PAL saga’s interesting turn

The checkered story of the flag carrier, Philippine Airlines, took another interesting turn last week with full ownership and management reverting to the camp of taipan Lucio Tan. This development ended a partnership with San Miguel Corp. head honcho Ramon Ang, the aggressive businessman who transformed the beer-based company into the highly diversified conglomerate that it is today.

SMC invested some $500 million in PAL in April 2012 in exchange for a 49-percent stake and full management control. Tan had agreed to a similar partnership for his lucrative Fortune Tobacco Corp., allowing Philip Morris to acquire a 50-percent interest and management control of the company.

In the two years that Ang led PAL, many positive changes happened to Southeast Asia’s oldest airline, and to the local aviation industry in general. First was the naming of a new management team led by Ang as president. On top of the team’s to-do list was to mend the severely fractured relationship between management and airline workers (the animosity had remained unresolved for decades). Immediately thereafter, an ambitious program was launched to replace PAL’s aging fleet. Deliveries started in the second half of 2013 with 12 Airbus units.

In the third quarter of 2013, the Aquino administration succeeded in having a European ban on flights coming from the Philippines lifted. This allowed PAL to mount flights to London beginning in November. It was even able to secure a slot in busy Heathrow Airport at no cost to the flag carrier. This airport slot reportedly trades at no lower than $20 million, if one is available. PAL continued its route expansion and, early this year, it launched flights to the Middle East, home to millions of overseas Filipino workers.

A major milestone in the local aviation sector was marked in the second quarter of 2014—the upgrade of the Philippines to Category 1 status by the US Federal Aviation Administration. It allowed the full utilization of PAL’s Boeing B777 to the United States starting in May. The aircraft, before the FAA upgrade, resulted in losses of $31.9 million in 2013.

Also this year, PAL added flights in premium profitable markets. It increased flights to Japan and secured slots at the Haneda Airport in Tokyo and opened Canadian routes that are now among the top five PAL earners. Last June, PAL also sealed a cooperation agreement with United Arab Emirates flag carrier Etihad, giving it more access to the Middle East market and connectivity to the rest of Europe, as well as synergies in the use of common facilities, front-desk offices at airport terminals and business lounges.

Only recently, PAL obtained approval for the use of the Russian overflight, cutting down flying hours to London by as much as two hours per trip.

In marketing, Ang’s team successfully completed the “One Brand” strategy this year (with the slogan “one face, one system, one quality”) to create a sustained positive image for both PAL and PAL Express. All domestic flights were moved to PAL Express for focus and to avoid overlaps and what businessmen call cannibalization. As a result, PAL Express became profitable this year.

Another management strategy was “the right plane for the right destination,” which implemented standards on fuel load per type of aircraft per destination. PAL noted that this significantly reduced technical stops on the US flights and resulted in savings of about $1 million a month. Fuel accounts for about 60 percent of the airline’s total cost.

All these were reflected in PAL’s financial statements. The adjusted comprehensive loss for the fiscal year ending March 2012 of $130.1 million was brought down to $122.6 million in fiscal year 2013, and further to $30.89 million as of December 2013 (first nine months of its fiscal year from April 2013). In the first half of 2014, operations turned around with an adjusted comprehensive income of $7.62 million.

These indications suggest that SMC’s entry into PAL, with Ang at its helm, was a good thing indeed. Tan’s group has hopefully learned something on how to keep the airline operating efficiently, profitably—and harmoniously with labor. At this point in the airline’s corporate life, going back to the old style of management will do PAL more harm than good.