Airline will need $2B from new partnerBy Daxim L. Lucas
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| “If we fought over it, it would destroy the value of PAL,” SMC president Ramon S. Ang on PAL |
San Miguel Corp. did not make a profit on its investment in Philippine Airlines (PAL) despite having turned around the moribund flag carrier during the two years when the diversified conglomerate was running the firm.
In fact, SMC president Ramon S. Ang said yesterday that the conglomerate—the country’s largest business group in terms of asset value—did not even break even on its PAL venture owing to its failure to recover its cost of funds.
“SMC lost money in this deal,” he said, breaking his silence for the first time since the airline was reacquired by tycoon Lucio Tan—its former controlling shareholder —two weeks ago.
Ang said he was willing to forego a long drawnout negotiation process with Tan because it was in danger of turning hostile, with frustration on both sides running high after a year of flip-flopping decisions by PAL’s former owner.
All told, the SMC group invested $1.36 billion in PAL—an amount Ang recovered, minus the interest that he should have charged for it over two years.
“If we fought over it, it would destroy the value of PAL,” he said, adding that adopting a hardline negotiating stance would result in a “lose-lose” situation for both sides and eventually erode the value of both tycoons’ holdings. “So I agreed to sell.”
Ang described the poor state of the airline’s finances when he assumed its presidency in 2012 after a $500-million deal with Tan gave SMC 49 percent of the airline, including management control.
He said that, on average, airlines spend 40 percent of total revenues on fuel and maintenance costs.
However, for PAL, which was saddled with older, gas-guzzling aircraft, fuel and maintenance expenses were as high as 55 percent of revenues when SMC came in. It was at this point when the new management decided to embark on a massive refleeting program and ordered a fleet of newer, more fuel-efficient planes from European plane-maker Airbus.
It was also at this point when allegations surfaced that Ang was supposedly earning commissions from PAL’s refleeting program. In response, Ang released a certification issued by Airbus upon his request to debunk the rumors.
“Both parties hereby represent and warrant that they have not paid, agreed to pay, authorized the payment of or caused to be paid, directly or indirectly in any form whatsoever any commission, percentage, contingent fee, brokerage or other similar payments of any kind, in connection with the establishment or operation of the agreement [to purchase 54 new aircraft] to any employee of the other party or to any person or entity in the other party’s country or elsewhere,” said Airbus senior vice president Cristophe Mourey in a July 23, 2012, letter to PAL.
“I don’t have the heart to make money from PAL,” Ang said, responding to allegations of profiting from aircraft orders.
Asked about the airline’s prospects going forward, Ang said it would be crucial for Tan to bring in a strategic partner to help buttress PAL’s books.
“Assuming the strategic investor would need to bring in $1 billion in equity, they would need up to $1 billion more for the airline’s working capital and to pay for aircraft deliveries in 2015,” he said. “So the new partner needs around $2 billion.”
The SMC chief said that he has effectively relinquished control of the airline since Sept. 15, describing his two-year stint at PAL’s helm as “mission accomplished.”
“We improved the image of the country overseas, we restored the airline’s profitability and we got the country taken out of the blacklist of both Europe and the US Federal Aviation Administration, with a lot of help from Airbus,” he said.
The San Miguel chief also said there was no truth to rumors that Philippine Airlines, under his watch, terminated all the privileges and benefits previously enjoyed by members of the Tan family and business group.
In fact, all contracts of Tan-owned firms with the airline continue to this day, including several contracts for MacroAsia and its maintenance joint venture partner Lufthansa Technik.
Ang said the only privilege that could perhaps remotely be considered an affront to the 80-year-old tycoon was the change in policy regarding the business class seats automatically reserved for Tan group members.
Previously, PAL kept two business class seats on all flights vacant, just in case the tycoon needed to hop onto a plane to any of its routes on short notice. When Ang was put in charge, he asked the Tan group that these seats be freed up because of the missed revenue opportunities. But they agreed that these seats would still be made available to Tan if he gives advance notice.
