TO THE RESCUE LINE

a i r l i n e s

Pilotless In Hong Kong: Cathay Pacific tries to end a labor dispute

LISTEN TO HOMESPUN ADVICE from Lucio Tan. "If a thousand cows run away from a single wolf, they will be devoured one by one," the chairman, CEO and majority owner of Philippine Airlines (PAL) told Asiaweek in a rare interview. "But if they stand their ground and fight, the wolf will run away. If you're afraid from the very start, you're sure to die. However, if you're not afraid, there is still a chance for you to live." Last week, the tycoon took his stand. Manila's Securities and Exchange Commission had given him until noon Friday, June 4, to inject $200 million into PAL, which is under receivership because it cannot service $2.2 billion in debts. Tan put up $100 million and asked three state-run corporations (which own small stakes in PAL) and international investors to make up the rest. The government enterprises and the money men said no. Ninety minutes before the deadline, obscure Tan associates in Hong Kong and Manila came up with the other $100 million.

The fresh funds can keep PAL flying for the next 10 months, giving the airline air space to raise revenues and cut spending. Tan plans to trim the 8,700-strong work force, already down from nearly 13,000 last year but still seen as far too many. He wants to spin off labor-intensive divisions like ground handling and maintenance and engineering. To further improve cash flow, Tan wants his creditors to let him postpone principal repayments, although PAL will continue servicing the interest on the loans. European credit agencies have started negotiations, but the U.S. Export-Import Bank doubts the tycoon's ability to engineer a turnaround and threatens to repossess the four Boeing 747-400 jets it helped PAL buy. In keeping with his fearless cows-vs.-the-wolf stance, Tan says he would withdraw the $200 million he and his friends raised and start another airline if the Eximbank does not cooperate.

Can the tycoon revitalize PAL? "Yes, I can," he insists. But Tan, a former janitor who made a fortune in cigarettes and tobacco allegedly with the help of deposed president Ferdinand Marcos, is battling a credibility problem. The Philippine flag carrier has been losing money for the past five years, especially after Tan decided in 1996 to push a $4-billion refleeting program that bloated the company's debts. Revenues plunged in 1997 as passenger and cargo traffic fell with the onset of the Asian Crisis. Then PAL pilots went on strike, forcing the airline to shut down last September. It reopened with the help of President Joseph Estrada, whose campaign Tan helped bankroll. After his creditors rejected a rehabilitation plan, Tan stepped down as CEO in January this year and hired Regent Star Services, a consultancy formed by five former executives of Cathay Pacific, to oversee PAL's operations. The creditors were mollified - until Tan asked the expatriates to step down in April and named himself CEO once again.

Tan told Asiaweek he will terminate PAL's five-year contract with Regent, even though PAL will need to pay millions of dollars in compensation. "They have committed many violations," he claims, but refuses to elaborate. Regent chief Peter Foster denies allegations of disloyalty - media reports say Tan suspects the consultants of leaking sensitive information to Cathay. Now Tan is negotiating a three-year management contract with Lufthansa Consulting, a subsidiary of the German flag carrier, and wants Lufthansa Technik to invest in a new company that will take over PAL's maintenance and engineering division, which will service not just PAL but also other airlines.

Tan says PAL will spin off all businesses except passenger and cargo services. Like the proposed engineering venture with Lufthansa Technik, PAL will look for partners for the new companies, which will absorb some 4,000 PAL personnel. Tan has promised Estrada that no employee will become jobless. In return, Tan wants all workers to sign an agreement not to strike in the next 10 years. Some 65% of the staff, including most of the pilots, have already obliged. Each one will receive PAL shares with par value of 60,000 pesos ($1,578). If all workers sign, they will collectively own 4.4% of the airline - smaller than the 20% promised them when Estrada helped settle last year's strike. Hong Kong businessman John Pang of Top Wealth Enterprises, whom Tan describes as "a long-time friend," will own 24.5% by virtue of the $70 million in new money he put in. Unknown Manila-based Maxell Holdings and Richmark Holdings, which kicked in $30 million, will get 10.4%. Tan will hold 53.6% of PAL, down from 70%.

Because they declined to put in fresh capital, the three government-owned corporations will see their combined stake shrink to 4.3% from 14%. At one point, Finance Secretary Edgardo Espiritu hinted that the enterprises may contribute $30 million. Estrada says he decided against it. "Tan helped me a lot [in the 1998 elections], but I turned him down because it is not the policy of the government to bail out private companies," says the president. But Tan has the government's ear on other matters. Manila is reviewing the government's airline deregulation policy, which PAL blames for its diminishing market share. The Securities and Exchange Commission is also supportive. After Eximbank questioned its approval of Tan's rehabilitation plan, the regulator huffed that the bank should convert its loans into equity if it wants a direct say in running PAL. But perhaps to appease Eximbank, the SEC named Foster and two other Regent consultants as permanent PAL receivers on June 8. Says Renato Francisco, who heads the receivers' committee: "We can override the actions of the PAL board or management if these are not in accordance with the approved rehabilitation plan."

PAL is still waiting for Eximbank's next move. But Tan is already looking ahead, forecasting earnings of $60 million on revenues of $775 million in the year to March 2001. "A quitter never wins, a winner never quits," he says. Just in case, though, the tycoon is negotiating to buy 70% of Air Philippines, a domestic airline that will soon start flying international routes. A winner also makes sure he has a fallback.

With reporting by Raissa Espinosa-Robles/Manila