PAL urged not to pursue deal to form Cambodia Airlines

By Lenie Lectura, BusinessMirror

Posted at 02/05/2014 

MANILA - Flag carrier Philippine Airlines (PAL) is said to be better off not pursuing a deal with Royal Group of Cambodia (RGC) to form Cambodia Airlines Co. Ltd., saying there are other “bigger priorities” for the flag carrier.

The Center for Asia-Pacific Aviation (CAPA) said PAL’s decision to shelve and question the viability of its Cambodian joint-venture project is the right move.

“The group should focus on the Philippine market, where it has opportunities but challenges including stiff competition from LCCs [low-cost carriers]. It should avoid the temptation of revisiting the Cambodian project or pursuing any other potential overseas joint venture,” the aviation think tank said in a report.

PAL was supposed to form a joint venture with Cambodia’s Inter Logistics (Cambodia) Co. Ltd. (ILC) on July 15, 2013. This was later moved to October 15. But the venture did not push through as planned as elections took place in Cambodia.

PAL was supposed to invest $10 million for a 49-percent stake in Cambodia Airlines, which is 100-percent owned by ILC which, in turn, is owned by RGC’s Neak Oknha Kith Meng.

PAL was supposed to pay $1 million as downpayment upon the completion of closing conditions in July. The remaining $9 million will be paid after a capital call made by the board of Cambodia Airlines.

“While PAL has enough aircraft commitments to support a new overseas venture, the group is better off focusing on reducing expenditure and improving profitability of its Philippine operation. In recent months the group has added three destinations in Australia, five in the Middle East, one in Europe and several within Asia. One of the Australian destinations has already been cut while a planned sixth Middle Eastern destination was pulled [out] prior to [the planned] launch. Further long-haul expansion is expected in 2014, including up to three destinations in continental Europe. Trying to also juggle the launch of an overseas affiliatewould pose a distraction, draining resources and the attention of management when significant work is required at home,” said CAPA.

The think tank noted that PAL needs to focus on maturing its new markets and building up its Manila hub. It also pointed to the need to forge new partnerships to help market its new long-haul flights and virtually expand its network.

CAPA pointed out that All Nippon Airways could help support PAL’s expansion in Japan.

“PAL is not in a global alliance and has a limited number of code-share partners. Expanding its partnership portfolio is much more pressing than building its own empire with overseas affiliates. Cambodia may be a growing market with opportunities but is small and can barely support additional capacity to the Philippines yet alone a new full-service airline,” CAPA noted.

CAPA said the Cambodia-Philippines is a small market, with Filipino visitors numbering only 109,000 in the first 11 months of 2013.

PAL would rely heavily on transit passengers for the Manila-Phnom Penh route and viewed Cambodia Airlines as a potential feeder as PAL pursues rapid expansion of its international network. But the opportunities to use Cambodia Airlines to feed PAL’s long-haul network would have been rather limited as the Philippines is not well geographically positioned to serve Cambodia’s traditional source market of Europe,” added CAPA.