ANALYSIS: ANA’s PAL deal is a two-way street

Aviation

The investment by All Nippon Airways (ANA) in Philippine Airlines (PAL) was a long time in the making, but both parties stand to benefit if the partnership is well executed.

PAL has been clear about its intention to recruit a strategic investor for a long time, with the focus not merely on gaining access to funding, but also to tap on a more experienced airline to help with its next stage of growth.

In late January, ANA Holdings signed a $95 million deal to take a 9.5% stake in PAL. This may be small change for the Japanese group, but a big win for the Filipino carrier, which is set on international growth.

PAL has aggressively expanded international operations over the past two years, especially with services to North America as it takes delivery of Airbus A350-900s. Still, it racked up a net loss of Ps7.3 billion ($140 million) in 2017 and looks likely to remain in the red in its as-yet unannounced 2018 results.

NEW OPPORTUNITIES

ANA says its investment in PAL reflects its “belief in the dynamism of the Asian region”, and will help to start a new era of growth at the Filipino carrier. The duo wants to expand codeshares, while also exploring opportunities in catering and ground handling.

Their codeshares now link 16 Japanese destinations and 11 in the Philippines. PAL operates 84 weekly flights to Japan, while ANA operates 14 weekly flights to the Philippines.

PAL chief operating officer Jaime Bautista believes the partnership could also help PAL start flights from secondary Filipino cities such as Bohol and Davao to Tokyo Narita.

Philippine Airlines’ services to Japan – February 2019

FlightMaps Analytics

PAL now flies from Manila to Fukuoka, Nagoya, Osaka, Sapporo and Tokyo and from Cebu to Nagoya, Osaka and Tokyo. ANA’s only route to the Philippines is Tokyo-Manila.

ANA president and chief executive Shinya Katanozaka says more than 80% of the Philippines-Japan traffic is for leisure, but he believes more business traffic will be generated following Japan’s visa relaxation in August 2018.

MUTUAL BENEFITS

Flight Ascend Consultancy’s chief economist, Peter Morris, believes that besides both sides being able to gain on the sizable Japanese-Philippines market, ANA, with its experience and leadership position, will be able to improve many aspects of PAL’s operations and systems. PAL, in turn, will be able to offer a cheap source of qualified labour such as cabin crew and engineers that could benefit ANA.

Besides its target of becoming a “five-star airline”, PAL is also seeking endorsement to join a global alliance – and Star Alliance member ANA may aid its case. PAL believes it would benefit from a shared frequent flyer programme, extended codeshares and joint purchasing.

With the more conservative Japanese carrier involved, PAL might also be expected to improve profitability and slow down its international expansion. It has been expanding its presence in North America, Australasia and the Middle East, but at the expense of its finances.

PARTNERSHIP

A partnership is not always easy, though, and ANA has experienced first-hand how challenging it can be to work with an incompatible partner through its failed AirAsia Japan joint venture.

Its partnership with PAL, however, looks more promising, given the duo’s long history of working together, and especially bearing in mind that the Filipino carrier wants guidance and is open to change. ANA will send a director to PAL and a steering committee will also be set up to check on the partnership’s progress every six months.

“PAL is amenable to change and the Japanese will want to see and drive change now that it is a stakeholder. It may also be a precursor to ANA raising its stake in the future,” says Shukor Yusof, founder of aviation consultancy Endau Analytics.

PAL had previously said that it was looking to offer a stake of up up to 40% to a strategic investor. ANA could raise its holding in future, or PAL might look elsewhere for further capital injection. Analysts believe it is unlikely another airline will come on board, with ANA already involved.

Yusof adds that while the PAL sale suits founder Lucio Tan’s aim of paring down his family’s ownership of the flag carrier, it also demonstrates ANA’s astute investment strategy.

“ANA has stakes in Vietnam Airlines and PAL. Both are in countries where Japan has strong roots and where tourism and corporate business are growing rapidly,” he says.

“Middle class Filipinos are known to enjoy regular trips to various Japanese cities. PAL will get a much-needed injection from a well-known and well-regarded brand and likely increase in Japanese tourists.”