THE TURBULENT FLIGHT OF THE FLAG CARRIER OF THE PHILIPPINES

Introduction (History and Company Background)

● History
The Philippine Aerial Taxi Co. (PATCO) was the
predecessor company of Philippine Airline founded in
1931 established by mining magnate Emmanuel N.
Bachrach in December of 1930, making it Asia’s oldest
scheduled carrier still in operation. Andres Soriano and
former senator Ramón J. Fernández acquired the
franchise of Philippine Aerial Taxi Company, Inc. and
renamed Philippine Airways then to Philippine
Airlines that we know today.

● Timeline of ownership
Philippine Airlines, Inc. was handled by different presidents and
management throughout the ages. In 1941, the general
manager was Andres Soriano, Jr. together with other
businessmen with 500,000.00 capitalization. In the same year, the Philippine government
invested in PAL through Rubicon. In 1946, the president of PAL was Andres Soriano, Sr. During
this year, with Trans World Airlines a deal was made: 2 million investment for 28% equity
interest. In 1965, Benigno Toda, Jr. acquired a majority stake of PAL through Rubicon with 75%
interest. In 1977, PAL was re-nationalized by the Philippine government with the Government
Service Insurance System (GSIS) having 92% interest. In 1979 to 1986, the president of PAL
was Roman Cruz. After Roman Cruz resigned, President of the Philippine Cory Aquino
appointed Dante Santos as PAL's president. In 1992, Carlos G. Doguez was elected as PAL's
president and the government sold its 67% shares of PAL to PR holdings. In 1995, Jose Antonio
Garcia was appointed as PAL's president and Lucio Tan became the new chairman and CEO. In
1998, the Security and Exchange Commission approved the PAL's rehabilitation plan with Lucio
Tan infusing 200 million dollars capital. In 2004, the appointed president was Jaime Bautista. In
2007, the PAL shares owned by six holding companies were acquired by PAL Holdings, Inc. this
includes the PR holdings and PAL shares owned by Lucio Tan and his group. In 2012, Ramon
Ang was appointed PAL's president. During this year, San Miguel Corporation Invested 500
million dollars in PAL for 49% stake. In 2014, Jaime Bautista was re-appointed as PAL's
president and Lucio Tan bought again the SMC's interest in PAL amounting to 1.36 billion
dollars. In 2019, ANA holdings, Inc. invested 95 billion million dollars for a 9.5% stake in PAL.

Point of View
Shareholders

Case Background
The Case Background includes significant events that occurred in PAL’s management.
● In 1996 PAL went on an aggressive expansion, with an ambitious US$4 billion
modernization and refleeting program with the goal of making PAL one of Asia’s best
 airlines in 3 years. PAL acquired 36 aircrafts from Airbus and Boeing between 1996 and
1999. PAL’s system and procedures were also revised, rationalized and modernized.
Along with this, PAL hired numerous employees.
● In 1995 President Fidel V. Ramos issued the Executive Order No. 219 which ended
PAL’s monopoly of the air transportation in the Philippines. This compounded the
problems of PAL due to growing competition in the Philippine market. In 1996 Cebu Air,
Inc. (also known as Cebu Pacific) became one of PAL’s emerging competition in the
industry since it is considered a low-cost carrier airline.
● In 1997 PAL was adversely affected by the Asian Financial Crisis when the refleeting
program was halfway through, This led to massive lay-offs, disputes between PAL and
employee’s union and in 1998 PAL went through a complete shutdown for fourteen days.
Due to these events PAL in 1997 incurred losses of P 2.5 billion and in 1998 P 8.08
billion loss.
● On 1998 of December, PAL submitted a rehabilitation plan to SEC that comprised a
business plan and revised financial restructuring plan. Due to this, PAL’s net income was
$44.2 million in its first year of rehabilitation in 2000, breaking the string of some six
years of heavy losses. PAL earned $419 million and $295 million in the next two years
2002 and 2003, respectively.
● Unfortunately, from 2008 to 2010 PAL suffered losses again due to the following:
○ The US Aviation Administration downgraded the Philippine’s aviation status to
category 2, preventing PAL’s expansion in US
○ EU banned Philippine Carriers
○ The height of the Sub-Prime Crisis in the US
○ Fuel prices skyrocketed, demand decline and competition increased
○ In July 2010, 25 PAL Pilots resigned and numerous disputes with other staffs
which DOLE approved the lay-off of 2600 employees
○ The entire global airline industry was adversely affected by the 2008 global
financial crisis due to increase in fuel costs and lower demand
○ PAL suffered $297.8 million net loss in the fiscal year 2008 - 2009 and a net loss
of $ 14.3 million in 2009 - 2010
● Subsequently in 2013, Ramon Ang embarked on a massive refleeting strategy - $9.5
billion and acquisition of 100 new aircrafts, SMC also reported advances close to $1
billion, Ang also purchased one spare Rolls Royce engine for every five airplanes worth
$16 million each. Ang also planned expansion in international network - Europe and
North America and in 2013, negotiated with CAmbodia’s hotel and telecommunications
empire to revive Royal Group’s Cambodia Airlines and in the end the deal did not push
through.
● In 2014 Lucio Tan bought back PAL from SMC, regaining management control, the
reasons for which are:
○ SMC started taking business away from PAL affiliates
○ Tan losing his most trusted employees
○ Issues on fuel-supply arrangement with SMC subsidiary - Petron
○ Too many aircrafts released
○ LAstly, Ang was collecting commissions from the refleeting which he denied.
 ● Due to these problems in management experienced by PAL there were numerous
attempts in order to improve PAL’s management. There were remedial measures taken
by the new Board and the Executive Team which revised Ramon Ang’s business plan
with regards to Destinations/Routes and Aircraft Orders. And in 2019 ANA Holdings,
Inc., the parent of All Nippon Airways, invested USD $ 95 million for a 9.5% stake in PAL
and with the entry of ANA, their collaboration with PAL can help improve PAL’s overall
management and operations.

