Philippine flag carer

Investment analysts were reportedly agog over San Miguel’s buying into the Philippine Airlines and its taking management control, saying it could be the best thing to happen for the country’s struggling flag carrier.

There was the publicized plan of San Miguel to inject $500 million in fresh capital into the airline. The money would not go to the owner of the airline, the Lucio Tan group. It would buy for PAL a new aircraft fleet.

That was all the information we have down here. Hardly any other detail was available to the public to serve as basis for the optimistic view in the local capital markets. Maybe the analysts knew something.

I am willing to bet my neighbor’s house that such optimism in the market relied heavily on the San Miguel track record in diversification in the past several years.

The group has long been contented as being the country’s biggest (and perhaps most profitable) food and beverage conglomerate. Starting about five years ago, San Miguel invested in other industries like mining, power distribution and generation, infrastructure and even airport operation.

The group already acquired 24 businesses, investing almost $5 billion since 2007. In fact, its latest financial statement showed that its combined revenue was equivalent to 5.4 percent of our entire economy, in terms of GDP [gross domestic product].

These investments turned out to be successful. Thus, analysts perhaps presumed that the same good fortune would hold out for San Miguel in its PAL venture.

San Miguel president and COO Ramon Ang (known as RSA in the group) must be optimistic about the PAL venture. He was said to have intimated to investment bankers that the group regarded PAL as a real business opportunity. Even to San Miguel, the $500-million investment in PAL should be a lot of money.

In the plan and estimation of San Miguel, understandably being kept as top secret in the group, the airline should recover and start to show profit with the new aircraft fleet. After all, no San Miguel venture has ever lost money.

Still, the 57-year old RSA must care for reasons other than profits for investing in PAL. My take is San Miguel took into account that the airline is still the one and only Philippine flag carrier. Its state—the service, the fleet or even financial performance—is always regarded as a reflection of the Philippines.

Thus, the PAL venture must be another San Miguel strategy to help the country polish its image as a tourism destination, which in the end should be good also for other San Miguel ventures in the tourism sector.

The group has ventured into airport operation, constructing new terminals at the Caticlan airport, which serves Boracay Island, the world-famous tourism destination here. The domestic terminal has been completed, already judged as the best in the country today.

Two years from now, or enough time for PAL to get stronger as a business, the Caticlan airport’s international terminal will be completed with the same high standards as the domestic terminal. It will be the first encounter in the Philippines by foreign visitors to Boracay, hopefully (at least for San Miguel) on board PAL aircraft.

For San Miguel, the PAL venture forms part of a basic strategy: In the tourism industry, in which the group intends to go full blast, the airline industry and airport operation go hand in hand.

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Traditionally, the most profitable route of PAL was said to be the one across the Pacific Ocean, meaning to and from the United States and Canada, in which the Philippine government, particularly the Civic Aviation Authority of the Philippines, was still having a serious problem.

From what I gathered, the new aircraft fleet of PAL was intended to serve that same route. The airline at present could not add more flights to the US, acquire new destinations such as New York or Chicago, or even change its airplanes in use for the route.

Four years ago, the US Federal Aviation Administration brought down to Category II its ratings of the Philippines. The rating, given by the FAA to all countries with airlines serving the US routes, has something to do with the government’s system in checking for the safety of airlines in the country. And the Philippine government failed the rating test.

That was four years ago, or two years under the cute administration of Gloriaetta and another two years under our leader Benigno Simeon (aka BS). The Philippine Category II rating by the FAA has not been changed.

Thus, as a result of the downgrade, PAL could not expand its operations to the US through no fault of the airline. In fact, PAL was the only local airline that obtained a certification from the International Civil Aviation Organization, or ICAO. The certification means PAL complied with the new safety standards that the organization implemented a few years ago. In other words, the FAA rating technically is not a PAL problem in itself, although it may be the problem of other local airlines that are not forced to comply with the ICAO standards by the Philippine government.

From what I gathered, San Miguel intended to help the Aquino (Part II) administration to hasten the country’s upgrading by FAA back to Category I.

For instance, PAL already invested $2 million in new computer system for CAAP to retrieve information on a particular airplane of a particular airline—on demand. This was a standard safety system demanded by the FAA.

Also, CAAP did not have qualified technical personnel to check on airline safety standards, such as the check pilots for new aircraft model like Boeing 777 series, which PAL precisely wanted to acquire for its new fleet.

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I heard that the able head of CAAP, Ramon Gutierrez, who is a former Philippine Air Force officer, had a meeting last week in Washington, DC, with representatives of ICAO and the FAA. He and his team (two other CAAP top officials) were to present their program to those outfits.

Hopefully, he would bring home some good news—something that could at least set a target date for the Philippines to get back the FAA Category I rating.

That should clear the way for the Philippine government to work on the problem in Europe. Three years ago, following the downgrading of the Philippines by the FAA, European countries blacklisted the Philippines, meaning no airline of ours could fly to those countries.

More than the lost opportunity for our airlines, the ban gave us a big black eye in the highly competitive tourism market abroad.