For love of country

When in April this year San Miguel invested $500 million for 49 percent control of our flag-carrier Philippine Airlines, the conglomerate also injected a good dose of confidence in the economy.

Already, from what I gathered, the airline recorded “positive cash flow” last month, indicating that just the prospect of fresh capital entering the airline, perhaps, even lifted the spirits of its work force, and we all know that the airline almost has been killed by labor problems over the past several years.

Now, San Miguel’s entry into PAL surprised not just a few in the business community, particularly those people—well, “critics,” mostly—closely watching the performance of San Miguel president and COO Ramon S. Ang, known in business as RSA, who only a few days ago bought a huge chunk of San Miguel shares to become the single biggest stockholder of the conglomerate.

They were saying that for some years now, the airline industry worldwide has been a tough business—tough even for the man that, in the past 14 years or so, steered a financially shaky San Miguel (back in the late 1990s), bleeding profusely as it was from huge investments in breweries in some godforsaken remote areas in China, to become one of the country’s most profitable companies and aggressive investors today.

Take note: The airline industry worldwide posted $1 billion in losses during the first quarter of 2012, due mainly to the sky-high prices of oil. Really, how can San Miguel make a killing in its PAL investments? To think, financial markets became used to San Miguel making a killing in its acquisitions here and abroad. PAL, as an investment, did not seem to promise such a bonanza.

But such intangibles as business confidence and national hope, precisely, were the main goals in the business strategy behind the San Miguel entry into PAL. The PAL investment—at least to RSA as the top executive of San Miguel—was not meant to bring in loads of cash, although San Miguel was confident it could make a little profit out of it. Reports abroad for instance quoted RSA as saying that San Miguel’s efforts to strengthen PAL would help boost economic growth in the Philippines. In a way, San Miguel investment in PAL is something for the country.

There, like it or not, the flag-carrier is one of the leading economic indicators in the country. It is also the best—the most effective—promoter of tourism. More travelers simply mean more business activities, which means more travelers, and so on, ad infinitum.

In other words RSA—who by the way is a licensed pilot himself—must know what he is doing when he caused San Miguel to invest in PAL, even committing some $8.5 billion in additional investment in the airline over the next 10 years.

According to think tanks in business, the Philippines must concentrate on four main economic sectors, namely tourism, agriculture, mining and infrastructure. All those areas, by the way, force the government to spend a lot of capital—that is, all of them except mining, which is the sector that promises huge “royalties” and tax revenues for the government.

Anyway, most financial institutions abroad are already looking at the Philippines as the next Asian country due for an economic boom. The country has such a big potential for the moment. Reports said that RSA found our good economic prospects right now as the “right timing” for PAL. It is a good time for the airline to make a big push towards regaining its status as one of the leading airlines in the region. His thinking already had basis in the experience of the Indonesian national airline Garuda, which only a few years ago turned around in consonance with the fast growth of the economy of that country.

Internally, from what I gathered, PAL already started a strict corporate regimen towards efficiency. Volumes upon volumes of analysis, focusing on reasons why international airlines lost tons of money in the past few years, point to the high cost of fuel. For PAL, fuel accounted for close to 50 percent of its total operating costs.

Surely there is nothing that PAL management, even with RSA at the helm, can do to bring down the international price of oil. The airline, thus, wants to concentrate on “best practices” in fuel management. The airline, for instance, has always been lenient regarding “excess luggage” on its routes across the Pacific Ocean, which naturally has needed more fuel to carry and, in the end, leading to higher costs to PAL, as heavier load simply means more fuel burned.

Moreover, it is said that the new ownership structure in the airline can plug some revenue leakages, since the majority owner, Lucio Tan (a.k.a. Kapitan) has been known to be too kind and generous to a fault, even to the riding customers of PAL, including of course politicians and government officials.

Thus, under the RSA business strategy for PAL, it seems that the airline must concentrate on four areas: changing its image (no more “late” arrivals for instance), financial discipline (stop the leakages), labor relationship (no intentional work slowdowns and such), and new fleet of aircraft.

On the last item, the aircraft model may have a lot to do with fuel efficiency. My info is that one foreign airline even offered to sell to PAL its new fleet of huge airplanes—at an attractive 40 percent discount. It should have been a tempting offer, since the airplane model recently became a “symbol of supremacy” in the airline industry in Asia. PAL turned down the offer for one and only reason: the aircraft model was a fuel monster.

By the way, in case you missed the reports, it was said that another San Miguel company, Petron, just signed a six-month contract to supply the fuel requirements of Malaysia Airlines for its fleet of Airbus A380 airplanes. It seems that Petron is now reaping the rewards of its promotion campaign in Malaysia, where it opened gas stations in line with its acquisition of more than 500 stations from US-based oil companies in Malaysia.

Of course, chaos in our airports also contributes to the high fuel costs of all our airlines. Thus the CAAP—the Civil Aviation Authority of the Philippines—is putting in place a new arrival system at the NAIA: If the airline has no landing slot, it cannot leave, as yet, its airport of origin. No more fuel-burning waiting time up in the air for landing at the NAIA!

San Miguel for its part already started to invest in airport operation about two years ago, by expanding the airstrip and facilities at Caticlan airport, which served the most promoted tourist spot in the country, none other than Boracay. Aside from polishing the country’s tourism image, the San Miguel investment in the Caticlan airport perhaps presaged its entry into the airline business.

From what I gathered, RSA wants to build a new airport—yes, both runway and terminal—near Metro Manila for the exclusive use of PAL. Based on his track record for San Miguel, he just may succeed.