1. PAL File Chapter 11 Bankruptcy in New York Court
Last Friday, Philippine Airlines (PAL) filed for U.S. Chapter 11 bankruptcy. The airline is permitted to continue normal operations while trying to restructure debt and other financial means in order to survive. The company aims to cut $2 billion in borrowings through a proposed restructuring plan, which needs court approval. Philippine Airlines will also get $505 million in equity and debt financing from its majority shareholder, as well as $150 million of debt financing from new investors. The carrier said it has support agreements from 90% of its lenders. A petition was filed in New York district court last Friday.
2. What is Chapter 11 Bankruptcy Code?
A case filed under chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy. Usually, the debtor remains “in possession,” has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow new money.
A plan of reorganization is proposed, creditors whose rights are affected may vote on the plan, and the plan may be confirmed by the court if it gets the required votes and satisfies certain legal requirements.
A chapter 11 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor has a domicile, residence, or principal place of business. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors that meet certain requirements. Unless the court orders otherwise, the debtor also must file with the court:
- schedules of assets and liabilities;
- a schedule of current income and expenditures;
- a schedule of executory contracts and unexpired leases; and
- a statement of financial affairs.
3. Restructuring Plan
As part of its reorganization plan, Philippine Airlines is planning on reducing the size of its fleet by roughly 21 aircraft, leaving the airline with 70 aircraft. Most significantly, Philippine Airlines intends to get rid of:
- Four of six Airbus A350-900s, which are an average of under three years old
- Four of 10 Boeing 777-300ERs, which are an average of just over seven years old
- An undisclosed number of Airbus A330-300s; the airline has 15 of these in its fleet, which are an average of just over seven years old
4. Filings in Philipines and Affect on Services
The airline—which also aims to complete a parallel filing in the Philippines under the Financial Insolvency and Rehabilitation Act of 2010—said it is committed to maintaining business continuity throughout the restructuring process while meeting its financial obligations to employees, customers, the Philippine government, its lessors and creditors.
According to Nikkei Asia, the company has been preparing since late last year for the court-backed restructuring amid turmoil in the travel and tourism industries due to the coronavirus pandemic. According to the newspaper report, the company has laid off a third of its workforce and pushed back deliveries of new aircraft.
5. Impact of Such Bankruptcy Filings
In many similar cases, we have seen struggling South East Asian airlines transform into a more regional-first airlines. For example, Malaysia Airlines, Garuda Indonesia and Thai Airways have all become more focused on their regional operations after restructuring processed triggered by decreased demand due to the pandemic.
While it may seem counter-intuitive that the Manila-based airline is seeking bankruptcy in the United States, this is often the case with multinational companies due to them having an entity in the U.S. for regulatory reasons. With this bankruptcy case, filed in New York, the airline hopes to be released of some debt and to reduce its fleet by 25%.
Both Boeing and Airbus planes will be returned to their lessors, bringing the fleet down from 92 to 70 aircraft. Also, the airline will ask Airbus to delay the arrival of 13 new narrow-body jets. Like other airlines worldwide, PAL has temporarily grounded some of its fleet while demand for air travel remains low.
Image Credit: Philippines Airlines Website
