Bad blood

I remember the time when Philippine Airlines was still looking for a white knight.

As early as 2010, PAL was already in talks with potential partners and investors, but nothing materialized. The company was losing heavily and needed new equity, but PAL Holdings which owned majority of the airline and was controlled by taipan Lucio Tan – did not want to put in additional funds.

At that time, PAL had to let go of at least 3,000 employees with the spin-off of its three core businesses. The affected workers were with the in-flight catering services, airport services (including ground, cargo terminal/cargo, and ramp handling) and call center reservations.

PAL officials explained that the move to outsource non-core units was essential to attract investors who could put in fresh capital to the financially strapped carrier.

Aside from its debts, the airline was also dealing with the problems brought about by the downgrading by the US Federal Aviation Authority (FAA) of the Philippines from Category 1 to Category 2, and the consequent blacklisting by the European Union. The downgrade prevented PAL from mounting additional flights to the US.

PAL explained that it was forced to pursue the restructuring plan due to several factors beyond its control that included, among others the unabated liberalization of the commercial aviation industry to the detriment of local players like PAL, the worldwide economic recession that led to a crippling slowdown in passenger traffic, as well as the record-high oil prices in 2008-2009 and the continuing increase in the price of aviation fuel, which account for nearly half of PAL’s operating expenses.

And then in early 2012, the San Miguel Corp. (SMC) group led by Ramon Ang acquired a 49 percent stake in PAL for $500 million.

Tan and Ang said the development would allow the two airlines to strengthen operations and stay competitive with the implementation of PAL and Air Phil’s fleet modernization program.

And it did.

PAL once again became a force to reckon with. It embarked on a massive expansion plan that involved the acquisition of new aircraft and the opening of new routes and additional flights in existing routes. When Europe lifted its ban on the Philippines, PAL was more than willing and able to take advantage of the opportunity, starting with the London route.

Such moves needed an aggressive management and ownership that had access to funds wherever and whenever needed. And SMC appeared to be the right partner for PAL.

But that is as far as the public can see.

What many did not realize is that had the SMC group not invested in PAL, the company’s losses, especially the items relative to the write down of the aircraft values, should have been borne by the Lucio Tan Group alone. The advances and the various credit support extended by SMC to PAL and PAL Express during the two-year period were advances that should have been made by the LT group.

In 2013, the PAL Group required additional infusion of working capital, which under the shareholders’ agreement should have been provided by both shareholders in the amounts equivalent to their ownership stakes. SMC had to advance the funds required as the LT Group was not able to comply with this requirement. Had SMC not done this, the airline’s operations and shareholders’ investments would have been significantly damaged.

SMC was willing to invest additional capital to finance PAL’s expansion that required the additional aircraft to be deployed in new routes and additional frequencies to existing routes. This would entail capital infusion which SMC was willing to do to lay the groundwork for a stronger, larger, more competitive flag carrier.

But the LT group wanted PAL back and in September, it reacquired SMC’s stake. The $1-billion estimated cost of the deal covered not only SMC’s 49 percent stake, but also the cash advances made by the latter for PAL’s refleeting program.

Unfortunately, what started out as a perfect partnership became akin to a bitter divorce, with the current PAL management raising a number of questions about certain business decisions made by the air carrier while the two “where still in bed.”

In all these though, what many observers cannot comprehend is why these questions were not raised during the two-year period of partnership when the LT group had all the opportunity to do so. Remember that the LT group was the majority owner and was likewise represented in the board of PAL.

One of these questions for instance involved the soundness of the massive refleeting program. According to the new management, PAL bought too many planes and that the refleeting program lacked deliberation.

But company insiders maintain that the purchase agreement for the brand new Airbus aircraft was approved and signed off by the PAL board of directors which again is controlled by the LT group.

PAL even engaged the services of a foreign consulting agency (chosen by both the SMC and LT Group) to assist the airline in the review of its business and come up with recommendations to help restore the airline to profitability. This is the same consulting firm engaged by the LT Group in 1998 to come up with PAL’s rehabilitation plan.

And then there’s the Cambodia Airlines deal which the new management claims is a homeless fleet that undermines profits.

Insiders insist that the Cambodia Airlines project was approved by the PAL board. Cambodia had bright prospects. It has been one of the world’s fastest growing aviation markets since 2010. Its three commercial airports handled 5.1 million passengers in 2013, representing an 18 percent growth compared to 2012. Cambodia Airports also recorded growth of 18 percent in 2012, 13 percent in 2011 and 14 percent in 2010. In fact, two airlines are now planning to start operations in Cambodia, namely Bassaka Air and Cambodia Bayon Airlines of China.

Investing in an overseas venture is a strategy adopted by a number of carriers. And it appeared to be a low risk, but potentially high return investment. PAL is just a minority investor yet all of the aircraft allocated for Cambodia Airlines would come from PAL’s fleet. In effect, there will be a potential new “home” for up to 10-15 of PAL’s A320 and certain turbo prop aircraft . 

And since Cambodia Airlines would be leasing the aircraft from PAL, the latter would be able reduce its aircraft rental obligations, and in a worse case scenario, would only be responsible for up to 49 percent of the aircraft rentals as the Royal Group of Cambodia would pay for the balance.

And then are of course accusations as to alleged failure by the SMC group to furnish the LT group with relevant financial documents.

Questions are being raised as to PAL’s substantial losses in 2013, but wasn’t there a $260-million write down of old aircraft, to align the values with market, which writedown was also approved by both audit committee and the board? Why are these questions only being raised now?

While it is true that the SMC group was managing PAL at that time, management of the company remained under the control and was subject to oversight by the PAL board which was still controlled by the LT group.

So it seems incomprehensible that these things could have escaped the attention of the LT group, which was still the majority owner of PAL.

It is always unfortunate when former partners turn into bitter enemies. After all, in business, and politics as well, there should be no permanent enemies.

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