Philippine Airlines, Inc.

PAL Building
Legaspi Street
Legaspi Village
Makati, Metro Manila
Philippines
(02) 818-0111
Fax: (02) 810-9214

Public Company
Incorporated: 1941
Employees: 11,118
Sales: P 18.5 billion (US$7.5 billion)

Philippine Airlines, Inc. (PAL) has been the dominant air carrier in the Philippine Islands since its creation in 1941. Operating both internationally and within the 7,100 islands that make up the Philippines, PAL is something of a curiosity and scandal among the world’s major airlines, for decades losing money while being traded among the handful of wealthy families in control of the Philippine economy. After 14 years of ownership by the Marcos government, PAL was sold at the order of President Corazon Aquino in 1992 to a consortium of companies under the leadership of the Soriano and Cojuangco families. Some felt that since Aquino—whose maiden name is Cojuangco—is cousin to new PAL Chairman Antonio Cojuangco, this “privatization” of PAL is not likely to break the pattern of corruption and inefficiency that has marred the airline’s history since 1941.

PAL’s origins are obscure, like those of most institutions in the maze of Philippine history. The first Philippine air transport companies were created in the early 1930s, primarily as a means of travel and freight delivery between the nation’s scattered islands. One of these pioneering companies was the Philippine Aerial Taxi Company (PATCO), which was granted a 25-year charter by the Philippine legislature in 1931 for both domestic and international flights. At that early date, however, Pan American Airways provided most of the Philippines’ international air transportation, and PATCO settled for short flights among the major islands of Luzon, Cebu, Leyte, and Mindanao. On the less developed islands, PATCO also provided intra-island flights between distant towns.

The 1941 transformation of PATCO into PAL involved an international cast of characters, most notably General Douglas D. MacArthur, at that time in charge of the United States Armed Forces in the Philippines and preparing for an expected Japanese invasion of the islands. General MacArthur, whose father had served as the first military governor following the Spanish-American War of 1896, had served in the Philippines in various capacities throughout his career, including a four-year period before World War II, during which he was employed by the Philippine government as its field marshall. MacArthur was recommissioned by the United States Army in 1941 and oversaw the eventual loss of the Philippines to the Japanese in 1942. MacArthur’s career is germane to the history of PAL because the general employed as his aide de camp a wealthy Spaniard named Andres Soriano.

Soriano had previously served as counsel in Manila for the Spanish dictator Francisco Franco; he controlled the large San Miguel Breweries along with a number of other corporations and was obviously a man with powerful connections in the Philippine capital. In 1941 he put those connections to good use by teaming with the National Development Company, a government agency, in forming Philippine Airlines, Inc., which promptly absorbed PATCO—also thought to be involved in the creation of PAL—thereby becoming the nation’s largest air carrier.

As the creation of General MacArthur’s aide de camp, PAL stood an excellent chance of winning contracts from the United States Armed Forces for their transport needs in the coming war. Unfortunately for Andres Soriano and his fellow investors, the war came early and was over quickly, the Japanese gaining control of the islands by the summer of 1942. It is not clear what became of PAL during the Japanese occupancy, but on the day after the attack on Pearl Harbor General MacArthur made Andres Soriano a colonel in the United States Army and an American citizen as well. It is safe to assume that Soriano returned to Manila with MacArthur’s liberating forces in 1944 and resumed control of his various business interests, including PAL.

There is considerable evidence that MacArthur helped Soriano and PAL whenever he could. In 1946, MacArthur instructed the War Department to fly 20 tons of bottle caps to Soriano’s San Miguel Brewery to cover a shortage. In addition, the two men were both rabidly anticommunist, and MacArthur’s own extensive business holdings in the Philippines made his relationship with Soriano more like one of business partners than military officers. Sterling Seagrave commented on the chaotic postwar scene in his book The Marcos Dynasty, “The $2 billion aid package [from the United States to the Philippines] was fought over and devoured by politicians, by rich MacArthur partisans, and by packs of bureaucrats.”

