Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

Week 13: April 17-18, 2024 for AOM 3B/3C – Lecture 22: Airlines from
Take-off to Landing; Lecture 23 on Airline Competitive Environment
April 19, 2024 for AOM 3A – Lecture 19 on Application of Productivity
Concepts in From Worst to First Lecture 20 on Productivity Concepts in
Philippine Airlines’ Road to Demise

Lecture 19: Application of Productivity Concepts in From Worst to First1

(AOM 3A)
A. CO at its worst in 1994
1. CO based on DOTR measurements of quality indicators of top 10 airlines in
1994
a. Last in OTP ( Optimal Aircraft Utilization) i.e., 15 minutes within
STD/STA
b. Last in number of mishandled baggage per 1000 handled baggage
c. 3x more than industry average in number of complaints per 100,000
passengers ( Quality Performance Standards)
d. 30% more than the 9th place holder among the 10
e. Among the worst in involuntarily denied boarding passengers in oversold
flights
2. The poor performance reflected in the financial standing of CO
a. In Chapter 11 twice in a row between 1984-1994 ( Financial
Accountability)
b. Continuous slide in price per stock that settled to USD3.25 in 1994
3. Company morale was rock bottom ( Personnel Care)
a. 10 presidents in 10 years with as many management schemes that failed
b. Non-compliance with management directives for lack of credibility
c. No disclosure of non-compliance because management would have changed
again before non-compliance is discovered ( Workforce Productivity)
d. One president used union busting as cost-saving measure resulting in CO
employees paid way below industry standards
e. On-the-job or industrial injury, sick leave and turnover astronomical
f. Employee cliques quarrel for scarce resources and wages
g. Ass-covering was the order of the day rather than problem-solving
h. Employees stripped the CO insignia from their uniform when out of the
workplace ashamed to be identified with the airline ( Personnel
Commitment) -
4. Bethune’s dilemma early in 1994
a. As COO he had no full control of the airline
b. Turned down United offer for better pay as he could not abandon colleagues
from Boeing, he brought into CO to help him
c. Some CO executives were desperate they were asking him to help and do
something.
d. In November 1994 he was made CEO and given full control of the airline
( Authority to match Responsibility)

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B. CO at its best, and being first, in 1995-1997

1. Focus on OTP and granting incentive pay triggered the miracle; with the
current workforce and fleet CO became: ( Reward Workforce Productivity)

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b. Consumer complaints went below industry average

c. Turned out best in the industry in taking care of passengers of oversold
flights
d. OTP improved and became contender among industry leaders
e. Became third best in all the four items in 1996 ( Kaizen: Gradual
Improvement
2. Marketing and finances also improved
a. Business Class in customer mix of 32.2% in 1994 went up to 42.8% in 1996
( Productivity in Marketing Mix and Market Segmentation) -
b. Business Class became the CO customer base over the low end
c. Made US202 million profit in 1995 over USD204 million loss in 1994
d. Made US556 million profit in 1996 over USD202 million of 1995
e. Attained 16 consecutive profitable quarters vs. 10 years of consistent losses
since 1994 ( No Substitute for Winning; Success)
3. All because of improved employee morale
a. Wages up 25%, sick leave down 29%, turnover down 45%
( Workforce Productivity)
b. Employees better paid, happier, prompt and focused at work
c. Not ashamed of their company anymore ( Personnel Commitment) -
d. No stripping of CO insignia and hiding of company ID
C. Industry and media recognition of, and accolades to CO
1. 1995 Stock of the year by Business Week
2. Positive publications by Wall Street Journal, New York Times, Fortune, Forbes,
USA Today ( Quality Recognition: Do good and make it known)
3. Invited by Honda and NASA to talk to their employees how to improve quality
and morale in the organization ( Productivity in Identity: If you’ve got it
flaunt it /share it.) -
4. Best in Customer Satisfaction and Best Airline twice in a row for 1996 and 1997
by both Frequent Flyer Magazine and J.D. Power Award of J.D. Power &
Associates
5. 1996 Airline of the Year by leading aviation industry magazine Air Transport
World, chosen out of over 300 airlines (Quality: steppingstone to get to the peak)
D. Understanding human behavior was all it took for CO to change from worst to first:
1. Explained to workforce what business CO was in – which was to take people
where they want to go, on time, with their baggage in safe, reliable, and
predictable way ( Productivity is knowing the business you’re in)
2. Gave the workforce the reason to do it – it was for them and their loved ones too
3. Expressed trust in them, and empowered them to do the job, and went out of
their way ( Workforce Empowerment to achieve Productivity) -
4. And they did their best and showed what they could really do
5. Helped them along the way while doing their job, not hindering them
6. Then explained to them the company vision for the airline and what was needed
for the workforce to do to achieve the vision, and subtly suggested a reward for
them delivering the vision ( Vision defines Direction) -

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 Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

7. All 400,000 CO workforce showed how great an airline CO was

E. 1998 partnership with Northwest for expansion (a surge in productivity)
1. Interest to buy CO was a measure of excellence
2. Partnership was in vogue and CO needed to be among the first
3. Delta (DL) and Northwest (NW) bid to buy CO
4. NW willing to own and let CO operate as a separate airline with workforce
intact
5. DL wanted a full merger and drop the employees;
6. DO went with NW not forgetting that the 40,000-workforce turned around CO
( Alliance/Merger as a Mode of Expansion) -
F. Being honest and straightforward in understanding what the customers and the
employees want is the linchpin of success as it enables:
1. The identification of strategies and methodologies in solving problems
2. The measurement of performance and communicating it to the workforce
3. Doing things with decency, honesty, and respect ( Management Transparency,
Honesty to foster Credibility) -
G. Brush with the first burst of problems in 1994; CO was in trouble because of what
was going on at the executive suite at the top
1. Doors were closed, with electronic ID to access (Open-door Policy to convey
the message top management was not afraid of its people) -
2. Executives at different pages, communication statics that filtered down the line
of disgruntled people due to poor pay and fear of losing jobs
3. CO culture after years of layoff, low wages cuts and freezes, and broken
promises
4. Backbiting, fear, mistrust, loathing
5. Infighting among units for scarce resources
6. Scheming to protect interests and turfs ( Organizational Integrity, Resiliency)
-
7. Breakdown of communications, erection of walls
8. CEO could not get things done because he did not want to reward people for
effecting changes; it must start from willingness to do and accept changes
H. Impact on the line as inaction and wars went on at the top
1. Employees feeling ashamed of own company
2. Poisonous work environment that ensured nothing gets done
3. Rude treatment of customers ( Personnel Commitment) -
4. Poor products and services if at all there were
5. CO Lite, LCC was a dismal failure
I. Tied hands in a fix: ( Responsibility without Authority will not work)
1. CEO and COO at odds is a flight with no defined destination: CEO had
authority, COO had responsibility – not fair, no chance
2. Backdoor exit for CEO rejected, CEO wanted to stay or given his walking
papers
3. COO given 10 days to present a plan for CO turnaround
J. Go Forward Plan: ( Winning was not everything, it was the only thing)
1. Marketing Plan – Fly to win
2. Financial Plan – Fund the future

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3. Product Plan – Make reliability a reality

