By EDU LOPEZ
April 12, 2012, 5:03pm
MANILA, philippines — The Philippine Airlines (PAL) and low-cost sister carrier AirPhil Express are embarking on a new but still challenging era following the sale of large minority stakes in the two companies to conglomerate San Miguel Corp.
The Center for Asia Pacific Aviation (CAPA) noted that the deal is significant as it provides US$500 million required for fleet renewal and reinvigoration at PAL and for expansion at AirPhil which will be used to fight off increasing low-cost carrier (LCC) competition.
"It is also significant as San Miguel will gain management control of both carriers, which could lead to some adjustments in the group’s strategy," said CAPA.
"The deal hardly comes as a surprise. On numerous occasions, PAL chairman Lucio Tan has looked to sell part of his stake in PAL, of which he took control 20 years ago after the flag carrier was privatized. The latest round of negotiations with San Miguel and one other potential buyer have been dragging on since late last year."
"Industry sources say Mr. Tan was initially reluctant to include AirPhil, which has a brighter outlook than PAL given its focus on the faster growing budget end of the market, and cede management control in either carrier."
"While San Miguel and PAL parent Trustmark Holdings have announced the deal will involve Trustmark and AirPhil parent Zuma Holdings issuing new shares in the two carriers to San Miguel Equity Investments, they have not confirmed exactly how large a stake will change hands."
"Reportedly, San Miguel will end up with stakes between 40% and 49% in both carriers. Zuma now owns all of AirPhil Express while Trustmark owns nearly all of PAL."
CAPA noted that PAL is among the weakest of Asia’s major flag carriers, having seen its share of the Philippine market steadily erode in recent years, and was in need of a recapitalization.
With the US$500 million coming from San Miguel, the carrier will be able to embark on a new business plan that will likely follow a strategy similar to the one used by similarly-sized Garuda Indonesia, said CAPA.
As part of its quantum leap business plan for 2011 to 2015, Garuda is investing in rapid expansion at budget brand Citilink as well as in improving its full-service offering through fleet renewal and premium product enhancements.
Garuda is now in the process of joining the SkyTeam alliance, which has required a complete overhaul of the carrier’s IT systems.
Joining a global alliance, upgrading IT systems and adding more codeshare partners will likely become an important component of the medium to long-term strategy at PAL as the flag carrier looks to expand its international network and improve its premium product, said CAPA.
PAL has said it plans to use the funds coming from San Miguel to renew its fleet, particularly its ageing Boeing 747-400s. The airline already has four additional 777-300ERs on order, which are slated for delivery in the second half of 2012 and 2013.
Some of the US$500 million will likely be used to complete the acquisition of these aircraft while new widebody and narrowbody orders, including for the A320neo, are also possible.
CAPA said that while the Philippine premium market is relatively small, PAL cannot compete directly with the country’s fast-growing LCC sector given its higher unit costs and legacy structure. It needs to differentiate the main PAL brand from local competitors, which are all LCCs and only offer economy class, CAPA added.
Like Garuda, PAL is no longer the largest carrier in its home market. LCC Cebu Pacific Air carries more passengers.
PAL has seen its share of the domestic market slip to about 20%, based on current capacity, while its share of the international market has slipped to about 25%, said CAPA.
The Center for Asia Pacific Aviation (CAPA) noted that the deal is significant as it provides US$500 million required for fleet renewal and reinvigoration at PAL and for expansion at AirPhil which will be used to fight off increasing low-cost carrier (LCC) competition.
"It is also significant as San Miguel will gain management control of both carriers, which could lead to some adjustments in the group’s strategy," said CAPA.
"The deal hardly comes as a surprise. On numerous occasions, PAL chairman Lucio Tan has looked to sell part of his stake in PAL, of which he took control 20 years ago after the flag carrier was privatized. The latest round of negotiations with San Miguel and one other potential buyer have been dragging on since late last year."
"Industry sources say Mr. Tan was initially reluctant to include AirPhil, which has a brighter outlook than PAL given its focus on the faster growing budget end of the market, and cede management control in either carrier."
"While San Miguel and PAL parent Trustmark Holdings have announced the deal will involve Trustmark and AirPhil parent Zuma Holdings issuing new shares in the two carriers to San Miguel Equity Investments, they have not confirmed exactly how large a stake will change hands."
"Reportedly, San Miguel will end up with stakes between 40% and 49% in both carriers. Zuma now owns all of AirPhil Express while Trustmark owns nearly all of PAL."
CAPA noted that PAL is among the weakest of Asia’s major flag carriers, having seen its share of the Philippine market steadily erode in recent years, and was in need of a recapitalization.
With the US$500 million coming from San Miguel, the carrier will be able to embark on a new business plan that will likely follow a strategy similar to the one used by similarly-sized Garuda Indonesia, said CAPA.
As part of its quantum leap business plan for 2011 to 2015, Garuda is investing in rapid expansion at budget brand Citilink as well as in improving its full-service offering through fleet renewal and premium product enhancements.
Garuda is now in the process of joining the SkyTeam alliance, which has required a complete overhaul of the carrier’s IT systems.
Joining a global alliance, upgrading IT systems and adding more codeshare partners will likely become an important component of the medium to long-term strategy at PAL as the flag carrier looks to expand its international network and improve its premium product, said CAPA.
PAL has said it plans to use the funds coming from San Miguel to renew its fleet, particularly its ageing Boeing 747-400s. The airline already has four additional 777-300ERs on order, which are slated for delivery in the second half of 2012 and 2013.
Some of the US$500 million will likely be used to complete the acquisition of these aircraft while new widebody and narrowbody orders, including for the A320neo, are also possible.
CAPA said that while the Philippine premium market is relatively small, PAL cannot compete directly with the country’s fast-growing LCC sector given its higher unit costs and legacy structure. It needs to differentiate the main PAL brand from local competitors, which are all LCCs and only offer economy class, CAPA added.
Like Garuda, PAL is no longer the largest carrier in its home market. LCC Cebu Pacific Air carries more passengers.
PAL has seen its share of the domestic market slip to about 20%, based on current capacity, while its share of the international market has slipped to about 25%, said CAPA.
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