Business World
Friday-Saturday, September 11-12, 1998
Armin Arnio, Carolyn Balingit, Maricris Carlos, et al
It looks like the problems of beleaguered flag carrier Philippine Airlines, Inc. (PAL) will never end.
Since last week, it has been suspended by the International Air Transport Association (IATA) for failure to pay its obligations amounting to $30 million.
IATA is an association of 221 airline companies.
Sources from PAL said no other foreign airline – except German airline Lufthansa – is recognizing PAL tickets as a result of the suspension.
The IATA obligation pushes PAL further to the brink of financial ruin, adding to the more than P85 billion in obligations it has already reported.
“PAL is about two months away from insolvency,” said an airline industry analyst, as he pointed out that its losses in July and August may total P2.4 billion. “We believe by end-October, PAL may report a negative equity.”
An interim receivership body is currently drafting a rehabilitation plan to resuscitate the flagging company. However, the success of the plan hinges largely on the employees’ acceptance of a proposed stock option plan.
As of press time, the respective boards of directors of the PAL Employees Association (PALEA), the Flight Attendants and Stewards Association of the Philippines (FASAP), and the Airline Pilots Association of the Philippines (ALPAP) were holding their respective referendums on whether to accept or reject the plan.
A high-ranking PAL official told BusinessWorld the management had asked the respective boards of the three unions to approve the stock option plan because it is “critical” to the flag carrier’s rehabilitation plan.
The PAL official said the unions’ approval of the plan would allow for the implementation of the 10-year CBA moratorium which is a key condition required by a number of the airline’s creditors and prospective investors.
In its official proposal to the unions, the PAL management asked a 10-year CBA suspension “in order for PAL to attain a degree of normalcy while we are tackling its problems.”
The official said the approval of the stock option plan is needed “to ensure the survival of the airline.”
“There are many ways of saving PAL but you have to hurdle the labor problems first before you can face the creditors,” the official said.
BAD NEWS
The PAL management is set to meet the airline’s foreign and local creditors today to brief them on the latest developments. “If we need to, we’ll tell them the bad news,” the official said.
In a meeting early this week, another BusinessWorld source said PAL’s board of directors had already given Chairman Lucio Tan authority to close the airline, asking for a report within 72 hours of any closure.
The source added the management has already prepared an “exit plan” for the flag carrier’s eventual closure. The initial stages would entail the retrenchment of 90% of the 9,000-strong work force. Among those to be left behind will be skeletal forces from Finance, Legal, Human Resource, Maintenance, Warehouse, and Security departments.
Despite the apparent urgency of the matter, the PAL unions are taking care not to rush into any decisions.
Yesterday, the PAL board gave the unions until 1 p.m. to respond. Later, however, it moved the deadline to 5 p.m. because the unions’ boards had not finished their deliberations. As of press time, the unions had still not given their answer.
The airlines is said to be not closing its doors to the possibility of ending its operations and selling its assets to pay off its creditors.
In an interview, another BusinessWorld source privy to the plans of PAL’s top management said although it is still bent on pursuing the petition filed with the Securities and Exchange Commission, management is not ruling out the possibility of dissolution as the best option.
“Who can blame them when the company’s coffers continue to bleed because of its continued labor problems,” the source added.
Under SEC rules, if a company opts for a dissolution it will have to stop its operations, its assets liquidated to pray off its creditors. The same rules also require the company to file a formal petition seeking dissolution.
SEC officials, meanwhile, said PAL has not yet informed the commission – either formally or informally – of any plan for a dissolution.
“As far as we know, PAL is going through with its June 19 petition with the SEC,” said an informed SEC official.
PAL sources, however, claimed the commission has already given its go-signal on the company’s closure.
Local and foreign creditors could be left holding the bag containing no less than $146.41 million worth of short-term debts (at P38 per dollar, estimates as of April 30) and over $1 billion long-term loans.
If PAL decides to close shop, banks will have to find ways of disposing the airline’s assets without having to sell these at discounts. The danger is that the company may no longer have enough assets to go around and that some creditors may eventually have to write off big chunks of loans.
But creditor banks yesterday continued to hold on to hopes that the closure is merely a rumor and that the rehabilitation plan submitted to the SEC is still a wide open door that could get PAL and the banks out the company’s financial problems.