4. People Plan – Working together
K. Marketing Plan – Fly to Win
1. Do only things that make money ( Pareto Principle)
2. Drop losing routes where CO was a minor player
3. Removing wasteful capacity kept the same revenue thus reduced cost
4. Do not tell customers what they want to buy; ask/know what they want to buy
and produce it ( Market and product research for customer wants)
5. Apologize and regain travel agents with mutually fair commissions
6. Restore the CO flights on the radar screen of the marketplace
7. Call on the customers, restore the award-winning FFP dismantled due to cost-
cutting ( Total Customer Care; Total Passenger Care in PAL).
L. Financial Plan – Fund the Future
1. No fund no future
2. Owed money from 1993 Chapter 11: ( Money begets money) reset payment
with a defined time frame when profitability is achieved)
3. Lost money in Continental Lite experiment
4. Needed to upgrade the cash and revenue forecasting system – get a better one
that comes out with accurate forecast; accurate information to win ( Value of
information: He who has the information wins) -
5. Cost of updating and improving programs and systems
6. Forecast of USD45 million profit from 10 years of consecutive losses was
daunting but it was a plan needing approval with one year stretch to deliver
7. Keep going and while coming up with plans improve the product and change the
culture of the workforce
M. Product Plan – Make Reliability a Reality
1. Back to basics – get people to where they want to go, on time, safely and with
their baggage ( OTP: Schedule, Departure, Arrival Reliability) -
2. Make the employees want to do it – ( Measure and reward); the USD65 bonus
3. Reward of US65 for every month that CO landed within the first half of airlines
in the percentage of flights arriving
4. Since CO management had no credibility – got DOTR to measure the OTP
performance which would be acceptable to the workforce ( In the absence of
credibility, get a referee) -
5. Raise the bar; to finish third or higher in OTP pay USD100, and did
N. People Plan – Working Together
1. Need to change the CO corporate culture
2. Change the way of treating people and get them to work together (
Motivational: Ugnayan, PALiwanagan, dialogue).
3. Find ways to measure and reward cooperation; encourage teamwork e.g.
a. the catering field men and cabin attendants saving a delayed flight by
collaborating or they both lose the OTP reward
b. Cargo warehouse loaders and tow tug operators collaborating to hasten
build-up of containers ( TPC3: Teamwork, Participation,
Communication).

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 Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

4. Beat the competitor at the outside by eliminating intrigues, losers and winners at
the inside, no infighting, no intrigues, no cliques
O. CEO leading the charge for Actual Change
1. First priority: showing the workforce CEO is different from the last 9 that
misinformed, blamed, and abused them for the failure of the company; must set
the tone for actual change ( CEO: Organizational and Personal Leader)
2. Get started with the plan with division of labor and start with the;
a. Announcement of the open-door policy from top down for the downward
hierarchy of management to emulate
b. Instruction to managers to introduce changes in running their departments;
any change strengthens the thought of a new management fostering changes
e.g., change meeting schedule, furniture arrangement and seating
arrangement in the briefing room, treat the office staff to pizza (
Innovation as a way out of Stagnation and Expiration).
c. Subtly telegraph to the subordinates the changes no matter how small for the
better ( Multi-Directional Communication).
3. Get everybody’s attention; be in the news, participate in TV talk shows:
a. Primarily for the attention of the employees who needed to be convinced to
cooperate; ( Workforce Motivational Ends).
b. Secondarily, to make the public aware of the changes in the company (
Commercial Communication).
4. With open doors invite the workforce to visit the executive suite at the top floors
for a chat, throw jokes, give them a tour of the suite, and answer questions e.g.
a. Is this USD65 bonus for real? You really think you can fix this company?
b. After a decade of closed doors open house at the top floor indicated change
( Sustained Communication and Motivation).
5. Make yourself comfortable. Casual dress on Fridays. Expand casual day to
season during the long hot summer;
a. The strategic objective is to dilute the neck-and-tie loathed image of
managers and be seen to be one of the boys
b. Managers who resist the change must be prevailed upon that dressing down
on Fridays is not a departmental change but a corporate change (
Organizational Harmony).
6. The art of conducting an executive staff meeting or dialogue with groups of
workforce members ( Ugnayan, PALiwanagan, Tipanan).
a. Discard the tradition of sitting at the head table at one end of a long
conference table with his cronies seated closest at his left and right
b. Sit instead at the middle table to be able to hear the participants talk, and to
maintain a more collegial atmosphere with the CEO directly facing virtually
half of the attendees
c. Be on schedule in starting and ending the meeting;
d. it is a gesture of respect for the time of the attendees;
e. it forces discipline to tackle only the number of agenda items that can be
finished within the allotted time for the meeting
f. Schedule reliability and predictability is achieved, and it prevents
embarrassments of people leaving a meeting running overtime

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Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

7. High profile measure: stop smoking (now academic, not then)

a. No smoking in offices and workstations worldwide; it is a major change, it
inspires trust initially grudgingly
b. No smoking on board the flights worldwide; no loss of passengers
8. Burn the books, liberate, let loose their creativity, empower the workforce
( Workforce Empowerment).
a. Set aside the detailed manual of procedures
b. Allow members of the workforce to use their balanced judgement
c. Do what is right for the customers but not at the expense of the company
d. Not to follow blindly the manuals that would upset the customer
e. Provide guidelines how they could balance their judgement
9. Later in the turnaround repaint the airplanes
a. A signal to the workforce that the company is staying in the business
b. A message to the customers, employees, and competitors that the company
was operating much better and professionally ( Competitive Measures).
10. Repaint/change livery of all aircraft within a specific and scheduled period
a. Not to repeat that sad experience of the past during the Frank Lorenzo
merger where many aircraft were in the old livery and some in the new livery
b. To demonstrate efficiency and reliability in meeting schedules
c. To achieve an image of discipline and professionalism
d. Use threat, if necessary, against members of the workforce that would claim
200 planes could not possibly be repainted within the time frame, or some
other obstructing reasons. ( Take the bull by the horns).
11. Spread the word: dialogue, town-hall-meeting like communication
a. Time to introduce Go Forward Plan fully to the workforce
b. Explain how it addressed not only some but all of CO’s problem
( Corporate Redemption) -
c. They would have an inkling of it, heard bits and pieces of it e.g.
1) The USD65 monthly on-time bonus
2) The new open-door policy
3) The burning of the employees’ manual
d. But they needed to know more, the whole of it
e. Questions of uncertainty and confusion; outbursts on lack of trust
1) Ask what their option is; where it is going by resisting
2) Define insanity: Doing the same thing repeatedly in the same way and
expecting different results
3) Throw a lifeline: Give us a chance; that it would help them – the USD65
monthly on-time bonus, the improved working environment, saving the
company and “ourselves” and our loved ones
12. Tell the truth: ( Corporate Transparency) -
a. Promised restoration of salary cut off during Chapter 11 to be put off
b. Reality of some lay offs
c. Closure of some workstations
d. But also share what it would be like if the plan succeeds
13. For adamant ones who do not believe it would succeed and would not cooperate

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a. A pilot will not stop flying and attempt to take control of an aircraft that is in
trouble, or he would crash with it
b. Suggest that the door is wide open, and it is their choice
( Decisive Leadership) -

