Business World
Monday, September 14, 1998
Manolo Serapio Jr, Patrisha de Leon, et al
The government is exploring all avenues, including a major review of the country's air transport deregulation policy, which could lead to the rescue of the national flag carrier, Philippine Airlines, lnc. (PAL), from possible closure.
Based on the report submitted to President Estrada last Thursday by the interagency task force led by the Department of Finance (DoF), the government may have to renegotiate a number of its bilateral air agreements as well as temporary operating permits granted to foreign carriers during the time of President Ramos with the goal of “leveling the playing field.”
Meanwhile, bank creditors of PAL are under no immense pressure to compel the beleaguered flag carrier to pay up, hopeful its rehabilitation plan can pull it back from the brink of financial ruin, the Philippine National Bank (PNB) said last Friday.
PNB president Benjamin Palma Gil, head of PAL creditors' committee, told BusinessWorld the creditors want to see PAL regain its strength and are willing to give the company enough time to recover from the crisis it is going through.
The PAL management had earlier blamed its financial decline to the “reckless” liberalization of the air transport sector.
"We're not trying to be protectionists … (but) we just want to be fair (to PAL),” said Finance Undersecretary Solomon Cua in an interview. He said the policy decisions made by the last administration have largely given foreign carriers "undue advantage over PAL."
Between 1993 and 1997, the Civil Aeronautics Board (CAB) amended or established new air service agreements as well as granted temporary operating permits to a number of foreign airlines which exposed PAL to more competition than it can handle.
The new permits allowed the foreign airlines — Singapore Airlines, Hong Kong's Cathay Pacific Airways, Korean Air and Asiana Airlines of South Korea, China Airlines, and Eva Airways of Taiwan — to eat into PAL's share of the profitable Manila-US market.
"Some of the agreements provide more capacity than the actual demand (to the disadvantage of PAL)," said Mr. Cua. "The situation is very much different now; we have to look out for the welfare of our own airline.” He added a review of the country's open skies policy is in order.
Mr. Cua, quoting from the inter-agency report, on Friday said PAL’s tax and duty exemption privileges under Presidential Decree No. 1590 will likewise be reviewed to determine whether or not the flag carrier has the necessary fiscal incentives for its importations and financial operations.
Legal opinion
He said the task force has requested for a legal opinion from the Department of Justice on the extent of the fiscal privileges available to PAL under the franchise order.
At the same time, Mr. Cua said the government may also spare PAL from flying missionary routes, instead requiring all other local carriers to distribute among themselves these domestic destinations.
The Finance official also reported that PAL Employees Association (PALEA) — one of the airline's three labor unions — had accepted the offer of majority owner Lucio Tan to get 20% of his personal holdings equivalent to P3 billion in exchange for the suspension of all collective bargaining agreements for 10 years.
PALEA represents at least 6,000 of PAL's 9,000 employees. At least 5,000 personnel have already been terminated as part of a retrenchment program.
The Chinese-Filipino tycoon, who owns 70% of PAL, has offered each PAL employee — in active payroll as of Sept. 15, 1998 — a maximum of 60,000 shares with a par value of P5 in a bid to end the labor conflict that has paralyzed PAL's operations since June 5. The shares will be equivalent to three seats in PAL's board of directors.
Under the plan, should any share-owning employee leave PAL, that employee has the option to keep or sell his/her holdings but only to other employees, Mr. Cua, quoting from the task force report, said.
Mr. Cua said the stock option plan is one of the salient points of the government's five-year rehabilitation plan for PAL which basically adopts a 22-aircraft, 9,000 work force system. Plan 22, as the program is called, limits PAL flights to the United States, Middle East and Asia destinations.
But the Flight Attendants and Stewards Association of the Philippines (FASAP) opted to take a different route.
In a phone interview, an FASAP official told BusinessWorld the union's 10-man board of directors voted against the stock option plan during its emergency meeting over the weekend.
However, the FASAP official clarified that the board's decision still needs to be ratified by union members this week.
Last week, PAL management told union leaders that should they reject the stock option plan the flag carrier will have to be closed.
Mr. Cua said the government is focusing its energies on resolving the labor row at PAL, saying a resolution will positively impact on the firm's financial distress.
"The key here is still the labor situation. Once this is solved, even the creditors will agree (on easing PAL's financial woes).
