For PAL’s reinvention, not liquidation

Congratulations to Justice Japar B. Dimaampao, 57, for his long-delayed but well-deserved promotion to the Supreme Court. I know him personally to be as trustworthy as his uncle, retired CJ Hilario G. Davide Jr., as gentle as his aunt Gigi Davide, and as devout a faithful Muslim is to the teachings of Allah, as a good Christian is to the commands of Jesus Christ to love God and neighbor.

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Though filed under Chapter 11 of the United States Bankruptcy Code, the 18-page petition (under Official Forms 201, 202, and 204) of Philippine Airlines (PAL) aims to restructure its finances, assure its recovery, and reinvent itself to become stronger and better, and not to liquidate its assets or to cease its operations.

This aim to continue in good faith its mission as a full-service airline and flag carrier of the country is clearly shown, in my humble opinion, by the facts that the petition was filed (1) voluntarily by PAL itself, not by its bankers, displeased vendors, or customers; (2) after PAL had obtained a consensual agreement with substantially all of its lenders, lessors, aircraft and engine suppliers, and its majority shareholders; and (3) after PAL had been able to secure firm commitments of fresh capital infusion of up to $655 million including Debtor-in-Possession (DIP) financing of $505 million from its major shareholders, Buona Sorte Holdings Inc. and PAL Holdings Inc. (both controlled by taipan Lucio C. Tan), and from local banks to sustain its liquidity during the crisis, and to be converted into equity or long-term debt later.

True enough, during the initial hearing on Sept. 9, the US Bankruptcy Court for the Southern District of New York granted all of PAL’s “First-Day” motions, thereby allowing the carrier (1) to operate in the normal course undisturbed by the pendency of the petition, (2) to honor and maintain all customer programs including valid tickets and travel vouchers, and Mabuhay Miles and benefits, (3) to pay ongoing suppliers and trade creditors in the ordinary course of business, (4) to continue paying all employee wages, compensation, and benefit obligations, (5) to operate its domestic and international flights, and crucially, (6) to access the first $20 million from its DIP financing of $505 million, thereby allowing it to undertake the five foregoing measures.

These milestones mark important steps in PAL’s recovery plan, especially in securing what bankers call a “permanent haircut” of over $2 billion (P100 billion) in liabilities, thereby enabling it to recover its accumulated deficit (as of June 30, 2021) almost equivalent to that sum.

Notably, despite its financial difficulties, PAL has remained as one of the top 10 safest airlines in the world chosen by the Safe Travel Barometer from 150 carriers, rating 4.2 out of a possible 5. Lufthansa copped the first place at 4.5, and Alaska Airlines the tenth at 4.1.

As required by law, the petition listed PAL’s five largest creditors secured by aircraft and spare engines as collaterals, as follows: PK Airfinance of Luxembourg, $334.23 million; “EXIM Guaranteed Loans” to four international banks, $240.1 million; Philippine National Bank (PNB), $156.51 million; Banco de Oro, $80.42 million; and China Banking Corp., $54.83 million.

It also listed in good faith the carrier’s 40 largest unsecured claims, including those from affiliates (Buona Sorte, PNB, Air Philippines, MacroAsia Airport Services), government agencies (Manila International Airport Authority, Civil Aviation Authority of the Philippines), local banks (Asia United Bank, China Banking Corp., Union Bank), aircraft lessors, foreign banks, maintenance service providers, etc.

In general, a Chapter 11 filing does not necessarily mean the filer is going out of business. In fact, it allows the filer to restructure its debts, downsize its operation, reduce expenses, free up assets, and emerge leaner and sprightlier, like what giants Delta Air Lines and General Motors have done.

Accordingly, to become slimmer and better, PAL will trim its fleet by 25 percent, which would entail the return of 22 aircraft; will relinquish its losing long-haul routes to NYC and London; and will focus on serving profitable destinations in the Philippines, China, and Australia.

Normally, Chapter 11 is a lengthy process. However, given the prepackaged and prenegotiated measures I earlier explained, I believe PAL can successfully exit Chapter 11 by yearend, as hoped for by PAL president Gilbert Santa Maria.

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