Lecture 20: Productivity Concepts in Philippine Airlines’ Road to Demise2

(AOM 3A)
P. Preceding events before the PAL bubble burst of 1998
1. Monopoly under One-Airline Policy (1973 to 1986) under the Marcos regime
a. PAL absorbed AMI and FOA in 1973 ( Mergers and Acquisitions)
b. Rash of hijackings during the period 1973-1976:
1) BAC 1-11 in October 1973 (DVOMNLHKG) by three young men
2) DC-3 in February 1975 (PAGZAMMNAL)
3) BAC 1-11 in October 1975 at MDA by a PAF airman surrendered after 8
hours
4) BAC1-11 in April 1976 by MNLF armed men (CGYMNLBKIKULBKK)
replaced with a DC8 (MNLBKKKHIBEN)
5) BAC11 in May 1976 by six Muslim youth (DVOMNLZAM); firefight in
ZAM, 3 hijackers and 10 passengers died, aircraft burned down
c. 1975-1986 aircraft accidents/incidents:
1) HS748 no. 2 caught fire and crashed in rice field near MDA in Feb 1975
2) HS748 upon retraction at take-off at MDA in May 1975
3) BAC111 bomb blast in lavatory enroute MNLRXS in Jun 1975
4) DC8 crashed at landing in Haneda in April 1977
5) YS11 ditched off Mactan in July 1977
6) BAC111 bomb blast in rear lavatory in April 1978
7) HS748 overshot Jolo in July 1982
8) BAC111 overshot Tacloban in August 1984 ended up in the sea
d. Fire gutted the MDA in 1976, used Miramar (the MIA burned down in 1972)

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( Innovations triggered by unexpected events)

Fig. 20.1: Yes, we can! (Challenging the Workforce for Greater Productivity)
e. Extended use of PAL aircraft in state visits in 1976; huge receivables
f. 1977 cargo scam killed the DC3 fleet
g. 1977 government take-over of PAL from Benigno Toda
h. 1978 PAL took over and absorbed PATI ( Mergers and Acquisitions)
i. 1978-81 glory years of PAL expansion and modernization:
1) Built mammoth aviation related facilities around NAIA: Technical
Center, Inflight Center with Inflight Kitchen, Data Center, Learning
Center in Manila & Aviation School in Clark; ( Productivity through
Facilities Improvement).
2) First automated reservations systems, CPARS, installed in 1978
3) New fleet of B747-200s, A300B4s, B727s, DC8s ( Productivity and
Quality through Systems and Equipment Acquisition)
4) Recapitalization from PHP250 million to PHP1.0 billion
j. Fuel crisis steadily grew from 1973 to 1980
k. String of losses: PHP395M in 1980, PHP595M in 1981, PHP232M in 1982,
PHP2.3B in 1983, PHP291M in 1984, PHP192M in 1985-86
l. Martial Law lifted in 1981
m. Replaced CPARS with PACERS in 1982
n. New MIAA passenger and cargo terminals inaugurated in 1982
o. Installed automated cargo system, Cargonauts in 1983
p. Aquino assassination in August 1983; political chaos, economic downfall
q. 1984 year of Civil Disobedience

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r. 1986 February 7 snap election; canvassing imbroglio, Marcos declared

winner; RAM, YOU and ATOM acted
s. 1986 February 25 People Power Revolution
2. Under the Cory Aquino regime from 1987 to 1993
a. Profit & (Loss):
1) FY1986-87 of PHP318M
2) FY1987-88 of (PHP70M)
3) FY1988-89 of PHP304M
4) FY1989-90 of PHP584M
5) FY1990-91 of (PHP2.3B)
6) FY1991-92 of PHP1.1B
b. Coup attempts:
1) July 1986 led by Tolentino,
2) November 1986 led by Enrile & RAM of Honasan
3) January 1987 led by Col. Canlas
4) April 1987 led by 56 rebel soldiers in Fort Bonifacio
5) August 1987 led by Honasan and RAM.
6) December 1989 led by Honasan of RAM and Marcos Loyalists led by
Abenina & Zumel
c. Aircraft accidents:
1) SD360 in Mt. Gurain in December 1987
2) BAC111 overshot NAIA in July 1989
3) Boeing 737 caught fire on tarmac of NAIA in May 1990
d. 1988 Revocation of One-Airline Policy (EO333) by the Cory Aquino
administration
e. 5th wave of domestic competition began: 1989 – Aerolift; 1993 – Cebu Air of
the Chiongbians, PEAC of PADC
f. 1990 June PALScam breakout involving 22 PAL executives and managers
g. 1990 July Luzon 7.8 magnitude earthquake disrupted operations
h. 1990 August Desert Storm Gulf War in Iraq resulted in flight diversions
i. 1991 June Mt. Pinatubo 2nd biggest eruption of 20th century caused huge
operational disruption
3. PAL Privatization in 1992 in the Cory Aquino and Fidel Ramos Administrations
a. Bidders for 67% share of PAL equity: ( Mergers and Acquisitions)
1) UBP Group with Speedwing/British Airways with PHP6.9B bid;
2) PCIB/Gokongwei Group with American Airlines with PHP9.0B bid;
3) AB Capital/Ayala/Cojuangco Group with Korean Air with PHP9.7B bid
b. Talks of sweet deal and “Kamag-anak” system e.g., Tony Boy Cojuangco of
PLDT and Bank of Commerce being nephew of Cory Aquino; PR Holdings
established by winning group as the full owner of PAL
c. PR Holdings paid PHP7.643B to government on March 25, 1992 for 67% of
PAL with GFIs holding the 33%; Cojuangco elected both Chairman &
President of PAL, and Mario Locsin as EVP
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d. New PAL management ordered 4 B747-400s and 6 A340-200s retired the

BAC11s and SD360s phased out
e. FVR became President in June 1992 while in January 1993 news broke out
that LTan provided Cojuangco the money to pay for the 67% equity in PAL
f. LTan surfaced as the true owner of PAL reportedly because of failure of
Cojuangco in consulting him in the acquisition of capital items particularly
aircraft; that he was not consulted in the acquisition of the B747-400s and
A340-200s ( Corporate Raiding as Mode for Expansion)
g. Battle for ownership between the Cojuangco/Ayala Group and the LTan
Group ensued during the first quarter of 1993; government gave its swing
vote of 20% combined equity of the GFIs in PR Holdings to the LTan Group
h. LTan ownership of PAL not welcomed by several sectors:
1) Congressman Payumo denunciation; LTan alleged to be Marcos’s crony;
calls for to protect the 33% in PAL and 20% in PR Holdings government
equity ( Corporate Transparency, Image Building).
2) DOT Secretary Carlos called for the pursuit of Open Skies policy
seconded by former DOT Secretary Narzalina Lim
3) DOTC Secretary Garcia also announced support for Open Skies
i. In the March 1993 board meeting of PAL Sonny Dominguez of the
government camp elected Chairman & President of PAL raising the issue of
government taking over PAL after privatizing it
j. In the March 1994 board meeting Pepeton Garcia elected President & COO
while Dominguez remained Chairman & CEO as the LTan Group inched to
full control of PAL and PR Holdings ( Consolidation and Control).
k. In September 1996, the LTan Group gained full control of PAL when the
BPI-Cumulus Holdings refused to exercise its preemptive rights in the capital
call, which the GFIs refused to do also in June 1996 leaving the LTGroup to
solely answer to the capital call and gain control of PAL and PR Holdings
4. Resurgence of labor militancy in 1993; PALEA notice of strike in May 1993 due
to CBA deadlock; management countermeasures ( QIP Implementation).
a. Launch of Cost-Efficiency Quality Service (CEQS)
b. PAL-Megalink tie-up for use of ATM for booking
c. Hiring the first woman pilot, Aimee Carandang
d. Increase the number of women aircraft mechanics
e. Signed up with BA Speedwing Logica for an Accounting System (Jade)
f. Implemented Eurobond Float Program as source of financing
g. Engaged travel agents to do domestic booking/ticketing and closure of city
ticket offices for cost reduction
h. New aircraft delivery used as public relations platforms to attract the
aviation industry players and the market
5. PAL 1992 privatization gave rise to more competitors in addition to Aerolift of
Danilo Onate and Ben Solis, Cebu Pacific of the Gokongweis and Pacific East
Asia Cargo (PEAC) of PADC:
a. Astro Air in 1993 of Cong. Roque Ablan and the Clemente family
b. All Asia Airlines in 1993 of Eduardo Cojuangco, Jr., and Ramon Ang
c. Pacific Air in 1993 of the Ilusorio family

