PAL, Lufthansa Technik sign landmark deals

Philippine Airlines and Lufthansa Technik Philippines (LTP), a German-led joint venture, today concluded two landmark agreements transferring ownership of PAL’s maintenance and engineering unit to LTP, while ensuring that the flag carrier’s long-term maintenance needs remained well attended-to.

In simple ceremonies, top officials of both companies signed an Asset Purchase Agreement and a Technical Services Agreement, as well as some side agreements.

The documents were signed by Thomas Gockel, president and chief executive officer of LTP; Washington Sycip, chairman of MacroAsia Corp., the Philippine partner in LTP; and Avelino L. Zapanta, president and chief operating officer of PAL.

“Our combined resources, experience and expertise presage far-reaching consequences for the aviation maintenance sector in the country. We now have the means to transform the Philippines into a center for aircraft maintenance, repair and overhaul (MRO) in Southeast Asia,” said the three executives in a joint statement.

"These transactions produce an ideal fit for all three partners and we all look forward to working closely together to realize its full potential.”

The agreements pave the way for the entry of German engineering giant Lufthansa Technik AG, the world’s largest provider of aircraft MRO services, into the Philippines via LTP, its joint venture with MacroAsia.

Lufthansa Technik holds 51% of LTP’s shareholdings while MacroAsia holds 49%. Lufthansa Technik will provide the management and technical skills necessary to enable the joint venture to render world-class services to the aviation industry.

LTP plans to invest over $200 million over the next five years – an amount that includes the initial purchase of PAL’s maintenance facilities and inventory – to improve the facilities and develop them into an MRO hub for Southeast Asia.

The infusion ranks among the largest foreign investments gained during the administration of President Joseph Estrada.

Lufthansa Technik said it selected the Philippines over other possible sites in the region because of the country’s central location and the availability of highly trained and skilled personnel.

Its entry considerably strengthens the country’s aeronautics infrastructure and establishes the Philippines as a serious player in the regional MRO market.

“Aircraft maintenance is a highly strategic industry and the economy stands to benefit immensely from this transaction. It also underscores the fact that the Philippines remains very much a favored investment destination despite the current negative perceptions,” said Sycip, who was elected chairman of LTP during the company’s board meeting earlier in the day.

“LTP expects to generate about $125 million worth of revenue every year, at least 70% of which will be in the form of exports. This consists primarily of third-party contract work from international airline customers,” Sycip added.

“This project will save the country precious foreign exchange, and, at the same time, showcase and improve the skills of Filipino aircraft mechanics.”

Under the Asset Purchase Agreement, PAL agreed to sell to LTP its extensive maintenance and engineering facilities located in Manila and Cebu, together with all the buildings, improvements, equipment, machinery, vehicles and tools related to their operation.

Under the Technical Services Agreement, PAL engaged LTP to be its exclusive provider of aircraft-related technical services for a period of ten years. Such services include regular aircraft maintenance; engine repair and overhaul; airframe overhaul and painting; component repair and overhaul; logistics for aircraft-related parts; and technical line station services.

An important feature of the transactions is the fact that there will be no economic dislocation for the roughly 1,400 employees of PAL’s maintenance and engineering division.

“Everybody who is currently employed will receive a new employment offer from either LTP or PAL. This is on top of the very generous separation package each one will receive. No one will be left out in the cold,” said Zapanta.

LTP confirmed that it would absorb the bulk of PAL’s M&E work force.

PAL’s decision to enter into the twin agreements was approved by the airline’s Permanent Rehabilitation Receiver and the Securities and Exchange Commission. It fulfills a key provision in the carrier’s rehabilitation plan which mandates the disposal of non-core activities, specifically maintenance and engineering.

"Letting go of our maintenance and engineering unit was a tough decision for PAL given the long historical attachment. But it made absolute economic sense in view of the unit’s massively underutilized capacity that could generate significantly more revenue than it does today,” said Zapanta.

He added: “In choosing a new operator, we were careful to pick one that would maximize the facility’s business value and potential. We settled for nothing less than the world’s best in aircraft maintenance.”

Said Wolfgang Mayrhuber, chairman of Lufthansa Technik: “Our medium-term goal is to turn this Manila facility, with its strategic location in Southeast Asia, into a ‘one-stop shop’ offering the full line of aircraft MRO services, at first locally, then regionally and ultimately, internationally.”

When it starts full-scale operations in September, LTP will initially maintain the PAL fleet, which currently consists of 31 aircraft. It will later service the fleet of Air Philippines, which signed a Letter of Intent with LTP today.

Hamburg-based Lufthansa Technik is an independent company within the Deutsche Lufthansa Group, whose flagship Lufthansa German Airlines is Europe’s second largest carrier.

Lufthansa Technik counts a network of 20 subsidiaries and affiliates, plus over 100 maintenance stations all over the world, making it the leading global player in the aircraft MRO industry today. Its overall sales, including those of affiliates, reached 5.2 billion German marks in 1999, for a leading share of 10% of the world market.

MacroAsia Corp., a holding company listed on the Philippine Stock Exchange, is engaged primarily in aviation-related businesses such as ground handling, airline catering and air taxi services.

A wholly owned subsidiary, MacroAsia Properties Development Corp., has been granted approval by the Philippine Economic Zone Authority to operate and develop an economic zone at the Ninoy Aquino International Airport (NAIA) complex. LTP will be the anchor locator in the zone.

Formed in 1946, PAL’s maintenance and engineering department is one of the flag carrier’s major operating units. It operates a 226,000-square-meter technical center and maintenance base at the NAIA complex, and a small hangar at the Mactan International Airport in Cebu.

The NAIA maintenance base includes a four-bay hangar able to accommodate four widebody aircraft, an engine overhaul shop with test cell, several repair and overhaul shops, and logistics and equipment inventory.