PAL starts due deligence on Zest Air

Zeroes in landing slots at NAIA

October 4, 2012

Philippine Airlines (PAL) President and Chief Operating Officer Ramon Ang is not about to stop his buying spree as he starts investment negotiation with AMY Holdings for management control of low cost carrier Zest Airways, as he unleashed new strategy of acquiring more landing slots at Ninoy Aquino International Airport (NAIA) in case its planned airport project goes nowhere.

Backed by the hugely successful conglomerate San Miguel Corporation, with US$ 416 million (17.5 billion pesos) net income in 2011, they have plenty of reasons to spend the money for future growth.

Alfredo M. Yao of AMY Holdings is willing to sell the the airline “lock, stock and barrel” according to Donald Dee, Airline Chairman, with the primordial consideration being the price of the buy-in. People from PAL is already making due diligence with the airline.

“It should be an offer we cannot refuse,” Dee said adding the sale of Zest Air could be concluded before the end of this year.

PAL investments in Zest Airways is seen as a boost to the airlines cash flow, which has seen operations bordering the red line to some of its domestic network as a result of intense competition by low cost carriers in domestic sector. 

Brian Hogan, Zest Air Chief Executive Adviser, said recently that the carrier is not "making money" in the domestic market because of the very expensive jet fuel. Hogan was the Chief Executive Adviser of Air Philippines Corporation who transformed the airline to Airphil Express to become the country's second biggest LCC, before he transferred to Zest Air . 

"I would tell you right now. I don't believe any airline is making money. Cebu Pacific is probably closer because they have a more established business and they charge baggage and all that. You've got to balance the domestic and international to break even," says Hogan.

"Its not making money so for us, I believe the play is to fly regional outside Manila," he added.

Zest Airways cut its daily flights to Virac, Catarman and Calbayog from Manila last July 1, with a plan to remove its daily flights to Marinduque, Masbate, Busuanga and Tablas in Romblon.

The airline has been offered foreign equity sale to Hainan Airline Group of China. However, negotiations with Hainan Airlines fell  after it failed to secure management control of the airline. Under the 1987 Philippine Constitution, 60% of the airline's corporate shares needs to be controlled by Filipinos. Although investment agreement may be agreed for possible  management control, both parties however failed to agree on the terms.

Zest Air was also in exploratory talks with Cebu Pacific and Air Asia Philippines, with the former almost exhausting all its landing rights, while the latter having problems securing landing rights at Manila Airport where the government already stopped granting new landing rights due to airport congestion.

Zest Air is set to operate 14 Airbus 320 planes by end this year. The Civil Aeronautics Board said that the airlines average load factor hovers around 70 percent on the routes which it flies into, making their operation viable.

The airline mostly flies to China, and Korea from its hub in Kalibo, Cebu and Manila and flies locally to Kalibo, Bacolod, Busuanga, Calbayog, Catarman, Cebu, Davao, Iloilo, Legazpi, Marinduque, Masbate, Puerto Princesa, San Fernando, San Jose, Tablas, Tacloban, Tagbilaran and Virac.

In 2011, the budget airline flew 2.3 million domestic and international passengers. ZestAir cut its passenger traffic target this year to three million from the earlier goal of 3.5 million due to suspension of some domestic flights. Of the revised target, 2.5 million will come from domestic flights and 500,000 passengers will come from international flights.