Clipped Wings

Business World

Monday, September 21, 1998

Market Forces

By JOSE M. GALANG JR.

Shutting down Philippine Airlines will be a terrible blow to the government's privatization program, a 12-year-old effort to attract more private investments into the economy.

When placed on the auction block in 1992, PAL, then under the control of a couple of state entities attracted no less than the top conglomerates in the land, all imbued with dreams of elevating the flag-carrier into a major participant in the Asian region, if not in the world.

Instead of growing, however, PAL has had its wings clipped after failing to, first, make its operations more cost-effective and, later, operate under highly competitive conditions made more difficult eventually by the Asian financial turmoil.

Just a year after it was turned over to private hands, PAL started running up losses, which continued even with the increased volume of passenger traffic brought about by the economic recovery in the mid-1990s.

Given such a fragile situation, it was no wonder that when the pilots walked out in July the company simply headed for collapse. The airline was no longer prepared for such a crippling stoppage in operations caused by the strike, later joined in by the other employees.

The PAL experience is a departure from that of other state corporations that had also been sold off to private investors. Most of the other privatized entities actually began making money after changes in management, giving truth to the belief that most economic activities can be better handled by private groups.

What has made PAL's case different?

The airline's top boss, Lucio Tan, the low-profile tycoon who built an empire on tobacco and liquor, was not even a direct participant in the beginning. An alliance led by PLDT head Antonio Cojuangco, Bank of PI, and then-chairman Andres Soriano III of San Miguel won the January 1992 bidding for PAL, but the group failed to raise sufficient cash for the down payment two months later and had to run for help to Tan, who, under the rules of the privatization program, was barred for being a so-called Marcos crony.

That arrangement was kept secret until a few months later when Tan, getting uncomfortable with the various purchases being made by the Cojuangco-led management group, asserted his right to the airline by virtue of his financial exposure.

Even that change in leadership, which put government nominee Carlos Dominguez at the pilot's seat, apparently was not helpful. PAL’s operating costs continued to mount.

By September 1993, PAL was in the red. The losses continued, even after cost-cutting measures, according to airline records. The string of losses prompted another change in management, this time with Tan-picked Jose "Pepeton" Garcia.

The bulk of the increase in costs has been in the servicing of the airline's fleet. In the early months of the privatized setup, such servicing was even farmed out to foreign groups.

The dollar-denominated fees just kept on growing, not to mention the write-offs of certain engines and parts that later proved to be unserviceable despite the expensive servicing costs.

Somehow, PAL was never really able to sustain a program to limit debts to "manageable" levels as it kept on borrowing for new aircraft acquisitions. These debts, mostly to foreign banks, are now the biggest burden to the airline.

Tan has also expressed a desire for PAL to focus on Asian routes because that was where the passenger traffic had been growing. There were, indeed, plans to establish "spoke-and-hub" operations around East Asia.

The goal might have been practical, analysts believed, but subsequent aircraft purchases, however, were for long-haul flights. Deployed to short-range routes, such aircraft could only mean costs that were uneconomic.

Should PAL actually stop flying in three days' time, the repercussion on the local investment climate can only be gloomy. It is not only the flow of tourists that an airline such as PAL supports. The flow of goods to keep industries from various parts of the country running will also be jeopardized with the absence of PAL.

And with the number of privatization plans being lined up by the Estrada government as part of its move to boost revenues for its various development projects, any diminution of investor interest can only lead to lackluster results.

Who will suffer from that scenario? The poor, of course. If the Estrada government is still keen on its pro-poor program, it should round up all the support it can muster to keep the airline in the air.