PAL owes foreign and local creditors $2.1 billion (approximately P85 billion) in loans. Of this amount, $1.2 billion was borrowed from a consortium of European banks, $400 million from US financial institutions and another $400 million from local banks led by PNB and Allied Bank.
Speaking for PNB, which has the biggest exposure in the airline, Mr. Palma Gil said "for as long as PAL is flying" the bank would continue to help in the rehabilitation of the airline.
"We are not under magnificent pressure to pull the plug on PAL," he added.
The creditors were supposed to meet last Friday, but Mr. Palma Gil said the meeting never transpired although there were constant communications between PAL and its creditors.
Representatives of the airline’s foreign creditors are reportedly also in town to get firsthand information, prior to a Sept. 21 meeting with the SEC.
The direction of the creditors’ meeting will largely depend on the decision of the three company unions regarding an employee stock option plan which, PAL said, is critical to the rehabilitation of the company. Until Friday, the unions were still discussing the scheme.
Mr. Palma Gil said its creditor-banks are not panicking as PAL has sufficient assets and its exposure is totally collateralized.
“Mr. (Lucio) Tan is a man of substance. He has other resources and the structure of our deals (allows us not to be apprehensive of our loans),” he added.
According to the SEC, PNB extended $66.09 million in secured short-term loans to PAL. This was in addition to long-term loans amounting to $14.25 million.
Last Friday, BusinessWorld reported that the 221-member International Air Transport Association (IATA) has suspended the membership of PAL for failure to pay its obligations amounting to P30 million.
This, in turn, sparked talks that the closure of PAL was imminent unless the unions accept a rehabilitation plan submitted to the SEC last week.
IATA return
But PAL is determined to see to its rehabilitation. It has been negotiating its way back into the IATA, targeting to regain its membership status by tomorrow, Sept. 15.
A top-ranking PAL official told BusinessWorld over the weekend the airline has been holding talks with IATA since last week for a possible restructuring of its bill.
“We’re very optimistic that we will be able to return to IATA by Sept. 15,” the official said.
Under the IATA suspension, and industry source told BusinessWorld the flag carrier is technically not allowed to issue tickets beyond its regular routes.
Because of this, the source said the most affected among PAL’s passengers are those in its Philippine-US market where connecting flights are a necessity.
“For example, a passenger wants to travel from Manila to Houston. Normally, PAL can take him from Manila to San Francisco – which is its regular route – and then issue a ticket going to Houston say, via American Airlines… But with the IATA suspension, American Airlines will not honor that Houston ticket issued by PAL,” the source explained.
With the IATA suspension on its third week now, the PAL official estimated the flag carrier has already lost 10% of its US traffic as passengers opted to take other airlines.
The US market accounts for 20% of the flag carrier’s total revenues from its flight operations.
Despite this, another PAL source claimed the flag carrier has managed to get around its suspension by dealing directly with other airlines.
The source said PAL was able to convince some IATA members to honor its tickets with a commitment to pay them directly instead of going through the association’s clearing house.
As it is, the source said PAL already has its hands full trying to recover from the $30-million loss it suffered from passenger cancellations during the pilots strike.
The source said PAL will also have to pay an additional $5 million to $8 million as airlines which during the June strike have charged the flag carrier regular fare rates.
“Even though the tickets we sold at that time were already discounted because of the lean season, the other airlines want us to pay them the full fare… So we end up losing more money,” the PAL source lamented.
Moratorium
During its weekend meeting, the FASAP board said it is particularly against the 10-year moratorium on CBAs as PAL management has not assured against any diminution of workers’ benefits.
“It would be okay if they assured us that our benefits would not be lessened. But under the (stock option) plan, they said all benefits provided in our CBAs would be ‘set aside’ and only the employees’ salaries would be retained as is,” the FASAP official said.
The official said this would be particularly difficult for the cabin crew whose employment compensation is largely derived from benefits such as productivity pay, per diem and other travel-related benefits.
Thus, he said it is not advantageous for flight attendants to give up their CBA compared with the ground crew whose compensation is largely based on their monthly salaries.
Illegal dismissal
In another development, government lawyers have asked the Supreme Court to hold PAL liable for the illegal dismissal of three employees assigned at the Mactan Airport in Cebu.
In an 11-page comment, the Office of the Solicitor General asked the High Tribunal to reject the airline’s petition to not be forced to reinstate the workers, claiming they were in fact employees of another independent firm.@
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