Closure of PAL Creating Jitters

The Manila Times

Saturday, September 19, 1998

THE impending closure of Philippine Airlines yesterday sent jitters across the economy, with the peso sliding 44 to the dollar in late trade and the stock market tumbling by 7.46 percent.

This even as government official warned that the closure of the flag carrier could have even more far-reaching effects on the country. Trade and tourism are among the sectors to be initially hit.

"Definitely, with the shutdown there will be losses to the economy," said Audi Pantillano, economist at Securities 2000.

"The magnitude is still uncertain but there will be a tremendous impact on tourism. Inflation will be affected and potentially almost half of the flow of (air cargo) goods may be disrupted," he added.

The demise of the airline, which dominates the domestic aviation market, would create a major supply bottleneck, pushing prices higher in the capital, Manila, Pantillano said.

The government expects economic growth of one percent this year, but analysts on average expect the economy to contract slightly from the previous full year.

Bankers Association of the Philippines president Deogracias Vistan said the closure of PAL could worsen banks' non-performing loans by 0.5 to 1.0 percentage point of total loans.

With PAL's demise, farmers would also face problems in storing produce due to freight delays, leading to more wastage.

“Definitely, the contraction of agriculture in the second half will not just be due to El Niño or La Niña but will also be due to the disruption of flights," Pantillano said.

Aside from its effect on the labor, banking, transportation and trade sectors, PAL’s closure will also hit local oil refiners because it is a major buyer of aviation fuel, analysts said.

More bad news

Finance Edgardo Espiritu said that even worse than the impending closure of PAL is the government's helplessness in doing something to save it.

"PAL is a private institution. The government has no say with regards to how it is supposed to be managed and certainly the government cannot take over since we are not in the position financially to infuse any capital to PAL," Espiritu explained in a press conference at the Malacañang Palace.

Executive Secretary Ronaldo Zamora said the government is very concerned about how other local airline companies can service thousands upon thousands of domestic passengers headed for various destinations.

Suppose PAL closes down, how will you fly your domestic products? Ilan lang ba ang domestic airlines. It's a bleak picture," Zamora said.

According to the Executive's Secretary, the government is no longer worrying about servicing the international routes as there are a number of foreign airline companies flying in the country.

President Estrada himself had said that the government "will do its best." to prevent the country flag carrier from closing down as it would impact negatively on the economy.

Still, Espiritu said the vaccum that will be created due to PAL’s closure is "only temporary' as other airlines can easily adopt to the situation by increasing their aircraft."

There may be some gaps in terms of other airlines being able to serve the routes particularly in the international routes Then are other airlines which can cover this up...(They) can always increase and augment their aircraft to cover the vacuum that may be created." Espiritu explained.

Tourism

Data from the Department of Tourism showed visitor receipts in 1997 amounted to a whopping $2.8 billion from $2.7 billion a year earlier.

From the Philippines alone, studies showed around 50 percent of out-bound travelers prefer PAL with a perception that the flag-carrier has the most highly skilled pilots in the country

The 120-member Philippine Tour Operators Association (Milton) said this development would discourage inbound tourists since tour packages are generally based on the availability of PAL flights.

"How can we promote the Philippines as a tourist destination if suddenly, the flights are gone?” Philtoa officer Bernard Sepe pointed out.

He noted that while travel agencies can opt to "transfer" their guests to another airline, it is not always certain if there will be flights available.

Businessmen

Business travelers themselves have confirmed they prefer PAL because it offers direct flights at very competitive prices.

"It lessens the inconvenience because you don't have to transfer from one plane to another or wait long hours," a businessman who frequently flies to Los Angeles said.

Requesting anonymity. government sources said investor confidence could erode even more if PAL closes its 57-year-old operations because investors would like "to see a stable infrastructure."

She said, "PAL has been one of the country's major identities. It’s already an institution in Philippine business. How can investors come in and do business here if they see that the country’s own flag-carrier has failed?”

“It sends a very disappointing message,” said Jake Hofileña, an analyst at New York-based Clemente Capital Inc., which has $400 million under management. “If it folds, it could be used as a symbol of how bad the crisis has affected the country."

The benchmark Philippine Stock Exchange composite index plunged as much as 112.62. or 8.9 percent, to 1,156.62 today. PAL isn't publicly traded.

PNB reacts

Already, the Philippine National Bank fell in mid-session yesterday due to its loan exposure to the beleaguered airline, traders said.

PNB shares gave up P1.50 or 5.26 percent to P27 pesos as of 0301 GMT. ”In terms of sentiment, the development with regard to PAL is weighing down PNB. Their exposure in PAL is quite substantial. And fundamentally, PNB is weak," said Jasmine Juanico analyst of Anscor Hagedorn Securities Inc.

PNB is the biggest local creditor of PAL, with about $80 million in short-term and long-term loans to the airline. PAL’s total loans is valued at around $'2.0 billion.

PNB's short-term loans to PAL are backed by collaterals consisting of mortgage on a parcel of land and the PAL building. On Thursday, Deogracias Vistan, President of the Bankers Association of the Philippines, said banks with secured loans to PAL will not have any problems since the airline can simply sell its aircraft to settle its obligation.

It is the unsecured creditors who will have a bigger headache, he said.

RSBS, too

Even the cash-strapped AFP Retirement and Separation Benefits System IRSBS) is set to lose some P500 million in investments once PAL closes shop.

This was revealed yesterday by Defense Secretary Orlando Mercado who expressed pessimism about ever recovering the RSBS money.

"The danger is that we might end up with nothing. It (money) may just evaporate in the air and consider it as (yet another) bad investment," Mercado told defense reporters.

The RSBS invested money with PR holdings in 1995.

Gov't intervention?

In Congress. Senate Pro-tempore Blas Ople called on the government to take over the operations of the troubled Philippine Airlines until such time that it can recover from its financial and labor troubles.

Ople said the government is empowered under the Constitution to take over the operations of the PAL when national interests demand it.

He cited Sec.17 of Article 12 of the Charter which states that “in times of emergency, when public Interest requires, the State may during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately-owned public utility or business affected with public interest."

While government may not have the money to sustain the operation of the country's flag carrier, Ople said the takeover will send a "positive signal" for prospective investors to pour their money to the beleaguered airline and salvage it from total shutdown.

Other senators urged management and labor to reconsider their respective positions and meet halfway to prevent a total dome.

But in Davao City, the Philippine Chamber of Commerce and Industry urged the government to leave the problem of Philippine Airlines to market forces even as it predicted that the expected negative effects of the shutdown in the airline industry will linger for the next six months.

The organization urged the government, however, to steer clear of the problem so as to make it easier for the airline industry to find its footing.—With reports from Connie D. Vercasion, Sandra Aguinaldo, Aries Rufo, Raffy Jimenez, Johnna R. Villaviray, and Carlos Conde.