Philtranco Always Tried Horizontal Integration

Horizontal integration is the setting up or the acquisition of a company at the same level of the value chain and that is meant to help the company compete. It can be a competitive strategy where economies of scale, more efficiency and increase of market power are the objectives. Companies engage in horizontal integration to benefit from possible synergies. But sometimes the resolution of a problem or a bottleneck prods a company into horizontal integration.

Philtranco Service Enterprises, Inc. (PSEI), the leading bus company in the Philippines then tried this strategy over a generation ago. From running a big fleet of buses from Manila to the southern part of the Philippines up to Davao City, they established their own RORO companies in the San Bernardino Strait crossing that linked Sorsogon and Samar. However, the results were certainly very mixed, to say the least, and controversial.

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The Cardinal Ferry 1. Research by Gorio Belen of PSSS in the National Library.

Since 1979, Philtranco buses (they were still known as Pantranco South then) have been rolling across already to Eastern Visayas via the San Bernardino Strait using the newly-fielded RORO Cardinal Ferry 1 of Cardinal Shipping. Newport Shipping which had ferries and cargo ships from Manila to Samar then followed with their Northern Star and Laoang Bay.

This reaction of Newport Shipping was very understandable as Newport Shipping was not really doing well with their Manila to Samar route and maybe they felt they have to defend their home turf as the owner of Newport Shipping is from Laoang, Northern Samar. They might have also felt that this new intermodal route might kill them in the long term and so they have to join the fun.

"Maharllika 1" Ferry unloading Bus

MV Northern Samar. Formerly the MV Northern Star before she was refitted. Photo by Lindsay Bridge of PSSS.

Before the ROROs arrived it was the motor boats of Bicolandia Shipping Lines (this company has legal-fiction companies like E. Tabinas) which dominated the route across San Bernardino Strait. But with the buses now rolling the passengers no longer have to cut their bus trip to Matnog and they do not take a local bus to Allen, Northern Samar to take the lancha (motor boat). Convenience is what the intermodal system offered. Cargo of the passengers that was once a hassle became less with the bus for it afforded less handling and haggling.

Immediately, there was a surplus of bottoms in San Bernardino Strait as the government-owned Maharlika II (later replaced by Maharlika I whom it replaced earlier) was also plying the official Matnog to San Isidro, N. Samar route. Moreover, the passengers to Eastern Visayas did not immediately shift to the buses especially the passengers to Leyte. They were still content with the liners of Sulpicio Lines and William Lines which had calls in Calbayog, Catbalogan, Tacloban and other ports in Leyte and Southern Leyte. In terms of comfort the bus is actually inferior to the liners which has its own toilets and baths, are equipped with bunks with mattresses and even linen (called “beddings”) plus the meals are free and the rice servings are generous. However, they only call in ports unlike buses which roll through the various towns.

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The Maharlika I. Photo from Edison Sy of PSSS.

In the aftermath of that surplus of bottoms, Cardinal Shipping and Newport Shipping teetered especially when Eugenia Tabinas got into the RORO act starting when she was able to acquire the Northern Star in 1981 which she then renamed into the Northern Samar. Eugenia Tabinas was in a strong position as she dominated the intra-Bicol routes with her motor boats and so she can compete in one of her routes at just break-even.

However, with many buses crossing San Bernardino Strait, Philtranco thought they could save money if they operated their own ROROs where they will always have priority. And so they also got caught in the RORO act (they were still strong then and they have just re-fleeted into Hino) and they thereby acquired the Laoang Bay of Newport Shipping which was renamed into the Black Double. In 1984, this became the Philtranco Ferry 1 of Philtranco Services.

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The Philtranco Ferry I. Research of Gorio Belen of PSSS in the National Library.

It is here that things began to get interesting and lively. Eugenia Tabinas or Bicolandia Shipping smelled that Philtranco was operating without a Certificate of Public Conveyance (CPC) and complained to MARINA, the Maritime Industry Authority which is the country’s maritime regulatory agency and which has quasi-judicial powers. Philtranco countered that since they were only loading their own buses then there is no need for them to get a CPC. Now, if MARINA agrees with that then Philtranco will be the only sea carrier without a CPC and that has great implications.

