MAY 12, 2000 VOL. 26 NO. 18 | SEARCH ASIAWEEK

Edwin Tuyay for Asiaweek Stormy Skies: PAL broke even last year, but its woes aren't over

Tan's New Flight Plan
The tycoon may want an aviation empire beyond Philippine Airlines
By RAISSA ROBLES Manila

Lucio Tan has not had a smooth flight in the aviation business. Since buying into Philippine Airlines (PAL) in 1992, the beer and tobacco tycoon has fought non-stop dogfights with rival investors, government officials, unions and creditors while suffering year after year of losses. So when he said last month that he wanted to sell the flag carrier, which is groaning under debts of $2.24 billion, was he grounding himself?

Not quite. At the same time, Tan's MacroAsia Corp. is rapidly expanding its airline service business, partly by acquiring operations from PAL. And Tan has ce-mented his control over the country's second-largest carrier, Air Philippines, which is inching toward starting international services. Tan may want out of PAL, but far from fleeing the skies, "El Kapitan" seems to be charting a new and more profitable flight path. "My personal opinion is," says an aviation insider, "he wants to control the industry."

PAL broke even in the fiscal year ended last March for the first time in six years, says Avelino Zapanta, the airline's president, but Tan has had enough of turbulence. The last few years have been especially rough, with the debt-laden PAL, driven to the brink by a pilots' strike, briefly suspending operations in Septem-ber 1998 before embarking on a drastic cost-cutting and rehabilitation drive. And after years of frosty relations with previous administrations, his close ties with President Joseph Estrada opened him up to constant charges of cronyism. Now he wants to end the talk and the headaches. Tan says that he is willing to sell control of PAL for $800 million and that he is holding talks with three airlines, including German carrier. Lufthansa. Zapanta says Tan would have gotten out earlier, if he could have. "He wanted to cut his losses and really run away, particularly when PAL closed down, except [President Estrada] twisted his arm to revive the company," Zapanta says. "Who could refuse the president of the republic?"

But PAL's woes opened the door to other opportunities for Tan. In June 1998, just after the start of the pilot's strike, PAL sold its 70% stake in airline services firm MacroAsia to Tan-controlled companies. Analysts then applauded the move as a way for PAL to raise much needed cash, even though Tan paid a 25% discount to MacroAsia's traded share price. The sleepy airline services company took off after the tycoon decided to close PAL that September when talks with unions broke down. MacroAsia's new inflight catering unit swung into action, inviting airlines that PAL supplied in Manila to switch. Within days, MacroAsia went from two clients (Air Macau and Singapore Airlines) to nine with the addition of Canadian, China Southern, Emirates, Northwest Airlines, Lufthansa, Pakistan Airlines and Qantas. Saudi and Cathay Pacific later followed suit. MacroAsia documents state: "Total revenue soared by 156% to 217 million pesos in 1998, primarily due to the start of commercial operations of MacroAsia Eurest Catering Services in September 1998."

PAL's closure also gave a kick start to MacroAsia's ground handling unit. Even after PAL resumed operations, instead of squeezing out the upstart, it leased equipment to MacroAsia. Today, the latter has 17% of the airline services business in Manila, cutting PAL's share to 73% (rival Manila International Airport Services Corp. has 19%), and it is poised to get more. In March this year, a joint venture of MacroAsia and Lufthansa Technik, a unit of the German airline and one of the world's leading aircraft engineering concerns, clinched a deal to buy PAL's engineering and maintenance division for $48 million and to maintain the Philippine carrier's planes for 10 years. More recently, MacroAsia's properties arm won permission to run a special economic zone inside Manila's international airport, where the PAL Technical Center is located. The zone will give tax perks to businesses providing maintenance, repair and overhaul services to domestic and foreign airlines.

