I.

INTRODUCTION

A. BACKGROUND OF THE STUDY

In the past few years, Philippine Airlines (PAL) has made airlines a
number of times and not all of them have been for good reasons. From labor
disputes to hundred million dollar deals, PAL has always been under public
scrutiny. The biggest news, perhaps, in the past 5 years regarding PAL was the
change in ownership when Lucio Tan sold 49% of his shares to fellow business
tycoon Ramon Ang of San Miguel Corporation. This type of change is something
that commonly occurs in the private sector, but perhaps not to this gravity. The
change in ownership, the labor disputes, the quarterly press releases regarding
profits are all things that have come with the reprivatization of Philippine Airlines.
Philippine Airlines under the Marcos era was under government control.
However, during the Aquino administration, the government realized that it
cannot maintain all of the companies that it had acquired during the Marcos
administration. According to Republic Act 2232 (1959), it was deemed vital for
“security and defense and to the enhancement of her commerce” that the
Philippines maintain a national flag carrier—an international air transport
services, namely Philippine Airlines. Because of this, the Aquino administration
enacted privatization policies in order to turnover the operations of Philippine
Airlines to a private entity.
With the rise of neoliberalism, the reprivatization of PAL was welcomed by
the private sector, with several companies bidding for control of the airline
company. The privatization of Philippine Airlines was meant to help improve the
use of public resources. Instead of spending on maintaining and operating PAL,
the Aquino administration wanted to free up those resources and use them on
other initiatives. However, privatization also brought about certain disadvantages.
Because Philippine Airlines became a private company, it also became more
susceptible to exogenous shocks such as the Asian Financial Crisis. However,

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we saw that during the Asian Financial Crisis, the Philippine government
intervened and didn’t allow for Philippine Airlines to go into bankruptcy.
The goal of this paper is to determine what were the effects of the
reprivatization on the efficiency and effectiveness of Philippine Airlines as our
national flag carrier. We write the paper in hopes of determining how privatization
has affected the role of the government in the operations of Philippine Airlines,
and how the private company and the government interact with one another. The
outline of this paper is as follows. Section II provides a brief review of related
literature, including a rundown of PAL’s rich history. Section III provides an
overview of PAL’s ownership timeline, together with the corresponding annual
profit for that year. It also provides any major exogenous and endogenous shock
such as labor disputes, financial crises, and oil price hikes. Section IV provides
our analysis and interpretation of our findings. The last part contains our
conclusion and recommendations for future studies.

B. STATEMENT OF THE PROBLEM

In the wake of the reprivatization of Philippine Airlines, several questions

were raised regarding the management of the company. Because the company
was now a private one, it became more susceptible to exogenous shocks such
as the Asian Financial Crisis, oil prices, and the foreign exchange rate. As the
flag carrier of the country, the Philippine government’s role in the management
and operations of PAL were put in to question. These are things that we, as
researchers, would like to be able to address.

Research Question: How did the re-privatization of Philippine Airlines

affect the role of the government in its operations?

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 Sub-questions:
 Did the re-privatization of PAL effectively and completely
abolish the control of government over it?
 What factors affected the change of ownership/management
of Philippine Airlines?
 What consequences were faced with the re-privatization of
PAL?
 Were the problems that led to its re-privatization solved?
 Is privatization an affirmation to neoliberalism in the
Philippines?

C. SCOPE AND LIMITATIONS

 This study was conducted to determine the effect of the reprivatization of
PAL (Philippine Airlines), in its current status, with the emphasis on its
efficiency and workforce, using different data and different articles about
PAL.
 The study would cover from as early as the establishment of PAL up to
now that it became a private entity again.
 The study is unilateral only to PAL and would not be comparative to the
other government owned and controlled corporations who were also
privatized.
 This study would also cover different issues concerning the management
of PAL and how privatization has played within these issues.

D. SIGNIFICANCE OF THE STUDY

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  This study would be beneficial to our theme, neoliberalism, in determining
the effects of privatizing a government owned company, which in this case
is PAL.
 This study could determine if the government should intervene with the
different issues in PAL. Given that the issues were caused when PAL was
privatized.
 The finding of this study will redound to how the effectiveness of the
private sector should be taken into consideration in giving out incentives
for privatization.
 This study is beneficial in determining if the promises of privatization were
achieved in the case of PAL.

