San Miguel Expects Decision on Philippine Airlines in Two Weeks

San Miguel Corporation is expected to make a decision within the next two weeks as to whether it will sell its remaining stake in Philippine Airlines, or buy out business partner Lucio Tan. Although Tan has stated that he wishes to buy out San Miguel, it remains unclear whether Tan will be able to generate the funds required.

Copyright Photo: Paul McCarthy/Airliners.net
The San Miguel Corporation currently owns 49 percent of the holding company that controls 90 percent of Philippine Airlines, with an estimated market value of $3.2 billion. While Lucio Tan owns 51 percent of the holding company, management control of the airline is in the hands of San Miguel Corporation.

With Philippine Airlines posting a profit in the most recent quarter, many believe that San Miguel stands to earn some profit on the deal with the Tan family. It is presently rumoured that both sides have agreed on a deadline for the buyback, which is set to fall sometime next week, with a transaction amount of at least $1.5 billion. 

San Miguel initially spent $500 million to purchase its 49 percent stake in Philippine Airlines. However, the conglomerate has advanced an additional $800 million over the last two years, primarily to cover the airline's fleet modernization program. That represents an overall investment of approximately $1.2 billion, which if the rumoured price of $1.5 billion is true, San Miguel stands to earn at least $200 million on the transaction. 

The recent profits posted by Philippine Airlines are highly attributed to the success of San Miguel Corporation to bring down the carrier's operating costs, primarily fuel and maintenance. These costs used to account for 55 percent of PAL's total annual costs. However, with the introduction of new aircraft, San Miguel has been able to reduce the cost down to 47 percent of total expenses. It is believed that these costs will go down further as more fuel-efficient aircraft enter the fleet. 

According to PAL President Ramon Ang, if San Miguel Corporation does exit the airline business, he will be left to focus on other existing businesses in the conglomerate's portfolio. "In two weeks, something will happen for sure and we will know the outcome," said Ang. "If ever we exit, we have many existing businesses. Then, I will concentrate more on our food business."

Media reports have suggested that the Tan group is displeased with several of San Miguel's management decisions at Philippine Airlines, including the cost of an early retirement package for ageing Philippine Airlines employees. Meanwhile, the prospects for Philippine Airlines does look brighter as the opportunity for expansion in the United States and the European Union is now an option after restrictions were lifted earlier this year. 

Philippine Airlines has been eager to recapture market share that it has lost in recent years to arch-rival Cebu Pacific, the nation's largest low cost carrier. PAL recently posted a profit of P1.46 billion for the second quarter of 2014, reversing a loss of P1.06 billion the previous year. Ang says that the company continues to post a profit even up to the end of July and he believes that the trend is likely to continue. 

If San Miguel does retain control of Philippine Airlines, Ramon Ang will be free to continue executing his plan to restore Philippine Airlines as one of the prominent carrier's in the region. As early as 2012, Ramon Ang had previously disclosed to a foreign publication that San Miguel was planning to take Philippine Airlines through a complete change of course and innovation. At the time, Ang committed to investing as much as $8.5 billion in Philippine Airlines over the course of the next ten years leading up to 2022.

If Ang manages to hold on for that long, he is likely to enjoy competing in not only a common aviation market in the ASEAN region, but also what will become the heaviest air traffic in the whole world in the Asia-Pacific region, as predicted by aircraft manufacturers and the world airline industry. There is indeed much to gain, but also much to lose if the right moves are not made over the next decade. 


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