SMC lost money on PAL investment

San Miguel Corp. did not make a profit on its investment in Philippine Airlines despite having turned around the moribund flag carrier during the two years when the diversified conglomerate was running the firm, SMC president Ramon S. Ang (inset) said on Monday. INQUIRER FILE PHOTOS / LEO M. SABANGAN II

San Miguel Corp. did not make a profit on its investment in Philippine Airlines (PAL) despite having turned around the moribund flag carrier during the two years when the diversified conglomerate was running the firm.

In fact, SMC president Ramon S. Ang said yesterday that the conglomerate—the country’s largest business group in terms of asset value—did not even break even on its PAL venture owing to its failure to recover its cost of funds.

“SMC lost money in this deal,” he said, breaking his silence for the first time since the airline was reacquired by tycoon Lucio Tan—its former controlling shareholder —two weeks ago.

Ang said he was willing to forego a long drawnout negotiation process with Tan because it was in danger of turning hostile, with frustration on both sides running high after a year of flip-flopping decisions by PAL’s former owner.

All told, the SMC group invested $1.36 billion in PAL—an amount Ang recovered, minus the interest that he should have charged for it over two years.

“If we fought over it, it would destroy the value of PAL,” he said, adding that adopting a hardline negotiating stance would result in a “lose-lose” situation for both sides and eventually erode the value of both tycoons’ holdings. “So I agreed to sell.”

Ang described the poor state of the airline’s finances when he assumed its presidency in 2012 after a $500-million deal with Tan gave SMC 49 percent of the airline, including management control.

He said that, on average, airlines spend 40 percent of total revenues on fuel and maintenance costs.

However, for PAL, which was saddled with older, gas-guzzling aircraft, fuel and maintenance expenses were as high as 55 percent of revenues when SMC came in. It was at this point when the new management decided to embark on a massive refleeting program and ordered a fleet of newer, more fuel-efficient planes from European plane-maker Airbus.

It was also at this point when allegations surfaced that Ang was supposedly earning commissions from PAL’s refleeting program. In response, Ang released a certification issued by Airbus upon his request to debunk the rumors.

“Both parties hereby represent and warrant that they have not paid, agreed to pay, authorized the payment of or caused to be paid, directly or indirectly in any form whatsoever any commission, percentage, contingent fee, brokerage or other similar payments of any kind, in connection with the establishment or operation of the agreement [to purchase 54 new aircraft] to any employee of the other party or to any person or entity in the other party’s country or elsewhere,” said Airbus senior vice president Cristophe Mourey in a July 23, 2012, letter to PAL.

“I don’t have the heart to make money from PAL,” Ang said, responding to allegations of profiting from aircraft orders.

Asked about the airline’s prospects going forward, Ang said it would be crucial for Tan to bring in a strategic partner to help buttress PAL’s books.

“Assuming the strategic investor would need to bring in $1 billion in equity, they would need up to $1 billion more for the airline’s working capital and to pay for aircraft deliveries in 2015,” he said. “So the new partner needs around $2 billion.”

The SMC chief said that he has effectively relinquished control of the airline since Sept. 15, describing his two-year stint at PAL’s helm as “mission accomplished.”

“We improved the image of the country overseas, we restored the airline’s profitability and we got the country taken out of the blacklist of both Europe and the US Federal Aviation Administration, with a lot of help from Airbus,” he said.