Philippine Airlines: Filing for Chapter 11 bankruptcy?

CHAPTER 11 APPLICATION? Philippine Airlines Inc. (PAL), facing a financial squeeze due to COVID-19, is reportedly in talks with aircraft lessors to reduce its fleet size and restructure amid the pandemic-driven downturn, local media reported. The airline is considering a Chapter 11 filing in the US to carry out a “restructuring” plan, the daily Business Mirror stated..

LOSSES: Based on latest published figures, PAL Holdings Inc., the holding company of Philippine Airlines, has reported losses since the first quarter of 2017, including nearly P29 billion ($607 million) in the first nine months of 2020.

RECOVERY PLAN: In November 2020, the Philippine flag-carrier said it was working on a recovery and restructuring plan, but did not give details. In February 2021, the airline announced it would cut 2,300 jobs — about a third of its workforce by mid-March.

TARGET DATE: On May 4, 2021, aviation data and analytics company Cirium has reported that PAL has informed its lessors of a plan to file for Chapter 11 bankruptcy protection in the US by the end of May 2021. The report quoted insiders with knowledge of the matter.

NO GOVERNMENT BAILOUT: After it emerged that a bailout by the Philippine government is nowhere near in sight, the loss-making PAL has sought to reduce its fleet size and told plane lessors about its planned Chapter 11 filing in the US as part of a “restructuring” plan, local media reported.

WHAT IS CHAPTER 11? Chapter 11 is a form of bankruptcy in the US that involves a reorganisation of a debtor's business affairs, debts, and assets, and, for that reason, is known as “reorganisation”. While a Chapter 7 business bankruptcy filing involves liquidation, Chapter 11 allows a business to restructure its debts and remain in operation. A business going through Chapter 11 often downsizes as part of the process, but the objective is reorganisation, not liquidation.

NO STATE OWNERSHIP: The Philippines’ Finance Secretary Carlos Dominguez has earlier told private banks to take the lead in assisting airlines, saying the government didn’t want to take ownership.

FLEET SIZE: PAL is owned by PAL Holdings, part of a group of companies owned by Filipino business tycoon Lucio Tan. It has a fleet of 61 aircraft. The airline could return at least two Airbus SE A350s to lessors and four of the 10 Boeing Co. 777s, according to local media reports quoting officials who asked not to be identified.

DOWNSIZING: Work on restructuring lease contracts and reaffirming commitments is ongoing, according to local reports. Two Airbus A350s are in the process of being taken back by aircraft lessors and will be redeployed to other carriers, according to the Manila-based Business Mirror. Prior to the negotiations, Philippine Airlines had six A350s. One lessor reached an agreement with the airline for it to keep a Boeing 777 and an Airbus A330.

PRE-PACKAGED BANKRUPTCY? PAL is reportedly working on documentation for a “pre-packaged bankruptcy”, local media stated, citing “people familiar” with the process. Philippine media reported that New York-based Seabury Capital LLC was advising the airline on the restructuring. Cirium had previously reported that Seabury was an adviser on the PAL’s “Chapter 11 plan”.

RESTRUCTURING PLAN: Founded in 1941, the airline is one of Asia’s oldest airlines. The airline has a fleet of 61 aircraft, including 10 777-300ERs, 6 Airbus A350-900. A “comprehensive restructuring plan” is sought to enable the airline to “emerge from the global crisis financially stronger”. Flights and operations won’t be affected in any restructuring, it said. Photo shows a PAL aircraft at Manila's NAIA Terminal 2, taken December 3, 2020.

PAL LESSORS: Aviation data analytics company Cirium stated Philippine Airlines’ (PAL) lessors include GE Capital Aviation Services and Goshawk Aviation Ltd. PAL would join dozens of carriers and other aviation businesses, including Latam Airlines Group SA and lessor AeroCentury Corp., in being forced to restructure after global travel was badly hit by the pandemic.

TOURISM DECIMATED: The tourism industry accounted for about 13% of the Philippines’ gross domestic product (GDP) in 2019, and employed 13.5% of its labor force. When COVID-19 hit, arrivals from overseas dropped 82% in 2020, to less than 1.5 million. A scene at Cebu International Airport taken April 15, 2021.

RETURN TO PRE-PANDEMIC LEVEL? In April, the International Air Transport Association (IATA) said it expects net airline industry losses of $47.7 billion in 2021 (net profit margin of -10.4%).

DOMESTIC OPERATIONS. Domestic flights had been active in the Philippines, though the country has adopted varying degrees of movement restrictions and flight bans on certain countries. IATA reported that domestic markets will improve faster than international travel. But as the virus mutates and governments take different approaches to opening borders, industry experts say a return to pre-pandemic levels of international traffic could still take years.

LESS PAINFUL YEAR: IATA stated that the aviation industry is facing a less painful year this 2021, reporting an overall improvement on the estimated net industry loss of $126.4 billion in 2020 (net profit margin of -33.9%). Yet it's still far from a recovery.

NOT GIVING UP: On May 16, 2021, PAL president Gilbert Santa Maria said: “PAL has the largest fleet in the Philippines. Our planes are new but very expensive, so this is a great time of challenge for us. We’re not giving up. We’ve been around for 80 years, and we will be around for a while longer, performing an essential service,” he told a webinar on the tourism industry hosted by Go Negosyo. Santa Maria was appointed PAL president and COO in July 2019.