Helped by such massive infusions of American capital, the Philippine economy rebounded from its wartime privations. PAL prospered so quickly that by 1948 it had already bought out two of its largest competitors, Far Eastern Air Transport, Inc., and Commercial Air Lines, Inc. Within a few years three other competing lines also threw in the towel, and PAL stood alone as the airline of the Philippines, its ownership still split between the Philippine government and the Soriano interests. The Sorianos were minority shareholders but handled the day to day management of the airline, which, if the later pattern of graft and kickbacks was already established in the 1950s, was the most lucrative end of the business. Philippine magnate Enrique Zobel once bluntly told the New York Times that “PAL is a milking cow,” and most of the milk seems to have been generated by what Far Eastern Economic Review described delicately as the “company’s operations, for instance by dictating its material requirements.”

PAL’s activities were described more directly in the New York Times, which quoted a study of PAL written by the World Bank in 1989. The study found that the airline was holding “millions of dollars of spare parts for aircraft it no longer owns and ground equipment so badly maintained that it has little value except as scrap.” At one time PAL was even accused of carrying an “inexplicably large inventory of 750,000 sanitary napkins,” as reported in the Far Eastern Economic Review. All of which may help to explain how an airline that so often reported a loss in its annual report could remain a financial plum much sought after by Philippines business families.

Whatever the intrigue surrounding its operation, PAL expanded its route system and doubled passenger miles between 1946 and 1950. The airline was serving 36 domestic airports by 1955 and owned a fleet of 35 planes, some of them DC 3/C47s and the rest Convair 240s. PAL’s primary business still lay in freight and communication services, such as the mail, since its ticket prices were far beyond the means of the average Philippine. From the international airport in Manila, PAL sent 33 flights weekly to Cebu City, the transport hub of the southern islands, and offered regular service to all sections of the widely scattered nation, even the more remote islands where passengers were few and the operation ran at a loss.

Indeed, the airline has repeatedly blamed its financial troubles on the large number of short, unprofitable flights it must offer as the nation’s only airline. In this regard, it was significant that on the eve of its sale to private investors in 1991, PAL announced a dramatic cutback in the number of its shorter domestic flights, encouraging the formation of new private companies to take these on. If, as PAL claimed in reports published as far apart as 1950 and 1989, the airline enjoys the lowest cost of operation in the industry, it would be hard to make sense of PAL’s frequent losses except by assuming the unprofitability of the line’s short haul domestic business or the possibility, already mentioned, of what one might call very loose accounting methods.

The Soriano family retained control of PAL until the late 1960s, the period of Ferdinand Marcos’s rise to power. One of the more equivocal figures of the twentieth century, Marcos was first elected president of the Philippines in 1965 and remained the country’s absolute ruler until his forced exile in 1985, when it was determined that he and his wife, Imelda, had systematically plundered their country for decades while amassing a fortune estimated to be at least $1 billion. Marcos literally had a hand in every major Philippine enterprise, including the nation’s airline monopoly. As Imelda Marcos became a regular guest at parties and government capitals around the world, she accrued a debt to PAL of nearly $6 million in the mid-1970s. The airline’s current owner, a man named Benny Toda, graciously offered to cut the bill in half if the Marcoses would deign to pay it; instead, Imelda Marcos demanded that he transfer his interests in the airline to the government, which meant, in effect, to the Marcoses themselves. Afraid to refuse, Toda settled on a price with Ferdinand Marcos and turned over his stock, for which he later said he was never paid.

PAL became one of the many baubles flaunted by Imelda Marcos, who by this time was one of the richest women in the world. The First Lady of the Philippines traveled around the world in her own PAL DC-8 jet equipped with beds, a built-in shower, and gold bathroom fixtures, sometimes also commandeering a second jet to carry her personal luggage. The airline was officially under the control of the Government Service Insurance System (GSIS), which controlled the pension funds of all government employees in the country and was one of the Philippines” largest financial institutions. GSIS was run by Roman A. Cruz, one of Imelda’s favorite proteges, and it was Cruz and his family who ran PAL from its takeover to the election of Corazon Aquino in 1986.