II. REVIEW OF RELATED LITERATURE

History of Philippine Airlines

In 1935, the Philippine Congress allowed for the franchise of the
Philippine Aerial Taxi Company Incorporated (PATCO) to provide aerial
service for mail, cargo, and people. From this, the Philippine Airlines (PAL)
was established by a group of businessmen, led by Andres Soriano, in
February of 1941, after Andres and co., together with former Senator
Ramon Fernandez acquired the franchise of PATCO. In September of the
same year, the Philippine government invested in PAL paving the way for
its nationalization. However, the process was halted when war broke out in
December of 1941. Philippine Airlines resumed its operations after the
way in 1946. It continued to operate under private ownership with Andres
acting as general manager, and Fernandez acting as chairman and
president. In 1959, Republic Act 2232 was passed as a sign of the
government’s desire to nationalize the airline. The act called for the
government to maintain its own international air operations. RA 2232
appropriated an average of 4,717,960 from the National Treasury to PAL

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as payment for carriage of international airmail. However, day-to-day
operations were still overseen by Andres, et al. By definition, Philippine
Airlines was still a privately owned company, which catered to the
demands of the government.
In the years during Martial Law, President Marcos took control over
all industries and put them under government control. PAL was put under
the control of the Government Security Insurance System (GSIS). When
the Marcos regime ended, Cory Aquino initiated several programs for the
reprivatization of the companies that were ceased by the government. In
the case of PAL, the airline company was auctioned to several bidders,
eventually being bought by PR Holdings. In 1995, business tycoon Lucio
Tan acquired majority of PAL’s shares, via PR Holdings. This was the start
of PAL’s second expansion, and even though the company saw several
years of losses (mainly due to the Asian Financial Crisis), PAL
continuously expanded its reach and its operations, with new routes and
new aircrafts. Even with the emergence of several domestic and
international competitors, PAL continued to be competitive and remain as
one of the top airline companies.
In 2012, after nearly 3 years of labor disputes and union
discussions, Lucio Tan sold 49% of his shares of PAL to Ramon Ang of
San Miguel Corporation. Under Ang, PAL entered into another era of
expansion. Ang bought several new aircrafts and announced the return of
old routes and arrival of new ones. Under SMC, PAL also announced
plans of becoming an investor in the aviation industry. However, in 2014, it
was announced that Lucio Tan had bought back the 49% shares from
Ramon Ang. In the same year, PAL entered several partnerships with
international aviation companies such as Etihad Airways and Nippon
Airways. Since then, PAL has continued its route expansion, reviving old
routes in Visayas and Mindanao, and opening new ones through its new
bilateral international partnerships.

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The Philippine Privatization Program
The economy of the Philippines fell into catastrophe during the
Marcos administration. GNP drastically dropped, together with a rise in
Philippine foreign debt. Graft and corruption in the government led to
prevalent dissatisfaction and social disorder. In 1986, the Aquino
administration took charge of stimulating the country’s worsening
economy. The economic reform of the administration prepared deliberate
goals intended at enhanced growth and improved economic efficiency,
poverty mitigation, advancement of social justice, and decentralization.
The government reserved revenues produced through privatization in
order to fund these improvements. On December 8, 1986, with the
issuance of Proclamation No. 5 by President Corazon Aquino, the
government instigated the Philippine Privatization Program. The program
was a main instrument to achieve the objectives of the development plan
of Aquino. It aimed to decrease government intervention and involvement
in firms, which are suitably managed by the private sector, and to direct
the resources of the government on more urgent matters, whereas the
economic gains, which will be accumulated from privatization of
government-owned entities, will be improved. The Government-Owned
and Controlled Corporations (GOCCs) and Transferred Assets (TAs) were
the urgent targets of the privatization program. TAs were originally under
private ownership but excluded by government-owned financial
institutions. After evaluating every GOCC to decide if it should be retained
by the government, privatized, liquidated, consolidated with another entity,
or commercialized, 122 were projected for privatization out of 301
GOCCS.
The Committee on Privatization (COP), which oversees the
privatization program, was created due to the Proclamation No. 5 of
Aquino. COP was tasked to develop policies and guidelines for the

