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Pal Doesn't Seem To Have A Friend (Int'l Edition)


International -- Intl' Business: THE PHILIPPINES

PAL DOESN'T SEEM TO HAVE A FRIEND (int'l edition)

Each day, three round-trip flights from Manila to two provincial Philippine cities together carry about a thousand passengers aboard a single jet run by Grand International Airways. They are Grand International's only customers. Despite the name, the Manila-based airline is anything but grand: It launched operations last March with one Airbus Industrie plane. That hasn't stopped its executives from thinking big. Now that the government is deregulating the industry, Grand International plans to challenge the former monopoly carrier, Philippine Airlines Inc. (PAL) on some of its biggest routes.

Competition is just one of the mounting pressures on PAL and its chairman, Lucio C. Tan. A former political associate of Ferdinand Marcos, Tan is locked in a bitter battle with President Fidel V. Ramos, who wants to break up monopolies--and prevent former Marcos cronies from once again dominating the Philippine economy. Ramos has opened domestic airways to competition and may soon name a local carrier to challenge PAL on international routes.

The liberalization of the Philippine air market is part of a broader effort by Ramos to pry loose the hold of entrenched monopolies in many key sectors. The former general has opened the telecommunications market, unleashing a firestorm of competition that has helped improve service for consumers. In February, Ramos' government announced plans to allow foreign banks to enter the country's tightly protected finance industry. The strong showing of Ramos candidates in the elections on May 8 should help give the President the support he needs in Congress to push through new economic measures aimed at further deregulating industry.

Yet officials at PAL, privatized in 1992, also see a political motive in Ramos' attempts to unleash competition. Tan controls an empire that ranges from tobacco and beer to banking and hotels. He acquired a 50% stake in PR Holdings, which owns 67% of PAL, two years ago. This embarrassed the government, which had an unwritten rule that Marcos associates were not to bid for privatization projects. Manila contends that Tan owes $1 billion in unpaid corporate taxes. Tan denies the charge.

Tan insists he wants to undo years of mismanagement that have left PAL a laggard among the airlines of Asia. While regional rivals such as Singapore Airlines Ltd. and Cathay Pacific Airways Ltd. have become world leaders, PAL is bloated and lethargic. The airline lost $64 million in the year ended Mar. 31, says Jaime J. Bautista, PAL chief financial officer, following an $18 million loss the previous year. The airline partially blames Manila, which sets domestic prices and requires it to make unprofitable flights to remote islands in the far-flung Philippine archipelago.

PAL's problems open the way for its fledgling competitors to grab part of the Philippine air business. Many of Grand International's employees, including Chairman Dante Santos, once worked for PAL. The airline's financiers have extensive interests in the hotel and tourism industry. Grand International recently took delivery of a second Airbus plane and has applied for permission to fly to most of PAL's major Asian markets. It hopes to begin international operations within 12 months.

POSTELECTION MUSCLE. PAL's other new rival, Cebu Air, will begin domestic flights in October with eight Boeing Co. and Airbus jets. The airline is controlled by Philippine tycoon John Gokongwei.

As competition heats up, Ramos is increasing the pressure on Tan in other ways. The government has asked the Securities & Exchange Commission to dissolve PR Holdings. That would shift control of the airline back to the government, which maintains a 33% stake in PAL. The SEC has frozen Tan's proposed $97 million recapitalization of PAL to purchase new aircraft and revamp existing operations, a plan that Bautista calls crucial to PAL's development. "With it we can begin making a profit within two years," he says. Officials of government corporations with stakes in PAL counter that the plan is a move by Tan to increase his stake and cement control even if PR Holdings is dissolved.

Given the President's postelection political strength, Ramos has an abundance of tools to use against Tan. For instance, the Transportation & Communications Dept. has discussed opening up one of the only profitable businesses PAL has: its catering and ground services for other carriers. If companies want to compete, the government is "open and supportive," says Porvernir Porciuncula, executive assistant to the Transportation Secretary. For Lucio Tan and PAL, the battle for the skies over Manila will be fierce.

PAL'S TROUBLED SKIES

DEREGULATION Two local upstarts are bidding to end PAL's lock on international traffic

POLITICAL FEUDING PAL Chairman Lucio Tan is battling with Philippine President Fidel Ramos for control of the airline

RED INK Mounting losses because of overstaffing and regulated fares

DATA: BUSINESS WEEKMichael Di Cicco in Manila


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