By that time the airline had racked up consistent losses for the better part of two decades. PAL was at least able to enjoy the benefits of Manila’s new international airport, completed in 1982 to replace a network of runways dangerously in need of repair; but, in the words of the Far Eastern Economic Review, “the airline [was] hobbled by ineffective management and corruption.” It was also plagued by employee defections to other airlines, which generally paid about four times as much as PAL and were not “hobbled” by corruption in such gross forms. During the 1980s more than 1,000 of PAL’s licensed mechanics—its most valuable ground workers—were lured by competing airlines, “exacerbating flight reliability problems,” according to the industry magazine Aviation Week & Space Technology. PAL had become something of an embarrassment to the international aviation industry.

The rise of “People Power” in the mid-1980s, culminating in the election of Corazon Aquino and the flight of the Marcoses to the United States in 1986, apparently offered a chance for significant changes in the Philippine economy. Not dwelt upon in the international press, however, was Aquino’s membership in the Cojuangco family, probably the wealthiest of all Philippine business clans and for many years a crucial supporter of Ferdinand Marcos. Observers point out that the election of Aquino changed less in the Philippines than was hoped for by her less affluent supporters; the privitization of PAL in 1992 offered little evidence of any real diminution of the powers of the elite families.

President Aquino originally ordered the sale of PAL along with hundreds of other government-owned companies shortly after her election in 1986. Since the airline had been run at a loss for many years, Aquino first hired a Philippine businessman named Dante Santos to make PAL profitable prior to its sale. Under Santos, PAL did report two years of net income but these were widely assumed to be the result of creative accounting methods rather than of any substantive changes in PAL’s performance. Indeed, in late 1990—four years after the accession of Dante Santos as president of the airline—no fewer than 22 of PAL’s top management were charged with a variety of negligence, fraud, and mismanagement; ten of these officials were eventually fired, including an executive vice-president, two senior vice-presidents, and four vice-presidents. They were accused of precisely the sort of corrupt operational practices that have been a way of life at PAL for decades, including theft of parts, over-purchasing, and kickbacks from travel agents. It is hard to say whether the firings were part of a genuine cleanup effort at PAL or merely a means of clearing the decks before the company’s sale, when the buyer would wish to install its own men in these lucrative positions.

The sale of PAL was carried out in a curious fashion. The government first paid approximately $350,000 to the Asian Development Bank for recommendations on how best to proceed with the privatization of PAL. The study concluded that a large infusion of foreign ownership and management would be needed to turn around the airline’s performance. For reasons of its own, the government rejected this proposal and instead commissioned a second study, this one from a branch of the World Bank. The second report also recommended that about one-third of the airline be transferred to foreign hands, chiefly as a means of retiring some of PAL’s $650 million in foreign debt. This plan was also largely ignored, however, and in the months immediately prior to the airline’s sale, PAL officials admitted that they could not return the company to profitability and were expecting a shortfall between its sale price and the amount of its debt. The company itself valued the two-thirds of its assets up for sale at somewhere between P 6.35 and P 6.69 billion, while the World Bank study had pegged their worth between P 5.25 and P 7.51 billion. Strangely enough, when the written bids were opened in January of 1992, two groups of Philippine companies had bid over P 9 billion, with AB Capital & Investment Corporation the winner at P 9.78 billion.

AB Capital represented a consortium of Philippine interests headed by the Soriano and Cojuangco families, who had created the airline in 1941. Contrary to the recommendations of both preliminary studies, none of the company was sold to foreign investors; instead, the remaining 33 percent was kept by the Philippine government, specifically by GSIS, through which the Marcoses had taken over PAL in 1978. In effect, PAL remained under the control of the same few Philippine families, this time without the bothersome intrusions of foreign investors, who might possibly insist on a more rigorous accounting of its daily operations.

Further Reading

Galang, Zoilo M., ed., Encyclopedia of the Philippines, volume 5, Manila, Exequiel Floro, 1950; Subcontractor’s Monograph Human Relations Area File-16, Chicago-5, The Philippines, volume 4, New Haven, 1955; Seagrave, Sterling, The Marcos Dynasty, New York, Harper & Row, 1988; Tiglao, Rigoberto, “PAL in a Spin,” Far Eastern Economic Review, January 1991; MacDonald, Lawrence, “Auction of Philippine State Airline ... May Come Soon,” Wall Street Journal, April 5, 1991; Tiglao, Rigoberto, “Carrier of the Clans,” Far Eastern Economic Review, February, 1992.

—Jonathan Martin