Philippine Airlines (PAL) vs Philippine Airlines Employees Association (PALEA)

Philippine Airlines (PAL) intends to terminate 2,600 regular employees and then rehire them through an outsourcing company as contractuals retaining only rank-and-file workers. This action will substantially cut PAL’s salaries expenses and increase profit margin. However, Philippine Airlines Employees Association (PALEA) opposes this management decision.

PALEA held a protest inside the airport to show resistance of what they call an illegal termination and implementation of outsourcing scheme. PALEA claims that PAL’s action is a manifestation of corporate greed as the Company had presented P3 billion comprehensive income in the fiscal year of 2011. PALEA established a protest camp located in front of PAL to express continuing resistance of the illegal termination and contractualization scheme.

In my opinion, the PALEA failed to emphasize a significant fact: PAL which was incorporated in 1941 was suffering from losses since Cebu Air challenged the Company’s market share 1997.

PALEA argued that PAL’s action is a manifestation of corporate greed because despite a 3 billion net income in 2011, PAL still aspires for higher profit by cutting employee costs. PALEA failed to emphasize is that PAL has been suffering with negative or low free cash flows (cash flow from operations less cash flow from investing), and has accumulated a deficit of 257 million in 2007 and despite the capital restructuring initiated by the company that wiped out these deficit in 2008; the Company still accumulated a deficit of 14 million as of 2011. One may argue that the Company is already in the course of turning the operations around since in 2011, PAL already presented 3 billion net income. Although the number is encouraging, the profit margin generated by PAL is only 4% which is less than half of Cebu Air’s 9% profit margin. One unfavorable increase in the prices of fuel will surely drag PAL back to losses.

I recommend that PAL management should encourage teamwork between them and employees before deciding in terminating and contractualization of the employees. The decision of terminating and rehiring them as contractuals might substantially decrease costs but employee morale will be greatly compromised. The management should set profit goals to achieve every quarter and present plans and strategies on how to achieve these goals. The formulation of the plan should also be in consideration of the employees’ suggestions to make them feel part in facing the daunting challenge of turning PAL’s operation around. To make sure that the Company is on track of these goals and employees stay motivated, constant monitoring of the progress should be put in place.


Making Sense on TDY Consolidation

On July 31, 2012, Tanduay Holdings, Inc. (TDY) disclosed the following: [1]

Lucio Tan (LT) wishes to consolidate his assets to TDY by having TDY acquire/invest in the companies above.

In order to determine the value of TDY after the consolidation of the mentioned companies, we may approach the valuation in two ways: accretion in earnings per share or book value accretion.

The consolidation of LT group’s assets in TDY shares will actually diminish TDY’s earnings but it can increase TDY’s assets to 18.75 per share.

Additional considerations:

According to a disclosure in the PSE, some of PNB’s assets require regulatory approvals which may delay TDY’s investment in the bank. [2]

TDY application for increase of authorized capital stock from 5 billion shares to 25 billion shares is approved by the SEC. Although the increase does not mean that all the 25 billion will be issued, it still suggests a possible dilution thus in effect may distort our computations above. [3]

Computation of 32%:


  1. Change in corporate name to LT Group, Inc.; investment in companies; Special Stockholders’ Meeting on September 18, 2012; resignation/election of directors; Lifting of trading suspension,
  2. Filing of application with SEC for amendments to Articles of Incorporation and By-Laws; Update on investments in companies under the Lucio Tan group,
  3. SEC approval of increase in authorized capital stock,

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Making Sense on PNB-ABC Merger

The Philippine National Bank (PNB) and Allied Banks (ABC) merger where PNB will be the surviving entity was approved by PNB’s shareholders way back 2008. The merger did not immediately push through due to regulatory issues specifically on ABC’s 27.78% stake in Oceanic Holdings which owns Oceanic Bank Holding Inc. US Federal reserve requires ABC to divest the stake before merging with PNB.[1]

In order to expedite the merger, ABC decided to transfer their stake in Oceanic Holdings to a trust fund on October 11, 2011 to be later sold to a third party.[2] As of July 26, 2012, PDIC approved the merger and BSP on August 2, 2012. Just recently, September 9, 2012, SEC approved the merger. With ABC’s Oceanic Holding stake divested and all three regulatory bodies giving the green light, PNB-ABC merger is good to go.

Using the terms of the merger as disclosed in the Philippine Stock Exchange,[3] we can have a rough calculation of PNB’s net assets and net income per share after the merger as shown below:

The merger would cause dilution of PNB shareholders’ EPS from P5.83 to approximately P4.78 or 15% decline but will increase PNB’s book value attributable to common shareholders from P49.03 to P57.22 or 17% increase. Other business developments due to the merger transaction that is not immediately quantifiable are economies of scale, market share growth, and access to new markets.

Market share growth and access to new markets is achieved by PNB in the merger by boosting their current 344 branches to 668 branches with the inclusion of ABC’s 324 branches. This also means that PNB will be able to instantly increase their branches in a profitable geographical market such as the Metro Manila thus creating a more cohesive franchise. Economies of scale will be achieved through reduction of senior management and redundant operations functions. For the year 2011, ABC’s management received total compensation and bonuses of 808 million.


  1. “PNB-Allied Bank merger to be completed in 2010”
  2. “Board approval of execution of Voting Trust Agreement re: Oceanic Bank’s shares,”
  3. “Board approval of amendment of Plan of Merger with ABC, resignation/election of directors,”

Disclosure: No position on any stock mentioned above.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.