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privatization program; approve the sale of disposition of GOCCs, TAs, and
other assets; and oversee the development of the privatization activities.
In addition, it designated and monitored the disposition entities (DEs)
accountable for the definite marketing of particular government assets
selected for disposition. 14 DEs were under the supervision of COP. Some
of them included the Asset Privatization Trust (APT), the Development
Bank of the Philippines (DBP), the National Development Company
(NDC), the Social Security System, the Philippine National Bank (PNB),
and the Government Service Insurance System (GSIS). The GSIS held a
number of companies, which were considered to be among the most
attractive assets for privatization, including the Commercial Bank of Manila
(Combank), the Manila Hotel, the Philippine Plaza, and Philippine Airlines.
The Aquino administration, in 1998, ensured the public of the
promise to privatize the Philippine Airlines (PAL). Government officials
came to an agreement that PAL was a liability, taking up too many public
funds and resources, which could have been invested into more significant
endeavors. The government believed that PAL as a private company
would contribute more to the development of economy. The airline’s
financial difficulties made the privatization plan difficult to implement so the
government had to enhance its appeal in order to attract private investors.
The Philippine Airline Privatization Committee was created to undertake
the task of disposing the airline. The Secretary of Finance, the Governor
of Central Bank and the President of GSIS were the committee’s
members. It had the authority to repeal the employment of GSIS as a DE,
given that GSIS publicly declared its objections and desire to hinder the
privatization plan. It was achieved by system of a debt for equity
transaction. These were substantial steps toward the privatization of PAL.
The airline’s appeal improved significantly making it more suitable as
privatization candidate.

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Problems Encountered by PAL Employees
In the mid-1990’s, the airline industry’s deregulation led to
the entry of Cebu Pacific, Air Philippines, Asian Spirit, Seair and Grand Air.
Cebu Pacific has overtaken PAL and is now the largest airline that flies
domestic and international passengers. PAL needed to improve its
operations in order to compete with Cebu Pacific. But instead of hiring
new employees, PAL proclaimed some of its pilots redundant, and most of
them were on the verge of retiring. Thus, these pilots would not be able to
avail the retirement package of PAL. The airline offered them an
alternative to be pilots again, but this time for Airphil Express. However, as
pilots of Airphil Express, they would receive lower salaries and fewer
benefits. Some of them accepted the Airphil post as they have families to
support and mortgages to pay.
Not all pilots accepted the job offer. Instead of waiting to be
declared as redundant or to be offered a job at Airphil and meet the same
fate as the others, the pilots decided to resign. In an interview at ANC’s
Headstart, resigned PAL pilot, First Officer Henry Claveria said that those
who declined the Airphil pilot post would be compensated. However, they
would be forbidden to use their flying skills for other airlines.
On short notice, 26 pilots resigned almost simultaneously as they
saw a better opportunity at foreign airlines with higher-paying jobs. Due to
the hefty and urgent resignation, PAL cancelled a number of 150-seater
Airbus A320 Manila flights on the way to Bacolod, Iloilo, Cagayan de Oro,
Cebu and Hong Kong due to the lack of pilots to fly the planes.
Philippine Airlines’ flight attendants experienced their own dilemma
as well. Matters of sexist policies and passive compensations lead to an
opposition between the Flight Attendants’ and Stewards’ Association of the
Philippines (FASAP) and the PAL management. Sexist policies include the
mandatory retirement age of 55 for women as opposed to 60 for men and
40 for new hires, and the decrease of 60 days of maternity leave from the
service years.

