PAL's Real Problem

Philippine Daily Inquirer

Friday, December 11, 1998

Analysis

Amando Doronila

Philippine Airlines has come up with a recovery plan that seeks government support for a package of measures that erects a wall of protec­tionist measures bristling with fortifications reminiscent of medieval castles. The plan is an anach­ronism in an age of deregulation of the airline industry in the Philippines and throws back the industry into an era where private enterprises were sheltered in the hothouse of government protec­tion, including subsidies (both implicit and ex­plicit), concessions and insulating PAL from competition.

That PAL presented such a package — virtu­ally sheltering it behind a Siegfried Line — re­flects not only the protectionist and rent-seeking mentality of PAL under the management of Lucio Tan but also its desperate straits in looking for a formula to revive the airline that was temporarily shut down for the first time since its founding, at the hands of Tan.

Before I go to the specifics of the new PAL protectionist package, it must be pointed out that it followed the collapse of talks for the merger of PAL with Cathay Pacific and a proposal for bridge financing of PAL with money from the Land Bank, the Philippine National Bank, and the GSIS.

The bridge financing scheme was intended to give PAL a breathing space in the search of a strategic partner, either local or overseas, follow­ing the collapse of negotiations with Cathay Pa­cific.

The bridge financing was supposed to be a "standalone," fallback position to help PAL con­tinue operations and revive its financial health.

It should he noted that in the bridge financing plan, in the protectionist package and in the negotiations with Cathay Pacific, two things stand out: first, PAL is relying heavily on the media­tion of President Estrada and on the resources of the Philippine state to bring it back to health, and second, (this is very important), nothing is said at all about shoving Tan to the door to make way for a new PAL management.

Tan's refusal to give up control of PAL's man­agement to Cathay Pacific, which was willing to pump $150 million for the rehabilitation of PAL, was the central issue in the impasse of the merger talks with Cathay Pacific, leading to the collapse.

Two cultures clashed in the talks — the profes­sionalism of Cathay Pacific as airline managers and operators, and the sleazy management culture shot through with patronage linkages with government in which PAL operates.

As expressed by David Turnball, Cathay Pacific's director and CEO, in typical British understatement, "We are simply airline managers, nothing more. We are not equipped to handle the politics of the Philip­pines, both within PAL, itself, or within the com­munity at large.”

“We are not arrogant people, nor do we have any political or hidden agenda. Our only con­cern has been to see the successful revival of PAL. Our team was instructed by myself to conduct a full investigation into the current status of PAL and therefore, by definition they have been re­quired to ask difficult questions, some of which might have appeared as aggressive. They were not meant to be and as I said, we are airline man­agers and we stand ready to help. It has become clear to us now that within the hierarchy of PAL and maybe the community, generally there is a small yet powerful element who does not want us and this has undermined the process."

Turnball hinted lack of transparency on the part of PAL to open its accounts for investiga­tion. Under these conditions, in which Tan would continue to have a say in the management of PAL, no foreign airline will ever again seriously enter into talks for merger. In view of these circumstances, the search for a strategic partner is doomed. Unless President Estrada recognizes that Tan is the problem in PAL, efforts to revive PAL face formidable obstacles.

Following the collapse of the talks, it is logical that the fallback position of PAL is to seek bridge financing from domestic resources and the erec­tion of protectionist walls around Fortress PAL. It should be noted that in his mediation effort to re­habilitate PAL, President Estrada has sought to give Tan advantageous deals and the breaks with­out even bothering to consider that Tan is the key obstacle to the rehabilitation of PAL.