The captain’s seat

A man who has spent all of his life at work will never be at home anywhere else.

That to my mind was why Mr. Lucio Tan simply had to get back control of Philippine Airlines. Contrary to the many rumors spread by ugly souls about losing face, losing control of businesses and the even uglier lie that commissions were being made from the company’s re-fleeting, Dr. Tan’s angst circled primarily around the proverbial “seller’s regret” and perhaps the discovery that many retirees like him have made: Having all that money can bore you to death.

Ramon Ang must have come to terms that there can only be one pilot and he was not willing to be co-pilot. He realized he could not “fly” PAL to even greater heights if he constantly had to carry the unwanted baggage of envy, distrust and being discredited by a cabal of operators only too willing to give Lucio Tan an excuse to claim back PAL. To quote RSA: “Yung samahan hindi na maganda after the first year.”

PAL was a business challenge, an opportunity to prove that under right management PAL could be better and “It was in the interest of the country’s reputation that the flag carrier looked good.” Ang of course is only too shy to admit that proving his critics wrong and putting his knowledge as a pilot and business guru to the test in aviation has long been in his bucket list of business challenges.

The two parties certainly had a management honeymoon in the first year where Lucio Tan had full control of the Board of Directors but was relieved of some U$300 million in collectibles, labor problems and an airline in the red. In addition to his board, Lucio Tan also had his original managers playing tag with the professional management team of San Miguel.

Given their peaceful coexistence, the San Miguel group quickly went to work to deal with “mistakes” such as Air Philippines directly competing for flights with PAL while posting an annual loss. The subsidiary was suppose to compete with the LCC or Low Cost Carriers but a very independent management went and bit the mother company in the butt by flying same routes, same time and lower rates than PAL.

Then followed the rationalization of aircraft size and design to routes and revenues. Ang’s group saw that PAL was using 55% of its revenues for fuel and maintenance above the maximum industry peg of 40%. PAL also had 7 types of aircraft and by the time the SMC group came in, some 16 planes were due for a “D” check or major maintenance work each costing $3 million or a total of $48 million in their first year of management. For 6 months the players computed maintenance, fuel inefficiency and utilization and eventually convinced Lucio Tan and his board to re-fleet and junk 16 planes.

Reacting to ugly rumors regarding purchases and commissions made on the Airbus planes, Ramon Ang, along with PAL CFO Jorge San Agustin and Mr. Andy Lee, who personally headed the study and negotiations for the new aircraft categorically denied such possibilities and backed this up with a certification and challenge from no less than Airbus for anyone to come forward and show proof. Apparently the entire process went under the magnifying glass of Lucio Tan and the Board and it was Lucio Tan who signed on the dotted line.

The management team also debunked claims that Lucio Tan felt insulted because the new management had stripped Tan and his family of long held businesses supplying PAL. Apparently the Tan group continued to hold on to engineering and maintenance contracts, Macro Asia ground handling, personnel staffing, Sky logistics check in and kitchen as well as being entitled to airline privileges that were not even enjoyed by Ang or his executives on their watch.

Rumor has it that at one point Lucio Tan had offered to sell out his shares, then changed his mind and offered to buy back SMC’s shares in PAL, but the white knight of the LT group bailed out. Then SMC was offered to buy out Lucio Tan until someone from the LT group suspected the entry of PAL into a code sharing agreement with Etihad Airlines as the first step into the eventual entry of Etihad as partner to replace the Lucio Tan group.

Rather than being cooked in their own fat, the LT group figured it would be smarter to buy out SMC and bring in Etihad whose investment can refund Lucio Tan’s expense while giving him control of an airline back in the black and tied up with a strong partner in the Middle East.

Question is: will Etihad come in with the necessary investment? If not, Tan’s only hope would be to convince Manny Pangilinan to be a white knight or turn to his contacts in Mainland China for financing. Any of the 3 options must happen because PAL will soon need added capital to pay for their planes for 2015 and 2016, that bill will be due in 90 days. According to the SMC team, the loan that Mr. Tan took out from BDO is just bridge financing also collectible in 90 days. In other words, after borrowing a lot of money, PAL and Mr. Tan will be needing even more to move forward or else it will eventually bring back the airline to square one.

Even worse if the LT group fails to cover the BDO loan, it could cost them control of PNB which covers the loan, while losing out to Lance Gokongwei whose airline Cebu Pacific could gain dominance all over again. As for SMC, the company apparently did not make money on the sale and were ecstatic to get their money back and get out of the Captain’s chair because the PAL overhaul distracted SMC management from concentrating on its core businesses.

The happy ending is that PAL has made money in the last 5 months, safety and maintenance standard of PAL is at industry level, the re-fleeting and purchase of Airbus planes solicited the indispensable support of Airbus so PAL could fly into Europe as well as the US once again and the country’s flag carrier now flies proud. That’s certainly Mission Accomplished for San Miguel and for Ramon Ang. 

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