer more competitive compensation packages or equalize the labor issues. ¶5. (SBU) With the exodus of qualified staff, the company's cost of service rises while it struggles to compete with subsidized Middle Eastern airlines and regional low cost carriers. According to Tan, the loss of pilots is so critical that it is affecting the company's ability to fly certain routes. He said the company has lost one-third of its pilots and is now flying with 400 pilots, which contributed to the recent decisions to suspend flights to MANILA 00001135 002 OF 002 Kuala Lumpur, Riyadh, and Laoag (Northern Philippines). This is particularly frustrating to Tan, given the financial investment and time it takes to train these pilots. "We become a training ground" for these companies, Tan complained. -------------- Comment -------------- ¶6. (SBU) Tan was vague about whether his plans were to purchase or lease any planes. In a subsequent discussion, his assistant told emboffs that Tan feels "his arm is being twisted" to buy Boeing, perhaps by GRP officials trying to leverage Tan's outstanding taxes or bid to operate the new Manila airport terminal (ref A). Tan made it clear that leasing a few planes is a better option for PAL than purchasing planes or making any large commitments right now. After assurances from the Boeing sales rep and the CDA, Tan may be less concerned with the safety of the twin engine than using his apprehension as a negotiating chip in the debate over the disputed $114 million (ref C). PAL may be interested in wide body planes to expand flights to the West Coast and tap the Filipino-American market to counter its difficulties competing in other markets. If so, the Boeing 777 would be a good fit and we will continue to encourage its purchase. JONES