Philippine Airlines: A Tale of Two Titans

As the battle for control of the nation’s flag carrier continues, Philippine Airlines is being treated to a surprising amount of attention given its challenges turning a profit over the years. Most investors or business executives likely would have fled rather than be drowned in a sea of red, especially with such mediocre prospects for the future. But in the Philippines, control of PAL isn’t purely a matter of profit, but truly a matter of pride and prestige. 

Image Source: Rappler
With Lucio Tan and Ramon Ang intensely negotiating a changing of the guard for management and control of Philippine Airlines, one can only wonder what their inspirations and motivations are driving the desire to own and control a company that has suffered huge losses and is a source of constant headaches.

In a recent column published in the Philippine Star, author Boo Chanco suggested that Lucio Tan enjoys the prestige of being the head of PAL and that his pride and ego are preventing him from making a decision that is in the pure interests of business. After all, it was less than a year ago that we heard that Tan wanted to sell his entire share of Philippine Airlines and exit the airline industry forever. Reports suggest that many people in the Tan camp have been against Ang’s complete management and control of the airline ever since the beginning.

In one national publication, a source revealed that Tan was indeed planning to sell his stake in Philippine Airlines. “We initially planned to sell to RSA (not to San Miguel Corporation since SMC doesn’t want to consolidate PAL into their books) and RSA agreed,” said the source. “However, RSA was delaying payment since he had a hard time raising cash. In the end, we decided to buy out SMC instead.”

The entire partnership between the San Miguel Corporation and Lucio Tan Group has been rocky from the very start. The initial deal took long to conclude as there were several within the Tan camp that opposed any partnership with San Miguel. However, Tan was growing tired of constantly infusing capital into Philippine Airlines and dealing with constant problems including record losses, labour struggles, economic downturns, fuel increases, high overhead, and an ageing fleet.

While Tan has always enjoyed the prestige of heading Philippine Airlines, there have been times when the headlines were not in his favour and did little to offer any sort of prestige. In spite of what Philippine Airlines did to Tan, Ramon Ang, a pilot himself, was intrigued at the prospect of running an airline and believed that he knew how to make PAL profitable. Although Ang had a strong desire to run PAL, he knew it would require a lot of work and a lot of capital with no guarantees. In spite of being conflicted, Ang eventually sealed the deal with Tan infusing approximately $1 billion in capital.

Knowing that Lucio Tan enjoyed the title as the Chairman of Philippine Airlines, Ang purchased only 49 percent of the flag carrier, but took complete management control. However, Tan relatives that had been employed in key positions at the airline including a daughter, son, and brother all exited when Ang took the helm.

If people in the Tan camp were already unhappy, it wasn’t long until things got worse with Ang shifting the PAL maintenance contract away from Lufthansa Technik, which is partly owned by Tan. It is believed that other Tan relatives that managed companies that did business with PAL were also not happy. Ang moved in and shifted services with the aim of cutting costs, while many still debate the impact that has had on PAL’s quality of service.

Long into the San Miguel-Tan partnership, there are many associates in the Tan Camp that never stopped complaining that giving Ang management control of PAL was a clear mistake. It has been believed by many that Ang collected commissions from Airbus for PAL’s re-fleeting program, which he denies and has allegedly obtained evidence from Airbus. Sadly, this is not the first time that such internal gossip within PAL has caused a breach of trust.

It remains unclear why the Lucio Tan Group did not end up selling its 51 percent stake to San Miguel Corporation. Apparently, the deal went as far as the drafting of the Share Purchase Agreement. However, rather than signing the agreement, the Tan Camp submitted an offer to buy back the 49 percent sold to San Miguel. The offer was accepted by Ang on the condition that Tan paid San Miguel back immediately for all of the advances made for the re-fleeting program in addition to the equity contribution.

But it seems that over the last year, both sides have gone back and forth trying to decide who would buy each other out. While it seems that Tan may be conflicted in regards to letting go of Philippine Airlines, Ang seems to not mind the deal going in either direction. Ang just wants everything to be completed at the soonest possible opportunity given the effect that delays can have on the airline, customers, staff, and decision making.

At this point, it seems that the Tan Camp is making an attempt to submit an offer that will be acceptable to Ang. If this does not happen, the deal could still go the other way. With the uncertainties facing Philippine Airlines, it is hard to understand why Tan would want to cease back control given his age and the headaches that PAL has given him in the past. But anyone who knows Tan well will likely attribute this decision to pride. In this case, that pride is valued at nearly $1 billion.

It is indeed an expensive price tag to pay given the mediocre prospects and poor financial record of the airline. Even if Philippine Airlines does end up posting a profit by year end, which is hardly any vote of confidence for long term profitability. For now, the battle continues and although many look down on Ang as a non-pedigree executive, he is worth his weight in street smarts. If the battle for control of Philippine Airlines comes down to a high stakes game of poker, Ang might just end up with the edge.

Source: Philippine Star

5 comments:

  1. I hope this doesn't end Asia's First Airline..

    ReplyDelete
  2. Maybe the columnist's source should ask PAL employees (pilots, cabin crew, ground staff, quality dept, etc) with regard on how they are doing. add also lufthansa technik staff who have been offered optional retirement or retrenchment being collateral damage of this rocky partnership.

    ReplyDelete
  3. For so many years that PAL was under Tan, it was always in the RED. When SMC entered, PAL returned to profitability. Handing control back to Tan is like signing the Death Certificate of PAL.

    ReplyDelete
  4. 에볼플레이 먹튀검증 안전노리터

    ReplyDelete

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