Preliminary Period Lectures: AB651 – Airline Logistics Management

Week 2: August 30-31, 2023 – Covers Lecture 3 and Lecture 4

Lecture 3: Capital Sourcing & Investment Allocation for the Business
Venture

Capital sourcing alternatives:

1. Single proprietorship – usually not applicable for an airline operation. Single
proprietorship is generally resorted to by small and medium enterprises and not
capital intensive industries such as the airline.
2. Partnership – usually not applicable for an airline operation unless the partnership
involves two or more business moguls, or corporations to venture in a big
undertaking like launching an airline. We have seen this happen in the case of Tony
Fernandez of Malaysia and majority owner of Air Asia when he partnered with Tony
Boy Cojuangco, Mikee Romero and Maan Hontiveros and her partner Fred Yao (who
owned the defunct Zest Air).
3. Corporations – often the instrument of capitalization for an airline operation.
Philippine Airlines today is majority owned by PR Holdings which in its initial stage
was the battleground for Chinese groups led by Lucio Tan and his many companies
against the Spanish-American group led by the Ayala/Zobel, BPI, Bank of
Commerce, ICTSI and Soriano y Cia. The Lucio Tan group won when the
government financial institutions led by GSIS, PNB, and DBP threw to the group its
swing vote. To date, PR Holdings is controlled by the Lucio Tan Group.
4. Personal investments of business proponents/participants – airline capitalization is
sometimes triggered by extreme obsession of individuals e.g. William Boeing that led
United Airlines until the US anti-trust laws forced him to choose between Boeing
Corporation and United Airlines; Howard Hughes who acquired Trans World
Airlines (TWA) and Air West; Richard Branson – who virtually singlehandedly built
the Virgin Group that holds substantial interests in Virgin airlines around the world
e.g. Virgin Atlantic, Virgin Australia, etc.; Tony Fernandez acquired the defunct Air
Asia of Malaysia and expanded it into a global carrier on the new low-cost carrier
business model. It eventually established Air Asia in many East Asian countries
holding significant interests in them to the maximum allowed by law.
5. Financial roadshows – medium to large corporations with reliable reputation in the
business world use this in raising funds from financial roadshows. This shows are
participated in by commercial banks, venture capitalists, and other financial
institutions public and private.
6. Loans and borrowings – Corporations with huge fixed asset base like real estate,
landholdings and buildings are easily to secure bank loans using these fixed assets as
collaterals.
7. Excess liquidity from business operation – strong companies which are able to raise
huge revenues from its business operations allow them to plow back into their
operation the excess revenue that otherwise would be idle if not readily invested

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 Preliminary Period Lectures: AB651 – Airline Logistics Management

Investment allocations:
1. Manpower budget – a significant part of the budgetary outlay of a business is devoted
to the acquisition of the best people in the industry it is engaged in.
a. For most if not all, it is important to hire the top business executives who
might be able to energize the business operation and propel to greater heights.
In big business the qualification and reputation of the CEO are of utmost
importance that stockholders are willing to pay them a fortune and even
provide them significant share in the company.
b. For businesses engaged in high technology it is imperative to hire the experts in
the field. These are the people with the capability to give the company the
latest in the line of technical products attractive to the market.

2. Operating expense budget – includes all the expense items vital in carrying the
business objectives of the company.

Figure 3.1: Airline

Operating Expenses –
The table shows level of
expenses for the different 2
functions in the airline
operation categorized
into nine major groups.
 Preliminary Period Lectures: AB651 – Airline Logistics Management

a. Labor and labor-related costs – SSS and other statutory deductions, fringe
benefits, medical assistance, educational assistance
b. Rentals and leases – office rental, equipment rental
c. Electric consumption charges – light and heat
d. Water consumption charges
e. Official travel and transportation expenses
f. Office supplies expenses – stationery, printer ink, pens, and pencils
g. Courier services - mail & parcel delivery services
h. Services purchased outside:
1) Catering the office industry guests for meetings or in courtesy calls
2) Consultancy on specific business functions e.g. legal, audit, marketing
3) Training services – on office application systems, etc.
4) Security service charges
5) Janitorial service charges

3. Capital expenditures budget – generally involves the acquisition of expensive pieces of

machineries, tools and construction of facilities
a. Aircraft, assemblies, rotables, life-limited parts
b. Facilities e.g. Terminals, hangars, warehouses
c. Ground equipment – main deck loader, motorized tug, etc.
d. Softwares and hardwares – applications, computers, operating systems
e. Construction, renovation and repairs – buildings, ticket offices, cargo offices

Lecture 4: Organizational Structure of the Board and of Top Management

1. How are members of the board selected and elected?
a. Board members are the equity holders’ choice – The stockholders choose the
board members depending on their shareholdings. It must be at a certain level
or share that would entitle it to elect one or more board members.
b. Elected based on the strength of the shareholding of equity holders – e.g., 75 per
cent shareholding can elect 75 per cent of the board members. The greater the
shareholding of a stockholder the more numerous members of the board he is
able to get elected. Bases for the selection of the board members: Qualities and
competencies
c. Affinity with the equity holders: relatives, friends, business associates – While
affinity is the major area of consideration it is the degree of trust of a
stockholder on an individual that pushes him to get someone to represent him in
the Board. The stockholder trusts that the individuals he chooses will be able to
protect, and more importantly to grow his stockholding in the business.
d. Shareholding with the company elects the board members – It is the amount of
stockholdings that board members get to be elected to the Board of Directors.
2. Legal and other requirements for the election of board members:

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Preliminary Period Lectures: AB651 – Airline Logistics Management

a. Number of board members – The SEC regulations requires that board members
must range from at least two to no more than 15 board members
b. Independent board members – at least two board members or at least 20% of
the board members
c. Why the need for independent board members – to protect the interest of small
stockholders who may be more numerous but have little share of stockholdings
example PAL; influenced by the Enron Case; also, to prevent very few board
members from controlling the board
d. Balance of executive and non-executive board members – The latter must have
sufficient qualification, stature, and number to carry some weight in the board
e. The Board may pass its own resolution to limit the board directorship of its
members so that multiple directorships may not affect the service of the board
members.
f. Chairman of the Board and CEO are preferred to be separate individuals for
more balance of power, increased accountability, and greater capacity for
independent decision-making.
g. One individual holding the Chairman and CEO positions means only one
individual may influence the vision, mission, and objectives of the company;
there is a need to establish check and balance measures to prevent abuse
h. Each director must hold at least one share of stock of the corporation and in his
name in the records of the corporation
i. Grounds for disqualification of a board member – conviction by a judicial or
administrative body of a long list of crimes, civil offenses, fraud, moral
turpitude, insolvency

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Figure 4.1: Organization of the Board
 Preliminary Period Lectures: AB651 – Airline Logistics Management

j. The Board may establish additional grounds for disqualification of a board

member e.g., education, competence, familiarity with the business, integrity and
probity, good governance training,
k. Board Committees – These committees are established by the Board as the
members deem necessary. The usual committees the corporate boards establish
are the following:
1) Audit Committee – Most corporate Boards establish this committee because
they always want to be aware of the audit results particularly financial
audits. This is to protect the financials of the company to ensure that the
stockholdings of their principals are also protected. Very often, they invite
the internal auditors and external auditors in their deliberation on certain
financial audit findings. The committee also occasionally look into the
results of manpower and operational audits to have an appreciation of how
the company activities are handled.
2) Finance Committee – Most corporate Boards also set up this committee to
ensure that they are on top of the financial situation of the company. They
look into how the Finance Department go about in their sourcing for funds,
the borrowings and investing of whatever excess liquidity they company may
have. They periodically require the review of the financial statements and
the results of financial analysis.
3) Human Resources Committee – The Board members are also always
interested if the company has the right size of manning and whether the
current officials are delivering excellent performance. Likewise, the board
members are interested to know the mood of the employees across the board,
the activities of the labor unions if any and whether the relationship with
them is cordial or not.
l. Board Secretary – The administrative function of the Board is handled by the
Board Secretary and his staff. This office prepares the Board meeting agenda,
takes the minutes of the meeting, the resolutions and keeps all the records of the
proceedings. Aside from preparing the stage for Board meetings the Board
Secretary and staff also take care of preparing the stage for the Stockholders’
meeting. The Office publishes the notice for the Stockholders’ meeting, sending
out the invitation to the Board members and corporate officers for the usual
election of the members of the Board and of the top management officers.
3. Management layers for which company officers are slotted:
a. President and/or CEO – There is generally only one leader who should be
responsible for the results of the business operation. This same leader is also
expected to set the examples for the organization to emulate in terms of integrity,
lifestyle, and energy in doing his task. He is after all always looked up to.
b. Group Heads – They may have an EVP or SVP designation. They directly
report to the President/CEO. There are usually four of them to take care of the
four basic functions of business i.e., administration, commercial or marketing,

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 Preliminary Period Lectures: AB651 – Airline Logistics Management

financial, production in the case of manufacturing and line services in case of

service companies.
c. Department Heads – Generally headed by VPs. PAL have regional networks
like Europe, the Americas, the Middle East, etc. These are headed by Regional
VPs. The departments are responsible for specific functions within the Groups’
functional responsibility. As such in Finance Group there is a VP responsible
for the Treasury and another one for Accounting Services, among others.
d. Division Heads – Normally these are headed by Managers. In bigger companies
with intermediate layers between the departments and the divisions these might
be headed by Assistant VPs, or Directors and in the case of Flight Operations
Department of PAL there are Chief Pilots responsible for a particular aircraft
type in the airline’s fleet.

Figure 4.2: Organizational Layers

e. Section Heads – Generally the last rung in the layering of a corporate totem pole
headed by Supervisors.
f. Unit Heads – Some large sections with clear delineation of functions might still
be subdivided into Units headed by Assistant Supervisors or Unit Heads.
4. Bases for the selection of the company officers:
a. Shareholding with the company may help secure a management position; close
affinity also works in some family corporations
b. Qualities and competencies are the major area of consideration in most
companies. For management positions they take into consideration those with
post-graduate diplomas. In high technology companies special and/or technical

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 Preliminary Period Lectures: AB651 – Airline Logistics Management

skills may qualify a job applicant. Training certificates are usually required for
these high technology positions. testing
c. Experience in the field of work applied for is very helpful particularly if backed
up by records e.g., certificates of recognition, letters of commendation, service
records from previous employers
d. Seniority is almost always a factor in the promotion to higher positions
particularly in the rank-and-file level of the company employees. It may have a
lower rate of 5 to 10% with competence, efficiency taking up the bigger share.
e. In public utility/service companies in the Philippines foreign citizens do not
qualify in the top management positions. Those positions are reserved for
Filipino citizens.

Additional Reading Materials of Lecture 4 on Role/Logistics Needs of CEO

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Preliminary Period Lectures: AB651 – Airline Logistics Management

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Preliminary Period Lectures: AB651 – Airline Logistics Management