PAL for the course

Whether or not the family of taipan Lucio Tan would make good on their tender to get back the whole of Philippine Airlines from San Miguel, the financial markets would probably consider it as an insignificant development for San Miguel.

If PAL would go back entirely to the taipan, or if San Miguel would keep its 49-percent interest in the airline, the market could easily view it, either way, as a plus for the listed San Miguel—you know, something like par for the course.

As we reported two years ago in 2012, when San Miguel injected initially some $500 million into the country’s struggling flag carrier PAL, the financial markets hardly showed signs of delight.

The price of San Miguel stocks remained steady then, showing none of the upbeat mood that usually followed the 25 or so business acquisitions by San Miguel starting in 2007, investing more than $5 billion over the past seven years, with its combined yearly revenues rising to an equivalent of 5.4 percent of the country’s GDP.

Anyway, the world airline business in 2012 incurred heavy losses, specifically $1 billion in just the first quarter of 2012, primarily because of the high prices of oil and thus airplane fuel. Surely, PAL found it difficult to beat the downtrend in the industry.

Even at that time, the San Miguel conglomerate was already recording Ebitda (earnings before interest, taxes, depreciation and amortization) of more than P70 billion a year. In short, based on its financial statements, San Miguel was doing fantastically well.

In the markets at that time, no wonder, analysts feared that, because of the troubles in the airline business in general, plus the unique problems besetting PAL such as labor unrest, the acquisition would only weigh San Miguel down.

If San Miguel, thus, would return its 49-percent stake in PAL to the Tan family, the financial markets would still regard it as a “win” for the conglomerate because, for one, the markets were not exactly in love with the acquisition, in the first place.

Moreover, San Miguel would likely make some profits from the deal with the Tan family. Word went around recently that the two groups agreed on a deadline on the buyback, falling due sometime next week, involving at least $1.5 billion.

As reports indicated, San Miguel initially put some $500 million into the airline, and from what I gathered, the conglomerate in the past two years put into the airline additional advances of around $800 million.

If the rumored price of $1.5 billion for the Tan family’s buyback of PAL would hold, it seemed that San Miguel would already earn a premium of at least $200 million and the markets as always would love any quick profits for blue-chip stocks.

On the other hand, if the buyback deal would not push through for any reason at all, such as a change of heart by the taipan known in the business community as “Kapitan,” San Miguel could then still pursue its plans for the airline.

Reports indicated that, even before San Miguel invested in PAL two years ago, San Miguel vice chair and COO Ramon S. Ang (a.k.a. RSA) was already confident that he could turn around the airline from its heavy losing streak.

RSA intimated to bankers and the like at that time that PAL might not produce the profit “windfall” that San Miguel had been known to enjoy in its acquisitions, but he was certain that the airline would turn around.

It was not a surprise therefore that, just recently PAL disclosed to the Philippine Stock Exchange a net income of $7.6 million during the first half of 2014, which was a complete reversal of the $57-million loss it incurred in the same period last year.

Also, PAL insiders were confident that the airline would post another good financial performance for July 2014, as their preliminary figures showed that it could expect a net income of about $11 million in just one month.

From what I gathered, for example, the airline succeeded in bringing down its operating costs, mainly through the huge drop in its fuel and maintenance costs, which used to account for at least 55 percent of its yearly total costs.

PAL was able to reduce the same problematic fuel and maintenance costs to around 47 percent of total expenses, and they are still bound to go down, mainly because the airline will add more fuel-efficient aircraft to its fleet.

The latest model aircraft bought by PAL, for one, would allow it to use the “right” aircraft for any particular route.

For instance, PAL formerly used the huge Boeing 747 model for regional or even domestic flights. But according to PAL insiders, even if the airline could fill the aircraft to full capacity in those routes, it would still lose money. Thus PAL decided to use smaller but cost-efficient aircraft models for such short routes, reserving its fleet of wide-bodied aircraft for long-haul destinations such as the United States and Europe.

In one news report abroad back in 2012, RSA disclosed that San Miguel would take PAL through a complete course of changes and innovations, committing even then the conglomerate to invest some $8.5 billion in PAL over the next 10 years or until 2022.

Oh, and by the way, by that time in 2022—based on the prognosis propagated over the past few years by aircraft manufacturers and the world airline industry—the Asia-Pacific region would enjoy the heaviest air traffic in the whole world.

In short, the resurgence of PAL as a premier airline in these parts would be something that San Miguel could also work on or even expect.

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