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d. Star Asia in 1993 of Don Tim Group, Butch Rodriguez, Enrique Davila
e. Silangan Airways in 1994 of the Aranetas
f. Philippine Eagles Airlines in 1994 of Island Holdings Corporation
g. Philippine Airways in 1994 of Rollie Moscardon
6. PAL’s labor problems intensified in 1994:
a. FASAP filed a notice of strike in January over demands for pay; walked out
of flights; PAL retaliated with suspensions
b. PALEA notice of strike in May for harassment, union busting, calling PAL
anti-union and anti-employee; joined by FASAP and ALPAP
7. PAL top management revamped in 1994:
a. Sonny Dominguez made Chairman & CEO
b. Pepeton Garcia designated President & COO
c. Locsin was replaced by David as EVP, Del Fonso replaced by Bien Tan III as
Financial Adviser; only Pangilinan and Zapanta retained as SVPs
8. Privatized PAL’s Profit & (Loss):
a. FY1992-93 PHP1.0B at the wake of the previous FY productivity
b. FY1993-94 (PHP451M) on the facilities and equipment expansion
c. FY1994-95 (PHP1.7B) on the resurgence of labor problems; terrorism;
impact of aviation deregulation and cost-inefficient fleet
d. FY1995-96 (PHP2.2B) due ownership struggle, labor unrest
e. FY1996-97 (PHP2.5B) due to labor unrest, downgrading to Cat 2
f. FY1997-98 (PHP8.5B) due to Asian contagion and Cat 2
g. FY1998-99 (PHP10.2) due to industrial problem, closure, revival

Fig. 20.2: A String of Losses

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9. External environment and aeropolitical problems burdened PAL

a. Terrorism as new scourge of aviation; B747-200 bomb blast over Okinawa in
December 1994 by Ramzi Yousef; Discovery of Oplan Bojinka
b. In July 1995, the US DOT downgraded the PHL to Category 2 preventing
PAL from expanding services to and from the US; unable to deploy new
A340 to US PAL cancelled SEL-LAX and YVR-NYC services
c. In April 1996, a PAL B737-300 and a Pacific Air light aircraft collided in the
NAIA runway; went to court for litigation
d. In June 1996 GrandAir and Cebu Pacific contested PAL in the allocation of
PHL traffic rights
10. FVR deregulated aviation in 1995 which triggered more airlines to surface:
a. GrandAir in January 1995 of the Panlilio family of the Grand Hotels &
Resorts Group with Dante Santos and Leslie Espino
b. Laoag International Airways in March 1995 of Shirley Ng
c. Cebu Pacific under Cebu Air in May 1995 of the Gokongweis
d. Aboitiz Air Transport in May 1995 of the Aboitiz family
e. Asian Spirit in October 1995 of an aviation cooperative
f. SEAIR in 1995 of Lopez, Dornier and Gitsis as charter airline and in July
1996 took over Star Asia which fell into operational difficulty
g. Air Philippines in December 1995 of William Gatchalian with favorable
endorsement of Vice President Joseph Estrada
h. Mindanao Express in March 1996 of the Lina Group launched operation on
BIMP-EAGA sectors after being named one of its airlines together with PAL
11. PAL’s labor problems reheated in 1995:
a. Unfavorable decision of DOLE/NLRC requiring PAL to reinstate dismissed
union leaders was appealed
b. Encouraged PALEA to increase the tempo of industrial action against PAL
c. ALPAP joined on the issue of PAL hiring 14 Malaysian pilots to fly the new
B747-400 for lack of Pilipino pilots to operate them; temporary hiring within
the CBA
d. FASAP joined on the issue of long overdue renewal of the CBA and the
hiring of more Chinese and Korean interpreters
e. The three unions formed the Association of PAL Unions (APLU) in 1995
f. Resolution of ownership issue of PAL and GFIs in June 1996 encouraged the
three labor unions (APLU) to push forward their agenda: hiring of
Malaysian pilots, conclusion of long overdue FASAP CBA, both filed notice
of strike in July; PALEA in support of the two other unions
g. DOLE averted the industrial action as strike in PAL might result in the
demise of the airline; APLU picketed the DOLE
h. Resolution of ownership issue of PAL and BPI-Cumulus in September 1996
encouraged the three labor unions (APLU) again to push forward their
agenda; PALEA struck in November 2-3 which FVR ordered settlement

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being eve of the APEC meeting in Manila on November 1-25, 1996; DOLE,
PAL and PALEA signed a settlement
i. On November 12, 1996, the PAL-FASAP CBA for the next four years till
2000 was signed after marathon meetings
j. The ALPAP’s demand of 15% salary increase every year for the next five
years was rejected by PAL raising the specter of a pilot strike on the eve of
the APEC meeting; FVR ordered PAL to yield to the pilots’ demand
12. (Productivity and Quality) measures from 1995:
a. Delivery of third B747-400 made possible non-stop Transpacific flights
b. Delivery of another A300 allowed PAL to confront GrandAir expansion in
Cebu and Davao
c. LTan gained control of PR Holdings in January 1995 with 51% on the sale of
the Soriano and Razon shares; committed a PHP5B fresh capital for
acquisition of two B747-400s four A300B4s
d. May 1995 all Transpacific flights were operated non-stop
e. In December 1995 PAL placed biggest aircraft order for 36 brand new
Boeing and Airbus aircraft worth USD4.3B consisting of 8 B747-400s and 22
Airbus A340, A330 and A320, with 4 more to be determined later.
f. Introduced services to YVR, NYC in September 1996
g. Restoration of the PHL to Category 1 and revival of suspended flights