Along the way, Black Double got unreliable as she was built in 1962 and diesel engines were not yet as reliable (with changes in design and technology that changed in the mid-1960s especially when Daihatsu marine engines became dominant). She was sold to Badjao Navigation and she became the Badjao and she plied a route from Cebu island to Leyte.

While the case was pending (as it reached the higher courts as MARINA quasi-judicial decisions can be appealed in the Court of Appeals and the Supreme Court), Philtranco acquired the salvaged Mindoro Express from Prince Valiant Navigation which then became the Christ The Saviour and Christ The King. The RORO became the Luzvimin Primo because she was now under the Luzvimin Ferry Services, the new ferry company of Philtranco.

Mindoro Express ( now Maharlika Cinco )

The Mindoro Express just before she became the Christ The King and Luzvimin Primo . Photo by Edison Sy of PSSS.

In due time (which means a long time), the Supreme Court sustained the ruling of MARINA that a shipping company cannot carry passengers without a CPC and the ferry service of Philtranco stopped. By that time Philtranco was already toppling and it was fast losing its Hino buses.

Philtranco then fell into the hands of transportation mogul Pepito Alvarez who then equipped Philtranco with his new MAN and Nissan buses. Soon, he was able to reach a deal with the administration of President Fidel V. Ramos to operate the already-weak Maharlika ferries which in that time consisted only of Maharlika I and Maharlika II (this one was not in San Bernardino Strait but in Surigao Strait).

After settling in, Pepito Alvarez added the Maharlika Tres, Maharlika Cuatro and Lakbayan Uno (this was later sold to Millennium Shipping). And then the Luzvimin Primo became the Maharlika Cinco. Later, the Maharlika Seiz and Maharlika Siete were also also added to be followed by the Grand Star RORO 1 and Grand Star RORO 3 which came from Phil-Nippon Kyoei. This time Philtranco was already careful about the CPC. In these moves, Pepito Alvarez worked through his protégé Cristopher Pastrana.

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Maharlika Cinco and Maharlika Seiz. Photo from the PPA.

The horizontal integration of Philtranco was not necessarily beneficial for the passengers unless maybe in its early years when the dominant Bicolandia Shipping Lines engaged in what is locally-known as “alas-puno” system of departures when a ferry will only leave if it was already full of rolling cargo (and that was the cause of their downfall later). With that system, the buses and its passengers lose time and it could be in the hours.

But when ROROs bloomed in San Bernardino Strait, horizontal integration became a negative because Philtranco buses have to wait for the ferries (Maharlika ferries were not so reliable and it tried many routes in the country including in Catanduanes, Masbate, Marinduque, Batangas and Panay and so its presence in San Bernardino Strait and Surigao Strait was actually diluted and trips were few) as Philtranco buses have no freedom to sail in competing ferries.

I was once a passenger aboard a Philtranco bus from Davao. Our driver was driving fast so we can board the morning RORO of Maharlika in their Dapdap port (owned by sister company Philharbor). We arrived at 8:30am only to see the ferry has just left. There was only one Maharlika RORO then there and we waited for its return. Finally, we left Dapdap port at 1:30pm and everybody was so pissed up including the drivers as we saw several ferries leaving the competing BALWHARTECO port ahead of us. If our Philtranco bus had freedom, we would have been aboard the first of those that left BALWHARTECO port and saved several hours of waiting time.

Dapdap port

Grand Star RORO I and Maharlika Tres in Dapdap port. Photo by Mike Baylon of PSSS.

The Philtranco driver/conductors also didn’t like that they have no freedom to load the buses in competing ROROs. The reason is they can’t avail of the “rebates” offered by the competing shipping companies. This comes in the form of free ferry tickets that can be sold by the driver/conductors to their passengers. Even if only half the tickets are free that can come up to an average of P1,500 for the driver/conductors in additional income.

When Archipelago Philippine Ferries, the name of the shipping company established by Pepito Alvarez) weakened and they just had a limited number of ROROs running, Philtranco finally allowed its buses to ride the competing ferries as passengers began to shun them. However, when the FastCat ROROs came for Archipelago Philippine Ferries, the Philtranco buses were no longer allowed that again. There was also the experiment where the Philtranco buses were no longer boarded aboard the FastCat ROROs and only the passengers and their cargo were loaded. In that system, a Philtranco bus will be waiting at the opposite port.