Point of View
The point of view that the group has taken is that of the shareholders/management of the
company.

Problem Statement
How did the numerous transfer of ownership and ownership structure affect PAL’s indeterminate
present condition?

Analysis
The case has stated that shifts in controlling interest have impacted the airline’s strategic
directions and financial performance. The following factors have been the main problems
encountered. (1) Lack of Clear Vision and Strategic Plan (2) Lack of destination flights and
proper fleet management, and (3) Complicated ownership structure and its frequent change. In
our case we looked into relating the presented data in relation to the OECD Principles of
Corporate Governance, as it were the principles generally followed by top countries, which the
Philippines would like to emulate.

OECD Principles of Corporate Governance

PRINCIPLE NARRATIVE IN RELATION TO PAL

Ensuring the The corporate governance It is clear that efficiency was not prioritized from
basis for an framework should the start and several business decisions have
effective promote transparent and compounded and supported this relation.
corporate efficient markets, be ● Privatization of PAL having a
governance consistent with the rule of ‘mismatched fleet’.
framework law, and clearly articulate ● Aggressive refleeting program which
the division of was very much vulnerable and inflexible
responsibilities among to regulatory changes.
different supervisory, ● A number of labor disputes.
regulatory, and ● Downgraded aviation status
enforcement authorities. ● “If you don’t use them, you’re wasting
millions...”

The rights of The corporate governance In relation to PAL, there may be excessive
shareholders framework should protect protection and prioritization with regards to
and key and facilitate the exercise shareholders which compromised several
ownership of shareholders’ rights. business processes and decisions made.
functions Moreover, as we could observe most of the
shares and rights were generally held by a
handful of people that are technically working
under the same company/group of companies.
This is irrefutable during that time as most of the
population were poor and the economy itself
was young and was recovering after the War.
But applied today this shareholder structure
translates to lack of consideration to improve
other services so long as profits and
shareholder’s share were returning
investments.

The equitable The corporate governance The inherent oligopolistic nature of Philippine’s
treatment of framework should ensure top echelon has been the dominant culture of
shareholders the equitable treatment of the company. This resulted in under-deliberated
all shareholders, including business decisions which consequently only
minority and foreign benefited those majority shareholders and their
shareholders. All allies. Like the aggressive refleeting program
shareholders should have which was vulnerable and inflexible to
the opportunity to obtain regulatory changes such that of the ending of
effective redress for Airspace monopoly. Another example is the
violation of their rights. Royal Group’s Cambodia failed consolidation
deal.

This hopefully would change as some names

have been cited to invest in PAL, namely ANA.

The role of The corporate governance The previous layoffs, in 1997 and 2010, and
stakeholders framework should strikes that followed suit relates to lack of
in corporate recognize the rights of consideration and recognition for the rights of
governance stakeholders established stakeholders. Though it may have been due to
by law or through mutual the financial crisis that occured. It was
agreements and compounded by the inefficient decisions and
encourage active inability to anticipate external risks such as
cooperation between ending of airspace monopoly and the
corporations and aggressive modernization without adequate
stakeholders in creating plan/consideration for other factors (airline
wealth, jobs, and the ratings, flight availability, human resource
sustainability of financially availability).
sound enterprises.
Currently Philippine Airlines has their own
training centers and university partners to deal
with the human resource. Also in 2019, PAL will
increase its flights to Toronto, Los Angeles, San
Francisco, Bangkok, and some Australian
Cities.