Fig. 20.3: Pilot members of ALPA

15 struck on June 5, 1998
Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

13. Prelude to PALs Death (Closure) in September 1998:

a. String of losses in the past six fiscal years from April 1993 to March 1998
totaling PHP15.351 of accumulated loss
b. Notice of strike filed by ALPAP in December 1997 illegal dismissal of union
members and refusal to release benefits of retire pilots
c. Weakening of the peso (due to the Asian Contagion in January 1998) against
a huge refleeting program with equally huge foreign currency commitments
d. As other airlines downsized or closed PAL deferred delivery of 16 brand new
aircraft and reduced manpower by 36% (4,700 of 13,000 employees)
e. All three labor unions rallied against the retrenchment
f. An A320 overshot BCD runway in February 1998 with several injured in the
aircraft and on the ground and aircraft wrecked and cannibalized for parts
g. ALPAP struck on June 5, 1998 paralyzing PAL’s operation; violated two
return-to-work order of DOLE; June 7 PAL declared all 27 officers of
ALPAP to have lost their PAL employment
h. June 8 ALPAP submitted 11 demands for them to return to work; PAL
rejected all the demands; ( Management integrity and resolve) -
i. June 11 ALPAP relented and willing to go back to work provided PAL
would not take retaliatory action and all pilots would retain their positions;
PAL hardened its position not to take back the 625 pilots who struck
j. June 12, Independence Day, both PALEA and FASAP announced they
would join the pilot strike; PAL said it would terminate the 625 pilots for
cause which would deny them retirement and other benefits; the DOLE
upheld the PAL decision saying it had to right to do so
k. June 15 PAL retrenched 5,000 of its employees, 1,000 from cabin crew
(FASAP) and 4,000 ground employees (PALEA); fleet reduced from 54 to 14
with international flights reduced from 28 to only 4; domestic stations
reduced from 36 to 15 points, only 70 management pilots remained; overall
reduction from 13,000 to 8,000 employees only; retirement benefits to be paid
when able
( Corporate Rightsizing)
14. Both FASAP and PALEA planned to go on strike, but public opinion was
against them; June 16 announced to slow down at work instead; PAL countered
what is to slow down when PAL already paralyzed; PALEA filed notice of strike
on June 19
a. June 20 LTan asked FASAP and PALEA to accept a 20% salary cut,
otherwise he would close the airline; LTan revised his offer on June 22: all
would be forgiven, all pilots may return up until June 26, provided all three
unions would agree to a 5-year suspension of the CBA; that he would close
the airline within one week if rejected ( Management Decisiveness)
b. On June 27 584 fully uniformed pilot reported to PAL Gate 1 which was
found closed; they were told to be late and must re-apply for their old posts if
they wanted to come back ( Decision-point: To accept or not to accept
them?)

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c. On July 1, the three unions held a National Day of Protest in front of

Malacanang to catch the attention of newly sworn President Estrada who
refused to meet with them
d. ALPAP affected by members’ dissension for refusal of ALPAP to return
their passports and licenses and threatened court action; ALPAP relented
and returned the passports on July 3
e. PALEA threatened to go on strike mid-July based on its June 19 notice of
strike if the 4,000 members would be reinstated;
f. On July 9 DOLE ordered PAL not to pursue anymore retrenchment and
PALEA not to stage a walkout; the consequent conciliation meetings were
tumultuous with many allegations of bad faith ( How to handle regulatory
intervention; a reality in business operation) -
g. Only July 19 the silent majority of PAL employees formed the Save PAL
Movement begging PALEA to cease from striking but the union called on the
labor sector for support and struck on July 22
h. The remaining PAL employees refused to join the strike resulting in
domestic and international flights operating to the dismay of PALEA;
fortunately for the union President Estrada reconciled PAL and PALEA
i. The downsized PAL operation and continuing losses pushed PAL in August
to revive its ESOP allocating 60K of shares for each employee in exchange
for suspension of CBAs for ten years; a condition of the investors and
aircraft lessors in supporting PAL’s rehabilitation; rejected outright by both
PALEA and FASAP ( Sustained Management Initiative to Address
Challenges)
j. On September 11 LTan improved the ESOP with pledge to give 20% of the
airline to the employees with three seats in the board in exchange for 10
years suspension of the CBAs; gave PALEA 72 hours to accept or he would
close the airline; majority of the PALEA board voted to accept but must be
ratified by members in a referendum; BMP of Popoy Lagman and TUCP
withdrew support of PALEA; infighting within PALEA broke out
k. LTan gave a final ultimatum of midnight of September 23; PAL would close
down if no acceptance of the ESOP would be received; PALEA held a
referendum on the same day with only 2,518 voted or 37% turnout; only 316
voted “YES” while 1371 voted “NO”
l. The last flight of PAL left at 10:00 PM on September 23 for San Francisco;
at midnight, the PAL executives had their last supper singing Auld Lang
Syne with tears streaming down their faces; LTan was seen crying by the
executives for the first time

Lecture 22: Airlines from Take-off to Landing3 (AOM 3B/3C)

A. Take-off – First commercial air services on record
(Productivity in Invention and Innovation)
1. The first airlines to take up wings:
a. 1909 DELAG, Germany – transcontinental with Zeppelins, 1937
b. 1909 CGT, France – within France & Switzerland with airships, 1921

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c. 1914 Benoist Airboat Line, US – Tampa-St. Petersburg, 1914

d. 1918 Aeropostale (The Line), France – within France, 1933
e. 1919 KLM, Netherlands, still in operation, oldest airline
f. 1919 AT&T – LONPAR, 1921
g. 1919 Philippine Airways Service Inc., (PASI), 1920.4
h. 1919 Chalk’s Ocean Airways – Florida-Bahamas, 2007
i. 1919 DLR – within Germany, 1923
j. 1919 SGTA, France – within France, 1933
k. 1919 Grand Express Airiens, France – within France, 1921
l. 1919 SNETA, Belgium – within Belgium, 1923
m. 1919 CDMA, France – within France, 1923
n. 1919 Daimler Airway, UK – within UK, 1924
o. 1919 SCADTA, Colombia – within South America, 1941
p. 1919 CCNA, Colombia – within Colombia, 1921
q. 1920 Svensk Lufttrafik, Sweden – within Sweden, 1921
r. 1920 DNL, Norway – within Scandinavia, 1921
s. 1920 Tinsay Airways, charter operator at present.
t. 1920 Philippine Air Service (PAS), 1921
u. 1924 Imperial Airways, UK, 1939
v. 1930 Philippine Air Transport Co. (PATCO), 1939.
w. 1932 Iloilo-Negros Air Express Co. (INAEC).
x. 1935 PAA China Clipper flight SFOMNL
y. 1939 BOAC, UK, 1974
z. 1941 Philippine Airlines (PAL), still operating.
aa. 1946 CALI and FEATI, 1947.

