Decoding PAL Conflict

12 November 2014

By Tony Lopez

The parting of ways September this year between San Miguel Corp. Vice Chair and President Ramon S. Ang (RSA) and taipan Lucio Tan over ownership and control of Philippine Airlines has been followed by recrimination between the two powerful business groups each of which until early September owned 49 percent of PAL. 

The conflict apparently stemmed from two factors: one, the strategy on how to make the national flag carrier grow and return to sustainable profitability, and two, how to finance such growth strategy.  PAL had to have scale and critical mass to be efficient and profitable and it had to have full financial backing like infusion of massive equity.

The San Miguel group bought for $500 million 49 percent and full management control of the national flag carrier in 2012.  According to sources, SMC actually acquired more than majority control of PAL, up to 70 percent, but RSA had the graciousness to agree to Tan’s request that he be made to appear still owning 49 percent to justify his holding the title of chairman.   In return, RSA would exercise full and tight management control.

As president, RSA designed PAL’s basic strategy which was to expand it while reducing its crippling fuel cost which was eating 55 percent of operating costs, thus returning the carrier to immediate profitability.

To cut fuel cost and enable PAL to service more destinations, RSA thought of ordering as many as 70 aircraft, including 64 Airbus jets.   The strategy had the full backing of PAL’s board in which Tan’s people were amply represented, equivalent not just to the taipan’s 49 percent equity, but the majority of the directors.

The new planes consume at least 30 percent less fuel than PAL’s fleet of aging aircraft then.  The math was quite simple: 30 percent of 55 would mean an 18 percent increase in profitability.   At the same time, PAL would recapture its old glory, take back markets it had conceded to rivals (like the Middle East, home to millions of OFWs), return to old destinations (like Paris and Rome), and open up new services (like London, Toronto, Perth, and New York).

At the same time, RSA tightened on supplies, services and other costs, including the controversial ban on free upgrades.  Most business class seats, he noted, were occupied by people who were upgraded.  But this rattled people’s nerves, especially the many friends and relatives of the Kapitan.

To finance PAL’s expansion and aircraft acquisition, RSA relied on San Miguel’s Triple A credit standing and solid reputation. Up to $850 million in such financing and guarantees were lined up.  This explains why when Tan decided to buy back San Miguel’s 49 percent, he paid, sources said, not just $500 million but also refunded the $850 million, for an effective acquisition cost of $1.35 billion.

Up to late 2013, RSA was actually the one wanting to buy Tan’s 49 percent and the latter agreed to sell.  By mid this year, however, Tan had changed his mind.  He wanted to buy back SMC’s 49 percent.  This desire later turned into a hostile bid.

Tan’s long-time finance whiz, the affable Jimmy Bautista took over from Ang as PAL president on Oct. 23.   A self-taught jet pilot and a car aficionado, Don Ramon completely severed ties to PAL and apparently to Tan.  He fretted over PAL’s future.

Back to his old job, Jimmy Bautista concluded that RSA had ordered far too many planes than PAL could possibly deploy and finance.  When Jimmy left as president in 2012, PAL had only about 30 planes.  Today, PAL has 45, mostly brand-new. Plus plenty of debts.

Reports online and print media quoted him as saying PAL’s refleeting as “lacking deliberation” and “risky”.  There were also allegations about lack of pilots to man the new planes, the eventual reduction in the number of Airbus 330 planes ordered, the wisdom of the Cambodia Airlines deal, and a $5 million expense for the reservation system of Cambodia Airlines for the next five years.

What is clear, however, is that the massive PAL refleeting under President Ang was approved and signed off by the PAL board which was majority controlled by Tan’s men.  Also, PAL commissioned the services of a foreign consulting agency, jointly chosen by the SMC and LT (Lucio Tan) Group, to review PAL’s business plan and recommend how to return to profitability.   This is the same consulting firm the LT Group got in 1998 to help PAL with its rehabilitation then.

The refleeting was anchored on PAL’s expansion as well as replacing PAL’s old planes – B747s, Airbus 319s, A330s and 340s, whose age, poor condition due to high cycle time and improper usage previously made their operation costly and inefficient and contributed to frequent breakdown and poor service to the flying public.

As to pilot shortage, PAL, in fact, had a surplus but they were pilots for the old planes like the B747s.   They had to be retrained to fly the new Boeing 777s or the Airbus A-330-300s.  There was never an instance PAL canceled a flight because there were no pilots.

PAL had to reduce its A330 order, from 20 to 15, and in their place, order eight additional A321 NEO planes.  This is called right-sizing.  Calibrating planes to market requirements is standard in the airline business.  Air Asia, for instance, deferred some of its A320 aircraft order.  Emirates canceled all its Airbus 350 plane order.

I find RSA’s entry into Cambodia brilliant.  With only one major attraction, Angkor Wat, Cambodia has now almost the same number of tourist arrivals as the Philippines, which has myriad of attractions.  Also, Cambodia was to use some of PAL’s new planes and PAL would park some of its new planes in Cambodia. Besides, PAL did not spend the $5 million for Cambodia Airlines reservation system, only $1 million.

Airlines now and then invest in other airlines.  Air Asia Malaysia has airlines in Indonesia, India, Japan and the Philippines.  Jetstar Airways is in Jetstar Pacific in Vietnam, Jetstar Asia, and Jetstar Japan. Etihad has investments in Virgin Australia, Jet Airways in India and Alitalia in Europe.

And yes, RSA did make PAL profitable again. - MST


  1. But Mr. Lopez, you are a nobody in the international airline industry, while the Centre for Aviation, a respected global think tank, begs to differ. RSA does not know how to run an airline. Period! No ifs, no buts!

  2. Another so called journalist with no brains who blindly swallows the press release of RSA. RSA may be a success in other business but with PAL he clearly screwed up. Good riddance. RSA should just stick to over leveraging SMC. Thats what he does best.

  3. SMC nearly folded up this year because of over leveraging. If not for Petron, they would already be in serious trouble. At least Lucio Tan is earning pretty well in China as a fallback. His new Eton project in Xiamen is quite remarkable.