The trouble with hello

By Amelia H.C. Ylagan

August 21, 2011

A Look at Philippine Airlines Privatization and Outsourcing

Cory Aquino’s six-year term as first President after the momentous People Power EDSA Revolution of 1986 had just ended, and it was the turn of Fidel Ramos to be President, in the fading euphoria of the country’s deliverance from the 14-year dictator Ferdinand Marcos. What to do, when faced with the stark embarrassment of the country’s dismal economic performance, which threatened to make pyrrhic the political victory of EDSA I?

Privatization of the country’s giant government-owned and -controlled corporations (GOCCs) was the answer, as coaxed by the International Monetary Fund (IMF), which was concerned about the repayment of the country’s huge foreign debt (debt service = 6% of Nominal GNP of P703.4 billion in 1992). The Philippine Privatization Program (PPP) launched by Aquino in 1986 and its implementing group of government offices, the Asset Privatization Trust (APT), were given another five years (until 1995) under the Ramos administration to sell initially the biggest 26 GOCCs among the 122 earmarked.The over 400 government holdings divested between 1987 and 1995 generated gross revenues of P111 billion (US$4.2 billion) -- nearly three times the government’s original target figure of P41.12 billion for the privatization program.

Philippine Airlines (PAL), with its $521-million debt assumed by the national government in Central Bank short-term debt, commercial bank borrowings, and Paris Club obligations as of 1992, was one logical target for privatization. The Gulf War then raging had battered PAL to a staggering P2.2-billion loss (FX rate in 1992 was P27.83=$1.00, just depreciated from P22.7=$1.00 in the previous year). The government was bleeding by owning PAL.

Yet when the government was privatizing Philippine Airlines in late 1991, every big businessman seemed to want it. To level the playing field and make those probably more desirable buyers with less wherewithal compete with big spenders suspected to be tainted with "Marcos money," it was agreed that offers will be entertained from consortiums, not individuals or individual corporations. PR Holdings, Inc., a consortium led by Antonio O. Cojuangco (then chairman of PLDT), formed by two major corporate groups, AB Capital Investment Corp. (ABCIC) and the Bank of Commerce (BoC),paid $368 million for 670 million shares (67%) of PAL.(The 130 million shares retained by the government had an accrued value of $71 million.)The government realized a total profit of $168 million from the PAL privatization.

A year after the Cojuangco group had taken over PAL, news erupted that P5.1 billion of the P9.780 billion put up by PR Holdings was actually secretly paid by cigarette and alcohol magnate Lucio Tan, a known Marcos crony. This was deeply resented by the Ayala and Soriano Groups, investors in the PR Holdings bid for PAL, according to a 1994USAID "post mortem" of the PAL privatization. (The two unhappy investors were soon "refunded.") For a while there, it was thought that the PAL privatization would be reversed for the non-disclosure of the Tan participation, but perhaps it was just too messy for the government to have to return the $368 million proceeds of the sale, or to call the PR Holdings bid in bad faith and award the sale to the next highest bidder, the PCI Bank/John Gokongwei consortium (bid=P9.170 billion). That did not happen, and Tan companies Trustmark Holdings, through PAL Holdings, still now own 5.3 billion (97.7%) PAL shares.

Despite the financial ups and downs (mostly downs) of PAL as a privatized entity, the going seems good for its investors. In accordance with the approved restructuring plan during the 1997 Asian financial crisis and way before that, even in the rehab template incorporated in the privatization offer, the non-core (non-flying) activities were to be spun off to strip the airline of risk in the fluctuations of those businesses. In-flight catering, ground handling, and aircraft maintenance were all consolidated under MacroAsia Corp. (MAC), a Tan-owned company which had built up a record one billion pesos in operating revenues in 2009. Meantime, the airline itself has ground down to a $10.6-million (about P455-million) loss in 2010. And there is wailing and gnashing of teeth about forthcoming spin-offs and lay-offs again.

Naturally, spin-offs of whole departments would cause redundancies in personnel, even if most are absorbed by the new operational entity. Disputes with the employees’ union have been PAL management’s biggest headache. This had led to a complete shutdown of PAL’s operations for a month in 1998, earning PAL the notoriety of being the first Asian airline to do so, a most embarrassing failure for an airline anywhere in the world. And here it is again, with the 3,500 PAL employees union threatening to do the very same sit-down strike, in protest of the planned lay-off of 2,600 employees in in-flight catering, call center reservations and airport services, as sanctioned by the Department of Labor for implementation this month.

Before PAL was privatized, there were over 11,500 employees (15,000 at an earlier peak before EDSA I) which included administrative and management personnel, cockpit and cabin crew, ground engineers and technicians, and rank-and-file employees doing administrative, flight operations, and other related services such as cargo handling, ground handling, catering, in-flight sales, refueling, and aircraft maintenance services. That is more than 60% reduction in workforce (basically because of the spin-offs and the early retirement incentives) over the two decades or so. Time enough for the employees to realize that lifetime employment is not in the plans of any businessman who buys a failing airline. Advice would be to try to negotiate the retrenchment package (now 1.25% of present accrued benefits) upward, take the money and go. Forget about the lifetime trip passes (non-revenue tickets) -- these are based on PAL’s lifetime, not yours! If you (still) wish, apply for employment in the spun-off airline support companies, to maximize your special talents and expertise in the field.

Privatizations dramatize the realities of business acquisitions of these entities after the "quick fix" enjoyed by governments on critical political/economic predicaments, such as the tremulous decade of 1990-2000, when the world economy was in a dead-fall due to the financial, food, oil, and Middle East crises. Not only the new, reformed Philippine government did extensive privatizations during this period. In fact this was the "thing to do" then, spurred by the successful privatizations of Margaret Thatcher in the UK. But all that being done, realignments in the social and economic individual and shared situations cannot but be resignedly made. Unfortunately, unions have lost their clout, aggravating the effects of spin-offs, mergers, sell-offs, because of the now very prevalent global business practice of outsourcing.

And what if PAL is again sold? The trouble with hello is goodbye. -- Businessworld

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