The Business Daily
Thursday, December 10, 1998
Three months after the country’s flag carrier Philippine Airlines started buckling under the weight of its financial woes, no end is in sight to the travails of the once proud airline.
With government support, management has scurried about to find an investor – any investor – willing to commit precious capital to restore the airline back to health. Several foreign airlines interested in taking over the ailing carrier were approached. But one after another, talks bogged down.
After talks with US carrier Northwest Airlines failed, observers said the most likely sore points were the valuation of PAL’s assets as well as the issue of trimming PAL’s bloated workforce.
Then negotiations with Hong Kong-based Cathay Pacific Airways hit the rocks over the same issues. Singapore Airlines immediately signaled its disinterest in acquiring a stake in the airline.
Recently, calls have become louder for a local white knight to rescue PAL. Proposed candidates for the job were numerous government financial institutions (GFIs), led by the Philippine National Bank (PNB). Being government-controlled, these companies could be mandated by the President of the Republic to infuse capital into PAL and save an airline which some people call part of the national patrimony.
Yesterday, however, in a move that hardly surprised the business community, PNB President Benjamin Palma-Gil announced that PNB had no intention of rescuing the flag carrier.
PNB, he said, was already over-committed to the airline in terms of both debt and equity.
Bank watchers commended the PNB president’s move as “prudent”, given the precarious position the bank currently finds itself in. “There is no sense in increasing PNB’s stake in PAL,” a banking analyst at a foreign brokerage firm said. “With his pronouncement, Palma-Gil showed the business community that he is level-headed, and not one to easily give in to political pressure.”
“Besides,” the analyst said, “PAL already owes PNB some $80.3 million. As it is, that is already an imprudent amount.”
This amount represents roughly 2% of the bank’s entire loan portfolio.
In addition, PNB also owns a minority stake in PAL with an acquisition cost of P753.0 million. Recently, PNB revalued its holdings in PAL. Its book value now stands at a mere P350.0 million.
PNB is expected to report a net loss for 1998. Banking analysts estimate PNB’s net loss to come in at somewhere between P300 million and P800 million for the year. “And that’s just for the recurring income part,” the banking analyst added.
Another issue bothering PNB is the failure early this year of its highly-publicized real estate deal with RJ Ventures Inc. The deal, involving the sale of a prime parcel of real estate in the Makati business district valued at P450, 000 per square meter, fell through after RJ Ventures was unable to meet its interest payments to the bank.
“Because of this, the bank will have to reverse the income it booked for that sale last year,” the banking analyst said. “That means an additional P3.7 billion one-time loss, in addition to the estimated P800.0 million recurring loss for this year.”
“That revaluation loss may happen this year or next year, but it will surely come,” the analyst said, “and that will keep PNB from making any grandiose moves in the near future.”
Grandiose moves like rescuing PAL. Even with the P10.0 billion the bank intends to raise through the issuance of convertible preferred shares next year, PNB will still be unable to make a useful contribution to PAL’s financial health, which needs at least $200.0 million to service its short-term obligations alone.
“Basically, PAL and PNB are two very sick companies,” the analyst added. “It’s just that PAL is terminally bedridden, while PNB can still walk.”
GFIs are not expected to be in a significantly better position than PNB for an equity infusion. “In fact,” the banking analyst noted, “the entire financial system is incapable of propping up PAL at this point.”
What PAL needs at this point is more than just the money to pay its debt. More than the capital, PAL needs a strong leader with a vision who will shepherd the airline back to profitability.
In a region – indeed, a world – flushed with excess airline capacity, putting black ink back into PAL’s financial books would be no mean feat.
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