Philippine Airlines battles with competition and domestic deregulation.
Paul Lewis/SINGAPORE
Philippine Airlines (PAL) has suffered more than its fair of share of turbulence over the last 54 years. Buffeted by a succession of political crises, military coups and corrupt mismanagement, control of the airline has routinely alternated between the state and private sector. PAL today is once again embroiled in a major political battle between its principal owner and the Philippine Government.
This latest highly public tussle for control has turned into a vitriolic personal conflict between the chairman of PAL, tobacco and beer tycoon Lucio Tan, and Philippine head of state, President Fidel Ramos. It comes at a time of mounting financial losses, growing international competition and domestic-airline deregulation.
Tan's involvement with PAL can be traced back to early 1992 and the Government's decision to sell off 67% of the carrier, after a decade of losses. PR Holdings, a consortium led by Philippine Long Distance Telephone president Antonio Cojuangco and backed by Tan, won the bidding and took control of PAL. The Government retained direct control of the remaining 33% of shares.
Not long afterwards, Cojuangco was ousted by Tan from his newly appointed position of PAL chairman and chief executive, much to the disapproval of the Philippine Government. The two men fell out over Cojuangco's ambitious plan to order $1.2 billion-worth of new Boeing 747-400s and Airbus Industrie A340-200s.
By August 1994, Tan had further consolidated his hold on PAL by increasing his representation on the airline's 15-man board, from four to six seats. He was appointed PAL chairman and chief executive, in January of this year, replacing Government appointee Carlos Dominguez.
Many Government officials and politicians have long had misgivings about Tan's involvement with PAL, judging him to have been too closely associated with disgraced former president Ferdinand Marcos. Tan's recent boardroom manoeuvres, and accusations of tax evasion levelled against him by the Government, have further aggravated relations between the Chinese tycoon and the Ramos administration.
STOCK INCREASE DEFERRED
These differences came to a head in March, with Tan's proposal to increase the company's capitalisation to underwrite a planned restructuring and expansion. Fearing a dilution of the state's 33% holdings, the Government's representative directors have managed to defer the planned stock increase.
The Government is trying at the same time to dissolve PR Holdings and convert its stock into direct PAL equity, in a move designed to wrestle back control of the airline from Tan (Flight International, 10-16 May, P26).
Government financial institutions collectively own 20% of PR Holdings, which, if converted, would equate to a 13.5% direct share in PAL. This added together with the Government's existing 33% stake in the carrier, would give it a total of 46.5% and control of PAL.
Tan's 51% stake in PR Holdings, which now gives him effective control of PAL, would in turn be reduced to a minority 33.5% interest. "This is reverse privatisation," states Jose Antonio Garcia, PAL president and chief operating officer and Tan's right-hand man.
The matter has been referred to the country's Securities Exchange Commission (SEC) for a decision. Tan's lawyers suggest, however, that the SEC cannot be expected to be impartial, given that the commission reports to the secretary of finance, who has already come out in favour of dissolving PR Holdings.
Whatever the SEC's ruling is, the row is unlikely to be settled and will almost certainly be referred to a higher judiciary body. "It's a foregone conclusion," predicts Garcia. "If we do not get a fair hearing, then we'll have to go to the Supreme Court. On the other hand, if Mr Tan's position is upheld, the Government will obviously do the same."
PAL marked its 54th anniversary on 15 March by announcing a 3.2 billion pesos ($125 million) plan to restructure and expand the airline. It calls for the acquisition of new passenger jets, including two additional Boeing 747-400s, the refurbishment of existing aircraft, the implementation of an on-time-performance programme and a complete re-organisation of the company.
The three-year plan is intended to reverse PAL's financial decline by making it more efficient and competitive, both in the domestic and the international markets. PAL, which lost 452 billion pesos in 1993-4, is expected to show a further loss of 1.6 billion pesos, for the 1994-5 financial year, ended 31 March.
PAL is already close to its maximum debt-equity ratio of 3:1, and faces major problems in raising new capital for expansion. Local loan repayments this year alone total more than 1 billion pesos. Other commitments include a $100 million Eurobond issue, expiring in 1996, and nearly 700 million pesos in capital lease payments, due over the next two years.
To reduce PAL's debt-equity ratio and enable it to borrow additional funds, Tan has sought to increase the company's capitalisation from 5 billion to 7.2 billion pesos initially, with an eventual target of 15 billion pesos. The SEC, however, has issued a temporary restraining order against additional equity being raised, until the issue of PR Holdings is resolved.
The injunction has effectively frozen most aspects of PAL's planned revitalisation. "We continue to do certain things that can be funded from our internal operations, such as computerisation of finance and accounting, but it's very, very little," says PAL executive vice-president Manolo Aquino.
MIX & MATCH
One immediate effect of the SEC's action has been to scupper PAL's planned purchase of a fourth 747-400. The carrier had been negotiating a "financially attractive" deal with Boeing for two new 747s, previously cancelled by Japan Airlines (JAL). It has only been able to raise, sufficient financing for a single aircraft, however.