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Philtranco buses that disembarked from a FastCat. Photo by Mike Baylon of PSSS.

Now, Philtranco’s fleet is whittled and it is already far from its number in the 1980s after they re-fleeted from Leyland to Hino. And the tables turned already. It is so-many FastCats that needs them now and not the other way around.

Now, did you know that founder A.L. Ammen tried horizontal integration too?

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It Is a Dogfight Now in the Surigao-Leyte Routes

In the early days there was only one RORO route connecting Surigao and Lipata across Surigao Strait and this was the Lipata-Liloan route using Lipata Ferry Terminal and Liloan Ferry Terminal. There was an earlier route using Surigao port and Liloan municipal port (run by Cardinal Ferry 2 of Cardinal Shipping) but that was in the earliest years and was gone in due time when the Ferry Terminals were built. And there was that really old routes using motor bancas to link Surigao to San Ricardo and Cabalian which are existing until today. And if Dinagat is considered still a part of Surigao then there is still a motor banca connecting that to Liloan.

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In the 1990’s, the RORO crossing between Lipata and Liloan was languid. At its worst there were only two trips each day and that happens in the off-peak season or when some ferries are hit by mechanical troubles or was in the drydock. This crossing then between Surigao Strait was known to be the base to some of the lousiest ferries in the country but to their credit they do not sink. Empirically, as has been noted in the Philippines there is no correlation between lack of maintenance and sinking. It really depends on the seamanship.

The Maharlika ferries then connecting Lipata and Liloan was known to sail even if only one of two of its engines is running. And Maharlika Dos will just stop sailing if its two engines were not running anymore and then clog Liloan Ferry Terminal. And to think this was a ferry built just the decade before. It even seems then that Maharlika Cinco was more reliable when to think she already had an excursion to the bottom of the sea in Coron as the Mindoro Express.

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The Millennium Uno of Millennium Shipping was no more reliable then being very old already and there were instances she simply conks out and is not heard for months. Many will then surmise she was cut up already and when many think she was gone she will reappear suddenly. I was not too surprised by the performance and lousiness of these ferries because I had already observed the pattern that this was an affliction of many Marcos transport companies. Maintenance is lousy and there is no management to speak of if based on management books.

Three trips then in a day in one way was just enough for the traffic. Two trips is bad especially if one arrives in an off-hours because that will mean hours of interminable wait. Baddest is if one just misses a ship. That happened twice to me when I missed the 12nn ship in Liloan and I have to wait for the next trip which was 11pm. Mind you there is really nothing to go to, nothing to do in Liloan and the nearest semi-urbanized town Sogod is more than 40 kilometers away. There was also no cellphone signal then there in Liloan. There were also many times I reached Liloan in late afternoon and the next ferry was still that 11pm ferry because the 5pm ferry is missing.

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There are not many vehicles crossing then yet and the only buses crossing were the Philtranco buses to and from Manila (it was Pantranco South earlier). The long-distance trucks still have to discover this route then. Most trucks crossing then were Mindanao trucks that have goods to sell north.

Slowly the traffic grew. There were even those that bring their vehicles to Manila so they will have a car there. And slowly the trucks from Manila began using this route as well as the trucks that have a commerce between Southern Mindanao and Cebu. The Bachelor buses also started their route to Tacloban and Ormoc.

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Photo Credit: Bemes Lee Mondia

That then proved that the old ferries of the route – Maharlika Dos, Maharlika Cinco and Millennium Uno were inadequate. The first challenge and the first improvement was the arrival of the Super Shuttle Ferry 5 of Asian Marine Transport Corporation (AMTC) which arrived in the late 1990’s. The Super Shuttle Ferry 10 replaced it later. Along the way, Asian Marine Transport Corporation also rotated other ferries there.

The fielding of a lone AMTC ferry was just enough to fill up the needed lack of ferries in the route especially since Maharlika Dos and Millennium Uno never had sustained periods of reliability. It was also welcome since it was cleaner, faster and had an airconditioned accommodation plus it did not smell.

Things changed when Benit port at the southern tip of Panaon island was built by Gloria Macapagal Arroyo, she who is wont for duplicate ports. However, Benit is not a simple duplicate port since its crossing distance is much shorter and so at the very start it was a threat to Liloan like when Allen displaced San Isidro port in Samar.

