MOLDEZ, Princess M.

BSA A3A

August 10, 2015

Strategic Management

Transfer or Sale of Philippines Airlines (PAL) from Lucio Tan to San

Miguel Corp. and from SMC back to Lucio Tan
In the year 2012, tycoon Lucio Tan surprised the market when it forged a deal to
sell nearly half its stake in legacy carrier Philippine Airlines (PAL) to an unlikely partner:
his arch rival in the beer industry, San Miguel Corporation. The 2012 agreement gave
San Miguel 49% of PAL for $500 million, and led by its top honcho Ramon Ang, also
took control of the airline management. The Tan group planned to leave the business by
selling the rest of its PAL stake to San Miguel, which, in turn, expressed intention to
acquire full ownership. Fast forward to 2014, the market was again surprised. Tan
announced he was taking back the stake it sold San Miguel to again become PALs
Kapitan, as he is fondly called.
PAL woes
The 80-year-old Tan took control of PAL from the government in 1995. It was the first
venture of the tobacco and beer entrepreneur into non-allied interests. In 1997, PAL
went on aggressive expansion, but an expensive refleeting program, along with
unprofitable routes, made it financially unstable. That year, Asia went through a financial
crisis, and PAL was badly hit as its debts ballooned. PAL undertook massive layoffs,
resulting in disputes with its worker union that forced it to shut down for a brief period in
1998. The disputes were settling, PAL underwent rehabilitation, and, by 2000, returned
to profitability. In 2008, the US Federal Aviation Administration downgraded the
Philippines aviation status to Category 2 from Category 1 due to non-compliance with
global safety standards. The downgrade prevented PAL from expanding operations in
the US. The downgrade would later on prompt the European Union (EU) to also ban
Philippine carriers from entering its airspace. While this happened, PAL was feeling the
brunt of soaring fuel prices and declining passenger demand amid tight local
competition. PAL was posting millions of dollars in losses.
San Miguels entry
San Miguels entry was a breath of fresh air. Bleeding from its woes, PAL, Asias first
airline, would benefit a lot from a new investor with funds, which it needed to survive the
industry. PAL embarked on a $9.5-billion refleeting program. It restructured operations
by using smaller but cost-efficient aircraft for short, domestic routes, and reserved the
wide-bodied aircraft for long-haul destinations such as the US and Europe. The
refleeting program called for the purchase of 100 new aircraft and retirement of aging
ones in a bid to become one of Asias youngest fleet at 3.5 years. Luck was also on
PALs side when, in 2013, the EU lifted its ban on the carrier and the US aviation
authorities followed suit this year, upgrading the Philippines status back to Category 1.
By the second quarter of 2014, PAL was back in black. The prospects of new services
to lucrative long-haul markets were all a possibility. Investing in PAL wasnt a bad idea
after all.

Why buy it back?

The promising developments as of late could be considered reason for Tan to
take PAL back. But analysts maintained the nature of the business remains the same: it
is risky, capital-intensive, and will continue to battle rising jet fuel prices and increasing
competition. It was an emotional decision for Tan, said the source. A column by The
Philippine Stars Boo Chanco also earlier suggested that Tan wanted to regain the
prestige he used to enjoy when he was head of PAL. His ego was preventing him from
making a decision thats purely business. The decision could be considered a
business one only for the reason that Ang kept delaying his promise to buy back the
rest of Tans stake.And with growing problems in their marriage, amid reported
disagreements over management, it was best to just take it all back. Reports had it that
the partnership had been shaky. Some members of the Tan camp were not at all happy
when San Miguel came in, much more when it started taking business away from PAL
affiliates. Tan was also reportedly not happy with the generous early retirement option
that Ang-led management offered PAL employees. Other issues involved a fuel supply
with San Miguels Petron Corporation and that Ang was collecting commissions from the
refleeting, an allegation Ang supposedly belied by presenting documents from aircraft
suppliers. In a party to celebrate the buyback on the night of September 15, Tan said:
PAL is more than an airline company for me. It goes beyond investing it is like family.
PAL is never far from my thoughts. In a disclosure to the Philippine Stock Exchange on
September 16, San Miguel said Tan assumed day-to-day management of PAL through
the appointment of its former president, Jaime Bautista, as general manager. But it
maintained that Ang, as president of PAL, remains, along with the rest of his team, "until
the relevant closing date of the agreement" between the parties.