International Herald Tribune
Monday, December 21, 1998
Mark Landler
MANILA --- Christmas is a sacred holiday in the Philippines and nowhere is that more evident at the headquarters of the Philippine Airlines. Religious statues adorn executive offices, and signs throughout the building announce a holiday Mass in the main lobby.
In these dark days when its frazzled executives are struggling to keep the airline afloat, a Mass seems entirely appropriate: One cannot help thinking that what the airline needs is divine intervention.
With $2.2 billion in debt, plunging revenues, and losses of close to $1 million a day, Asia’s oldest airline, known as PAL, is in desperate shape. After negotiations for Cathay Pacific Airways to acquire a stake collapsed this month, several analysts said the airline’s options were running out.
"The rescue effort is not just huge, it is astronomical," said Nicholas Ionides, a Singapore-based editor of Air Transport Intelligence, a news agency that covers the industry. “The question is, do you keep an airline like this alive for pride reasons? My opinion is that they should just shut it down.”
But Philippine Airlines is not just another shipwreck of a company. It is the nation’s flag carrier, a state company until after the ouster of Ferdinand Marcos, when it was spun off to a group of investors led by Lucio Tan, an ethnic Chinese who traded on his ties with Mr. Marcos to amass one of the greatest fortunes in the Philippines. The airline is the crown jewel in Mr. Tan’s empire.
Mr. Tan is a leading supporter of the new president of the Philippines, Joseph Estrada, not only contributing to his campaign but giving him the use of his planes. When a labor dispute prompted Mr. Tan to shut down the 75-year-old airline in September, provoking tears from nostalgic Filipinos, it was Mr. Estrada who brokered an agreement that got the planes flying again.
“For Estrada, it’s a mark of political prestige to save the airline, and Lucio Tan knows it,” said Alexander Magno, president of the Foundation for Economic Freedom, a research organization in Manila.
In the murky world of Asian business, where friendships often count more than solvency, Philippine Airlines would seem to be the classic candidate for a government bailout. The catch is that Mr. Estrada, wanting foreign investors to view the Philippines as having a level playing field, has ruled out injecting any public money.
As the losses pile up, though, Philippine Airlines will be an acid test for this movie-star-turned-politician, who has been in office for six months. Mr. Estrada, 61, may find it hard not to help a friend in need, even if it reinforces the image of the Philippines as a den of crony capitalism.
“It’s going to be very tough for Estrada,” said Christian Monzad, former chairman of the Philippine Election Commission and a consultant to the Lopez Group, a Filipino conglomerate. “He is very loyal to his friends, and he would like to repay his political debts.”
Mr. Estrada’s decision will be watched carefully in other Asian capitals, which are grappling with similar issues. In Indonesia, the government has refused to aid companies with ties to its fallen president, Suharto. But in Malaysia, Prime Minister Mahathir bin Mohamad has continued to pump public money into private companies.
In the Spartan offices of the Philippine Airlines, senior executives insist they can go it alone. On Dec. 7, they submitted a rehabilitation plan to the Philippine Securities and Exchange Commission (SEC) that would turn PAL from sprawling national airline into a compact carrier focused on profitable routes.
The airline said it would prune its fleet, which was aggressively expanded in the years leading up to the Asian economic crisis, to 22 planes from 57. It would cut its domestic routes to 17 from 36 and its international routes to 13 from 26; among the routes lost would be those to Los Angeles and San Francisco.
The trouble is, the finances do not add up. The airline says it needs $150 million in fresh capital to overhaul its operations and begin paying off its debt. Mr. Tan and other shareholders will come up with $90 million, and rest would come from new investors.
After the collapse of the talks with Cathay Pacific, analysts said they doubted that Philippine Airlines would find a white knight. Jaime Bautista, chief financial officer of the airline, conceded that the carrier was not talking to any other airlines, though he has retained Chase Manhattan Bank to scour the world for potential partners.
In the meantime, Mr. Bautista said, he saw nothing wrong with the government throwing the airline a few favors.
“A national flag carrier is very important to a country,” said Mr. Bautista, an amiable man whose punishing work schedule has made him look a good deal older than his 41 years. “Governments have always been there to help.”
Mr. Tan declined to be interviewed. But Mr. Bautista said the airline deserved help because his boss had been treated unfairly by the government. In truth, Mr. Tan’s experience is more a case of ending up on the wrong side of history. Under the Marcos regime, he made a fortune in the cigarette and beer businesses – in no small part through government tax breaks.
But after Mr. Marcos was ousted in 1986, Mr. Tan got a chillier reception from his successors, Corazon Aquino and Fidel Ramos. The now 64-year-old tycoon was hit with a $1 billion tax-evasion lawsuit that was finally dismissed by the Supreme Court in 1996.
And he no longer enjoyed preferential treatment.
None of his stopped Mr. Tan from adding to his empire. He first invested in Philippine Airlines in 1992 and won control in 1996.
But Mr. Ramos, who was intent on privatizing the economy, opened the industry to competition, licensing rivals like Air Philippines, Cebu Pacific and Grand Air.
Mr. Bautista said the new airlines competed with Philippine Airlines on profitable routes, like flights to the resort island of Cebu.
But the government required the airline to continue serving money-losing “missionary routes” – outposts in this vast archipelago where the planes often fly empty.
Mr. Bautista said the government also allowed foreign carriers to increase flights to Manila, enabling them to undercut PAL’s fares.
Last week the airline asked the Estrada administration to cut back the flights open to foreign carriers to pre-Ramos levels.
Edgardo Espiritu, the finance secretary, said the government would probably grant the request to reverse the “unhealthy actions” of the previous administration.
Mr. Magno said these protections “would restore PAL to monopoly status.”
The government is not stopping there. Mr. Espiritu has asked several government-affiliated banks to make bridge loans to Philippine Airlines. The president of the Philippine National Bank, which is already owed $81 million by the airline, has resisted the idea. But the government is the bank’s largest shareholder, with a 45 percent stake, so he may have little choice.
Still, it is not clear that cash alone will solve the problem.
Analysts said the Philippine Airlines was being choked by a bloated payroll. The airline has trimmed its ranks from 12,986 employees to 8,589 since May. But analysts said it would have to cut that 2,000 to compete with more efficient carriers like Cathay Pacific or Singapore Airlines.
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