US embassy cable - 05MANILA5276

UNCLAS SECTION 01 OF 03 MANILA 005276 
 
SIPDIS 
 
Sensitive 
 
STATE FOR EAP/MTS 
STATE ALSO PASS USAID FOR AA/ANE and AA/G 
TREASURY FOR OASIA 
TRANSPORTATION FOR FAA 
SINGAPORE AND TOKYO FOR FAA 
COMMERCE FOR BISBEE 
 
E.O. 12958: N/A 
TAGS: ETRD, BEXP, EINV, EAIR, ECON, RP 
SUBJECT: Philippine Airlines Eyes Boeing Purchase 
 
 
Sensitive but Unclassified - Not for Internet - Protect 
Accordingly. 
 
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Summary 
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1.   (SBU) Philippine Airlines (PAL) plans to re-fleet to 
remain competitive and fulfill expansion plans.  PAL is 
now considering the purchase of up to twelve wide-body 
Boeing 777s.  The sticking point appears to be a $114 
million deposit on aircraft that PAL forfeited when it 
canceled a Boeing purchase contract in the late 1990s. 
In addition to the importance for the US-RP trade 
relationship, the transaction now under consideration 
could result in a more fuel-efficient fleet, as compared 
to Airbus. Thus a Boeing purchase fits with APEC strategy 
for energy security and sustainability.  Para 7 contains 
suggested talking points for use with senior GRP 
officials at APEC.  End summary. 
 
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Boeing planes fit PAL's expansion plans 
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2.  (U) Econ counselor and econoffs met separately with 
Boeing's Director for Asia Pacific Sales Ray Lau and 
Philippine Airlines (PAL) CEO Jaime Bautista to discuss a 
potential sale of up to twelve Boeing 777 aircraft to 
PAL.  Bautista explained that PAL needed to re-fleet to 
remain competitive and fulfill its expansion plans.  PAL 
began flights to Beijing this month and is considering 
flights from Cebu to Los Angeles and other US routes. 
PAL also views Japan and Korea as key expansion markets. 
PAL recently leased nine narrow-body Airbus A320 planes 
but is still considering the purchase of wide-body Boeing 
777 planes. 
 
3.  (U) Lau said that Boeing 777 twinjet planes are more 
expensive than their Airbus counterparts (A340-600s) but 
would save PAL money in the long run.  Each plane costs 
approximately $200 million.  According to Boeing 
publications, the 777s are fuel-efficient, consuming 20% 
less fuel per seat than the A340-600.  This is 
particularly important given the recent dramatic increase 
in oil prices.  The planes are 18% lighter than the A340- 
600 and therefore landing fees and maintenance costs are 
less.  They are larger and therefore provide more 
passenger and cargo space.  Lau suggested that PAL is 
"missing out" on the cargo business and could benefit 
from the larger cargo space. 
 
4.  (SBU) PAL executives have a favorable view of Boeing 
777s.  In a private discussion with us, they explained 
that perhaps the only person left to convince was owner 
Lucio Tan.  Bautista and Joseph Chua, Tan's son-in-law, 
said that Tan questioned the safety of a two-engine, as 
opposed to a four-engine plane, for trans-Pacific 
crossings.  (Note: Tan's concern appears to be an 
interesting diversion.  The two-engine planes, of course, 
meet ICAO and FAA safety requirements.  We have heard 
from a variety of sources, including PAL executives, that 
PAL forfeited a $114 million deposit when it backed out 
of a previous Boeing purchase.  Tan reportedly still 
hopes to recover the lost deposit and Bautista insisted 
that PAL should be reimbursed.  Lau, on the other hand, 
is trying to find a way to save face for both parties. 
End note.) 
 
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Significance for RP economy and US-RP relations 
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5.  (SBU) Both Boeing and PAL reps agreed that the 
purchase from Boeing could strengthen the RP-US 
relationship while an Airbus purchase would do less to 
improve RP-EU relations since PAL does not fly to Europe. 
By contrast, PAL was influential in the US-RP air 
transportation agreement, has access to unlimited flight 
frequencies to the US, enjoys multiple flights weekly to 
five major US cities, and plans to expand its US routes. 
6.  (U) The Boeing sale would help improve PAL's 
competitiveness and would be consistent with GRP energy 
conservation policies.  The Philippines is one of the 
most energy-dependent countries in Southeast Asia and 
spent approximately $44 billion on oil imports in 2004. 
As oil prices remain high, investing in fuel-efficient 
planes is one way to help mitigate the burden and support 
ASEAN and APEC goals of regional energy security and 
sustainability.  APEC Energy Ministers recently pointed 
out that sustainable economic development depends on 
implementing a range of supply and demand-side measures 
to address oil shocks, including promoting energy 
efficiency.  With the high price of oil, International 
Air Transport Association (IATA) estimates that fuel 
costs will make up about 25% of total airline costs in 
2005.  These costs normally range between 14-16% and 
newer aircraft could reduce these costs to 10% of total 
costs, according to a global market forecast by Airbus. 
IATA also estimates that every $1 increase in oil prices 
costs the aviation industry an additional $1 billion. 
 
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Talking Points for Use with Senior GRP Officials at APEC 
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7.  (U) Boeing has formally submitted a request for USG 
advocacy through the Advocacy Center. Embassy suggests 
the following talking points for the US delegation to use 
during the APEC meetings in Korea this month in their 
discussions with President Arroyo and senior GRP 
officials.  The purchase of Boeing planes by PAL could 
further US-RP civil aviation and trade relations as well 
as President Arroyo's energy conservation efforts.  The 
APEC meetings provide an opportunity to expand trade and 
build goodwill into our relations with the Philippines' 
major international carrier - Philippine Airlines (PAL) - 
as it considers purchase of new passenger aircraft.  PAL 
now flies to five US cities for a total of 28 PAL flights 
per week.  PAL does not fly to Europe. 
 
Talking Points: 
 
-- From our discussions with senior PAL executives, we 
understand that many at PAL have very favorable views of 
Boeing's engineering, quality, and safety.  Through our 
embassy, PAL has also expressed interest in adding 
another entry point into the US.  It is natural that we 
try to foster this civair relationship. 
 
-- As APEC members, we seek ways to improve energy 
conservation where it is practical.  According to Boeing, 
fuel efficiency is a critical feature of its planes, 
particularly with jet fuel prices currently over $60 per 
barrel.  Boeing 777 long-range planes are 20% more fuel 
efficient per seat than the comparable Airbus model, 
according to Boeing data.  On a typical trans-Pacific 
flight, the savings would be substantial. 
 
-- In addition to its trade and commercial value, a 
Boeing purchase would be a very positive signal for 
President Arroyo's energy conservation efforts as well as 
a tangible commitment to APEC's sustainable energy 
strategy. 
 
-- We urge you to approach the leadership at PAL and 
explain the mutual advantages of a Boeing purchase. 
PAL's overall orientation is toward the United States, 
not Europe.  A decision to purchase Boeing would 
strengthen our trade as well as our civil aviation 
relationship.  It would be emblematic of our strong 
bilateral ties. 
 
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Comment 
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8.  (SBU) Emboffs are working closely with Boeing and PAL 
to encourage the sale.  Raising the profile of the sale 
at APEC would likely help it along.  Boeing sales manager 
Lau will be returning to Manila in mid-November and 
making intermittent visits over the coming months to 
continue talks with PAL.  Bautista told us that PAL would 
probably make a decision before the end of the year. 
 
Jones