Buckle Your Seatbelts 1992 PAL privatized. Lucio Tan a hidden shareholder 1993 Tan asserts control of PAL 1996 Tan launches $4 billion expansion plan, sharply boosting the airline's costs and debts 1997 PAL buys 70% of airline services firm MacroAsia Corp. 1998 June: PAL pilots go on strike. PAL sells MacroAsia to Tan September: PAL shuts down for 2 week. MacroAsia takes over part of PAL's catering and groundhandling business 1999 March: Tan takes control of Air Philippines June: SEC appoints permanent rehabilitation receiver for PAL 2000 March: MacroAsia and Lufthansa buy PAL's maintenance arm April: Tan says he wants to sell PAL. MacroAsia gets okay to operate special economic zone in Manila international airport

Given that Tan controls both PAL and MacroAsia, all these deals between the two have raised some eyebrows. PAL is under government receivership, so sales of assets must be approved by officials. When MacroAsia and Lufthansa Technik first announced plans to take over PAL's engineering division last year, the U.S. Export-Import Bank, which accounts for 16% of PAL's debts, demanded that officials conduct a "fair and open" auction process, complaining that clos-ed-door negotiations favored Tan. However, Renato Francisco, head of the Permanent Re-habilitation Receiver overseeing PAL, says creditors were furnished copies of relevant documents and "have not raised any objections." The deal has also been okayed by the Securities and Exchange Commission (SEC). PAL president Zapanta adds that the sale of non-core businesses to raise cash and allow the airline to focus on its primary operations is an essential part of its rehabilitation plan, supported by regulators and creditors.

MacroAsia not only allows Tan to seemingly cherrypick PAL's profitable assets, it also enables him to undercut his nemesis at the airline - the union. When MacroAsia and Lufthansa Technik take over PAL's engineering division, they will rehire most of the unit's 1,600 employees, which will reduce the ranks of the 5,000-strong Philippine Airlines Employees Association by the same number. PALEA national secretary Isagani Dawal slams the deal as "a ploy to bust the union." He fears the next step will be to spin off PAL's ground-handling and catering operations, taking away another 1,400 employees. Zapanta denies the union-busting charge, and adds he has no plans to sell ground-handling and catering, although the rehabilitation plan does envision such a move. He also points out that PAL could not afford the investment needed to upgrade the division's facilities and skills. MacroAsia, on the other hand just raised $13 million in a stock rights offer to help pay its share of the deal.

It should be noted that MacroAsia is a growing business in its own right. Its chairman is the respected Makati businessman Washington SyCip. (Tan's son Lucio Jr. is president.) The clearest sign of its prospects can be seen by its partnership with world-class players like Lufthansa Technik for engineering and maintenance, Odgen Aviation of the Netherlands for ground handling, and Eurest International of Britain for inflight catering. It is even talking with U.S. database giant Oracle Corp. about an online venture. Wee Ah Kee, the company's chief operating officer, says Lufthansa Technik plans to make its venture with MacroAsia, due to start operation in June, one of the German firm's 12 global service hubs. Asked if its link to the controversial Tan is a liability, Wee says: "We've always been cast in a negative light. Our board directed us that we should just focus on our objectives."

But Tan's history and secretive style inevitably draw critics. He embarked on the road to riches by winning a tobacco monopoly under the late president Ferdi-nand Marcos. After the dictator's fall, Tan was out of favor with Manila, but he was invited to join the privatization of PAL as a hidden financier by Antonio Cojuangco, who did not have enough cash to do the deal. After falling out with Cojuangco in 1993, Tan claimed control of PAL, but his stake remains blurred behind nominees and subsidiaries - press reports peg it at anything from 53.6% to over 90% but usually settle around 70%. Similarly, his name does not appear on MacroAsia's list of owners, although receiver head Francisco says he has been told that Tan controls some 70%. His stake in Air Philippines is also unknown, but a source close to the airline's founder, plastics magnate William Gatchalian, confirms that Tan has taken the helm. Critics complain that the number and obscurity of Tan's holdings make it difficult to see where his interests lie. Friends call him simply an astute businessman.

Tan's friendship with President Estrada has also been a lightning rod for both men, with many accusations of official favoritism. Example: After Tan complained that Taiwan airlines were poaching PAL passengers last year, the Phil-ippines suspended its air services agreement with the island. Now Tan says he is tired of being called a crony. Besides PAL, he has agreed to sell his 46% stake in Philippine National Bank (PNB) that he quietly amassed last year, jointly with the government's 30% stake. That won him plaudits from the presidential palace, even though the revelation that Tan had ac-quired a controlling position in PNB had nearly scuttled the government's planned privatization of its stake. (The joint sale may get Tan a better price as well.) There are concerns that spinning off PAL's profitable units undermines its survivability and salability. But a source close to the engineering division deal says it was all part of a strategy to make "a lean airline, one with fewer employees, one that can operate without too much fat and be more profitable" - and more attractive to a potential buyer. Whatever. The one certainty is, out of the wreckage of PAL, Lucio Tan is taking off for bluer skies.

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