PAL investing in airline venture in Cambodia

Flag carrier Philippine Airlines has struck a deal to help set up a new airline in Cambodia in partnership with local tycoon Okhna Kith Meng. To many, the deal shows the new face of Cambodian capitalism.

In a disclosure to the Philippine Stock Exchange, San Miguel Corp., which holds significant stake in PAL, said a joint venture with Kith Meng was formed to create Cambodia Airlines, in which PAL will control a 49-percent interest.

This development highlights a landmark initiative by a Philippine conglomerate to make an overseas investment in the highly competitive regional aviation sector. It also marks a bold attempt by PAL, Asia’s oldest commercial airline, to incubate a new airline in a new market that is among the least developed in the region but which enjoys a rapid pace of growth.

“Cambodia is SMC’s investment focus and the government of Prime Minister Hun Sen is good,” SMC president Ramon Ang said in a text message, when asked about the rationale for this investment.

Hun Sen is widely credited for bringing stability and economic growth to Cambodia since consolidating power after the 1997 coup. With peace and security restored after almost three decades of conflict, Cambodia posted rapid growth and has benefited from large capital inflows, both official development assistance and private capital, according to an Asian Development Bank report.

Ang, who is also chief executive officer of PAL, said the group had yet to finalize the budget for the fresh investment in Cambodia. Ang recently flew to Cambodia to seal the deal with Kith Meng, whose group controls leading television and telecommunications networks in Cambodia and also has interests in hotels, banking, insurance and education.

Industry sources said PAL’s expansion to Cambodia would allow the flag carrier to better maximize its assets—particularly its fleet.

“SMC may become an IndoChina play,” said Jose Mari Lacson, head of research at local stock brokerage Campos Lanuza & Co.

Lacson said Cambodia was a small market to begin with but noted that “the main advantage is that it is fast growing and there is a lot of interest in that area these days.”

After relegating the bulk of its domestic operations to affiliate Air Philippines—now operating as PAL Express—the Philippine flag carrier is banking on the expansion of its international operations to boost its operations.

However, the Center for Asia Pacific Aviation (Capa), a research firm, said PAL was facing headwinds in the form of stiff competition from other airlines both locally and overseas, especially from low-cost carriers.

“The group’s new focus on the full-service end of the market could hinder its ability to expand internationally as LCCs have gradually been increasing their share of the Philippine international market,” CAPA said in a report published this week.

Citing data from the Civil Aeronautics Board, Capa said PAL had seen its share of the Philippine international passenger market slip from 27.5 percent in 2010 to 24.9 percent in 2011 and 23.6 percent in 2012. This was despite the fact that 58 percent of PAL’s seats were already reserved for international flights, Capa said.

It added that Cebu Pacific, an LCC owned by the Gokongwei family, was already ahead of PAL in regional destinations. Cebu Pacific currently has a 28- percent share of seat capacity in the Philippines-Southeast Asia international market compared to the PAL group’s 23 percent.