The two 747s had originally been destined for PAL, as part of a larger four-aircraft order negotiated by the airline's former chairman, Antonio Cojuangco. Following Tan's take-over the order was halved and the two aircraft were sold on to JAL by Boeing. "We still want a fourth one," says Aquino, although it is unclear when and from where it will come.
In addition to its three -400s, PAL operates a mixed fleet of older 747-200s. Five of the aircraft, are powered by Pratt & Whitney JT9D-7Qs, while six are fitted with General Electric, CF6-50E2s. PAL is planning to phase out its P&W-powered 747s (as it is unable to support the JT9D) and standardise the fleet with GE power plants.
"This is the fleet Mr. Tan inherited and for which he is now blamed for mismanagement," comments Garcia. Finding replacement GE-powered aircraft of a reasonable age, fitted with the same auxiliary power unit, galleys and cabin, is not proving easy, however.
Cojuangco's 1992 buying spree also included a $560 million order for six Airbus A340-200s. Under a renegotiated deal hammered out in 1994 by Tan and Airbus, two aircraft were cancelled and the remaining four deferred for two years. The four A340s will now be leased to PAL for six years from November 1996.
Cathay Pacific Airways, in the meantime, has leased the four PAL aircraft as an interim measure, until its own A340-300Hs are delivered. PAL in return, agreed to take four older ex-Pan American Airways' A300B4s on a five-year lease from Airbus. With the hand-over of the last two B4s in May, PAL's A300 fleet now stands at 12 aircraft
Longer-term fleet planning calls for, the replacement of PAL's ten leased Fokker 50s, with a new turbofan powered aircraft. The new jet is needed to supplement the airline's 12 Boeing 737-300s on shorter domestic routes. Types under evaluation include the Avro RJ series, the Canadair RJ and the Fokker 70 (Flight International, 5-11 April, P13).
The airline hopes that by introducing jets and improving services, it will be allowed to raise domestic airfares. Garcia estimates that for the carrier's turboprop services to break even under the existing Government-imposed fare structure, it would need to achieve load factors, in excess of 170%.
Given PAL's cash shortage and the need to introduce the A340 into service in 1996, a replacement decision is not expected for a while. Garcia adds: "We would rather delay than jump in, like PAL did in the past, when choosing a new aircraft."
PAL is understood to want a "total-package" solution, which would include the disposal of its leased Fokker 50s, many of which are not due to be returned for another four to five years. The company is still living with the consequences of earlier mismanaged lease deals.
Around $100,000 a month is paid out for two leased Shorts 360s, neither of which have been flown for nearly three years. It is more economical for the aircraft to sit idle in a hangar than for them to be flown under the existing fare structure, explains Garcia.
Another major area of contention between PAL and the Government centres on Ramos' Executive Order 219. The bill, enacted in early January, calls for the opening up the country's domestic and international routes to greater competition. Among its provisions is the stipulation that "...at least two international carriers shall be designated official carriers for the Philippines". Future traffic rights will be granted on the basis of wider national economic interests and may include fifth-freedom rights "...to promote the development of routes and destinations".
PAL is strongly opposed to the new order, suggesting, that it contains questionable provisions and inconsistencies, which work against fair competition. The airline warns that the Government risks introducing excessive competition, which will ultimately lead to ruin for both operators and consumers.
There is already a large number of international carriers failing to use existing landing rights at secondary destinations such as Cebu, Zamboanga, Davao and Laoag. Further liberalisation will only result in additional excess capacity and even lower yields, argues PAL.
"It's getting harder and harder," complains Garcia. "Our revenue is going down for the simplistic reasons that we're carrying less, or if not less, the increase we would expect is at reduced fares arising from increased competition."
DOMESTIC DILEMMA
Potentially even more damaging for PAL is the liberalisation of the domestic-airline industry. Executive Order 219 calls for single airline routes to be opened up to competition from a minimum of two carriers a sector. Air fares on routes served by more than one airline will also be deregulated.
Competition has already appeared in the form of new domestic carrier GrandAir, headed by former PAL president Dante Santos. The airline operates two leased Airbus A300s on the highly profitable Manila to Cebu and Davao trunk routes.
Another ex-PAL president, Roman Cruz, is understood to have revived defunct domestic carrier Silangan Airways. Other smaller start-up turboprop operators include Star Asia Airways and Cebu Air.
PAL considers the Government's domestic deregulation policy to be biased in favour of new carriers. The company points out that Order 219 prevents it from abandoning existing unprofitable routes, without previous official approval. The Government, at the same time, continues to regulate airfares on single-carrier routes, preventing PAL from raising prices.
"No airline is going to go into what they perceive as unprofitable routes and we'll be left as the single operator on those routes. On profitable routes, we're being burdened with competition at cut-throat prices. It's a very pernicious situation for PAL," states Garcia.
In spite of the many, seemingly insurmountable, problems faced by PAL, Tan and his team of managers appear determined to stick with the company and make it work.
Says Garcia: "All the senior people here are optimists. Our answer is to become more efficient, hard working, smarter and self-reliant. That might sound like a bunch of platitudes, but it is the only way things can get done."
Source: Flight International
