San Miguel Corporation to have its own airlines?


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Aviation think-tank CAPA recently disclosed that San Miguel Corporation (SMC), one of the Philippines’ largest conglomerates, is considering putting up its own airline company.

To be based in Caticlan Airport, gateway to Boracay, the airline is said to fly both domestic and international flights.

According to company sources, SMC is in talks with Boeing, Bombardier and Embraer respectively. SMC previously owned a 49% stake in Philippine Airlines until 2014 when Lucio Tan acquired it for USD1.1billion.

Abangan.

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San Miguel Corporation Eyes Airport Contracts


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Image Source: ramzkie.com

San Miguel Corp.(SMC) is keen on bidding for provincial airport public private partnership (PPP) contracts to be auctioned by the government, company president Ramon S. Ang said, signaling the conglomerate’s intention to continue growing its transport infrastructure portfolio.

Ang said in a text message Friday that SMC had bought bid documents for the auction, which so far includes airport deals in Iloilo, Bacolod-Silay, Davao, Laguindingan and Bohol, to be packaged into two separate bundles.

SMC, which has diversified its assets to include oil refining and tollroads, already operates the Godofredo P. Ramos Airport, better known as the Boracay Airport, which is the closest gateway to Boracay Island, one of the Philippines’ most popular tourist destinations.

SMC partnered with South Korea’s Incheon International Airport in 2013 for the P17.5-billion Mactan Cebu International Airport PPP, although the tandem lost to a consortium led by Megawide Construction Corp. and India’s GMR Infrastructure.

Gokongwei-led JG Summit Holdings Inc. and Megawide also acquired bid documents for the provincial airport auction, the PPP Center and their respective officials confirmed.

Manuel V. Pangilinan-led Metro Pacific Investments Corp. is in separate talks with JG Summit to revive a partnership from the Cebu airport PPP deal to bid for the five airport projects, a stock exchange filing showed on Friday.

The PPP Center on Friday confirmed that at least three groups had so far acquired bid documents for the provincial airport PPP, which was rolled out earlier this month.

The Department of Transportation and Communications is seeking private sector support to upgrade and operate the five air gateways, which have been selected for their growing tourism and business prospects. Some of the deals would also require significant capital spending, the DOTC noted.

The DOTC said Davao Airport, which handled 2.76 million passengers in 2013, would require the largest capital spending with a total development cost of P40.57 billion.

Significant spending swould also be required for Iloilo (P30.4 billion) and Bacolod (P20.3 billion).

In its instructions to bidders, the DOTC included a revised timeline, with the submission of pre-qualification documents now set on May 18 this year.

It has yet to specify a bid submission date.

However, the instructions showed that the project was expected to be awarded by March 2016, a few months before President Aquino’s term ends by the middle of that year.

Source: Miguel R. Camus, Philippine Daily Inquirer

Philippine Airlines: Clipped Wings


MANILA, Philippines – When San Miguel Corporation (SMC) acquired 49% ownership of Philippine Airlines (PAL) two years ago, the conglomerate committed to turn the national flag carrier into a profitable business.

Part of returning the legacy carrier to black was to add passenger aircraft into its fleet.

So in 2012, PAL ordered 44 units of Airbus A321, and 10 A330-300 twin-aisle jets. It intended to implement the re-fleeting plan to reduce fuel and operating costs, according to its former president, Ramon Ang. The 54 wide and narrow-bodied Airbus aircraft had a $7-billion price tag.

Two years later and in a disclosure to the Philippine Stock Exchange (PSE), PAL’s parent firm PAL Holdings Inc. posted a net income of P1.49 billion ($33.24 million*) in the second quarter of 2014, an upturn of P1.08 million ($24,096.39) worth from the same quarter last year.

From April to June this year, revenues jumped 47.4% to P27.3 billion ($608.75 million) compared to P18.52 billion ($412.98 million) in the same period last year as passenger revenues surged 51% while cargo revenues grew 33%. (READ: PAL is back in the black)

“But that’s normal because it’s the (April-June) peak season,” said Jaime Bautista, who assumed PAL’s presidency role from Ang in a board election held Thursday, October 23.

Tycoon Lucio Tan was also reelected as chairman of the board and chief executive officer.

Ang resigned effective October 23.

The ‘real’ figures

Bautista said the first and third quarters of 2014, were “almost break even or a loss.”

In the last two years, he said Philippine Airlines and budget carrier Air Philippines reported a loss of $500 million, the same amount San Miguel spent to buy minority shares of PAL in 2012.

