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All Nippon Airways a winner with bargain Philippine Airlines investment
February 15th 2019
By investing in Philippine Airlines (PAL), All Nippon Airways (ANA) is delivering on a strategy and a promise to investors to expand its business beyond slow growing Japan. Read More » The PAL investment adds to ANA’s previous minority equity in Vietnam Airlines as well as two airline investment attempts in Myanmar that were withdrawn.
ANA has the unusual and luxurious position in the airline industry of arguably having more cash than it needs. The market has previously criticised ANA for raising cash under the pretence of international investments but then spending part of it on domestic airlines, StarFlyer and Skymark. But the deals were small and too good to refuse.
The question turns to partnership implementation, which ANA and PAL discussed in February a few weeks after the investment was disclosed. Initial targets are modest: ANA wants to handle PAL’s catering in Japan, adding to existing Tokyo Haneda ground handling. PAL hopes to learn from ANA’s marketing and other areas. PAL is seeking a Skytrax five-star rating, which ANA has had for several years.
PAL president and COO, Jaime Bautista, said PAL is evaluating new routes to Tokyo Narita from Palawan, Clark and Davao that could have a stronger business case with ANA’s backing. PAL has a diverse Philippines-Japan network whereas ANA only flies to Manila from Haneda and Narita. To be considered would be a PAL co-location at Narita ANA’s terminal one.
The Philippines-Japan market is experiencing double-digit growth with leisure travellers making up 80% of demand. Although Japan’s visa requirements for Filipinos were relaxed in August 2018, there is still loosening to be done, governments permitting.
Longer-term, Bautista said PAL was talking to all three global alliances. ANA CEO, Yuji Hirako, hopes PAL will grow closer to Star, but noted it is a decision for PAL.
ANA invested in Vietnam Airlines when the Vietnamese flag carrier wanted to concentrate exclusively on North America. In contrast, PAL is growing a large, but under-recognised, North American market. Most PAL traffic is origin and destination Philippines, but it is increasingly targeting sixth freedom traffic, especially in the premium cabin. Yet the overlap with its new shareholder is small.
Assessments of the deal should not be too critical. ANA receives a 9.5% holding in PAL and one seat on the nine-member board for US$95 million. It is a relatively small sum for ANA and equates to two or three narrow body aircraft - or less than a single wide body - all of which ANA has been buying with regularity. Instead of purchasing an aircraft to use in Japan, ANA has the opportunity to profit in an entirely new market.
At the very least, ANA has prevented another airline from investing in PAL. Other suitors are unclear, but PAL had been holding equity talks for several years and mooted a stake sale up to 40%. ANA and PAL reportedly began discussions in 2013, and in 2014 grew closer via a codeshare. Perhaps PAL’s drawn-out investor search gave ANA a bargain of a deal that values PAL at only US$1 billion. PAL has said it will not seek additional investors, but ANA HOLDINGS INC. president and CEO, Shinya Katanozaka, did not rule out expanding its investment in PAL.
Southeast Asian aviation is particularly attractive to ANA and JAL given its faster economic growth than Japan and more opportunities than in Northeast Asia. Southeast Asia is a key source market for North American flights, the main long-haul business for ANA and JAL. JAL has not invested in a foreign airline, but has formed a partnership with LCC, VietJet.
