By Mary Ann LL. Reyes (The Philippine Star) Updated July 23, 2010 12:00 AM
MANILA, Philippines - Lucio Tan-led PAL Holdings is open to partnerships insofar as owning flag carrier Philippine Airlines is concerned, top company officials said yesterday.
PAL chief finance officer Susan Lee said the holding company has been entertaining inquiries, mostly from international airline companies, on the possibility of putting in fresh capital into PAL.
Earlier, PAL president Jaime Bautista revealed that some international airlines have expressed interest in partnering with PAL Holdings, which owns 83 percent of PAL, and have made inquiries regarding this matter.
Bautista said that the equity needed from a possible investor should be at least 25 percent, but should not exceed 40 percent, of PAL’s total assets which stood at $1.1 billion.
He added that if there is a good offer to buy the entire business of PAL, the company’s owners, led by Tan, are willing to give the company up. Tan is reportedly not interested in shelling out more funds for PAL considering his already substantial investment in the airline.
Bautista, however, emphasized that PAL is not a bankrupt company. “It only needs to have additional equity,” he stressed.
But Lee pointed out that nothing definite has been agreed upon and discussions are still mostly in the exploratory stages.
PAL is in talks with several fund managers and Asian carriers for possible investments but according to Bautista, instead of the shareholders selling their stocks, they will be considering issuing new shares.
Bautista, however, explained that at this point, it is not clear whether the shares will be that of PAL or of publicly-listed PAL Holdings.
Although issuing new shares could dilute the Lucio Tan group’s stake in PAL, Bautista said Tan is more concerned with the fresh funds being put into the airline than the ownership aspect.
About a decade ago, Hong Kong-based Cathay Pacific Airways Ltd. had contemplated on investing in PAL but this plan failed to materialize. Now, Bautista revealed that Cathay is now among the carriers that PAL is in discussions with.
PAL Holdings’ share prices has been climbing, from P3 per share at the start of the month to P4.60 last Friday, as rumors circulated that new investors were about to come in.
Despite its financial difficulties, Bautista said PAL settled $40 million in maturing debts last month, on top of the $10 million it has been paying monthly. PAL was able to bring down its liabilities to about $1 billion since entering corporate receivership.
The company emerged from receivership after recording a profit in 2007 but the airline’s finances spiraled in the succeeding three years as it incurred over $350 million, or at least P15 billion, in losses during its last two fiscal years. Its equity also dropped precipitously to a little over $1.1 million as of February this year.
With this, the company decided to let go of at least 3,000 employees with the spin-off of its three core businesses. The affected workers belong to the in-flight catering services, airport services (including ground handling, cargo terminal/cargo handling and ramp handling) and call center reservations.
Although the industry is improving, Bautista said PAL has to continue implementing more measures to generate more revenues and reduce costs.
Aside from its debts, the airline is also dealing with the problems brought about by the downgrading by the US Federal Aviation Authority (FAA) of the Philippines, from Category 1 to Category 2, and the consequent blacklisting by the European Union. The downgrade has prevented PAL from mounting additional flights to the US.
Earlier, PAL’s chief executive explained that the move to outsource non-core units is essential to attract investors that will put in fresh capital for the financially strapped carrier.
PAL explained that it was constrained to pursue the restructuring plan due to several factors beyond its control that include, among others the unabated liberalization of the commercial aviation industry to the detriment of local players like PAL, the worldwide economic recession that led to a crippling slowdown in passenger traffic, as well as the record-high oil prices in 2008-2009 and the continuing increase in the price of aviation fuel, which account for nearly half of PAL’s operating expenses.
In April, Bautista said that apart from a series of cost-cutting initiatives, PAL approached several investors but none were interested given the fact that in 2009 alone, more than 20 airlines went bankrupt. “We approached government for help but it, too, was in dire financial straits,” he added.
To stave off failure and protect company assets, PAL said it had to act quickly. “Given this grim scenario, PAL has no choice but to restructure. It must also sell and/or cease operations of non-core businesses since no airline in Asia, or the world for that matter, continue to operate non-core businesses. Moreover, PAL has to meet its huge outstanding obligations as they fall due to prevent creditors from taking over the business,” it stressed.
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