In an unaudited January to August 2014 financial statement of Philippine Airlines and Air Philippines (the latest financial statement has yet to be released) shown to Rappler, it revealed a combined earnings of $11 million from that period. In comparison, PAL Holdings reported earnings of P45.40 billion ($1,013 billion) from March to December 2013.

However, another $13.75 million of “other income” has to be deducted from its $11-million January-August earnings because the amount accounted for the lease charges of the aircraft Ang acquired under the airline’s fleet renewal program.

In that case, PAL had an excess of liabilities of more than $2 million.

In 2013, the airline’s parent company, PAL Holdings Inc., reported a net loss of P11.85 billion ($264.24 million) ending December – over 4 times its P2.74 billion ($61.15 million*) net loss in the same period in 2012, while its comprehensive net losses was at P2.7 billion($60.25 million).

From April to December, passenger volume fell to 5 million, while total expense reached P61.5 billion ($1.37 billion).

PAL Holdings Inc., the parent company of Philippine Airlines and Air Philippines Corporation (which operates PAL Express), currently finances for its leased aircraft with terms ranging from 6 to 12.3 years.

A combination of low passenger demand during off-peak seasons, fuel price fluctuations, economic slowdown, competition, security and safety risks, plus the continuous expenses due to re-fleeting caused PAL’s break even or loss periods.

Too many wings

In an exclusive interview with Rappler, Bautista lamented that Ang had bought “too many” airplanes, adding capacity beyond what the airline needs.

This has contributed to PAL’s losses, with the company’s total long-term obligations at P26.63 billion ($594.29 million) as of June 2014.

“Before his entry to PAL, we only had around 40 airplanes. Now we have 60 airplanes. And then we’re taking another delivery of 32 airplanes in the next 3 to 4 years,” Bautista said.

In its latest quarterly report though, PAL listed 85 aircraft in its fleet. Out of the 85, it owns 33 airplanes, while the rest of the 52 airplanes either under finance lease or operating lease.

The re-fleeting program involved acquiring a mix of brand new A330s and second-hand A340s. It was meant to decrease cash flow for the airline. Instead of retaining old aircraft, operating newer airplanes would save PAL from spending more on maintenance. That, Bautista said, was Ang’s idea.

The ambitious fleet renewal program aimed at increasing PAL’s fleet to 100 planes. In May, PAL completed an order for over 70 planes, even after booking multibillion net losses.

In September last year, PAL negotiated with banks and export credit agencies to finance its $9.5-billion fleet modernization program. The airline’s financial consultant that time, Ian Reid, then declined to provide details of how much are being negotiated for the financing.

TOO MANY WINGS. Bautista laments that Ang had bought “too many” airplanes, adding capacity beyond what the airline needs. File photo from Philippine Airlines

TOO MANY WINGS. Bautista laments that Ang had bought “too many” airplanes, adding capacity beyond what the airline needs. File photo from Philippine Airlines

The effects of such aircraft purchases are expected to take a toll on PAL’s income for the third quarter, where PAL is anticipating to report losses. PAL has not yet released its latest quarterly report yet.

Lacking pilots

Acquiring too many wings, however, won’t help PAL fly to profitability. Bautista explained that an airplane must have 6 sets of pilot comprised of a captain and a first officer, making it 12 pilots per aircraft.

“They lack pilots when I asked how many do they have,” he said.

Every month, a leasing company also charges PAL for the excess planes – which would not have been the case if the planes had been used in its operations, said Bautista.

Financing on aircraft leases is the bulk of PAL’s capital spending, Bautista said. Lease rates are pegged at around 1%. Therefore, a $100-million aircraft’s lease rate is worth $1 million. Whether PAL uses the planes or not, leasing companies charge the airline for all leased aircraft in its fleet.

As of June 30, PAL has 3 Boeing 777-300ER ($330 million) and Airbus 320-200 ($221.7 million) under finance lease. Its 3 Boeing 777-300ERs ($330 million); 10 Airbus 330-300s ($245.6); 7 Airbus 321-231s ($120.5 million); 18 Airbus 320-200s ($221.7); and an Airbus 319-100 ($94.4 million) are under operating lease. (The prices cited are based on Boeing’sand Airbus’ latest commercial pricing.)

“If you don’t use it, you’re wasting millions. We wanted to use (them), but we can’t find destinations,” he said.

Bautista described the re-fleeting lacking deliberation, costing the carrier money.

Realizing it added too many wings for its fleet, the Ang-led management in March 2014 negotiated with Airbus to reduce its A330 order from 20 to 15. It compensated the cutback by ordering 8 additional A321 NEO aircraft, but it did not proceed with the transaction. The Airbuses were meant to be used for PAL’s long-haul flights.

