PAL flies to brighter skies

Tony Lopez

Tony Lopez

What a difference an aviation safety upgrade can make.

On July 12, the day the ban on Philippine Airlines flights to Europe was lifted, the share price of PAL Holdings, Inc. climbed a stratospheric 50 percent to the day’s high of P7.35 per share, from the P4.85 per share closing on Dec. 28, 2012, the last time the stock was traded before it was suspended.

At P7.35 a share, PAL Holdings was briefly valued in mid-July at P182.54 billion, up P62.08 billion ($1.44 billion) over the company’s market value of P120.45 billion at end-2012. The stock closed on July 12 at P6.95 a share, valuing PAL Holdings at P172.6 billion, an increase of P52 billion or a 42 percent jump in less than seven months.

PAL Holdings owns about 90 percent of unlisted Philippine Airlines, Inc., Asia’s first airline. By July 19, PAL Holdings’ share price at stabilized at P5.86, giving the company a market value of P141.57 billion ($3.29 billion) despite losing P3.637 billion in its latest fiscal year 2013 ending March 31, 2013.

The P141.57 billion valuation reflects the efforts of new management headed by Philippine Airlines, Inc. President Ramon S. Ang to recast Asia’s oldest airline into one of the region’s best, in competitiveness and profitability, by modernizing its fleet, improving service, and expanding its route network globally.

To improve its margins, PAL said it will also restructure its organization, optimize flight and ground operations, and manage costs, without compromising safety and customer satisfaction.

The July 12 upgrade by Europe will allow PAL to resume flights to Paris, London, Rome and Amsterdam as early as this September The carrier can fly seven times a week to London and Paris.

In 1999, due to labor and cost problems, PAL stopped flying to Europe. After Europe raised significant safety concerns in 2009, PAL has not been able to return to Europe, until this year. Outside of Europe, PAL currently flies to 31 international destinations.

Ang thinks Europe can be a lucrative market by flying direct out of Manila, using brand new planes, and vastly improved ground and inflight service.

PAL becomes the only airline to offer direct Manila-Europe flights non-stop, a flying time of 13 hours or less.

PAL’s new Boeing 777 planes consume 30 percent less fuel. Fuel charges of P31.52 billion in the most recent fiscal year 2013 ate up 40.5 percent of the airline’s expenses. Reducing P31.52 billion by 30 percent, assuming fuel prices are constant, theoretically can bring in operating profits of P10 billion.

With PAL revenues nearly flat at P74 billion over the past three years and crude prices rising steadily during the same period, fuel now accounts up to 60 percent of revenues. So reducing the 60 percent to 40 percent and applying this ratio on the P74 billion revenues implies potential profits of P14.8 billion.

However, last week, July 18, after the initial euphoria with PAL’s resuming flights to Europe, the share price of PAL Holdings had settled at P5.70, up just 16 percent from its December price. From the July 12, 2013 closing of P6.95, the stock actually lost 18 percent in value, probably because of the price decline in the shares of San Miguel Corp..

SMC owns 49 percent of PAL. The conglomerate last week was hit by speculation about a debt bubble, thanks to an insidious report by the International Monetary Fund that discussed a possible default on its “foreign obligations and/or domestic loans” by an unnamed “highly leveraged” Philippine conglomerate.

True, the fictitious conglomerate was unnamed but the IMF report complained about the non-inclusion of liabilities from petroleum and Public-Private Partnership (PPP) projects in reckoning the fictitious conglomerate’s debt burden. Curiously, San Miguel is the only Philippine conglomerate into petroleum (with its Petron Corp. subsidiary) and PPP projects at the same time.

The speculation dragged down the share prices of both SMC and PAL. SMC President Ramon S. Ang angrily reacted to the reports lifted from the IMF Article IV report.

“We would like to clarify that the conglomerate, which was the subject of the news article that referred to an IMF report dated April as the source, was not SMC,” Ang asserted. “It is unfortunate that certain people have taken advantage of that information to fabricate and spread malicious stories and sow panic in the market to the detriment of our shareholders and the investing public, in general.”

The IMF office in Manila clarified that its report did not identify any specific conglomerate at risk of default.

For his part, Bangko Sentral Governor Amando M. Tetangco dismissed the IMF warning as generic, not targeted at any specific company.

Not-too-big-to-fail issue
In any case, Tetangco assured, loan defaults by big companies could be absorbed by the local banking system and would not lead to a credit crunch, adding “even with significant write-downs, the banks would still be able to absorb it and remain well above the minimum (capital) requirement.”

In San Miguel’s case, it is not even heavily borrowed. Under its covenant with its lender banks, the conglomerate can borrow 5.5 times its EBITDA (earnings before interest, taxes and depreciation) or P428 billion (based on EBITDA of P78 billion as of March 2013). The company’s net debt is P239 billion which is 3.06x EBITDA or P189 billion less than what its bankers have pegged as ceiling.

“We would like to clarify that the conglomerate, which was the subject of the news article that referred to an IMF report dated April as the source, was not SMC. It is unfortunate that certain people have taken advantage of that information to fabricate and spread malicious stories and sow panic in the market to the detriment of our shareholders and the investing public, in general,” SMC said in a statement given the stock exchange on July 18.
SMC has P152B cash
As of the first quarter of this year, SMC’s consolidated cash and cash equivalent stood at P152.3B while its gearing ratio, at 3.1x net debt to EBITDA, is lower than the 5.5x stipulated in its loan covenants.

In view of what he called the unjust assault on SMC’s financial reputation, SMC Chief Financial Officer Ferdinand K. Constantino declared that “Management shall hold accountable, through all possible means, individual or individuals who directly or indirectly fueled these unwarranted speculations. The Company will continue to drive value for its shareholders and exhaust every means to protect their investments.”


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  1. When I learned that PAL bought the airline from Mr. Lucio Tan, I was very pleased with the transaction, hoping that after so many years of poor services by the airline under the Lucio Tan management. However what I expected did not happen and am very disappointed. Last year I took the PAL flight to San Francisco and in the middle of the flight the aircon of the 747 conked out making it a very warm flight, their was no entertainment available making the monitor in front of my seat useless. I entertained myself with a few selection of music but the passenger in the middle of our row kept on complaining that he could not enjoy music because it was static. During my return trip things were better but still no movie. Two weeks ago, my daughter left for L.A. and she complained that what I experienced during the flight was similar to what I did last year. It is really a good feeling for the owners to make as much money as they can but at the expense of the passengers is bad management. I have experienced flying on Korean Air and Asiana and will attest that the services are much, much better overall. The only drawback is they do not have direct flights from the U.S.