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 As for the matter of compensation, FASAP demanded a pay
increase of 7%, which amount to Php260 million.
In response, PAL management proposed to broaden maternity benefits,
which have been agreed to by both parties. On the mandatory retirement
age, PAL offered to increase the retirement age to 45 on the circumstance
that FASAP will permit junior cabin crew to be mixed with senior cabin
crew in international flights. This situation benefits the senior crew
assigned to international flights for them to relish incentives and
allowances.
PAL reported in November 2010 that it would begin contacting out
in-flight catering, cargo handling and call center reservations as this
system is expected to save P600 million a year, and the savings would be
passed on by charging lower fees to the customers. As a result of this
outsourcing, 2600 workers are estimated to be reduced. The employees to
be retrenched will be offered P1M as severance benefit. PAL will also
provide free tickets to the affected workers, as well as their families. The
scheme elicited turmoil among labor groups specifying that long-term job
security is more important than P1M.

PALEA vs PAL
On September 2011, PAL management implemented an
outsourcing and contractualization scheme causing 2,600 regular
employees in the 'non-core' departments, particularly, in the passenger
handling, catering and call center reservation, to lose their jobs. This has
been an attempt to bring back the flag-carrier airline on track after
suffering from losses due to crisis and its growing competition for market
shares with other airlines. This has led the Philippine Airline Employees
Association to start a demonstration to show their opposition and assert
their rights. They set up protest camps in front of PAL Inflight Center near
NAIA Terminal 1 and 2. “The new round of layoffs is another wave of

9
 contractualization. Regular unionized workers are being replaced with
contractual employees who will be paid less in wages and benefits,” said
Gerry Rivera, PALEA president and PM vice chair. PALEA also argued that
the personnel from different outsourcing companies who replaced the
PALEA members were "overworked" and "untrained", compromising the
safety of tourists and passengers.
The Department of Labor (DOLE) took the side of PAL, recognizing
their plan as a management prerogative. The Aquino Administration
further affirmed this. Many cases have been filed since then, including
cases of Assault against PALEA, bribery, etc. It went on for two years until
on November 15, 2013, the two parties finally formalized an agreement.
With a new administration, PAL has consented to reinstate PALEA’s 600
members as regular workers, provided they pass certain qualifications.

III. METHODOLOGY

In order to determine the effects of reprivatization of PAL on its efficiency

and effectiveness, we had to identify variables that we could observe. We
decided to look at that financial status of Philippine Airlines for each year—
whether they incurred profits or suffered a loss. We also looked at major
exogenous and endogenous factors that could’ve affected their performance,
other than the fact that it is now a private entity. We looked at the overall financial
stability of the country and the international community—was there a recession,
how high/low were the exchange rates. We also looked into endogenous factors
such as labor disputes, wage hikes, change in ownerships.

A. RESULTS

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 PROFIT
YEAR Ownership Change Major Event
(LOSS)
Lucio Tan becomes
majority shareholder of PR
1995 (P227M) Holdings
1996 (P2.182B) PR Holdings ASIAN FINANCIAL
1997 (P2.502B) PR Holdings CRISIS--Gov't helps
PAL in its
1998 (P1.639B) PR Holdings rehabilitation
1999 (P2.854B) PR Holdings
2000 P44.2M PR Holdings
2001 P419M PR Holdings
2002 P295M PR Holdings
2003 P291M PR Holdings
Political instability;
Oil Crisis in the
2004 (P640M) PR Holdings Middle East
2005 P858M PR Holdings
2006 P725M PR Holdings
2007 P4.5B PR Holdings
Start of the financial
2008 (P1.3B) PR Holdings crisis
2009 (P12.5B) PR Holdings Major labor disputes
2010 (P645M) PR Holdings —Government
assisted in facilitating
talks between labor
union and company;
International
2011 P3.1B PR Holdings Financial Crisis
Lucio Tan sells 49% to San
2012 (P5.3B) Miguel Corporation
2013 (P3.7B) San Miguel Corporation
San Miguel Corporation
2014 P786M sells shares to Lucio Tan

B. ANALYSIS

Based on the data that we gathered, we can see that PAL experienced
failures and successes under private management. We were correct in
hypothesizing that the privatization of PAL would make it more susceptible to

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exogenous economic shocks such as the Asian Financial Crisis and the recent
International Financial Crisis. However, despite incurring losses, we can see that
Philippine Airlines still continued to operate to the best of its abilities. This is
because the loss is incurred at the cost of the private owners and so business
goes on. So where does the government come in?
As you can see from our table, the government intervened in two key
scenarios. First, when PAL was on the brink of shutting down due to the Asian
Financial Crisis and second, when PAL suffered major losses and became
unprofitable due to the International Financial Crisis and major labor disputes. IN
the course of the privatization of Philippine Airlines, the Philippine government
has acted as a regulator, ensuring that despite the effects of all these exogenous
shocks, Philippine Airlines is able to maintain its day-to-day operations.