Also, part of the deal with Airbus was to purchase a $16-million Rolls Royce-made spare engine for every 5 airplanes, Bautista saidwho credited Ang for sealing a deal with the airplane engine maker as Rolls Royce’s performance is said to be superior than other brands.

PAL is also negotiating with Rolls Royce whether they could return the deposit of the excess spare engines, but Bautista said, since the transaction has been booked as a sale, Rolls Royce is reluctant to do a refund.

PAL’s fleet utilization is also low.

Their new aircraft has an average utilization of 4 hours per day, Bautista said, which is far lower than the ideal usage of 14-16 hours per day. Apart from the low usage, Manila’s congested runway has put a break on their ambition to mount additional destinations, on top of the fact that budget airlines such as Cebu Pacific, TigerAir, and AirAsia have already eaten up their share in the market.

Because of the re-fleeting program, PAL’s liabilities have reached $1.5 billion, said Bautista.

Botched deals

On top of the aircraft buying spree, there are those unprofitable ventures that PAL got into.

Ang, who is president and chief operating officer of San Miguel Corporation, hinted in 2012 that they were considering a deal with a regional airline. It would have been PAL’s first overseas venture since it commenced operations on March 15, 1941.

Then in 2013, PAL struck a $10-million deal with Cambodia’s hotel and telecommunications empire Royal Group to revive Cambodia Airlines, but it did not push through.

According to Bautista, Ang’s interest was rooted in an intention to use some of PAL’s aircraft for Cambodia Airlines. The revival of Cambodia Airlines was seen to compete against other domestic airlines in Cambodia. With the Royal Group of Cambodia, Cambodia Airlines would serve regional destinations to become the fastest growing airline.

The deal was supposed to make PAL a 49% shareholder of Cambodia Airlines. Royal Group would own the majority 51% shares.

It was reported that PAL was bound to pay a $1-million down payment in July 2013. However, Bautista said the botched deal had already cost PAL $5 million.

The Center for Asia-Pacific Aviation (CAPA) warned PAL in February 2013 against investing in Cambodia Air, describing the venture as “risky.” CAPA said, “the group is better off focusing on reducing expenditure and improving profitability of its Philippine operation.”

Bautista said PAL has fixed expenses worth $5 million payable in the next 5 years. This is because a company that has been tapped to develop the reservation system for its Cambodia operations have been contracted despite securing an airline operator’s certificate before pushing for a joint venture agreement with the Royal Group of Cambodia.

Thanks to long-haul ventures, PAL’s profit saw an upturn, except for the Manila-London service which was last serviced 15 years ago.

The slot PAL got though as it started flying again in November 2013, required the airline to arrive in London at 3:30 pm. For passengers, it meant departing from NAIA Terminal 2 at 7 am, on top of a 3-hour wait or check-in time for international departures.

“Is that a good timing for departure? It’s not,” Bautista said.

CAPA had earlier warned PAL, including Garuda Indonesia, that they would face “intense competition” from Singapore Airlines, Thai Airways, Malaysia Airlines, Vietnam Airlines, and Royal Brunei Airlines.

Apart from competing with large carriers, PAL is not a member of global airline alliance SkyTeam, which makes their European service inferior even when competing with Garuda, which joined the alliance in March this year.

Manila’s under-maintained international airport, as well as its geographical location weakens the demand for such flight.

Non-disclosure

Apart from the airplane buying spree and the unprofitable ventures, there were also other transactions that apparently, Ang did not disclose to the Lucio Tan group, Bautista said.

“In the beginning it was OK because Ang would always report to the board. After a few months when he started buying planes, he had many transactions not reported to the board,” Bautista said.

For instance, Ang terminated PAL’s contract with a call center and procured a contract with a San Miguel Corporation subsidiary, San Miguel Information Technology Systems.

In 2010, PAL outsourced its non-core airline functions such as call center reservations operations to a Philippine Long Distance Telephone Company subsidiary.

“The San Miguel call center he put up is a little bit expensive, which he promised to be cheaper,” Bautista said.

Future

THE WORK AHEAD. “We need to see how we can reduce the impact of over purchasing airplanes. We have to do something about it,” PAL President Jaime Bautista says. Photo by Mick Basa / Rappler

THE WORK AHEAD. “We need to see how we can reduce the impact of over purchasing airplanes. We have to do something about it,” PAL President Jaime Bautista says. Photo by Mick Basa / Rappler

Bautista said their return “means more work.”

“We need to see how we can reduce the impact of over purchasing airplanes. We have to do something about it,” Bautista said.