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At the start, nobody plied a route to Benit. Maybe the incumbent ships of the route didn’t want a change because after all they can charge more in the longer route. But that proved shortsighted.

Gloria Macapagal Arroyo then gave the operation of the port to Montenegro Shipping Lines, her favorite shipping company. Maybe to forestall any loss she made it a buy one, take one deal. She also gave the operation of the very profitable Matnog port to Montenegro Lines! As they say in the Philippines, iba na ang malakas!

Montenegro Lines then proceeded to operate a Lipata-Benit route. Suddenly, the former pliers of the Lipata-Liloan route found they have been outflanked. The crossing time to Benit is just over a third of theirs. And woe to them, the Manila bus companies which had a route to Liloan extended their route to San Ricardo (which has jurisdiction over Benit). But don’t think the Manila buses goes to Benit port. They don’t. One still has to take a 2-kilometer habal-habal ride to the port.

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Montenegro Lines made a killing in the Benit route. Their rates are almost the same as the Liloan rates and yet they only travel 3/8 of the distance. If that is not tubong-lugaw, I don’t know what is. The passenger fares are also much higher per nautical mile than the Liloan fares. And ever since from then the ridership and load of the Liloan ferries have been on the decline. There was even a time when all buses – Philtranco, Bachelor and the various colorum buses were taking the Benit route.

Then came the Typhoon Yolanda tragedy. With the surge in relief and rehabilitation efforts suddenly there were complaints of mile-long queues of trucks. It was not only because of Yolanda. By this time the forwarders and shippers have found that sending a truck especially a wing van truck to Mindanao is cheaper than a container van and it arrives earlier. This was also the time too when Manila port congestion and Manila traffic became issues and the forwarders and shippers found it was better to send a truck down south than try to beat the traffic and congestion in Manila. And the benefit is double if the origin is LABAZON (CALABARZON without Cavite and Rizal). By the time the cargo is loaded in a container ship in North Harbor the comparative truck will already be making deliveries in Mindanao.

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And so MARINA approved the fielding of Cargo RORO LCTs which was designed to take in the trucks and its crews. Supposedly it does not take in passengers but it seems there are exceptions. The people call it “2GO” there because the operator is NN+ATS. The Cargo RORO LCTs are just chartered but they are the brand-new China LCTs which are called “deck loading ships”.

Along this way, AMTC lost its route service because they lacked ships and they pulled out the Super Shuttle Ferry 18 so it will retain its Roxas-Caticlan route. Sta. Clara Shipping/Penafrancia Shipping then appeared in the Liloan-Lipata route. I thought there was an equilibrium already.

But lo and behold! the much anticipated and already announced FastCats of Archipelago Philippine Ferries (which were also the owner of the lousy Maharlika ships appeared) and they brought not one but two new catamaran FastCats which are faster and has higher rolling capacity than the old ferries in the route. They might have really been entitled to two since previously they had two ships there but one already sank, the Maharlika Dos and the others were sold, the Maharlika Cuatro and Maharlika Cinco (the first was a replacement for the latter).

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Lately, it seems FastCat pulled out one of its crafts but is still sailing 3 round trips a day (or at least two on weak days). And being fast and new it is pulling in the vehicles. Meanwhile, the Cargo RORO LCTs are suctioning the trucks as it is the cheapest transit available. With those two developments even Montenegro Lines in Benit is affected. But more affected are the other ferries in Liloan that they now resort to “callers” in the junction leading to Liloan port. How fortunes change! In the past just when a ship is arriving there was already a queue of vehicles for them.

Added to the fray is Millennium Shipping which is not quitting yet. The Grandstar RORO 3, previously of Archipelago Philippine Ferries appeared and it is using the Liloan municipal port. Reports say it is Millennium Shipping that is operating it already aside from their Millennium Uno.

Times have changed. Where before three or four trips a day seemed adequate it seems there are about 15 trips a day now but not all are full. The way I sense it with the Cargo RORO LCTs and FastCat it is already a dogfight now and there might even be an excess of bottoms already.

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Photo Credit: Joel Bado

Well, that is good as the public might benefit. However, I have doubts as I noticed MARINA never ever learned how to compute rates even in light of cheap fuel. I wonder if fuel consumption is ever factored in their rates.

I just wonder if AMTC and Ocean King I are thankful they are no longer in the route.