Who wants PAL? Not Lufthansa

Lucio Tan says he is in talks to sell part of Philippine Airlines to Lufthansa. An unlikely story, which has subsequently been denied by the German carrier.

Lucio Tan claims to be in talks to sell part of his controlling stake in debt-ridden Philippine Airlines (PAL) to Lufthansa, though these would appear to be fairly one-sided at present.

"There are no talks regarding buying shares in PAL," says Lufthansa spokeswoman Clara So.

Like many big corporations, Lufthansa normally maintains a barrier of silence when its name is churned out of the rumour mill. However, this case is probably a bit more sensitive than most.

The German airline is a core partner of the Star Alliance, which has since the start of the year been looking slightly fragile in Asia. Thai Airways, one of the founder partners of the Star Alliance, is none too happy with the entry of Singapore Airlines into the airline group - a move that looks certain to marginalise its importance within the alliance - and the possibility of a further Asian carrier joining, or forging close ties with a core member, would likely force it to look elsewhere for partners, possibly Swissair's Qualiflyer group.

The rationale for Lufthansa to buy PAL is hardly convincing; the only logical motive being to block the rival OneWorld alliance from securing Manila as a second Asian hub to Hong Kong, the home base of OneWorld's Cathay Pacific. As hubs go, Manila is hardly the pick of the bunch and one would have to ask why OneWorld would want a second centre in Asia so close to Hong Kong.

In all fairness, Cathay Pacific can't be ruled out as a possible bidder for a PAL stake, but the Hong Kong-based carrier has tried to walk down the aisle once before with PAL and a second attempt may require considerable prompting from the Filipino side. Cathay Pacific and Tan held talks in late-1998, but these foundered as a result of Tan's refusal to hand over managerial control to Cathay Pacific.

Negotiations break down

Shortly after the breakdown in negotiations, five Cathay Pacific executives set up Regent Star Services, with which Tan signed a five-year contract giving it responsiblity for implementing a rehabilitation plan and reviving PAL's fortunes. This contract was terminated after just six months as a result of Regent Star's criticism of the existing PAL management. Lufthansa Consulting, a Lufthansa subsidiary, has been advising PAL since.

Although Tan owns over 70% of PAL, which has debts in the region of $2.3 billion, he can't sell more than 49% to a foreign party.

"No one can buy more than 49% of PAL, otherwise PAL will lose its landing rights in foreign countries," says Timothy Ross, analyst at Warburg Dillon Read.

Apart from Cathay Pacific, Singapore Airlines (SIA) would normally be a name in the frame as a potential investor in PAL. However, SIA has its hands full for now, having since the start of this year bought 49% of Virgin Atlantic Airways, 25% of Air New Zealand and, in partnership with Lufthansa, is to head up a Star Alliance bid for a 10% stake in Thai Airways. SIA's membership of Star Alliance is also a barrier to it having an interest in PAL.

Outside of Asia, there is talk Northwest Airlines may want a piece of PAL since it does not yet have a hub in the region. The US carrier looks set to rectify ths situation shortly.

Northwest was in talks earlier this year with the Taiwan Government to acquire the one-third stake in China Airlines that is up for sale. However, the two parties failed to agree a price and the stake sale process has been put on hold until late May when the new Taiwanese Government assumes power. In addition, it seems likely Malaysia Airlines (MAS) will soon join the Wings alliance, which is headed up by Northwest and KLM.

"I suspect with MAS likely to enter the Wings alliance, Northwest will probably put most of its aircraft movements in Asia through Kuala Lumpur," says Ross.