Was PAL’s early exit from rehab premature?

Tuesday, 17 August 2010 00:00

BY DARWIN G. AMOJELAR SENIOR REPORTER
THE MANILA TIMES

THE present troubles of Philippine Airlines (PAL) come three years after Asia’s oldest carrier emerged from corporate rehabilitation proceedings—and exactly three years ahead of its scheduled exit.
When the Securities and Exchange Commission (SEC) approved its early exit from rehab in 2007, things were looking up for the flag-carrier.

Just the year before, PAL received a citation for Turnaround Airline of 2006 from the Center for Asia Pacific Aviation.

The airline could boast of three years of profitability starting 2005, culminating in record earnings of $140.3 million on the third year.

From $2.07 billion when it suspended payments in 1998, PAL had trimmed its debts to $869 million in 2007, when the airline asked the Permanent Rehabilitation Receiver to favorably endorse the carrier’s early exit from rehabilitation.

At the time it sought an early exit, PAL had signed restructuring agreements with 92 percent of all creditors, with the finalization of similar agreements with the Export-Import Bank of the United States and the Philippine government—both of which accounted for the remaining 8 percent of the airline’s liabilities—supposedly in the works.

Convinced of PAL’s success
In its recommendation to the SEC, the three-member receivership panel said it was “convinced that PAL has now successfully emerged from its financial distress.”

“[T]he case of PAL is truly a showcase to the entire Philippine business community of a successful implementation of a rehabilitation proceeding which is a key achievement not of the company alone but more so of the SEC,” the recommendation letter dated September 17, 2007 further read.

The receiver’s recommendation was signed by Renato Francisco as chairman, and Monico Jacob and Carlos Alindada as members.

The Manila Times tried but failed to get the panel members to comment on PAL’s present difficulties for the record.

In its order approving PAL’s early exit from rehab, the SEC adopted lock-stock-and-barrel the airline’s three-year income and cash-flow projections.

To wit, the airline had claimed that it would likely earn $ 32.32 in 2008, $ 26.86 million in 2009 and $ 47.41 million in 2010. Furthermore, the carrier had expected to enjoy net cash of $299 million in 2008, $295 million in 2009 and $274.8 million in 2010.

This even as the SEC had noted in its order that PAL’s 2007 financial results included an “extraordinary income” of $100 million.

The early exit from rehab was approved notwithstanding a caveat from the receiver that PAL incurred losses during its fiscal years 2001 to 2002 and 2003 to 2004 on account of a global slowdown in the aviation industry brought about by the 9-11 terrorist attack and the Severe Acute Respiratory Syndrome (SARS) epidemic for those two periods.

In short, PAL’s fortunes were tied in to that of the external economic environment.

The SEC approved PAL’s early exit from rehab on September 28, 2007, or 14 days after the receiver filed its recommendation letter.

Signatories to the SEC order were its chairperson Fe Barin, and commission members Maria Juanita Cueto, Raul Palabrica, Thaddeus Venturanza and the late Jesus Enrique Martinez.

On road to profitability
But an industry source said PAL was on the road to profitability when it exited from rehabilitation in 2007.

“But it was not sustained because of the global economic crisis and higher fuel prices,” the source said.

Still one can’t help but compare PAL with its closest domestic rival, Cebu Pacific, which has grown 31.3 percent and 18.4 percent during the crisis years of 2008 to 2009.

Last year, Cebu Pacific was in the black at P3.26 billion, a complete turnaround from the previous year’s net loss of P3.26 billion.

Its revenues increased 18.4 percent to P23.31 billion from P19.68 billion in 2008.

In 2010, the company’s revenues are projected to grow 30 percent.

All over the world, low-cost carriers (LCCs) are doing well compared to legacy carriers, even during difficult economic situations, Candice Iyog, Cebu Pacific vice president for marketing said.

“At Cebu Pacific, we are able to reduce our seat mile cost to roughly 40 percent less than legacy carriers by maximizing seat configuration, aircraft utilization, seat load factor, and state-of-the-art technology. We also do away with costs that passengers do not want to pay for,” Iyog said.

Because of these, Cebu Pacific offers the traveling public much lower fares, which in turn stimulates the travel market, she said.

“The business model of an LCC is a critical factor in the success of Cebu Pacific. This is why we will continue to maintain this business model as we expand and enter new markets,” she said.

Because of Cebu Pacific’s much lower cost base, Iyog said its operating margins are amongst the best in the world, and substantially better than local competitors that continue to run high-cost business models.

3 years not a long time
While he didn’t discount the possibility of mismanagement, Jun Calaycay of Accord Capital Equities said it was too soon to tell because the airline left rehabilitation only three years ago.

“In business cycles, three years is not a long time to really say that management is not being effective or not,” he said.

Another source familiar with PAL’s rehabilitation case agreed: “It’s basically the environment, it ahs nothing to do with the management.”

The source said PAL has complied with the requirements of SEC for an early exit from rehab, including good performance, compliance with the rehabilitation program and payment of debts.

Jaime Bautista, PAL president, insists the airline’s exit from rehab was not premature.

“We were really hit by the crisis after we got out of rehab,” he said, adding that the company is complying with the rehabilitation plan despite its failure to meet its profit targets.

“The important thing is you were able to pay your obligations,” the executive said.

In June, PAL paid $46 million in maturing debts on top of the $10 million that the flag-carrier has been paying every month.

The 69- year-old airline still has about $1 billion in liabilities, down from $2.12 billion in 1999 when it entered corporate receivership.

Labor is next problem
Industry players claim PAL is likewise taking a hit, ironically from the global recovery.

“The airline industry is picking up that’s why everybody is expanding. Everybody is ordering aircraft, they have to be able to secure pilots and mechanics,” an industry source said.

The source said PAL’s problem with its pilots, 26 of whom have left for greener pastures abroad, is a sign that the global aviation industry is recovering.

Giovanni Bisignani, director general of International Air Transport Association (IATA) said the next risk of the airline industry is labor.

“We cannot pay salary increases with our $47 billion in losses. Pilots and crew must come down to earth and strikes at this time are shortsighted nonsense. Labor needs to stop picketing and cooperate,” Bisigani said.

As this went to press, the Flight Attendants and Stewards Association of the Philippines (FASAP) and the PAL Employees Association (PALEA) have dug in their heels, with plans of holding a strike to force management to give in to their demands of higher pay and the removal of a new policy on compulsory retirement based on age.