Price Tags Of Philipines Airlines Increases

Price Tags Of Philipines Airlines Increases

Although Lucio Tan submitted an offer of $372 million cash initially to buy back Philippine Airlines, the tycoon will likely need to come up with more cash in order to gain full control of the carrier as Philippine Airlines is set to report a rare profit for the first half of 2014.

Reports have suggested that Tan must raise at least $1 billion in order to purchase back the 49 percent equity stake currently held by San Miguel Corporation. This includes the $500 million that was originally invested by San Miguel to purchase their stake, along with cash advances supplied for the massive refleeting program.

However, with PAL set to report an improved balance sheet, the price tag is likely to exceed $1 billion or at the very least be non negotiable at the hefty price tag. According to sources at the flag carrier, Philippine Airlines posted a rare net profit of approximately $34 million in the second quarter ending June of this year. That income offsets the loss incurred in the first quarter of 2014 that ended in March. This restores Philippine Airlines to the black in the first half of 2014. PAL will apparently make an official report on the development to stockholders this week, while submitting a financial report to the Securities and Exchange Commission.

Lucio Tan will have until August 27 to finalize his offer to purchase the 49 percent stake back from San Miguel. Sources indicate that San Miguel is not planning to make any counter offer and will simply cede its minority control putting Tan back at the helm by the end of this month. Rumours suggest that Jaime Bautista could be restored to his old post as President of PAL at least for a temporary period.

However, with the recent financial performance, San Miguel executives that are currently managing Philippine Airlines believe that the stakes have risen dramatically and that San Miguel's stake exceeds its investment cost. The executives claim that PAL has turned a corner and is on its way to recording profits in succeeding quarters, which could influence future negotiations for control of Philippine Airlines.

Current PAL President Ramon Ang predicted that the national flag carrier would post a profit sometime this year following the completion of a modernization program that saw PAL dump a number of its older fuel inefficient aircraft, while expanding service to the United States using its fuel efficient fleet of modern Boeing 777 aircraft.

Ang reported in April that Philippine Airlines had completed the $261-million fleet modernization program to replace older legacy aircraft. Overall, Philippine Airlines replaced 20 ageing aircraft including the Boeing 747-400 which is set to permanently retire at the end of this month. The new modern and fuel efficient aircraft that have replaced the ageing fleet have enabled PAL to drastically reduce fuel and maintenance costs. The airline expects to save as much as $120 million annually in fuel and maintenance costs just by using the Boeing 777 on routes to the United States.

"We reported a loss of $250-million, a one-off expense covering the replacement of old aircraft," said Ang. "But from now on, we are confident that Philippine Airlines will be back to being profitable right away. Moving forward now, I believe we will be profitable this year." Previously, Philippine Airlines posted a loss of P4.13 billion for the year ending March 31, 2013, which was just six percent less than the P4.37 billion loss posted in 2012.

When RSA returns to the negotiating table with Tan in the near future, it is likely that he will be highlighting his "back in the black" mantra, while Tan will simply shrug it off, delivering the necessary capital to regain control of his beloved flagship. Tan has been working double-time in order to raise the necessary capital. Although San Miguel Corporation seems happy to divulge of its interest in PAL, the company is also keen to consolidate its control should Tan fail to come up with the necessary funds. 

Meanwhile, Philippine Airlines is projected to end 2014 with a net profit of $30 million. This can be primarily attributed to the restoration of Category 1 status and the largest refleeting program undertaken in the carrier's history. However, not all critics remain as optimistic as PAL executives on the airline's future, with many questioning the extensive cost-cutting that has diminished the carrier's on board product in exchange for short-term profit projections. 

Many wonder if PAL will be able to effectively compete with the other Asian flagships and build a loyal customer base with a less competitive product as PAL moves closer to a LCC style of operation. While many may seem curious to try out the new Philippine Airlines, critics are concerned that PAL will fail to recruit the lucrative repeat business and loyalty necessary for long term growth. It remains unclear if this new hybrid model can be sustained well into the future as discretionary income in the country rises and passengers are able to choose the carrier that offers the best value. 

Philippine Airlines currently has its eyes set on expansion in the United States with the possibility of adding new destinations such as New York and San Diego. However, the carrier will ultimately need to acquire additional long range Aircraft in order to support this expansion. Such decisions are presently stalled until the ownership dispute between Tan and Ang has been resolved. Moreover, if Tan does regain control, it's hard to predict if he shares a similar vision as Ang or if he will take the company in a completely new direction.

Ang and his San Miguel team have led the charge to overhaul the operations at Philippine Airlines over the last two years. With the completion of the refleeting program, Philippine Airlines is seen to have one of the youngest fleets in the industry with an average age of just 3.5 years. In addition to fleet management, the San Miguel team have been focused on route optimization and development, as well as cost control measures as part of its key focus on management. Substantial efforts have also been made to strengthen the Philippine Airlines management and operations team, while upgrading existing Technology and information systems. Although the team claims to have improved the on board customer service, as well as marketing and promotional activities, critics are not convinced that PAL has yet achieved the standard of a first quality, top notch flag carrier.PAL's recent performance at the 2014 World Airline Awards, where it slipped from 90th to 93rd place certainly leaves many in doubt.

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Mohini Porwal [ B Sc]
Trainee News Editor
Philipines Aviation News Editor