V. CONCLUSION
Based on all of our research, we can say that the study was successful in
finding answers for all the questions we posed at the start of this paper. In the
wake of the privatization of PAL, the government became a regulatory body that
ensures that PAL is able to remain competitive despite all the external factors
that might affect its performance. It reaffirms the belief that public-private
partnerships are sometimes necessary in order for the government to fulfill its
duties—in this case, providing a form of public transport and maintaining its own
international air carrier as mandated by the law.
Apart from that, we also see that the story of Philippine Airlines shows the
advantages and disadvantages of privatization. Through the privatization of PAL,
the Aquino administration was able to acquire funds (via the auction), part of it
was used in order to establish regulatory bodies for all the companies which were
being privatized. The privatization of PAL allowed for funds previously being used
for its maintenance and operations to be freed and available for use for other
government projects. Apart from that, we also saw huge expansion periods for

12
the airline industry amounting to billions of dollars. These expansion periods
under private ownership allowed for Philippine Airlines to be more competitive
locally and internationally. This was because of the profit driven owners, who
wanted to be able to expand their market. The very nature of the private sector
generally allows for more efficiency, because of its merit based system and lack
of political constraints. However, we also saw that being in the private sector also
has its disadvantages. Philippine Airlines was severely affected by the two
financial crises and even shut down for a couple of weeks in 1998. Because
losses are incurred by private entities, shutting down and simply leaving
becomes a very viable option as soon as the company becomes unprofitable.
Because of the merits and demerits of privatization, the government must
remain an active participant in regulating the airline company’s affairs. Although it
needn’t participate in all aspects of maintaining and operating Philippine Airlines,
it still has the responsibility to ensure that the company continues to operate
because of its importance to Philippine society.

VI. REFERENCES

 Austria, M. (2001). Competition in the Domestic Air Transport Industry:

Can it be sustained without competition policy? PIDS: POLICY NOTES,
(06).

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 Lim, R. (2005). The Odyssey of Our National Flag Carrier in a Liberalizing
Air Transport Industry. (PPT). Retrieved from
www.icao.int/Meetings/ATConf5/Documents/lim.ppt

 Milestones. (nod). Retrieved November 24, 2015, from

http://www.philippineairlines.com/about-pal/milestones/

 Philippine Airlines (PAL). (2012, November 6). Retrieved November 24,

2015, from http://20thcenturyaviationmagazine.com/open-forum-talk-
about-anything-aviation/philippine-airlines-pal/

 Philippine Airlines labor problems. (n.d.). Retrieved November 24, 2015,

from
http://en.wikipilipinas.org/index.php/Philippine_Airlines_labor_problems

 Philippine Airlines, Inc. - Company Profile, Information, Business

Description, History, Background Information on Philippine Airlines, Inc.
(n.d.). Retrieved November 24, 2015, from
http://www.referenceforbusiness.com/history2/42/Philippine-Airlines-
Inc.html

 Philippine Airlines, PAL Employees Association end 2-year row | Sun.Star.

(n.d.). Retrieved November 24, 2015, from
http://archive.sunstar.com.ph/breaking-news/2013/11/14/pal-palea-end-2-
year-row-313722

 Philippine Airlines. LAT Collection. (1998-Present). Retrieved from:

http://articles.latimes.com/keyword/philippine-airlines

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 The saga of PAL - our national flag carrier. (n.d.). Retrieved November 24,
2015, from http://www.philstar.com/opinion/732967/saga-pal-our-national-
flag-carrier

 Union urges Tourism Congress to look into safety issues at PAL. (n.d.).
Retrieved November 24, 2015, from
http://newsinfo.inquirer.net/72817/union-urges-tourism-congress-to-look-
into-safety-issues-at-pal

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