Disclosure and The corporate governance GIven that PAL has been a nationalized
transparency framework should ensure company for quite some time one could safely
 that timely and accurate assumed that their disclosure and transparency
disclosure is made on all were accurate. However, several unreliable
material matters regarding circumstances were given in the case which led
the corporation, including to the reported rampant corruption in the
the financial situation, company.
performance, ownership, ● Ramon Ang’s refleeting strategy which
and governance of the he denied collecting commission.
company ● Royal Group’s Cambodia failed
consolidation deal.
● Issue of internal thief of parts and fuels
and dubious dealing from its various
administration.

The The corporate governance The series of re-nationalization and

responsibilities framework should ensure re-privatization has definitely affected the
of the board the strategic guidance of company’s effective monitoring and
the company, the effective accountability to the shareholders. Given that
monitoring of majority of the PAL’s board were a handful of
management by the people generally working on the same group of
board, and the board’s companies. Which results to lack of opposition
accountability to the on several decision due to inequality in the
company and the power and position of the board members and
shareholders. their tendency to follow the status quo.

Unfortunately, as PAL was recovering from the previous change of management and
privatization, the sudden halt of global air travel due to COVID-19 pandemic has dealt a heavy
blow to the company which led to filing for Chapter 11 bankruptcy protection in the US.

Recommendations
In order to ensure a solid foundation for the corporate governance framework, PAL
should prioritize the improvement of its efficiency and effectiveness by setting up a restructured
and reviewed corporate governance framework, which includes contingency plans for
unforeseen circumstances, namely financial, economic and health crises, and regulatory
changes. This would not only mitigate the challenges brought by these circumstances, but also
provide a sound base in case of detrimental effects undergone by the company. Furthermore,
labor policies should also be addressed, especially in light of the COVID-19 pandemic, such as
prioritizing the safety and wellbeing of employees, and the appropriate compensation, benefits,
and incentives, as well as compliance with the Department of Labor and Employment (DOLE).
Moreover, the company should also continue to fulfill the modifications on the aircraft orders,
and review and approve alternatives to cancel, sublease, or sell old aircraft models (e.g. Boeing
757, A320s, and A340s to not only address the influx of aircraft models, but also the
unnecessary costs.

On the other hand, the company should control its excessive prioritization of the
shareholders that compromises the operations, procedures, standards, and overall business
processes, but still fulfill the duty to protect and uphold the rights of the shareholders and key
ownership functions. With this in mind, the company should also honor the equitable treatment
of shareholders by eliminating or reducing the oligarchy found in the members of the board,
which affects the objectivity and integrity of decision making through prejudices and
unwarranted influences of family members or relatives with higher position and power in the
company. As such, this would also promote fair, valid, and substantial decision making for the
betterment of the company. Furthermore, the responsibilities of the board should also be given
importance, specifically adequate and well-grounded planning and considerations of company
goals, objectives, and strategies, as well as monitor and evaluate their achievement.
Meanwhile, the company should implement and apply the principle of checks and balances in
order to mitigate and prevent corruption, which has happened multiple times in the PAL’s history,
where full disclosure and transparency are exercised by the company. Furthermore, the
company should also diversify its ownership structure by selling some of the stakes to foreign
investors, similar to what happened in the deal with All Nippon Airways Co., Ltd (ANA). These
would also avoid the concentration of control and power, as well as the constantly conflicting
decisions/business plans, which hinder the company in implementing the necessary and
appropriate business processes and decisions.

Lastly, PAL has outlined its Recovery Plan last September 3, 2021 that mainly focuses
on its voluntary decision to financially structure the company under the U.S. Chapter 11, which
is also a part of a set of major agreements reached by PAL with substantially all of the
stakeholders ("Philippine Airlines Recovery Plan", 2021). This aims to enable PAL to start with
fresh capital, lower its outstanding debts, and serve as an additional foundation to the
company’s future. Despite this Recovery Plan, PAL will continue to increase the lower quantity
of domestic and international flights due to the pandemic as travel restrictions ease.
Furthermore, they will continue to fly and serve its customers to the best ability and continue to
help the customers fly safer and more conveniently, because of its adherence to health and
safety protocols. In conclusion, I recommend PAL to continue to execute its Recovery Plan so it
could recover earlier than expected since the airline industry has struggled tremendously in the
past year.

References

Philippine Airlines Recovery Plan. Philippine Airlines Recovery Plan.

(2021). Retrieved 31 October 2021, from https://palrecovery.com/.

PATCO (Philippine Aerial Transport Co.), Airline History (2021) Retrieved

30 October 2021, from
https://airlinehistory.co.uk/airline/patco-philippine-aerial-transport-co/.