MANILA—San Miguel Corp.’s President Ramon Ang is placing a multibillion-dollar bet that he can reinvigorate Asia’s oldest air carrier and tap into the growing buzz around the country’s potential as Southeast Asia’s next growth story.
Air travel has boomed in Southeast Asia in recent years. Driven by a population of more than 600 million people with a combined economy outstripping that of India, several carriers now cover the region and beyond, opening opportunities for faster economic growth.
But Philippine Airlines Inc. has missed out so far. Labor disputes, security problems at Manila’s airport terminals and an aging fleet have limited the historic airline’s expansion as young rivals are making hay.
Now San Miguel aims to turn the unprofitable carrier around, having bought a 49% stake and management control of the airline from Philippines businessman Lucio Tan for $500 million in April.
Mr. Ang says he plans to spend as much as $8.5 billion over the next 10 years to restore Philippine Airlines to its position as one of the region’s top carriers—and accelerate San Miguel’s transformation from a colonial-era brewer to a modern, infrastructure-and-consumer-based conglomerate.
“If we rebrand, refleet, instill strong financial discipline, and create a good relationship with our work force, then definitely, this thing will fly,” Mr. Ang says in an interview.
It won’t be easy.
Analysts say Philippine Airlines is hobbled by problems at the country’s airports. U.S. aviation authorities in 2008 stripped the Philippines of its Category 1 status and European regulators followed suit, making it impossible for the carrier to expand in both markets. Among the complaints: computerized maintenance and pilot staffing records weren’t up to international standards. In 2003 the former chief of the Philippines’ Air Transportation Office seized control of Manila’s control tower in a political protest and was shot dead by a SWAT team.
Philippine aviation authorities are working to address the problems. People in the industry say Manila could win back its Category 1 status in coming months, potentially opening up badly needed new routes to the West, but that isn’t certain.
“Category 1 is far from guaranteed, and this uncertainty clearly reduces the value of Philippine Airlines,” says a recent note from the Sydney-based Centre for Asia Pacific Aviation. The research firm expressed surprise that San Miguel struck its deal while the Philippines was under Category 2 restrictions.
Mr. Ang is drafting plans to open regional routes on profitable single-aisle aircraft to go head-to-head with Southeast Asia’s plethora of low-cost carriers.
Two important tasks: Strengthen Philippine Airlines’ budget carrier, Air Philippines Express, and win over Philippine Airlines’ employee unions, which have been locked in pay and other disputes with the airline for years.
“The flight attendants wouldn’t even look at you and wouldn’t help you put your bags up,” Mr. Ang says. “Some of the pilots would intentionally slow down.”
The airline’s established shorthand, PAL, was said in some quarters to stand for “PAL Always Late.”
“Just the fact that our group has come into the picture will give them hope that things will get better,” Mr. Ang says.
The airline’s unions say they are ready to talk and are urging the airline to reinstate 2,600 workers the company’s previous management laid off last year. Ground-crew union President Gerry Rivera says giving skilled workers their jobs back should be a central part of the carrier’s turnaround.
Some analysts worry that Mr. Ang might be blinkered by his long-standing affection for airplanes. A pilot, he subscribes to specialized aviation publications. The chairman and chief executive at San Miguel, Eduardo Cojuangco Jr., also is an avid aviator.
But there is a model for what Mr. Ang hopes to achieve across the Celebes Sea in Indonesia.
PT Garuda Indonesia also struggled for years, losing much of its domestic market to upstart low-cost carriers such as Lion Air, much as Philippine Airlines lost its position to Cebu Pacific.
Garuda responded by investing heavily in its own low-cost unit, Citilink, before beefing up its own premium-market offerings to cash in on the growing cachet of Indonesia’s fast-growing economy.
Earnings at state-controlled Garuda rose 56% last year to 805 billion rupiah ($87 million) and revenue climbed 39% to 27.16 trillion rupiah as profit at other airlines around Asia slumped.
With economists pointing to the Philippines as the potential site of a boom, Mr. Ang reckons Philippine Airlines can take a dose of Garuda’s medicine and nurse itself back to health.
Foreign direct investment is returning as wage costs rise in China. Call centers and other back-office businesses, meanwhile, generate as much foreign-currency inflow as remittances from the country’s legions of overseas workers, prompting Credit Suisse to suggest in a recent report that the Philippines could become the region’s next rising star.
“We can help support that growth by having a strong airline,” Mr. Ang says. “It can help bring more revenue to our economy and increase the sales for our other businesses—food, beer, power, everything that we do.”
He is thinking about building more airports, too. San Miguel is expanding the airstrip and facilities at Caticlan, opposite the country’s biggest tourist draw, Boracay Island. Now he is considering building a new airport near Manila, dedicated to Philippine Airlines.
“We’ve identified three banks of land where we think we can do it, and the dream is to have a terminal and our own runway and traffic control,” Mr. Ang says. “If we can do that, we’ll be world class. You’ll be surprised.”
A version of this article appeared May 7, 2012, on page B13 in some U.S. editions of The Wall Street Journal, with the headline: San Miguel Takes a Flier.
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By: James Hookway
Source: Wall Street Journal, May 6, 2012
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