To address the issues causing PAL to hemorrhage money over the expensive re-fleeting program, Bautista said an aircraft leasing company has been engaged to help sublease the excess jets.

However, as potential buyers know why PAL is selling the unutilized Airbuses, Bautista said the airplanes would be subleased at a lower price. PAL has already subleased some of its airplanes to VietJet, he added.

Another 10 units of Airbuses for PAL will arrive next year. Another 10 units will arrive in 2017, and another 8 units in 2018. For the hard-pressed airline, it means another chain of challenge.

The Japan International Cooperation Agency (JICA) has showed the Philippines that it would need to pour P436 billion ($9.72 billion)to replace the old and congested Ninoy Aquino International Airport.

A better airport, one that could accommodate more aircraft and passengers, is what the flag carrier is wishing for.

“That’s the reason why we are not able to maximize utilization of airplanes because of the limited infrastructure facilities,” Bautista said.

The ambitious re-fleeting program would have not jeopardized PAL’s business performance only if the volume of aircraft ordered per year harmonized with the rate of how the market grows annually.

“It’s just [about] timing. The market grows an average of 6% to 7% a year. But the increase in our capacity is almost double in the last two years. So that’s the challenge,” Bautista said.

The challenge to expand their market, however, will be a turbulent ride.

One of its operations, the Cebu hub which served flights between Cebu and other destinations in Visayas, have been stopped because budget carriers that have turned into formidable rivals in the industry have eaten up PAL’s market share.

“We have to stop it to reduce losses or else we continue to lose money. We have to be very careful in mounting more flights,” he said.

PAL’s long-haul service will also experience a slight shrink, as Bautista said the incoming management is not keen on expanding in Europe.

This time, PAL wants to make its presence strongly felt in the US and the Middle East.

Now 57, Bautista, a certified public accountant who started his career with the country’s largest auditing firm Sycip Gorres Velayo & Co., and helped Tan in many of his major business deals, is looking to improve the airline’s cash flow.

“How can we operate without acquiring more equity from the owners or borrowing money from the banks? How can we have a positive cash flow? We have to be very creative in thinking of plans to generate cash,” he said.

Despite what happened with the San Miguel group, Bautista thinks a partnership is still an option.

“I personally think there’s a need for PAL to look a strategic partner. And we will recommend to the owners that we should go toward that direction of getting a strategic partner,” he said.

A strategic partner could be a carrier anywhere in the world as long as it “should have airline operations,” Bautista said.

The aviation business in general is a difficult one, especially for Asia’s oldest commercial carrier which history included the Asian financial crisis, its $2-billion debt that led to its closure in 1998, and the rehabilitation plan it sought for in 1999.

In 2000, PAL made a drastic turnaround from an unfortunate streak of 6-year loss. But a year later, the September 11 attacks happened and demand for flights dropped. Few years later, it went through turbulence again, including the global recession in 2009, which spiked jet fuel prices, hurting its operations. In 2010, PAL announced it would let go of its non-core airline services, which earned ire among its more than 3,000 affected employees.

“This year should be a good year only if we’re not burdened by the overcapacity of our planes. That’s the problem that we [are dealing with],” said Bautista.

Analysts have continued to point out that PAL would still be a risky venture: it’s capital-intensive, with jet fuel prices and competition among budget airlines already a serious trouble. Ramon Ang’s exit was a right move, they said, and many have wondered: why, despite previous pronouncements that Tan would leave its airline business, would it want to have a troubled airline back?

“Mr. Tan thinks PAL is a very important asset of the country …. And it will take a guy like Mr. Lucio Tan, who is willing to risk a big amount of his fortune [to make it work],” said Bautista.– with reports from Mick Basa and Lynda C. Corpuz/Rappler.com

Bautista Takes Over as RSA Exits


It looks like Jaime Bautista will re-assume the seat to be vacated by Ramon S. Ang as the San Miguel president and his team that revamped the flag carrier and quieted PAL’s militant labor union in two trying years return to their Ortigas headquarters.

The formal management turnover is set for October 15, but already, according to the Philippine Airlines grapevine, Bautista is all set to transition from his seat-warming “general manager” designation to the expansive presidential chair to be left behind by RSA.

Already, the French expatriate hired by RSA, ex-United Airlines executive Laurent Recoura, has yielded his commercial group head title in favor of career sales executive David Lim, with Recoura as his deputy.

Another RSA appointee, chief financial officer Jorge San Agustin, is slated to return to the SMC Group, according to the PAL chatter, to be replaced by Marianne Raymundo, currently vice president for financial services.

