What's next for Philippine Airlines?
As the San Miguel Corporation prepares to exit management of Philippine Airlines, the question on everyone's mind remains, "What's next for Philippine Airlines?" Under the leadership of Ramon Ang, Philippine Airlines unveiled an ambitious expansion plan which raised doubts in the minds of critics. However, the dramatic turnaround of Philippine Airlines witnessed earlier this year with the restoration of Category 1 status in the United States and the most recent posting of profit in the last five months have led many to believe that the national flag carrier may have a future after all.
Unfortunately, with the recent turn of events and change in management, the future of Philippine Airlines is anything but stable. Although Lucio Tan has sealed a deal to purchase back shares owned by San Miguel Corporation, an anonymous source revealed that the deal has yet to be executed as there are certain procedural requirements that must be met in order for an agreement to close.
"The deal is final, but not yet executory," said the source. "There are still requisite steps to be undertaken, like the disclosure before the Securities and Exchange Commission of both parties, and their official announcement to their stakeholders."
While there are no doubts that the deal will be executed, it is most likely that it will not close completely until October. That means that Ramon Ang will remain at the helm until all of the closing conditions have been met, though it appears that Ang has stepped back already from signing executive documents.
Lucio Tan has reintroduced former Philippine Airlines President Jaime Bautista as the company's new General Manager. In this position, he will be responsible for the oversight of the day to day operations at the airline. It is expected that the incoming management will differ greatly in style to the team led by Ang and San Miguel Corporation.
Bautista has already revealed to the airline's employees that current programs and resources will all be reviewed to determine the best use of the new aircraft and the most practical choices for new destinations, while also maximizing the benefit of recently introduced innovations.
"We may have to revisit the previous strategy by striking a balance between cost-reduction with improving productivity and performance," said Bautista. Many critics and passengers would agree after Philippine Airlines unveiled its new long-haul aircraft earlier this year with less than impressive cabins and no embedded in-flight entertainment.
The new design means that passengers without laptops, smart phones, or tablets would be forced to rent an iPad from the carrier for an additional fee in order to enjoy the wireless in-flight entertainment system. It remains a debatable proposition in the airline industry and Philippine Airlines has become the first and only carrier to introduce the wireless only product on long-haul flights. Qantas of Australia offers a similar product, but has attached an iPad to every seat on board the aircraft, making the units available to all passengers at no additional charge -- very similar to an embedded system.
Bautista added that the carrier must address declining market share, sustain its recent profitability, and capitalize on opportunities such as the recent lifting of the European ban and the Category 1 designation from the United States. "We plan to conduct a review as to where we stand, plot new direction, revisit existing ideas, and adapt to a new environment," said Bautista.
The carrier is now in the midst of a forty-five day transition period as stipulated in the agreement, which at the time of expiry would lead to Ramon Ang stepping down from his post at the carrier. Although no formal announcements have been made, it is believed that Joseph Chua will take over as President of Philippine Airlines. Chua, a son-in-law of Tan, is currently President & CEO of MacroAsia Corporation.
Chua was a director of Philippine Airlines from August 2003 to April 2012, when San Miguel Corporation assumed management of the carrier. With the return of management to the Tan Group, Lucio Tan is now poised to build yet another new Philippine Airlines, targeting new destinations to sustain its market share and maintain profitability.
"Let us build a new PAL, an airline that the entire nation can be proud of," said Tan. "I decided to regain full ownership of PAL because I love PAL. I was not there during difficulties. I pledge to work harder than ever so that PAL will soar even higher. You can look forward to my active participation. You can be assured that your management will treat you equal as partners. You have my firm commitment."
The Tan-led management has not revealed its intentions for the Philippine Airlines fleet. Although the carrier embarked on an ambitious refleeting program under Ramon Ang, the carrier has still yet to place an order for additional long-haul aircraft, which is vital if the carrier wants to continue its expansion into the United States and Europe. According to PAL Holdings Director Lucio K. Tan Jr, the new management still needs to sit down and discuss many details and that this is only the first major step.
For the eighty-year old Lucio Tan, Philippine Airlines is not as much an investment as it is a love affair. Although the carrier has lost hundreds of millions of dollars, it remains the tycoon's favourite. Nothing can tug at his heart strings more than the proud image of the nation's flag carrier soaring into the sky.
