The Politics of PAL

Manila Standard

Saturday, December 5, 1998

Alex Magno

The man named Lucio Tan just couldn’t keep away from the headlines.

In the midst of much brouhaha over his tax cases, the airline he acquired, controlled and, some say, ran to the ground is back in troubled waters. Like a thunderclap, Standard broke the news last Thursday that Cathay Pacific has pulled out of the negotiations to come in as a strategic investor in financially-troubled Philippines Airlines (PAL).

PAL was earlier scheduled to submit its rehabilitation plan to the Securities and Exchange Commission (SEC) on Nov. 20. Because of sticky issues bogging down the negotiations with Cathay, the deadline was moved to Dec. 7 – the next working day from today.

The tightness of the schedule for submission of a rehabilitation plan seems to foreclose the entry of a new strategic investor to save the beleaguered airline. East Asia’s economic woes have created great difficulties for the region’s airline.

It is tough enough to attract new investments into the airline industry. It is tougher to get investments into an airline company such as PAL that appears to have a damaged corporate culture.

Cathay withdrew from the negotiations due to what they described as “major differences.” What these could be, we can only surmise.

Constitutional limitations prohibit the foreign company from holding a majority stake at PAL. We know from reports that Cathay wanted management control of the company.

One sticky issue is the “right-sizing” of PAL’s plantilla. As many as 3,000 employees could be laid off as a result of such “right-sizing.” Reports have it that current PAL chairman Lucio Tan resisted the massive layoff. The unions believe otherwise: they say the reduction of the fleet size of PAL and out jobbing imply substantial employee reductions.

Whatever the “major differences” are, it now appears that PAL will go through the rehabilitation program without a strategic partner. A spokesman for the company did say that PAL was ready to go it alone, relying on local groups to put in the required equity stake.

It is estimated that PAL requires $150 million in new infusions to keep its operations going. PAL executive vice-president Manolo Aquino says that $90 million could be raised by Tan himself and the other $60 million brought in by other new investors.

Erap’s role

From his utterances, it seems that President Joseph Estrada is inclined to see that the strategic partnership between PAL and Cathay push through.

The President himself announced that a letter was sent him by Cathay Pacific indicating the company’s interest in pursuing the negotiations. He expressed hope that the alliance would push through.

There is distinct dissonance between the President’s view of the situation and that of PAL’s management. While Lucio Tan’s spokesmen seem gung-ho about going it alone in the midst of daunting financial circumstances, the President does not seem to be as confident about the Tan group’s ability to nurse the airline back to health.

Estrada has reason to be concerned. PAL’s state of corporate health is very much a political question for his presidency.

Perhaps the brightest spot in the President’s first hundred days in office was his success in brokering PAL’s resurrection from closure. The emphasis he gave the issue in his first hundred day speech underscores that.

Estrada himself arbitrated talks between the management and the stubborn unions. At the risk of being labeled “anti-worker”, the President cajoled the union leaders into accepting a 10-year moratorium on collective bargaining – the critical question in re-opening PAL.

Conversely, should PAL again succumb to its financial troubles, the event will be read as a major political failure on the part of the Estrada administration. This is over and above the adverse economic fallout ensuing from the interruption of PAL’s services.

Estrada has staked the prestige of the highest office of the land on the successful negotiations between PAL and a sound strategic partner. The signals are clear from the President’s end. PAL’s management is bound to heed those signals – even if it means completely overriding the expressed sentiments of the unions.

Whichever way PAL’s rehabilitation is configured, it seems that substantial reduction in personnel is unavoidable. The unions cannot be the controlling variable in this long drawn-out drama.