In all, RSA was said to have placed over dozen executives within PAL’s key departments, whose appointments are apparently also now up for review as well.

Within taipan Lucio Tan’s expanded family, his namesake son Lucio Jr. and son-in-law Joseph Chua of MacroAsia appeared to have been assigned a more involved, though behind-the-scenes role within the flag carrier.

In addition to helping round up a creditors’ group to re-acquire the SMC stake, the son was spotted among the cheering crowd of PAL executives and staff to welcome the 80-year-old taipan back into his empire.

Finally, PAL spokesperson Cielo Villaluna appears to be safe from any management shakeup; the former newscaster and her corporate communications team were said to have rounded up the warm bodies for the rousing welcome

Air Passenger Volume Up 9.5% in H1


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MANILA, Philippines – Air passenger traffic rose to 21.73 million in the first half of 2014, attributed to the continued increase in the number of foreign and domestic tourists, the Civil Aeronautics Board (CAB) reported.

Volume of airline passengers grew by 9.5% from January to June this year compared to 19.84 million in the same period in 2013.

Domestic airline passengers surged 15.32% to 12.42 million in the first half of 2014 from 10.77 million in the same period last year.

Foreign passengers inched up by 2.6% to 9.31 million from 9.07 million, CAB reported.

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Air traffic in the Philippines has been recovering from flat growth last year amid the reforms being implemented by the Aquino administration, CAB executive director Carmelo Arcilla said.

Air traffic in the country has been growing by double-digit levels since 2005, except for 2013, Arcilla said.

“We are reaping the benefits of the deregulated policy adopted by the Aquino administration,” Arcilla said.

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Budget airline Cebu Air Inc (Cebu Pacific) of taipan John Gokongwei dominated the domestic market after flying 5.82 million passengers in the first half of the year.

Philippine Airlines (PAL) Express came second with 2.77 million, national flag carrier Philippine Airlines Inc with 1.98 million, AirAsia Zest with 1.06 million, and Tiger Airways Philippines with 575,093.

PAL, which used to be jointly owned by tycoon Lucio Tan and diversified conglomerate San Miguel Corporation (SMC), dominated the international market after flying 2.5 million passengers from January to June this year.

Cebu Pacific came second with 1.62 million, followed by AirAsia Zest with 377,198, Tigerair Philippines with 104,467, and PAL Express with 77,309.

Tiger

Agreements, projects to boost air traffic growth

Arcilla said there is further room for growth of the country’s air traffic as the Aquino administration is pushing several projects, including the proposed P2.4 billion ($53.92 million*) parallel runway to help decongest the Ninoy Aquino International Airport (NAIA).

Arcilla added that the proposed runway optimization program could raise the capacity of the country’s main gateway to 50 to 60 events per hour from the current 40 to 42 landings and take-offs per hour.

Likewise, the CAB official said several airports are being expanded and developed in the provinces including the P17.5-billion ($393.17 million) Mactan-Cebu international airport being undertaken by the tandem of Megawide Construction and Bangalore-based GMR Group, and the expansion of the Clark International Airport in Pampanga.

“There are foreign airlines waiting in the wings,” Arcilla said.

DMIA

Arcilla also said that the air agreements signed by the Philippines over the past few years led to more tourist arrivals. CAB hopes to conclude agreements with 3 more countries, including Australia, this year.

So far this year, the Philippines concluded air talks with France, Singapore, New Zealand, Myanmar, Canada, Macau,and South Africa. Air talks with Malaysia were called off twice.

Last year, the Philippines signed air agreements with Japan, Macau, Brazil, Australia, Israel, and Italy.

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The Aquino administration is pursuing air talks as part of its open skies policy. Under Executive Order No. 29, airports other than NAIA would be opened to more foreign traffic, in line with the target to lure 10 million tourists by 2016.

Source: Rappler.com

Philippine Airlines: SMC Lost Investment


San Miguel Corp. did not make a profit on its investment in Philippine Airlines (PAL) despite having turned around the moribund flag carrier during the two years when the diversified conglomerate was running the firm.

In fact, SMC president Ramon S. Ang said yesterday that the conglomerate—the country’s largest business group in terms of asset value—did not even break even on its PAL venture owing to its failure to recover its cost of funds.

“SMC lost money in this deal,” he said, breaking his silence for the first time since the airline was reacquired by tycoon Lucio Tan—its former controlling shareholder —two weeks ago.

Ang said he was willing to forego a long drawnout negotiation process with Tan because it was in danger of turning hostile, with frustration on both sides running high after a year of flip-flopping decisions by PAL’s former owner.

