The troubles of flag carrier Philippine Airlines (PAL) are far from over, with more dark clouds forecast to cause turbulence in the next few years. Monday’s tragic hostage taking highlights the country’s problem with peace and order, one of the many problems the company has had to deal with in its seven-decade history. PAL has lost over $300 million in the last two years because of a combination of low demand, restrictions to its expansion to lucrative routes in the United States, and a bad hedging decision that led to the airline paying a lot of money for oil that got cheap. The company’s biggest challenges now are the low grades several international aviation bodies — the US Federal Aviation Administration (FAA) and the International Civil Aviation Organization (ICAO) — have given the Philippines. “The Philippines is in an aviation crisis," PAL president Jaime Bautista said. “We have two basic but very serious problems that involve our aviation authorities." In 2008, the FAA downgraded the Philippines to category 2 status, mostly because of deficiencies in the now-defunct Air Transportation Office (ATO). “What this means is that we could not expand our operations in the US," he said, noting that this derailed the company’s earlier plans to start flights to San Diego or even some in the east coast - New York or Chicago. The downgrade also meant that PAL would not be allowed to use its two brand new and more efficient Boeing 777 aircraft for flights to the US. The acquisition of the new aircraft, ordered during the airline industry’s boom period before the 2008 fuel crisis, were part of PAL’s route expansion program. Failure to pass audit Another blow to PAL’s plans was the Civil Aviation Authority of the Philippines’ (CAAP) failure to pass a recent audit by ICAO that raised significant safety concerns over the country’s air travel industry. CAAP was formed to replace ATO, precisely to get the category 2 status by the FAA on the Philippines lifted. So far, it has failed to introduce significant reforms. “One of the reasons they failed is because they lacked surveillance programs for airlines’ operations. The other is problems with the registration and issuance of airline operators’ certificate," Bautista said. The ICAO grade later led to the European Union putting Philippine carriers in a blacklist of airlines banned from flying to the continent. Bautista noted that PAL was able to pass separate safety audits by ICAO and the International Air Transportation Association. However, the country’s poor grade dragged PAL down. “We are a safe airline. We were rated at par with European airlines’ Lufthansa and KLM," he said. “They acknowledged PAL is safe but they still saw serious deficiencies in CAAP as a regulator," he said. Bautista said it was this problem with regulatory authorities that has kept PAL from expanding its operations to offset the drop in demand due to crisis conditions in 2009. Quality of Philippine airports Massive operating losses of over $300 million in fiscal years 2007-2008 and 2008-2009 dragged PAL’s equity position to around $1 million by early this year. Exacerbating these problems was the quality of Philippines airports. Two months ago, radar and navigation equipment at Ninoy Aquino International Airport broke down, forcing several domestic and international flights to divert to nearby airports in Clark and Cebu. This proved to be another stain on the reputation of the country’s civil aviation and the Philippines as a tourist destination. As part of its “survival plan," Bautista said PAL had implemented several measures to improve cost efficiencies and increase capacity. The centerpiece of this plan is the outsourcing of 2,600 employees engaged in non-core services to turn PAL into a lean, mean organization. PAL wanted to outsource jobs in its airport services, cargo handling and in-flight catering so that the airline could focus on its core business. The company expected to save $20 million in lower personnel fees and capital investments from the planned outsourcing. But the plan was blocked by its labor union representing employees to be affected by it. The Labor and Employment Department ruled that the planned spin-off was legal, but the decision remained on appeal. Making matters worse, the rest of PAL’s workers have also decided to act up. Poaching by other airlines Last month’s high-profile resignation of 27 pilots, who reportedly left for higher-paying jobs abroad, forced PAL to cancel several flights, affecting over 5,000 passengers. PAL said it was a simple issue of poaching by other airlines. But the pilots contented the resignations were prompted by PAL’s plan to move its airmen to sister company Air Philippines where salaries are lower. At the same time, the company’s flight attendants have also threatened to go on strike if PAL does not change a policy that requires cabin crew to retire by the age of 40. Despite its many problems, Bautista said that everything is being done to ensure that the flag carrier would remain a constant figure in the country’s skies. “We have to save this airline and continue the mission to provide safe and reliable services to the riding public," he said.