Philippine conglomerate San Miguel Corp (SMC) will take a minor stake in Philippine Airlines (PAL) and its low-cost partner Air Philippines (Air Phil) after agreeing to invest in their parent companies.
Trustmark Holdings and Zuma Holdings and Management, the holding companies of PAL and Air Phil that are owned by Philippine tycoon Lucio Tan, will issue new shares to SMC's wholly owned subsidiary San Miguel Equity Investments as part of the deal.
Stock exchange disclosures by publicly-listed San Miguel and PAL Holdings, which is majority owned by Trustmark, revealed neither the financial details of the deal nor the size of the stake. San Miguel - a food and beverage company that has diversified into the oil refining, telecommunications and power industries - said its stake in the airlines is via its investment in the holding companies.
"The new investment will allow the two airlines to strengthen operations and stay competitive with the implementation of PAL and Air Phil's fleet mordernisation programme," it adds.
San Miguel has been in talks with Tan since last year on a possible investment in the airlines.
This was to help the floundering Philippine Airlines with its fleet upgrading and modernisation plan and to help Air Phil subsidiary AirPhil Express to grow its share of the low-cost market.
Philippine Airlines reported a comprehensive loss of Philippine peso (Ps) 3.6 billion ($84.3 million) for the nine months to 31 December 2011, a reversal from a profit of Ps3.2 billion it reported a year before, despite a 2% increase in revenue to Ps55.2 billion for the 2011 period. This resulted from higher expenses and an unfavourable exchange rate as well as a sharp drop in non-operating income.
Over the last few years, the flag carrier has struggled to cope with the emergence of budget carrier Cebu Pacific, which now has the largest market share in the Philippines. PAL is keen to retire many of its older and uneconomical widebody aircraft and replace them with a new fleet that will allow it to compete effectively on the long-haul markets.
AirPhil Express, meanwhile, has seen a resurgence over the last two years and is fast emerging as a serious competitor to Cebu Pacific in the low-fare market segment.