All told, the SMC group invested $1.36 billion in PAL—an amount Ang recovered, minus the interest that he should have charged for it over two years.

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“If we fought over it, it would destroy the value of PAL,” he said, adding that adopting a hardline negotiating stance would result in a “lose-lose” situation for both sides and eventually erode the value of both tycoons’ holdings. “So I agreed to sell.”

Ang described the poor state of the airline’s finances when he assumed its presidency in 2012 after a $500-million deal with Tan gave SMC 49 percent of the airline, including management control.

He said that, on average, airlines spend 40 percent of total revenues on fuel and maintenance costs.

However, for PAL, which was saddled with older, gas-guzzling aircraft, fuel and maintenance expenses were as high as 55 percent of revenues when SMC came in. It was at this point when the new management decided to embark on a massive refleeting program and ordered a fleet of newer, more fuel-efficient planes from European plane-maker Airbus.

It was also at this point when allegations surfaced that Ang was supposedly earning commissions from PAL’s refleeting program. In response, Ang released a certification issued by Airbus  upon his request to debunk the rumors.

“Both parties hereby represent and warrant that they have not paid, agreed to pay, authorized the payment of or caused to be paid, directly or indirectly in any form whatsoever any commission, percentage, contingent fee, brokerage or other similar payments of any kind, in connection with the establishment or operation of the agreement [to purchase 54 new aircraft] to any employee of the other party or to any person or entity in the other party’s country or elsewhere,” said Airbus senior vice president Cristophe Mourey in a July 23, 2012, letter to PAL.

“Idon’t have the heart to make money from PAL,” Ang said, responding to allegations of profiting from aircraft orders.

Asked about the airline’s prospects going forward, Ang said it would be crucial for Tan to bring in a strategic partner to help buttress PAL’s books.

“Assuming the strategic investor would need to bring in $1 billion in equity, they would need up to $1 billion more for the airline’s working capital and to pay for aircraft deliveries in 2015,” he said. “So the new partner needs around $2 billion.”

The SMC chief said that he has effectively relinquished control of the airline since Sept. 15, describing his two-year stint at PAL’s helm as “mission accomplished.”

“We improved the image of the country overseas, we restored the airline’s profitability and we got the country taken out of the blacklist of both Europe and the US Federal Aviation Administration, with a lot of help from Airbus,” he said.

Source: |

 

 

Lucio Tan Regains Control of Philippine Airlines


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MANILA–The Philippines’ second richest man will regain full control of Philippine Airlines (PAL) by buying back a 49-percent stake from San Miguel, the firms said Tuesday, in a deal reportedly worth US$1 billion.

Lucio Tan is to take back the stake he sold to San Miguel two years ago, according to disclosure statements filed with the stock exchange that did not disclose the price.

“The two biggest stockholders of Philippine Airlines … signed a joint agreement whereby (San Miguel Corp.) expressed willingness to sell its 49 percent stake to the group of Dr. Lucio Tan,” a San Miguel statement said.

PAL Holdings, the airline’s holding company, issued a similar statement.

Spokeswomen of the two companies declined to give the amount of the planned deal.

San Miguel paid US$500 million when it bought the stake from the LT Group, a holding firm controlled by Tan who is listed by Forbes magazine as the second richest man in the Philippines with a net worth of US$6.1 billion.

The 2012 deal saw San Miguel take management control of the flag-carrier even though Tan remained in control of the majority 51 percent shareholding.

San Miguel then invested more to help pay for a major modernization of PAL’s fleet, which included a 2012 order for 54 Airbus with a list price of US$7 billion. Since then, the airline has also been removed from European and U.S. aviation safety blacklists.

San Miguel President Ramon Ang, listed by Forbes as the 32nd richest man in the Philippines, has overseen the diversification of the firm from its base in the beer, food and beverage industries into infrastructure, power and airlines.

However San Miguel’s investment in PAL soured as two of the nation’s most powerful men decided they did not want to share control, according to Alex Tiu, a stock market analyst with AB Capital Securities.

“What insiders are saying is that this is more of a pride issue. It was either going to be full control to Ramon Ang or full control to the Lucio Tan group,” Tiu told AFP.

Media reports that Tan paid San Miguel US$1 billion for the stake sounded credible, Tiu added.

But Tan, who also has interests in tobacco, banking and beer-making, may also profit from full control of PAL, according to Tiu.

The airline returned to profit this year under San Miguel’s stewardship.

PAL Holdings posted a net income of 1.49 billion pesos (US$34 million) in the second quarter of this year from a loss of 1.08 billion pesos in the same period last year, the company’s records showed.