2. Philippine Aviation Contribution to Industrial Productivity

a. 1898: Inception of Aviation Technology in the Philippines: Frank Lahm,
Schriver Skylark,
b. 1912: Commercial Relevance of the Aircraft in the Philippines: Francis
Burton Harrison, Manila Carnival, Lee Hammond, Ruth Law
c. 1919: Philippine Aviation after World War I: Stevenot, Alfred Croft, PASI,
Zablan, Carmelo, Fernando, PAS
d. 1921: A Decade of Lull in Philippine Aviation; Show of Flags by Europeans:
Francisco Pinedo, Marchetti Savoia 16; Eduardo Gallarza, Rafael Esteve,
Joaquin Loriga, Breguet 19; H.M. Brown-Cave, Southampton Supermarine;
Rafael Alunan, Pai, 1927
e. 1930: First Scheduled Airlines of the Philippines: PATCO (1931), Russel
Maughan, Fernando Rein, INAEC Stinson Trimotor (1932),
f. 1933: Aviation in the Commonwealth Era: Quezon Commonwealth of 1935;
PANAM Transpac crossing, ARNACAL, PAI/PAL 1927/1941,
g. 1941: Pioneering PAL Pilots from the ranks of the Military: Capt. Paul
Gunn – retired US air corps pilot; PAL VP Operation in 1941; Recruited the

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first three PAL pilots from PAAC (Tirona, Ramos and Arnaiz); rejoined the
US air corps during the war; flew the B29 and participated in many sorties
against the Japanese in the Pacific; plotted a one-man raid of the UST where
his American family was incarcerated; grounded due to the reckless plan;
made part of the engineering unit that prepared the Tacloban runway for US
air force use in the Leyte landing in 1944; wounded in a Japanese strafing of
the runway workers; Capt. Antonio Arnaiz – 1936 ARNACAL Fairchild 24
flight fame; promoted Lt. Col. in the PAAC; third PAL pilot in February
1941; stayed after flying to become Manager of Commercial; Capt. Oscar D.
Ramos – PAAC pilot; second PAL pilot in February 1941; retired in 1972;
Capt. Rodolfo Tirona – PAAC pilot; first PAL pilots in February 1941;
stayed to become Manager of Flight Control; retired in 1970 at age 65; Capt.
Joe Rogers – one of the PAAC/PAF airmen to double up as PAL pilots after
the war; married a PAL cabin attendant, Naty Crame
h. 1941: Philippine Aviation during World War II: WWII, Chicago Convention
of 1944, PAAC/PAF 1947; Capt. Geronimo Aclan – member of the PAAC 6th
Pursuit Squadron; fought in the dogfight with Japanese pilots December 10,
1941; PAL pilot 1960s-1970s; ATO official after PAL; recognized as one of
the heroes of Calamba, Laguna; Capt. Manuel Conde – member of the
PAAC 6th Pursuit Squadron; fought in the dogfight with Japanese pilots
December 10, 1941; PAL pilot coincidentally exposed to the Calapan
jailbreak firefight at the Calapan airport, 1947; Capt. Jose Kare - member of
the PAAC 6th Pursuit Squadron; confirmed kill of a Japanese Zero over the
Ragay Gulf; PAL Manager for Southern Philippines 1970s; Capt. Godofredo
Juliano – among the PAAC pilots inducted into the USAFFE in 1941;
member of the PAAC 6th Pursuit Squadron; fought in the dogfight with
Japanese pilots December 10, 1941; awarded the Distinguished Flying Cross;
PAL Vice President
i. 1946: Philippine Aviation after World War II: MIA, PAL, FEATI, CALI,
Transpac and Euro flights of PAL
a. 1950: Golden Age of Philippine Aviation: JAL Assist, Blue Diamond,
Magsaysay 1954 Suspension of PAL international flights
b. 1961: PAL Privatization Ushered Rebirth of Competition: Baretto – Dc8
Sampaguita – Igoa – Toda – FOA – AMI – Sabrejet – F5 – PAL/KLM –
BAC111 – Hs748 – 1967 IATA AGM Manila – PAL Building
c. 1972: Philippine Aviation during the Martial Law Regime: Martial Law –
Super Dc8-63 – Hijack – Dc10 – Training – PATI – Roman Cruz – Yes We
Can – KORDA – Pope John Paul II – B747 – A300b4 – B727-100 – China
Visit – Cargo – Ninoy Aquino – Baguio – ACE – Snap Election
d. 1986: Philippine Aviation in a Revolutionary Government People Power –
Santos – SD360 – Mt. Gurain – T2 – F50 – MBA – Aerolift – Kalabasa
Award – B737-300 – Pal Scam – Belmonte
e. 1992: Second Privatization of PAL Led to Aviation Liberalization Purchase –
Cojuangco – Ramos – Tan – Dominguez – MRO – PEAC – EO253 – Pilot
Strike Villaruel & A/P – PAL Strike – Garcia Of PAL – Garcia Of DOTC –
Closure Of Rome – Opening Of Osaka

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f. 1995: Airline Deregulation and Re-emergence of Competition GrandAir –

A300b4 – Let410/SEAIR – AirPhils – Cebu Pacific – Asian Spirit – BIMP
EAGA – A340-200 – Lagdameo – Tanega – Vancouver – New York –
Honolulu-Laoag – Mindanao Express – Gokongwei – Enrile
g. 1998: Asian Contagion: Death and Resurrection of PAL 5J/PR Accidents –
Pilots Strike – Loss – 10-Yr Moratorium Lost – Closure Of Pal – CX Entry –
Second Voting – Virata – Zapanta – Rehab Plan Ok’d – LTP – Naia T2
h. 2000: Philippine Aviation at the Advent of the Third Millennium PIATCO –
PAL Turnaround – 2p Accident – Open Skies – Alvarez – 911 – Skal –
Mendoza – AAPA – US/RP OKI – SARS – YVR-LAS- Fraport - Bautista
i. 2005: Rise of the Low-Cost Carriers in the Philippines 5J A320 – Jetstar –
Air Asia – SEAIR’s Fastest – T3 Inspection – 1st Aviation Book – SEAIR-
Tiger – Zapanta At SEAIR – Grp Paid PIATCO D/P – Luciano Of Clark –
Dash8 Q300 – ATR – Yao – Iloilo Intl A/P – Ciron/CAAP – Zest Air – Silay-
Bacolod Intl A/P – B777-300 – ASPI
j. 2010: Emergence of Philippine Open Sky Lim – Cusi – Gutierrez – RPC4319
– Jin Air – Roxas – Air Asia Phils – Hotchkiss – TF On Tickets – Abaya –
Ang – Zobel – Dg Domestic – Dg Fun Livery – Tan – Skyjet
k. From 2012 to 2020
1) 2/2012 SMC bought 49% of PAL
2) 3/2013 - Category 1 upgrade and selective EU blacklisting
3) 3/2013 - AAP bought 49% of Zest Air; merged in July
4) 3/2013 - AirPhils rebranded PAL Express
5) 7/2013 - SEAIR rebranded Tiger Air Phis; acquired by CebPac
6) 8/2014 LT took back control of PR
7) 7/2018 - MCIA T2 completed
8) 3/2020 – PAL recorded the biggest loss of $208 million in 2019, equivalent
to P10.6 billion at prevailing exchange rate
9) 10/2020 – Cebu Pacific is selling shares and bonds to raise over $500
million (P24.2 billion) to weather an industry-wide crisis
10) 10/2020 - WTO said international tourists arrivals plunged by an
annualized 70% during the first eight months of 2020
11) 11/2020 - IATA said the airlines need up to another $80 billion to survive
12) 12/2020 – MIAA OPS granted to Megawide GMR for the rehab of NAIA
l. From 2021 to 2022
1) 1/2021 - Plight of the commercial airlines during the COVID 19 pandemic
2) 9/2021 – PAL filed bankruptcy protection in the US, commit to slash its
fleet size by 25% and raise $655 million (P32.6 billion) in funding
3) 12/2021 – PAL won the backing of creditors in its US Chapter 11
petition, remove debts worth $2.1 billion; US Bankruptcy Court of the
Southern District of New York approved its plan of reorganization
4) 1/2022 - OPS of SPIA Consortium (Cavitex & Yuchengco) accepted by
Cavite Provincial Government re Sangley International Airport
construction
5) 2/2022 - Airlines prepare for summer revenge travel. Hopes are high that
the worst of the pandemic has passed.

