PAL to borrow P2.5 billion to finance restructuring

MANILA, Philippines - Flag carrier Philippine Airlines (PAL) is borrowing P2.5 billion from local sources to finance a corporate restructuring plan that will involve outsourcing three non-core activities.

The implementation of the plan will likely result in PAL being more attractive to new investors. “With the implementation of the spinning off of three non-core units, we will be able to control our cost and make the company more cost-efficient, not to mention the P500 to P600 million in savings that we can generate from the spin off,” PAL president and CEO Jaime Bautista said.

One of the reasons cited by potential investors for hesitating in investing in PAL is its cost structure. The company also expects the service providers to be more efficient in undertaking these PAL non-core activities, resulting in better service to customers.

Bautista said the flag carrier plans to finance the severance package of close to 2,600 rank-and-file workers by securing loans from government financial institutions like the Development Bank of the Philippines or the Land Bank of the Philippines. “If this is not possible, we will seek financing from other PAL creditors,” he said.

In a recent decision, the Department of Labor and Employment (DOLE) recognized PAL management’s prerogative to restructure its operations, a move that will cost the flag carrier an estimated P2.5 billion.

Bautista said the planned spin-off of PAL’s In-Flight Catering, Airport Services and Call Center Reservations was originally estimated to cost about P2 billion under the original DOLE decision. However, last week’s ruling of Labor Secretary Rosalinda Baldoz upped the figure by more than P500-million due to enhanced separation benefits and other modifications in the financial and non-cash awards.

“Given its recent losses and current financial position, PAL would be hard put to raise P2.5 billion but this is a bitter pill we have to swallow. PAL believes DOLE’s decision is ‘just, reasonable and humane’. Since it has the force and effect of a law, we must respect the ruling,” he said, citing the P15 billion in accumulated losses which PAL suffered over the last two years.

Barring the grant of by higher court of a temporary restraining order to be filed by the PAL Employees Association (PALEA), Bautista said PAL management plans to implement the appropriate provisions of DOLE’s order after the prescriptive period for further legal remedies has lapsed.

“By not contesting the DOLE Secretary’s decision, especially the grant of additional benefits, PAL hopes to finally implement a long delayed corporate restructuring that aims to stabilize the airline’s finances and eventually lead to an expansion and improvement of services,” he said.

Bautista stressed that the decision to spin-off was difficult but necessary. “At the end of the day, PAL wants to be remembered not for the 2,600 jobs it lost, but the more than 4,000 it saved,” he said.

While the increased benefits will bear heavily on the airline’s precarious financial position, PAL said it will do its best to pay all affected employees the modified package approved by DOLE. He then urged PALEA leaders to respect the DOLE decision and look at the bigger picture of the airline’s continued survival amid a difficult operating environment.

“Sec. Baldoz, no less, assured PALEA there will be no jobs lost in the spin off. Aside from receiving their benefits, all affected workers have the option of applying for positions in the third party service providers if they so choose,” he said.

Bautista said PAL will have to pay the affected workers 1.25 months for every year of service as retirement benefit, P50,00 in gratuity each, 100 percent of accumulated unused vacation leave, 100 percent of accumulated sick leave, medical benefits for one year, free tickets for the worker and their family members, and guarantee one-year payment based on the new rates to be given to them by the service provider.

Bautista assured PAL passengers and customers that the implementation of the spin off will not affect the flag carrier’s daily flights and other ground services.

Contrary to claims by the PALEA, Bautista said the airline is not engaging in contractualization. “The spin off means PAL will sell its In-Flight Catering, Airport Services and Call Center Reservations which will lead to the early retirement of affected rank-and-file workers. They will all receive their respective separation pay and benefits that are much more than what the Labor Code provides,” he explained.

Bautista stressed that third party service providers like PLDT e-Ventus for Call Center/Reservations is owned by PLDT subsidiary SPi while Sky Kitchen for Catering and Sky Logistics for Airport Services are both owned by Cebu-based businessman Manny Osmena. These service providers are not owned by PAL chairman Lucio Tan or any of his family members.

He said PALEA’s apprehensions on the spin off can best be allayed by referring to the actual events of the successful turn-over in 2000 of PAL’s Maintenance and Engineering Department to Lufthansa Technik Philippines (LTP), a world-class maintenance, repair and overhaul service provider.

The more than 1,300 mechanics and other skilled workers who transferred to LTP and are now enjoying fulfilling careers, can confirm that those spin off anxieties are unfounded, he said.

Ten years later, PAL was compelled to further spin off three non-core units and focus on the core business of air transport in order to survive a compendium of debilitating issues which include, among others: a $312-million loss in the last two years due to the global recession; volatile fuel prices; the US Federal Aviation Administration’s downgrade of the Philippines’ aviation safety rating to Category 2; cut throat competition from budget airlines; the previous government’s liberal grant of air traffic rights to foreign carriers, and other factors.

Bautista said PAL is the only carrier in Asia operating its own catering and ground handling service. “If we have to compete with the mega carriers in Asia and the low cost carriers in the Philippines, we have to innovate and implement this long-delayed corporate restructuring. This program is not meant to retrench but is a program for our survival, “ he said.

Hee said other company departments that can be outsourced include medical, information technology and human resources. “This is not part of the program but if given the chance, we will study and implement it,” he added. - With Mayen Jaymalin and Rudy Santos