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.

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D. SIGNIFICANCE OF THE STUDY 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

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government to maintain its own international air operations. RA 2232

appropriated an average of 4,717,960 from the National Treasury to PAL

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

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routes in Visayas and Mindanao, and opening new ones through its new

bilateral international partnerships.

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.

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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

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.

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The airline’s appeal improved significantly making it more suitable as

privatization candidate.

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

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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.

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

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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

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.

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A. RESULTS

YEAR PROFIT (LOSS) Ownership Change Major Event

1995 (P227M)

Lucio Tan becomes majority shareholder of PR

Holdings1996 (P2.182B) PR Holdings ASIAN FINANCIAL

CRISIS--Gov't helps PAL in its

rehabilitation

1997 (P2.502B) PR Holdings

1998 (P1.639B) PR Holdings1999 (P2.854B) PR Holdings2000 P44.2M PR Holdings2001 P419M PR Holdings2002 P295M PR Holdings2003 P291M PR Holdings

2004 (P640M) PR Holdings

Political instability; Oil Crisis in the

Middle East2005 P858M PR Holdings2006 P725M PR Holdings2007 P4.5B PR Holdings

2008 (P1.3B) PR HoldingsStart of the financial

crisis2009 (P12.5B) PR Holdings Major labor disputes

—Government assisted in facilitating talks between labor union and company;

International Financial Crisis

2010 (P645M) PR Holdings

2011 P3.1B PR Holdings

2012 (P5.3B)Lucio Tan sells 49% to San

Miguel Corporation2013 (P3.7B) San Miguel Corporation

2014 P786MSan Miguel Corporation sells shares to Lucio Tan

B. ANALYSIS

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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

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. CONCLUSIONBased 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

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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

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

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Can it be sustained without competition policy? PIDS: POLICY NOTES,

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www.icao.int/Meetings/ATConf5/Documents/lim.ppt

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

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

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about-anything-aviation/philippine-airlines-pal/

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from

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

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

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(n.d.). Retrieved November 24, 2015, from

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year-row-313722

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

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

The saga of PAL - our national flag carrier. (n.d.). Retrieved November 24,

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flag-carrier

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