PAL is also expected to benefit from the Philippines’ recovering economy, the government’s new tourism thrust and the airline’s removal from the safety blacklists, Tiu said.

Source: AFP, http://www.chinapost.com.tw/

Philippine Airlines Buyout: “Done Deal”


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MANILA, Philippines – Filipino-Chinese taipan Lucio Tan has reportedly concluded an agreement to buy back the 49 percent of the Philippine Airlines (PAL) he earlier sold to San Miguel Corp. (SMC).

Tan, who has kept his 51 percent majority stake in PAL, will reacquire full control of the country’s flag carrier from incumbent PAL president Ramon Ang, who is concurrently the president and chief operating officer of SMC.

Both Tan and Ang, however, declined to discuss the reported buyback. “Not yet,” said Ang in a text message to The STAR when asked if the buyback was a done deal.

The reported return of PAL to the full control of Tan was the hot topic among local and foreign travel industry leaders attending the SKAL reception Friday night at the New World Hotel.

“There will be a formal announcement probably next week once finalized,” former PAL president Jaime Bautista, who was present at the SKAL reception, said without elaborating.

Tan recently named Bautista to represent him in the PAL board.

Talks have been going with Ang on a move by the Lucio Tan Group to buy back SMC’s 49 percent stake in PAL.

In April 2012, SMC’s wholly owned subsidiary San Miguel Equity Investments Inc. (SMEII) acquired a 49-percent equity interest in Trustmark Holdings Corp. for $500 million.

Trustmark owns 97.71 percent of PAL Holdings, which in turn owns 84.67 percent of PAL through PR Holdings Inc.

Ang has been steering PAL for the past three years. Highlighting his management was PAL’s acquisition of a new fleet of Airbus aircraft as well as the opening of new routes.

As of end-June, PAL has received a total of 17 aircraft from Airbus, including 10 A330 and seven A321.

The fleet of the PAL Group including PAL Express comprised 85 aircraft as of end-June.

PAL is set to retire 20 aging aircraft, including four Boeing 747-400s, as part of efforts to transform the company into “Asia’s airline of choice” and one of Asia’s youngest fleet, at 3.5 years.

PAL is back in the black after booking a net income of P1.49 billion in the second quarter of the year from a net loss of P1.08 billion in the same quarter last year.

Ang is still hopeful that the buyout talks would be completed within the third quarter of the year. The prolonged buyout talks have affected the operations of the national flag carrier, with its planned return to New York postponed to the first quarter of next year. The airline plans to fly to JFK International airport in New York via Vancouver at least four times a week starting March 15. The original schedule was for October this year, after the US Federal Aviation Administration upgraded the aviation safety rating of the Philippines back to Category 1 from Category 2.

It is also set to launch more direct flights to Europe including Paris, Rome, Amsterdam, among others after successfully mounting direct flights to London last November after the airline was allowed by the European Union to enter European airspace.

Source: Marichu Villanueva with Lawrence Agcaoili, http://www.philstar.com

San Miguel Chief Sees Decision on Philippine Airlines in 2 Weeks


 

Aug 22 (Reuters) – San Miguel Corp said it would make a decision in the next two weeks on whether it will sell its stake in Philippine Airlines’ parent PAL Holdings Inc to business tycoon and partner Lucio Tan or buy Tan out.

 

Tan has said he wants to buy out San Miguel, and an exit would allow the country’s biggest conglomerate to focus more on its food interests.

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San Miguel owns 49 percent of a holding company that controls around 90 percent of PAL, which has a market value of $3.2 billion. Although Tan owns 51 percent of the holding company, management control of the airline rests with San Miguel.

“In two weeks, something will happen for sure…in two weeks, we will know the outcome,” San Miguel President and Chief Operating Officer Ramon Ang told Reuters late on Thursday.

“If ever we exit, we have many existing businesses. If ever, I will concentrate more on our food business,” he said.

Local media reports have said the Tan group is unhappy with some of San Miguel’s management decisions for the airline, including the cost of an early retirement package. Representatives for both companies have declined to comment on the reports.

This year the United States’ aviation regulator upgraded the Philippines’ civil aviation status to allow its airlines to operate new direct flights to the U.S., while the European Union last year lifted a ban on Philippine Airlines, saying its safety standards had improved.

PAL Holdings, which is looking to retake market share lost to archrival Cebu Air Inc, swung to a net profit of 1.46 billion pesos ($33 million) in the April-June quarter from a 1.06 billion peso net loss a year ago.

