San Miguel considers PAL-Cayman deal amid PH air safety rating issues

MANILA, Philippines – What’s San Miguel Corp. to do if its newly acquired multi-million aircraft could not be deployed for the intended lucrative routes?

The country’s biggest business group got creative and is now negotiating with an airline that could fly those restricted routes.

On Wednesday, November 14, San Miguel confirmed to the stock exchange that it is in talks for a possible investment deal between its airline unit and the flag carrier of Cayman Islands in the Carribean.

“We confirm that the Company is in talks with the Government of the Cayman Islands for a possible investment in Cayman Airways with the end in view of jointly pursuing potential areas of collaboration in aircraft operations,” the conglomerate said in a disclosure.

“An appropriate disclosure shall be made in the event the parties reach and conclude definitive agreement,” San Miguel stressed.

San Miguel owns a minority 49% in but controls the only legacy carrier in the country, privately owned Philippine Airlines (PAL).

San Miguel president and COO Ramon Ang said in June that they are eyeing an investment in a regional, foreign carrier.

In a text message to reporters on November 13, he said the talks with Cayman Airways are still “preliminary.”

New planes, US restrictions

As part of PAL’s refleeting program, San Miguel acquired new wide-bodied Boeing and Airbus aircraft, with the first batch already considered the biggest deal in the history of the Philippine airline industry. More are expected to be announced soon.

Aside from the fact that the brand new planes are more efficient in burning jet fuel — the single biggest cost item in the airline operations — they are meant to be deployed for long-haul destinations to maximize yield.

However, deploying them for the most lucrative of PAL’s network of routes — North America — is hindered because of the Federal Aviation Authority (FAA) of the United States still rates the ability of its Philippine counterpart — the Civil Aviation Authority of the Philippines (CAAP) — to enforce global safety standards under Category 2.

The European Union, following the FAA rating, also followed suit and barred any Philippine carrier from flying into any of its member countries.

As long as CAAP fails the almost annual audit, PAL cannot expand its current operations in Europe, but particularly in the United States.

Enter Cayman Airways, a state-owned carrier.

The Carribean country is rated by the FAA as under Category 1 status, so its commercial airlines, such as Cayman Airways, are not restricted from expanding its operations into the United States.

How it started?

The talks between PAL and Cayman government were first reported in mid-October, around the time the Cayman Premier McKeeva Bush was in Tokyo in Japan for the Commonwealth Finance Ministers conference.

Cayman Net News reported in October 15 that Bush and San Miguel’s Ang signed a memorandum of agreement to jointly explore investment opportunities in areas of aviation, tourism and infrastructure.

Bush was quoted as saying, “We are looking forward to working together and capitalizing on the synergies of both SMC (San Miguel) and the Cayman Islands. This joint cooperation underscores our commitment to study and work with projects that will be mutually beneficial to both parties.”

He added: “This combined effort will help us realise the objectives that we have set for our islands, to bring in more investments, breathe life into our existing industries and make the Cayman Islands the choice destination for the region. We are happy that SMC, the Philippines largest conglomerate, has chosen us to be a potential strategic partner for its international expansion.”

On the other hand, San Miguel’s Ang was quoted as saying: “This is a historic moment for both San Miguel Corporation and the Cayman Islands as represented by Hon Mckeeva Bush, and offers countless opportunities for our company to become a potent force in developing the economy of the Cayman islands through potential investments. We hope that this understanding translates into a fruitful cooperation.”

Win-win

Caymanian Compass reported that Bush informed the Legislative Assembly on Friday, November 9, that San Miguel has submitted an investment proposal to the Cayman Islands government that has since been passed on to the Carribean airline’s board of directors to explore.

“Cayman Airways is currently in discussions with Philippine Airlines to ascertain if there are ways for the two airlines to work together,” Bush was quoted as saying.

“The exploration of this potential collaboration is covering a variety of areas, but includes reviewing the ability to code share, to provide aircraft operations and includes other strategic areas,” he added.

By code sharing or entering into a leasing agreement where an airline provides an aircraft, complete crew, maintenance, and insurance to another airline is one possible way around the Category 2 restriction PAL is facing.

Cayman Airways operates 6 planes serving Caribbean and U.S. destinations, according to its website.

The investment proposal reportedly being discussed provide Cayman other opportunities, including the possible airport/runway improvements on Grand Cayman and Little Cayman, as well as new aircraft for the legacy carrier.

“There has been early indications that [San Miguel Corporation] would consider such investments, and possibly investments to redevelop the aerodrome in Little Cayman to accommodate aircraft in the 30-50 seat range, which could assist CAL in realizing a long held objective to replace the Twin Otters with larger more comfortable and efficient aircraft,” Cayman Airways CEO Fabian Whorms was quoted as saying at the Legislative Assembly.

Preferred shares

Among those being considered for the investment proposal was San Miguel’s acquisition of non-voting preferred shares of Cayman Airways.

Bush was reported as saying that the ability of Cayman Airlines to issue preference shares would require approval not only from Cabinet and the Legislative Assembly, but also from the United Kingdom.

The equivalent equity stake of these preferred shares when they get converted into common shares have yet to be ironed out, although Philippine Star reported it is around the 49% level.

Caymanian Compass reported, however, that the convertibility of the shares into common stock is not part of the current agreement. – Rappler.com