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6) 3/2022 - Cebu Pacific net loss deepened to P24.9B in ’21 on fewer flights.
7) 5/2022 - SMC plans to complete Bulacan International Airport in 2025
8) 5/2022 - LIPAD transfers to new CIA Terminal 2
9) 5/2022 - Megawide to revive its proposal for NAIA rehab revoked by
DOTr in 2021

3. The corporate struggles that prevent airlines’ economic take-off:

( Productivity in Business Launches and Expansions)
a. 1919 - German financing of the first Colombian airline SCADTA resulted in
PAA forays in South America at the behest of US government in keeping
with the Monroe Doctrine (opposition to European colonialism in the
Western Hemisphere to America for the Americans)
b. 1927 - the politicization and passage of a law on the helium industry killed
the German Zeppelin air services; allegedly led to use of hydrogen in the
Hindenburg that caught fire in its mooring in New Jersey
c. 1933 - sacking of private operators UA&T, TWA, AA, EA (the Big Four)
from the lucrative airmail contracts, followed by the Lindbergh/Roosevelt
tussle and the reinstatement of the Big Four plus Braniff and Delta
d. 1939 - refusal of the US to grant INAEC air traffic rights led to its closure;
triggered by INAEC and KNLM initiatives to pursue interlining between the
Philippines and the Dutch East Indies (now Indonesia)
e. 1945 - Allied prohibition after WWII resulted in German (LH 1953) and
Japanese (JL 1951) airlines unable to restore operation until the 1950s
f. 1971 - global rise of the low-cost carrier (LCC) business model led by
Southwest Airlines adopted from the 1949 PSW model
g. 1991 - cessation of PAA due to bankruptcy due to the 1988 Lockerbie
aircraft sabotage that aggravated poor financial standing due to the impact
of rising fuel cost, the Gulf War and many other reasons
h. 2003 - crash of the Concorde led to the demise of SST operation of BA/AF
which should not have been launched, the option US and Russia took due to
the poor economics of the SSTs;
i. 2019 - Boeing 737 Max Maneuvering Characteristics Augmentation System
(MCAS) problems resulted in aircraft crashes and grounding of the fleet
globally affecting airlines operating the B737 Max
j. 2020 – the pandemic that lingers to the present
k. 2021 - stoppage of the A380 production after the last units ordered by
Emirates Airlines shall have been delivered; triggered by cancellation of 39
orders of Emirates and virtually all other airlines that put up options for the
A380 for economic reasons; too big an aircraft to operate with costly support
systems

Lecture 23: Airline Competitive Environment5 (AOM 3B/3C)

B. Airline Competitive Environment: Comparative Business Models

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( Traffic & Revenue Generation through Innovative

Competition)
1. Full-service airlines (FSAs) High-, medium- and low-end of the market target
a. Multi-class service: First, Business, Economy ( Market Segmentation by
Value for Money)
b. Multi-range service: Long, Medium, Short Haul Services ( Market
Segmentation by Preferred Sector Distance)
c. Mixed fleet for long, medium, and short haul services ( Equipment
compatibility to Preferred Sector Distance)
d. Full inflight meal and snack services
e. Full inflight entertainment ( Product and Service Quality)
f. Full interlining agreements and alliances
g. Global network: Domestic, Regional, and International
h. Combination passenger and cargo services
i. Full institutional and tactical advertising and promotions ( Marketing
Modes of Communication)
j. Economics: High yield, high volume, acceptable level of cost ( Economic
Analysis of each Type of Operation)
2. Low-cost carriers (LCCs): Low-end of the market target
a. Monoclass type of service ( Low-fares, no-frills)
b. Common fleet; one type aircraft ( Airline Economics re Fleet)
c. Passenger operation only )
d. No interlining, no alliances ) ( KISS – Keep it simple, stupid.)
e. No cargo )
f. No free inflight meal service and entertainment ( Ancillary Revenue
Generation)
g. High in ancillary services with corresponding charges ( Ancillary Revenue
Generation).
h. Low fare ( Low-end market segment, new market targeting)
i. Short sectors, high frequency operation ( Airline Economics re Aircraft
Utilization)
j. Usually domestic and/or regional operation only
k. Economics: Commonality, high productivity, simple operation, low-cost, high
ancillary
3. Full freighter operators: Bulk shipment market target
a. No full freighter or all-cargo operator in the PHL (Market research on O&D
cargo traffic volume)
b. FAL full freighters operators: FedEx, UPS, DHL
c. Usually, large freighter operation for bulk and outsized shipments; use of
modified passenger aircraft e.g., B737-400s ( Fleet utilization optimization;
economics in fleet determination)

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d. Hub-and-spoke operation with complementing wide- and narrow-body

freighter fleet
e. Aims for 7th freedom operation to enable change of gauge e.g., Sunburst
operation ( Air traffic rights reliance)
f. Economics: Proper balance of volume, sector distance, network e.g., 7th
freedom, hub-and-spoke, full automation and mechanization of systems
g. All-Cargo Operators thrive mostly in highly industrialized country with
manufacturing establishments that export globally e.g., US, EU, Japan,
South Korea, and Taiwan.
h. In the PHL not known to be an industrialized and a manufacturing country
there is not a single All-Cargo Operator in existence.
i. Small volumes of agricultural and aquatic produce used to be carried by
DC3 freighters but the old DC3s have been phased out.
j. Airfreight production of PHL is carried in the belly compartments of
combination passenger-cargo aircraft operated by the legacy or full-service
airlines. The widebody long-haul fleet of PAL is the dominant airfreight
carrier of the country in exporting ICs, tuna, agricultural and aquatic
produce e.g., fruits, vegetables, cut flowers, tropical fish, etc.
( Payload optimization; fleet productivity)
k. LCCs shun cargo because it requires capital equipment and facilities which
cannot be sustained by the small capacity of their generally low-density
aircraft; no economy of scale. ( Economies of scale issue).
4. Charter and air taxi operators:
a. Non-scheduled operation permit
b. Light aircraft, business jets, helicopters
c. Charter and/or air taxi operation; scheduled airline simulation;
d. Passenger and/or cargo service
e. Integration or Marketing arrangements with hotels and resorts
f. (Economics of operation): Traffic density, flight frequency, high fleet
utilization, productivity, balance of pricing and operating expense
5. Clash of Business Models: 1971 New Entrant LCC Southwest (WN) vs.
Entrenched FSAs Braniff & Trans-Texas: How the issues were hurdled:6 (
Management Agility vs. Competitive Pressures).
a. Issue brought to court a day before launch of inaugural flight: Departing
from plan on which flying authority was granted by the state of Texas;
Kelleher barged into a cocktail party of the members of the Texas Supreme
Court, got a commitment to hear his case the following day and won
b. Operational dilatory tactic: WN allegedly violated state ruling that all
certificated airlines were to operate at DFW a new airport as big as
Manhattan island 45 minutes away from downtown Dallas; WN preferred to
stay at Dallas Love Field on the perimeter of the city (as LCC business model
stipulate); being a lawyer, Kelleher’s defense was that WN was not CAB-
certificated and not under federal regulations since it was operating within
Texas only (the triangle of Dallas, Houston, and San Antonio

