Too big to fail?

DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - December 4, 2020 - 12:00am

Over the years, big business has developed the self-serving concept that some corporations are too big to fail… and taxpayers must pay the cost of their mistakes. This is supposedly true for a number of really big banks.

The other industry often cited is the airline business. Maintaining air transport connectivity is important because economic activities and jobs, notably in tourism, depend on it.

When COVID-19 shut down most flights all over the world, airlines were quick to ask governments for massive assistance. They claimed, rightly so, that the pandemic was not their fault. Still with so many calls for assistance, it won’t be easy to get a dole out.

In the United States, even a Trump administration – one that’s susceptible to high stakes lobbying, the Treasury Secretary insisted that larger airlines repay at least some of the money they received.

Here in the Philippines, the airline industry association was early to reach out with the begging bowl. The Air Carriers Association of the Philippines (ACAP) sought government assistance, including emergency loans and credit guarantees, as airports shut down under strict COVID-19 quarantine rules.

All of a sudden, they had excess planes and staff. Retrenchment was inevitable. Cebu Pacific even had to fly a number of their aircrafts to Australia for storage. PAL became the evacuation carrier of the government, picking up stranded OFWs from all over the world.

Things aren’t back to normal at this time. The airlines are not flying enough flights to keep their balance sheets aloft.

But for PAL, its financials were weak even before COVID-19. PAL Holdings, the operator of the Philippines’ flag carrier, reported a net loss of P29.03 billion in the first nine months of the year, 269 percent  greater than the P7.86 billion in losses it incurred in the same period last year. PAL revenues fell by 61.5 percent to P45.3 billion.

The total liabilities of PAL – including its outstanding obligations to foreign aircraft lessors – stands at almost $5 billion. Its debt restructuring plan will be the largest in the country’s history.

PAL is expected to seek US court protection once it has 67 percent of its creditors or lessors agreeing to its request for restructuring.

A banker told a local daily that our government should be the white knight for PAL. That’s a view not held by Finance Secretary Carlos Dominguez. Sec. Sonny is a hawk in protecting public funds.

The other thing with Sec. Sonny is that he knows PAL. He was once upon a time president of PAL during the Cory years. He knows the financial risks of the airline. He is not about to throw good public money after bad in an aid infusion to PAL, which must be significant to make a difference.

It seems Sec. Sonny wants the owners of PAL, the Lucio Tan family, to cough up more cash to support the airline. MacroAsia, a Tan company, is leading a consortium to build a $4 billion international airport in Sangley.

So, there is money within the Tan conglomerate and it is a matter of prioritizing their investments. Sec. Sonny knows the resources of the family (that includes property holdings in China) can well afford more infusion into the airline. Indeed, the family had been infusing more money, but the debt hole is rather deep.

Well, it was a hole that the “Kapitan” dug himself into. He had the chance to half his risk on the airline when San Miguel bought in, but he insisted on buying San Miguel’s shares back.

There could be structural problems too. The management under “Kapitan” broke up PAL into separate companies and consolidated revenues in the holding company.

They effectively removed from PAL activities considered part of its normal business: maintenance of aircraft and engines; ground handling of aircraft and terminal services, and also spun off inflight services like catering and other cabin services to newly created Tan-related companies.

PAL had to start paying for services that were once internally controlled costs. Cebu Pacific, on the other hand, had a business model that considered all those services as outsourced expenses from the start.

From what I heard, when RSA took over PAL management, he insisted on making all the related companies competitively bid for PAL’s business. It didn’t make him popular with the family. This is probably one of the reasons why Tan relatives running those companies convinced “Kapitan” to buy back full control.

The question arises, is PAL worth saving? Perhaps, but not with government money. We are not the US Treasury with its muscle. We have better uses for our limited funds at this time of COVID… like buying enough vaccines for all 110 million of us.

Even a partial government ownership or a partial re-nationalization will not work. Our tax money will just be a hostage in a company with serious management and legacy cost problems… including those incurred before Lucio Tan.

Politicians will start interfering with operations if government money is put in. That’s how PAL’s staff got bloated, to begin with, under government management.

I remember the late John Gokongwei telling me that he was happy, in hindsight, he lost the privatization bidding for PAL. He built Cebu Pacific from scratch, with no legacy costs.

In any case, the principle of capitalism is simple: the good companies thrive, the failures should be allowed to fail. Then new ones come up in its place… including, potentially in this case, a new airline Lucio Tan may want to organize. No entity should be too big to fail.

Now is the best time for a new airline to come up from scratch. There are many idle, almost brand-new aircrafts under mothball. There are many out of job staff, including pilots. Costs are going to be competitive as asset owners (aircraft leasing companies) are eager to liquidate bad debts.

For taxpayers, Sec. Sonny’s job is to remain hawklike in an era of great demands for stimulus money. Luckily, taxpayers can feel secure with Sec. Sonny in charge of our money today. No one can put one over him. No one.



Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

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