Security Bank vice-president Emma Yuhico told BusinessWorld PAL has always been upfront with its creditors ever since the problems began and for as long as it has not given its official announcement, the bank will hold on to the rehabilitation plan.
Security Bank has an exposure of $11.02 million to the airline. Ms. Yuhico said these are long-term loans that are fully collateralized.
Virgilio Lugtu, assistant vice-president at Unionbank of the Philippines, during one of the regular creditors update held just last week, said the discussions were mostly hopeful that PAL will soon see the end of its troubles.
TEMPORARY SHUTDOWN
An executive vice-president of one of the creditor banks, meanwhile, said he would not be surprised if PAL decides to “temporarily shut down” the flag carrier’s operations just to send a strong message to the unions that management is firm on implementing the stock option plan.
He claimed Mr. Tan “threatened to close down PAL” during a recent meeting with union members if the latter still refuse to budge from their position.
The banker also said banks would not be surprised if the Estrada administration suddenly comes to PAL’s rescue and agree to a capital infusion. ”After all,” the banker said, “PAL is a national flag carrier.”
For his part, Urban Bank president Teodoro Borlongan said the bank “will try to be flexible to the needs of the PAL … especially during these times.”
But the government will not bailout cash-strapped PAL even if it means the flag carrier will close shop. “That’s not going to happen,” Executive Secretary Ronaldo Zamora said.
If the PAL management decided to shut down, Mr. Zamora said the most the government can do is “encourage other investors to fill up the slack.”
Asked whether Mr. Tan, a known close associate of President Estrada, has directly asked for Malacañang’s help, Mr. Zamora said only in a “general” way.
“In a general way, sinabi lang niya (he said) … basically, his problem is he running out of money. He is saying that he’s losing tens of millions every day,” he added.
While it has been a going concern in the last 57 years, the ride has been anything but smooth for Philippine Airlines, Inc. (PAL).
BACKGROUND
Founded on 1941 by a group of businessmen led by Andres Soriano, PAL started operations with a single Beech Model 18 making one flight daily between Manila and Baguio.
A lot has changed since then as PAL counted some 54 airplanes under its belt and around P85 million in debts burning its pockets.
The last 12 years has been particularly tumultuous as the company lived through three changes in ownership but with little change in bottom line figures.
Reporting a net income was more the exception than the rule as the company recorded net losses in eight out of the 12 fiscal periods from 1986 to 1998.
As a government-owned and –controlled corporation from 1986 to 1991, the company’s performance was at best spotty as management’s fought to keep the company at even keel despite changes in the political and economic landscapes of the country.
During the five-year stretch, PAL’s income statements stayed on the black in the fiscal year ending 1987, 1989 and lost its battle to the red the rest of the period.
When the company was privatized in 1992, the new stakeholders brought in the much-needed capital infusion to strengthen PAL’s equity base.
From a capital deficiency of P9.4 billion in 1991, PAL’s stockholder’s equity rose to P8.13 billion in fiscal year ending 1992.
Under the helm of Antonio Cojuangco, the company reported positive net income figures for two consecutive years, a first in the last 12 years.
In 1994, Mr. Tan entered PAL through what has been described as its “backdoor,” by purchasing 40% of PR Holdings, which holds a 34% stake in PAL. At the cost of P10.5 billion, Mr. Tan became owner of one-third of the airline.
DISMAL
Since then, PAL has reported dismal performances year on year despite an ambitious refleeting program.
While the company continued to enjoy capital infusions from its stakeholders, the company had little to show for it.
Even as stockholder’s equity reached its peak in 1997 at P10.99 billion, the company posted a net loss of P2.5 billion, the highest during the period until this fiscal year’s record-breaking loss.
PAL said the airline’s accumulated losses have reached P14.93 billion in the last five fiscal years.
As of the fiscal year ending March 1998, PAL is coming off a record of P8.08 billion in net losses, the largest in a single year in its 57-year history.
With no end in sight to the company’s financial bleeding, made worse by the labor dispute earlier in the year, it is no longer surprising that PAL’s closure has been floated as the ultimate solution.
From the owner’s standpoint, the evaluation of the company’s performance can be based on the measure of additional value brought about by operations, to the investment made by the owner.
In the last five years, return on equity or the measure of profit in relation to the investment of the owner has been negative. This means that investors, instead of earning profits, have actually seen their initial investments eroded.@
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