"PAL is more than an airline company for me," said Tan. "It goes beyond investing - it is like family. PAL is never far from my thoughts." This should come as no surprise given all that Tan has been through with the company over the last two decades.
Since Tan entered the airline industry, Philippine Airlines has been plagued by crisis after crisis including aviation bans in Europe and the United States, the SARS outbreak, the September 11 disaster, and the Asian financial crisis, in addition to internal problems such as long-standing labour disputes.
In spite of all the on-going challenges and the traditional nature of the airline business that makes it a capital-intensive and risky investment, the recent promising developments in the Philippine aviation industry have given Tan enough reason to take Philippine Airlines back. According to Brendan Sobie, the Chief Analyst for Southeast Asia at the Centre for Aviation, a focus on higher-yielding international routes for Philippine Airlines could offset any shortcomings in domestic operations. However, there is a long road ahead. "It's a high-risk venture," said Sobie. "Re-establishing an airline on long-haul routes that are intensely competitive is an expensive proposition with huge, upfront costs."
With such a capital-intensive venture at hand and the need to cover the loans taken in order to buy back the carrier, Philippine Airlines must continue to search for a strategic investor that can support turnaround efforts and help to maintain the recent profits achieved. Unfortunately, most foreign airlines have hesitated to touch Philippine Airlines as the carrier's position remains weak in the highly competitive Southeast Asian market. With a challenging market and limited synergies with potential suitors, there are few airlines that Philippine Airlines can count on for an investment.
Philippine Airlines did manage to forge a new relationship with Abu Dhabi-based Etihad Airways recently, which could be a starting point toward a future investment. The partnership with Etihad improves the prospects of Philippine Airlines as it plans to expand its footprint in the Middle East and in Europe. Although Etihad has said that it has no intention of investing in PAL, there is always the possibility of a future investment given the existing partnership.
Although it remains unclear whether Etihad will come on board in the future, what is clear is that Philippine Airlines will undoubtedly require another infusion of cash as PAL will soon require capital to pay for planes scheduled for delivery in 2015 and 2016. Those invoices are due in as little as ninety days. In addition, according to the San Miguel management, the loan used to buy back Philippine Airlines taken from BDO is merely bridge financing which is also due in 90 days. In short, the company is heavily stretched and will require capital sooner rather than later. If no investment comes through, Tan may once again be looking to contacts in Mainland China or even Manny Pangilinan.
If the Lucio Tan Group is unable to repay the BDO loan within the allotted period, it could be at risk of losing control of the Philippine National Bank. In the event of default, BDO could also step in to complete the PAL buyout and take over from Tan. There is much to lose for the Tan Group so it is expected that the entire team will be working hard to meet the necessary obligations as the clock ticks forward.
As for Philippine Airlines, plans to order additional long-haul aircraft and expand service in the United States to destinations such as Florida, Chicago, Las Vegas, and San Diego all remain on hold, as do plans to expand in Europe to cities such as Paris, Frankfurt, Rome, and Amsterdam. Earlier this month, the carrier announced that it would launch service to New York via Vancouver but it is unclear if it will materialize after the change of management. In addition, a plan to acquire Boeing 757 aircraft to expand service in Australia was recently shelved.
Although it seems that the San Miguel Corporation apparently did not make money on the sale of Philippine Airlines, shareholders seem to be pleased that the company can now focus once again on its core businesses. However, in spite of the exit from Philippine Airlines, Ramon Ang has not ruled out a return to the skies for the company. Ang told reporters that with the right opportunity, San Miguel Corporation would re-enter the highly volatile airline industry.
In this instance, the right opportunity would mean investing in a carrier with a global operation in either the United States or Japan where there are greater economies of scale and earning potential. "If I can buy a US airline, I will," said Ang. "If I can buy a Japanese airline, I will. If I can get a big Korean airline, I will."
However, he added that a possible major airline deal is far-fetched for now as his targets likely won't sell, but if the opportunity presented itself, it is a goal that would be pursued either through San Miguel or through his own personal capacity. "American Airlines earns billions and billions of dollars because their capacity and demand are balanced," said Ang. "If you can become one of the big players, it's like printing money."
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Originally Posted by grahamw48
speaks for itself ... 
... yet, despite recently reported incidents, air travel continues to maintain a pretty good safety record overall. So really, 
... bugger the 
. Aisle seats near an exit are safest 
- in terms of 