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c. Catchy if not sexy operating tones focused on the “love” theme:

1) Hiring only young women, Raquel Welch look-alike cabin attendants
2) Racy advertising tones e.g., cabin attendants in hot pants climbing the
airstairs; and knee-high; leggy cabin attendant asking provocative
question “How do I love thee? Let us count the ways 8:30…11:00…
1:30…” her fading count is followed by an image of a WN airplane
moving across the screen with the nose pointed into her lap;
3) The airline’s stock symbol of LUV, inflight almonds call “love” bites
(which “love” theme likely the basis for the PAL Love ‘Ya campaign in
the ‘70s e.g., red lips in the A300s named Love Buses with the image of
red lips painted at portside just below the PIC window, with Love ‘Ya
mugs and other give-away items) https://youtu.be/wXvYxc1Vt0g
d. PHL Parallels: PAL Domestic Ticketing Program as a competitive tool,
capturing the distribution intermediaries by opening up domestic to travel
agents and other intermediaries e.g., hotels, resorts with exclusivity clause
e. Invasion of Boracay by PAL and Cebu Pacific; forced SEAIR to launch LCC
operation with narrow-body jets and disrupt PAL and Cebu Pacific duopoly
f. Upstart LCC SEAIR vs. FSA PAL and LCC Cebu Pacific in 2008 attempt of
SEAIR to break into the LCC market; other issues
1) Issue of cabotage due to the marketing arrangement with Tiger Air
2) Issue of cabotage due to alleged lease of aircraft from Tiger Air
3) After two years of dilatory tactics by PAL and Cebu Pacific SEAIR won
in 2010 on the grounds that: PAL has numerous marketing arrangements
with FALS; that both PAL and Cebu Pacific leased to and from other
airlines; that the lease of SEAIR was not even from an airline but from
Tiger Air Aircraft Leasing, a separate company from Tiger Air the
airline
6. Early LCCs mode of survival: Flying a 4-aircraft flight schedule with only 3
aircraft ( Operational Efficiency and Flexibility; Optimal Utilization of the
Fleet; Improving Workforce Productivity).
a. WN had to sell one of 4 aircraft in 1972 to meet cash flow constraints
b. Threat of lay-off (of workforce hired from retirees/resigned ones of other
airlines) spurred workforce productivity to make 3 aircraft do the task of 4
c. Turned around flights every 10 minutes!!!
d. Pilots assisting in baggage and loading the aircraft
e. Ticket collection on board, not on the ground
f. Restocking inflight provisions simultaneous with passenger disembarkation
g. Cabin attendants stationed at the rear clean the cabin from rear to front as
passengers disembark;
h. As the last passenger disembarks cabin attendants stationed front of the
cabin clean the aircraft from front to rear to meet the other group about
halfway
i. Then they fix themselves e.g., brush their hair for the turnaround

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7. Realization (start) of the low-fare scheme of LCCs; it all started in WN (

Traffic & Revenue Generation Productivity).
a. In the triangular route system of WN (DAL, HOU, SAT) one of the 3 aircraft
returns to DAL for maintenance every night empty
b. To recover part of the operating expenses WN sold the seats for USD10 well
below the off-peak fare of USD26, and bus fare equivalent between the three
equidistant cities
c. Only one radio ad was used to announce the flight and the low-fare; the
flight was full on day one with first riders or non-traditional plane eiders,
who use to hop into their cars for the average 230-mile car drive between the
three cities of DAL, HOU and SAT; WN created a huge new air travel
market
d. Parallel gimmick among PHL LCCs: Extra sections set up for Ati-atihan,
Dinagyang and Sinulog return empty to Manila at the start of the festivals;
and empty from Manila to Kalibo, Iloilo, Cebu to pick up return traffic;
e. The dead legs are sold for PHP10 for PHP3000 from 300 passengers, and
PHP25,000+ for ancillary revenue from sale of coffee, snacks or meals in an
otherwise zero passenger, zero revenue flights
f. The same gimmick is applied at the onset of directional seasonality traffic
imbalance in certain routes e.g., Holy Week, Christmas holidays, summer
school break
g. Surging revenue and diminishing operating expense enabled WN to further
reduce its daytime regular fares giving meaning to the “low-cost carrier” tag
of aviation’s new business model
h. Braniff and Texas Int’l countered WN USD10 nighttime fare with a USD13
daytime fare thinking WN would not last long if it matched that daytime fare
i. WNs new marketing gimmick: match the USD13 daytime fare but for those
paying the regular USD26 daytime fare would get a free Chivas Regal bottle;
the target: business travelers paying on company account who did not mind
the expense, which was not out of their pockets anyway, yet they get to take
home a bottle of fine whiskey; in 1973 WN became the largest distributor of
Chivas Regal in Texas
j. WN established firmly as a leading LCC based on 1) inflight titillation, 2) 10-
minute turnaround, 3) off-peak pricing, and 4) free bottle of booze
8. The beginning of advance booking concept at half-price or less ( Optimization
of Revenue Generation).
a. In 1976 Frank Lorenzo of TI had the arithmetic done on WN’s low-pricing
scheme coupled with Vicks Vaporub’s marketing gimmick of “half off if you
order today” i.e., advance booking/ticketing
b. Discovered that flying a fully loaded aircraft at half price is better than flying
it one-third full at full fares
c. Lorenzo recalled how busy his father’s Third Avenue beauty salon had
become busy when a sign for a special price for permanent hair coiffure was
splashed on the saloon’s show window; he approved the scheme

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 Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

d. Restructuring in the US CAB resulted in the scheme being approved; first

time airlines flying interstate was allowed to across-the-board price cut in
response to market condition
e. TI’s passenger traffic grew more than 600% on the second day of
implementation without advertising except word-of-mouth and free publicity
generated by the standard airline peanut in small sachet with promotional
imprints of the “peanut” fares
f. Two years later more drastic restructuring at the CAB resulted in the policy
of deregulation on the new government outlook of protecting the consumer
more than the airlines most of which were well established and entrenched
Additional Reading Materials: Marketing the ME, EU, and the US EC

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Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

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 Pre-Final Period Lectures: AvBus 660 - Productivity & Quality Tools

ENDNOTES

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1
Gordon Bethune, From Worst to First, John Wiley & Sons, Canada, 1998
2
Avelino Zapanta, History of Philippine Aviation 1909-2012, Central Publishing, Inc., QC, 2014
3
Thomas Petzinger, Jr., Hard Landing, Random House, Inc., USA, 1995 – Many concepts in the lectures used this
book as reference
4
Avelino Zapanta, History of Philippine Aviation 1909-2012, Central Publishing, Inc., QC, 2014 – Many concepts in
the lectures used this book as reference
5
Avelino Zapanta, Lecture on Airline Management Economics
6
Petzinger, Jr., Hard Landing