Higher flight altitude for PAL this time

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 By Jarius Bondoc

April 25, 2012

From food and drinks, giant San Miguel Corp. has branched out to heavy industries. Since 2007 the conglomerate plunked $5 billion into oil, power, mining, airports, toll roads, and telecoms. Its 24 acquisitions and mergers, notably in Meralco and of Petron, have all been profitable.
The latest is arguably the toughest: SMC’s 49-percent buy into tottering Philippine Airlines. Globally airline commerce is being choked by a dizzying cocktail of US-European financial crises, Arab political tumult, high fuel rates, currency shakiness, and drop in demand for expensive seats. A recent Economist report has it that the US airline industry, the world’s most advanced, is the least lucrative. Giant carriers have taken off with bang, dropped in operating altitude, and saved from crash only by cutbacks and takeovers. Historically since its start, the US sector has lost more than $33 billion.

PAL’s deficits have also been in the multibillions — P1.5 billion in the last quarter of 2011 alone. But bad news doesn’t daunt, only excite, SMC president Ramon S. Ang. Taking over yesterday as PAL president-COO, Ang gives a cockpit’s view of the direction to which he will pilot the company.

First, on PAL’s and most other airlines’ biggest headaches:

• Fuel costs: “Do you think anyone can be better than us in plotting the rise and fall of oil prices and supplies?” When Ang engineered SMC’s 2008 buyout of Petron, the country’s top oil refiner-distributor was $350 million in the red; he has since turned it around. Weeks ago he oversaw SMC’s purchase of 65 percent of Exxon-Mobil of Malaysia. Information (on fuel price spikes and wastage) is power, but more so is corporate synergy, which he foresees among Petron, Exxon-Mobil, and PAL.

• Labor unrest: PAL’s ground crew union, emasculated by the spinoff of certain departments, has announced plans to dialogue with the new boss from SMC. Flight attendants, downcast due to a Supreme Court flip-flop against them, have promised to cooperate. Ang aims to spur them from low morale to high productivity — for their own pay and retirement benefit. Once a pilot rated for several aircraft types, Ang also knows the thinking of PAL plight crews.

• New routes: Flights to more US cities and re-openings in Europe will depend a lot on the Civil Aviation Authority of the Philippines. The state agency needs to get the Philippines’ safety rating upgraded to Category-1 by the US Federal Aviation Administration. To follow suit would be the European Union counterpart, and then the rest of the International Civil Aviation Organization. PAL is largely out of the picture, as the government acquires new flight navigation and airport safety equipment. Still the airline is not taking any chances. Lucio Tan, PAL’s old (and remaining 51-percent owner), had thrown in $2 million to computerize the CAAP, and lent his staff as check pilots. Ang will continue to pitch in: “I trust the government to do its job.”

At the core of Ang’s takeoff plan is PAL’s re-fleeting with 80 (!) new aircraft. Scratch off the 600 to 700-seater super jumbos, only the 400 to 450-seater wide-bodies better suited for Philippine airports. Short-haul flights will be single class: economy; long hauls, two or three classes. Whichever, Ang promises full in-flight services.

How will PAL finance the 80-aircraft purchase? SMC already has plunked in $500 million for PAL’s 49-percent stake, with management control and budget carrier-sister Air Philippines thrown in. SMC is to infuse $250 million more within two months, to be matched by Tan with another $250 million. “You will see our new jumbos within a year,” Ang says of the first rollout from the total $1 billion.

Fares are largely dictated by competition and fuel costs. Asian airlines have been experiencing a drop in purchases of premium seats and cargo space. Ang sees the solution simply in improving ground and in-flight personnel and services. Like most passengers, he hates long queues to buy or refund tickets, and to check in for flights. His solution: enlist the help of SMC subsidiaries. “Plane tickets can be bought from any of Petron’s 3,000 filling stations or Bank of Commerce branches,” Ang says. “That will bring down fares by six percent. You can also pay the terminal fees there.” PAL finally would also have on-line check-in. The new setup would allow passengers to go to the airport only an hour before flight.

Ang also knows the sad state of most airports (SMC is building a state-of-the-art international airfield for Boracay). For convenience, he is contemplating giving complimentary bottled water, courtesy of Magnolia, for passengers in airports that cruelly do not have drinking fountains. Perhaps, even corned beef, meat loaf or chicken nuggets in pandesal, courtesy of SMC Purefoods. Being finicky as well about toilets and in-flight entertainment, expect improvements in those areas as well.

All this, Ang aims to accomplish by bringing with him only a few SMC advisers to help in PAL. “I need monitors of purchases and finance.” The airline’s current $1-billion debts versus EBITDA (earnings before interest, taxes, depreciation and amortization) comply with industry norms. Ang targets within a year PAL’s best revenues in the past, and to be at par with the likes of Cathay Pacific and Singapore Airlines by 2017. To stockholders he promises not just a turnaround, but “a growth story.”

Looking this writer straight in the eye, he asks: “If you were our shareholder, wouldn’t you believe we can do it?”

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