The Philippine Star
Friday, December 4, 1998
President Estrada remained hopeful yesterday that Cathay Pacific Airways Ltd. would resume negotiations to acquire a stake in debt-ridden Philippine Airlines (PAL) after the Hong Kong carrier pulled out of talks Wednesday.
"Cathay management wrote me a letter that they are still available for another (round of) negotiations," said the President, who has taken a personal interest in the survival of the 57-year-old airline. "So let us not lose hope.
Mr. Estrada added that he was waiting for PAL chairman Lucio Tan to return to the country from Guam so they can discuss the issue.
Tan, the principal shareholder in PAL, had tried to revive a prospective deal with United States' Northwest Airlines to invest in the ailing flag carrier but the President said this also failed to push through. "They're no longer talking," he said.
Finance Secretary Edgardo Espiritu said, however, that Tan is now negotiating with "non-strategic" partners to raise $150 million in capital for PAL to retain control of the fledgling carrier. He said that the International Finance Corp. (IFC), the investment arm of the World Bank, was one of the non-strategic partners being eyed by Tan. IFC is reportedly interested in investing up to $23 million in PAL, although analysts said the amount would do little to help the airline out of its current difficulties.
But PAL sources told The STAR yesterday that Tan is prepared to go it alone in PAL as he is convinced that the national government is no longer interested in making additional investments in the airline.
"They need an equity infusion and it would be better if it came from an airline that could bring some expertise. By all accounts they need help,” said Philip Tulk, a Hong Kong-based aviation analyst for Lehman Brothers.
"By all accounts the small stake would not be enough," he added.
Cathay said Wednesday it was pulling out of negotiations with PAL, citing irreconcilable differences over management control and valuations.
Cathay had reportedly offered to invest up to $100 million into PAL during the talks in exchange for management control. In November it announced that it had reached a "conditional" investment deal with PAL and was already drafting a rehabilitation plan to restructure PAL's $2.1-billion debt and mince its fleet size and manpower.
However, PAL management reportedly balked at Cathay's proposal to cut the workforce from 8,000 to 5,000, fearing this would antagonize workers' unions.
But apparently. there were other reasons for the pullout.
David Turnbull, Cathay's Chief Executive Officer, in a letter to Tan dated Nov. 27, said that being merely "airline managers and nothing more ... We are not equipped to handle the politics of the Philippines, both within PAL itself, or within the community at large."
Turnbull pointed out that “within the hierarchy of PAL and maybe within the community generally, them is a small yet powerful element who do not want us and this has undermined the process (of negotiations)."
PAL shut clown operations Sept. 23 after its biggest union, the PAL Employees' Association, rejected a proposed rehabilitation plan that included a 10-year suspension of collective bargaining agreement in exchange for 20 percent stake in the company.
The union later reversed its decision, paving the way for PAL's resumption of domestic operations on Oct. 7 and international operations on Oct. 29.
During the airline's 13-day closure, several foreign airlines expressed interest in buying part of PAL. Cathay's chances of becoming the airline's foreign partner were boosted when it helped mount domestic flights to key cities.
PAL talks with other investors
In the wake of the Cathay pullout, PAL said it had "resumed negotiations with a perspective foreign investor ' whose identity it declined to reveal.
PAL Senior Vice President Avelino Zapanta promised, however, that the airline would not be forced to resort to another shutdown. "PAL and the government have a public commitment. We will continue our service."
Lawyer Estelito Mendoza, the airline's legal counsel, also assured that despite the collapse of PAL's talks with Cathay and Northwest, the airline has no intentions of asking the Securities and Exchange Commission for another extension of the deadline for the submission of a rehabilitation plan which would be the SEC's basis for deciding whether PAL should be saved or liquidated.
The rehabilitation plan is set to be submitted Monthly, Dec. 7.
Mendoza said that PAL would he submitting only what he called a "standalone" rehabilitation plan in place of the one that was supposed to incorporate the recovery program designed by Cathay.
He admitted that PAL's rehabilitation "would definitely be more difficult" now that Cathay and Northwest have withdrawn from the talks. "But it is not impossible. And one thing, PAL will have to downsize drastically. It will be a smaller PAL."
As this developed, a neophyte lawmaker urged the government yesterday to help bail out PAL from its financial difficulties, saying this may be the only remaining option to keep the airline flying.
"Clearly the breakdown of negotiations with both Cathay Pacific and Northwest suggests that the market has failed. The second best policy option for PAL in its current form is a government bailout by way of loan guarantees," said Albay Rep. Joey Sarte Salceda.
The solon noted that although a government bailout may not be the best policy, "it is still the right thing to do."
"It is the price the Philippines must pay to prevent PAL from closing. The government must give up something for a vast improvement in our business environment," he said. “There is no such thing as a free lunch."
Salceda, a former stock market analyst admitted his proposal was against his own economic views but it was the only thing left to do to maintain the country's dignity.
“I cannot imagine our President traveling to other countries on board Cathay Pacific or Northwest Airlines. Clearly, a national flag carrier remains vital to international recognition, he said.
Salceda has come up with the following suggestions for his bailout proposal:
- The government, through its financial institutions, should issue dollar-denominated guarantees covering $450 million in PAL's unsecured loans. These will be similar to guarantees issued by government during the Marcos regime for behest loans of the late dictator's cronies.
- In exchange for such guarantees, PAL and Tan, its Chaiman, would surrender all their assets to the government as collateral. Tan's assets would include his stakes in Allied Bank, Fortune Tobacco and Asia Brewery.
- Tan would issue $100 million (about P4 billion) in additional capital and PAL would raise P500 million by selling nonstrategic assets to reduce short-term debt.
- PAL workers, if unwilling to have 3,000 of their number retrenched, should agree on a work rotation scheme that would reduce their work hours.
- The company's top-heavy management structure should be trimmed.
- And PAL's unsecured creditors should be willing to write off 25 percent of the airline's loans.
However, President Estrada has already dismissed suggestions of a bailout, saying the government has no money to do it. He also said that the government would not guarantee any private firm like PAL.
The government-controlled Development Bank of the Philippines maintains a P750-million stake in PAL and DBP President Remedios Macalingcag said that the bank does not want to put more money into the airline.
"We don't want to concentrate on pump-priming the economy. It is not our priority," she said.
Senators Ramon Magsaysay Jr. and John Osmeña, meanwhile, said that although the government does not want to infuse additional capital into PAL, it should nonetheless help scout companies who might be interested in rehabilitating the airline. — Marichu Villanueva, Marianne Go, Rocel Felix, Jess Diaz, Perseus Echeminada, wire reports
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