Lucio Tan pledges to invest in order to divest PAL stake

Filipino tycoon Lucio Tan is promising a $200 million investment in PAL in return for government protection from foreign competition. Six weeks ago he was looking to sell out for $200 million.

Filipino businessman Lucio Tan is offering to invest $200 million in Philippine Airlines (PAL) on condition the government restricts foreign carriers' access to the Philippines. This is a pretty new tune Tan is playing. Only six weeks ago, finance minister Jose Pardo said Tan had dropped the asking price for his entire PAL interest to $200 million (from $800 million), plus the airline's $2.3 billion debt.

So is he planning to invest or divest? It seems divestment is still the preferred option and in order to fetch a worthwhile price Tan is trying to secure some sweeteners for PAL. However, the protectionist measures he is after come at a cost and it's not just the airline that will pay the price.

"Capacity restrictions imposed on other countries will invite reciprocal restrictions, and hinder the expansion into international markets of other Philippine-based carriers not hobbled by the problems of PAL," says the Management Association of the Philippines. "What PAL is asking for is outright capacity controls in air services to and from the country."

What Tan is asking for is monopolistic powers that will make PAL saleable, regardless of the damage done to other Philippine carriers and the country's economy.

German airline shows interest

Lufthansa has long been reported as a potential buyer of PAL. A Lufthansa subsidiary in 1999 signed a two-year agreement to manage PAL. Nonetheless, it seems unlikely the German airline, one of the pillars of the Star Alliance, would buy PAL. In Star Alliance, Lufthansa already has Singapore Airlines (SIA) and Thai Airways as partners; a third Asian carrier would not go down very well, particularly with Thai, which threatened to leave the alliance when SIA joined. In late April this year, Lufthansa denied Tan's claim that the two parties were in negotiations regarding a PAL stake sale.

In 1998 Cash-rich Cathay Pacific entered talks to buy part of PAL, but ultimately walked away after Tan refused to relinquish managerial control of the airline. Cathay Pacific has since turned its attention to mainland China, with a view to investing in China Eastern Airlines.

Although Tan owns over 70% of PAL, any foreign buyer would be limited to acquiring a 49% stake in order for PAL to retain its landing rights.

In the year ended 31 March, PAL achieved a net profit of Ps44.2 million ($990,000). In the previous six financial years, PAL racked up losses totalling Ps25.6 billion.