“That’s the only change in the benefits they enjoyed,” Ang said. “Everything else was the same.”
In fact, SMC president Ramon S. Ang said yesterday that the conglomerate—the country’s largest business group in terms of asset value—did not even break even on its PAL venture owing to its failure to recover its cost of funds.
“SMC lost money in this deal,” he said, breaking his silence for the first time since the airline was reacquired by tycoon Lucio Tan—its former controlling shareholder —two weeks ago.
Ang said he was willing to forego a long drawnout negotiation process with Tan because it was in danger of turning hostile, with frustration on both sides running high after a year of flip-flopping decisions by PAL’s former owner.
All told, the SMC group invested $1.36 billion in PAL—an amount Ang recovered, minus the interest that he should have charged for it over two years.
“If we fought over it, it would destroy the value of PAL,” he said, adding that adopting a hardline negotiating stance would result in a “lose-lose” situation for both sides and eventually erode the value of both tycoons’ holdings. “So I agreed to sell.”
Ang described the poor state of the airline’s finances when he assumed its presidency in 2012 after a $500-million deal with Tan gave SMC 49 percent of the airline, including management control.
He said that, on average, airlines spend 40 percent of total revenues on fuel and maintenance costs.
However, for PAL, which was saddled with older, gas-guzzling aircraft, fuel and maintenance expenses were as high as 55 percent of revenues when SMC came in. It was at this point when the new management decided to embark on a massive refleeting program and ordered a fleet of newer, more fuel-efficient planes from European plane-maker Airbus.
It was also at this point when allegations surfaced that Ang was supposedly earning commissions from PAL’s refleeting program. In response, Ang released a certification issued by Airbus upon his request to debunk the rumors.
“Both parties hereby represent and warrant that they have not paid, agreed to pay, authorized the payment of or caused to be paid, directly or indirectly in any form whatsoever any commission, percentage, contingent fee, brokerage or other similar payments of any kind, in connection with the establishment or operation of the agreement [to purchase 54 new aircraft] to any employee of the other party or to any person or entity in the other party’s country or elsewhere,” said Airbus senior vice president Cristophe Mourey in a July 23, 2012, letter to PAL.
“I don’t have the heart to make money from PAL,” Ang said, responding to allegations of profiting from aircraft orders.
Asked about the airline’s prospects going forward, Ang said it would be crucial for Tan to bring in a strategic partner to help buttress PAL’s books.
“Assuming the strategic investor would need to bring in $1 billion in equity, they would need up to $1 billion more for the airline’s working capital and to pay for aircraft deliveries in 2015,” he said. “So the new partner needs around $2 billion.”
The SMC chief said that he has effectively relinquished control of the airline since Sept. 15, describing his two-year stint at PAL’s helm as “mission accomplished.”
“We improved the image of the country overseas, we restored the airline’s profitability and we got the country taken out of the blacklist of both Europe and the US Federal Aviation Administration, with a lot of help from Airbus,” he said.
The San Miguel chief also said there was no truth to rumors that Philippine Airlines, under his watch, terminated all the privileges and benefits previously enjoyed by members of the Tan family and business group.
In fact, all contracts of Tan-owned firms with the airline continue to this day, including several contracts for MacroAsia and its maintenance joint venture partner Lufthansa Technik.
Ang said the only privilege that could perhaps remotely be considered an affront to the 80-year-old tycoon was the change in policy regarding the business class seats automatically reserved for Tan group members.
Previously, PAL kept two business class seats on all flights vacant, just in case the tycoon needed to hop onto a plane to any of its routes on short notice. When Ang was put in charge, he asked the Tan group that these seats be freed up because of the missed revenue opportunities. But they agreed that these seats would still be made available to Tan if he gives advance notice.
“That’s the only change in the benefits they enjoyed,” Ang said. “Everything else was the same.”
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