Ang said the company has posted profits in the past four months and the trend will likely continue. (Reporting by Neil Jerome Morales; Editing by Edwina Gibbs)

PAL For The Course


LT

Whether or not the family of taipan Lucio Tan would make good on their tender to get back the whole of Philippine Airlines from San Miguel, the financial markets would probably consider it as an insignificant development for San Miguel.

If PAL would go back entirely to the taipan, or if San Miguel would keep its 49-percent interest in the airline, the market could easily view it, either way, as a plus for the listed San Miguel—you know, something like par for the course.

As we reported two years ago in 2012, when San Miguel injected initially some $500 million into the country’s struggling flag carrier PAL, the financial markets hardly showed signs of delight.

The price of San Miguel stocks remained steady then, showing none of the upbeat mood that usually followed the 25 or so business acquisitions by San Miguel starting in 2007, investing more than $5 billion over the past seven years, with its combined yearly revenues rising to an equivalent of 5.4 percent of the country’s GDP.

Anyway, the world airline business in 2012 incurred heavy losses, specifically $1 billion in just the first quarter of 2012, primarily because of the high prices of oil and thus airplane fuel. Surely, PAL found it difficult to beat the downtrend in the industry.

Even at that time, the San Miguel conglomerate was already recording Ebitda (earnings before interest, taxes, depreciation and amortization) of more than P70 billion a year. In short, based on its financial statements, San Miguel was doing fantastically well.

In the markets at that time, no wonder, analysts feared that, because of the troubles in the airline business in general, plus the unique problems besetting PAL such as labor unrest, the acquisition would only weigh San Miguel down.

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If San Miguel, thus, would return its 49-percent stake in PAL to the Tan family, the financial markets would still regard it as a “win” for the conglomerate because, for one, the markets were not exactly in love with the acquisition, in the first place.

Moreover, San Miguel would likely make some profits from the deal with the Tan family. Word went around recently that the two groups agreed on a deadline on the buyback, falling due sometime next week, involving at least $1.5 billion.

As reports indicated, San Miguel initially put some $500 million into the airline, and from what I gathered, the conglomerate in the past two years put into the airline additional advances of around $800 million.

If the rumored price of $1.5 billion for the Tan family’s buyback of PAL would hold, it seemed that San Miguel would already earn a premium of at least $200 million and the markets as always would love any quick profits for blue-chip stocks.

On the other hand, if the buyback deal would not push through for any reason at all, such as a change of heart by the taipan known in the business community as “Kapitan,” San Miguel could then still pursue its plans for the airline.

Reports indicated that, even before San Miguel invested in PAL two years ago, San Miguel vice chair and COO Ramon S. Ang (a.k.a. RSA) was already confident that he could turn around the airline from its heavy losing streak.

RSA intimated to bankers and the like at that time that PAL might not produce the profit “windfall” that San Miguel had been known to enjoy in its acquisitions, but he was certain that the airline would turn around.

It was not a surprise therefore that, just recently PAL disclosed to the Philippine Stock Exchange a net income of $7.6 million during the first half of 2014, which was a complete reversal of the $57-million loss it incurred in the same period last year.

Also, PAL insiders were confident that the airline would post another good financial performance for July 2014, as their preliminary figures showed that it could expect a net income of about $11 million in just one month.

From what I gathered, for example, the airline succeeded in bringing down its operating costs, mainly through the huge drop in its fuel and maintenance costs, which used to account for at least 55 percent of its yearly total costs.

PAL was able to reduce the same problematic fuel and maintenance costs to around 47 percent of total expenses, and they are still bound to go down, mainly because the airline will add more fuel-efficient aircraft to its fleet.

The latest model aircraft bought by PAL, for one, would allow it to use the “right” aircraft for any particular route.

For instance, PAL formerly used the huge Boeing 747 model for regional or even domestic flights. But according to PAL insiders, even if the airline could fill the aircraft to full capacity in those routes, it would still lose money. Thus PAL decided to use smaller but cost-efficient aircraft models for such short routes, reserving its fleet of wide-bodied aircraft for long-haul destinations such as the United States and Europe.

In one news report abroad back in 2012, RSA disclosed that San Miguel would take PAL through a complete course of changes and innovations, committing even then the conglomerate to invest some $8.5 billion in PAL over the next 10 years or until 2022.

Oh, and by the way, by that time in 2022—based on the prognosis propagated over the past few years by aircraft manufacturers and the world airline industry—the Asia-Pacific region would enjoy the heaviest air traffic in the whole world.

In short, the resurgence of PAL as a premier airline in these parts would be something that San Miguel could also work on or even expect.

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