Government News Analysis

Air-debt outrage

Lucio Tan of Philippine Airlines

Earlier this month, Lucio Tan (photo) – chairman and chief executive of Philippine Airlines (PAL) – told the media that, at 83, “My wish now is for an easy, easy life”. That wish, however, may have to wait; PAL’s been flying through some turbulence recently with accumulated net losses for the past two quarters hitting PHP1.63 billion. Now, to add to those woes, even darker storm clouds have gathered to disrupt the flag carrier’s flight plans.

The Department of Transport (DOTr) has given PAL 30 days to pay unpaid bills to the tune of nearly PHP7 billion. In addition, it’s dismissed the company’s offer of seeking to pay off its arrears in seven years. According to the DOTr: “All such request have been denied”. Furthermore, in a letter to PAL it said that unless “full payment” is made “appropriate legal action [will be taken] to protect the interest of the government”.

While higher fuel costs and increases in aircraft-leasing charges were largely responsible for the January to June deficits, the big bill comprises PHP322,122,275 – due to the Manila International Airport Authority (MIAA) for navigational and other fees – and PHP6,594,562,560 for runway charges and other services provided by the Civil Aviation Authority of the Philippines (CAAP). The MIAA and the CAAP are attached agencies of the Transport Department.

But PAL’s bumpy flight doesn’t end there. To make matters worse, on Tuesday, Philippine President Rodrigo Duterte entered the air-traffic-control tower and told Tan that he has just 10 days in which to settle his debts or he’ll close down Terminal 2 at the Ninoy Aquino International Airport in Manila – the terminal which PAL has had the exclusive use of since 1999. The only other airline operating from there is PAL’s budget-travel domestic stable mate, PAL Express.

If that happens, PAL would effectively be grounded. And the timing couldn’t be worse. For one thing it would miss out on a tourism surge that’s seen 3.36 million arrivals in the first half of the year – a 13% leap from the same period last year.

Secondly, right now PAL is seeking to lure an investment dollars. In August, Jaime Bautista, the president of PAL Holdings – PAL’s listed parent – announced that the company was in talks with a strategic foreign investor and that a deal was expected by the year’s end.

But given the company’s accumulated debt – and more significantly, its less-than-affable relationship with the DOTr, the country’s air-transport regulator; as well as the country’s president – the carrier’s immediate future must be in some doubt. And a potential investor will be heavily factoring all that negative data into any offer. If indeed there is one given the current climate.

Tan, with US$5.84 billion, the 278th richest person in the world according to the 2017 Bloomberg Billionaires Index – and the 4th wealthiest person in the Philippines on this year’s rich list put out by Fortune magazine – has been struggling to make PAL profitable for years.

He’s made big efforts, however. The company’s restructured its capital; reconfigured its fleet; expanded its routes – it resumed its daily Manila-Kuala Lumpur service in June after a lapse of four years; and brought its fleet strength up to 81 aircraft, operating 777-300ERs, A340-300s, A330-300s, A321s and A320s. But with all that, on revenues of PHP116.6 billion last year, it only posted a profit of PHP3.5 billion. As Tan has wryly explained: “Airlines are a very competitive business”.

And they are, but if you don’t pay your bills to the government that issues the licence to operate – and provides the facilities for that operation – you’ll be out of business. But how likely is that really?

Certainly, we think it’s fair to say Duterte is no fan of Tan. He turned down an offer of campaign contributions from the tycoon in the closing stages of last year’s presidential election run. He said later that he didn’t want to feel beholden to large donors, but also he was concerned that PAL was using government airports and not paying its bills. He also had misgivings about PAL’s tax liabilities.

And so, addressing the Philippine Constitution Association at the Manila Hotel on Tuesday – it was the association’s 56th birthday – the president seemed emphatic. Issuing Tan with a reduced 10-day ultimatum he said this: “If you don’t pay it, then I’ll close [the airport]. We won’t have an airport. So What? Pay it … I do not mind. If we sink, we sink … We have to enforce the law … There’s nothing I can do … The law is the law. It is the law”.

The only problem with that is, while it would certainly deliver a very serious body blow to PAL – losses would run into billions of pesos resulting from lost ticket sales, a mounting leasing bill, and spiralling ground payments while aircraft are parked up in Manila – it will also create massive travel chaos to and from the capital. Tourism and business travel would be heavily disrupted, incurring heavy economic losses.

From its terminal PAL services routes to North America, Europe, the Middle East, Asia and Oceania, while PAL Express operates flights to airports across the archipelago. Between them, daily, they handle around 22,000 passengers.

In short, closing down Terminal 2 – the Centennial Terminal – would damage the economy and provide a very unhelpful optic at a time when the Philippines is showing impressive economic growth and attracting increased investment from overseas and greater tourist numbers. Furthermore, that plan doesn’t have an exit strategy for the government.

There’s no question that PAL should be made to pay its bills and certainly, as a remedy of last resort, the government would be well within its rights to put PAL into receivership for failing to meet its financial obligations. It can also distrain its assets which is what legal recourse provides for anyway.

This debt, however, has been accumulated over years; long before this administration set up shop in Manila. Nearly PHP7 billion worth of unpaid bills for the country’s flag carrier is an outrage and nothing short of a scandal – though in Philippine terms perhaps not a huge one.

It’s certainly not in the same league as the 2013 pork-barrel scam in which a number of the country’s legislators pocketed PHP10 billion intended for projects in their constituencies; or the US$81 million hacked from Bangladesh’s central bank which found its way into the Philippines’ casino network last year. Nor does it come close to the 2008 defrauding of investors to the tune of US$250 million in the Performance Investment Products Corp’s ponzi scheme; or the 2013 Aman Futures pyramid scam which relieved some 15,000 Filipinos of US$295 million.

But it’s still a scandal and it’s yet another legacy problem which Duterte’s been left to deal with – another of those all-too-familiar cozy marriages of politics and business where blind eyes are turned and business goes on as usual. And that’s why Duterte is determined to end it.

The irony is though, that while PAL seems to be struggling to settle its debts of PHP7 billion, in late August Bautista announced that his airline was preparing a proposal, which it would be submitting to the DOTr, to build a brand new PHP20 billion passenger terminal at the side of Terminal 2.

The Terminal 2 Annex, in which PAL would inject capital, would sit on an adjacent 16-hectare site which – with the government’s assistance – it hoped to lease. He said that this new facility would increase the airport’s overall capacity by between 12 and 15 million passengers a year.

So let’s see if we’ve got that right. PAL is looking to build a brand spanking new terminal extension – presumably again for its exclusive use – and will bank roll some part of that; and yet it can’t find around one third of the new terminal’s build-cost to pay off its debt. Meanwhile, as it continues to stonewall and deny the government the money it’s owed, it’s seeking the government’s help to boost its business by facilitating a land lease on its behalf.

We don’t see that getting off the ground given the present landscape; but if Lucio Tan manages somehow to pull it off he’ll certainly have earned “an easy, easy life”.

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