Philippine Airlines files for bankruptcy protection as COVID continues to drain financials

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Metro Manila (CNN Philippines, September 4) – Philippine Airlines (PAL) is seeking bankruptcy protection in the United States—a move the flag carrier is banking on to survive the coronavirus pandemic as it encounters a turbulence in its finances.

After months of keeping mum on the matter, the company in a statement on Saturday said key stakeholders have agreed to pursue the filing for the US Chapter 11 bankruptcy in New York, which allows the airline to continue its operations while under restructuring.

A parallel filing for recognitions in the Philippines under the Financial Rehabilitation and Insolvency Act (FRIA) of 2010 will also be made.

PAL said the restructuring plan, which needs court approval, includes hopes to slash $2 billion in borrowings and cut its operating fleet capacity by 25%.

The group is also aiming to raise fresh funds amounting to $505 million in long-term equity and debt financing from its majority shareholders, and $150 million from new investors.

"We welcome this major breakthrough, an overall agreement that enables PAL to remain the flag carrier of the Philippines and the premier global airline of the country, one that is better equipped to execute strategic initiatives and sustain the Philippines’ vital global air links to the world," Lucio C. Tan, PAL chairman and chief executive officer, was reported as saying in the statement.

"We are grateful to our lenders, aviation partners and other creditors for supporting the plan, which empowers PAL to overcome the unprecedented impact of the global pandemic that has significantly disrupted businesses in all sectors, especially aviation, and emerge stronger for the long-term," he added.

The airline said it would be business as usual, mounting flights in the normal course in accordance with safety regulations.

PAL is eyeing to bolster its local and international flights in anticipation of a travel rebound, with passenger and cargo operations untouched by the filing of bankruptcy protection.

"Flights to continue uninterrupted and all valid tickets, vouchers, refund applications and Mabuhay Miles to be honored," it said.

The firm added its partner travel agencies and other commercial partners do not have to worry about disruption in their interactions with PAL.

Investors watching PAL's next moves

Equity trader Aniceto K. Pangan said in a mobile message that while the decision would dampen investors' sentiment, this was the "best option" for PAL given the current global health crisis drying up air travel demand.

"Definitely, investors would feel negatively on this move as this just manifests the difficulty of running the company at this pandemic time. As always, this is the best option that management could take for now so as to survive [and] continue to operate in this crisis," he told CNN Philippines.

Philstocks financial senior supervisor for research Japhet Tantiangco also said that once the air carrier receives court approval, this will "strengthen their balance sheet while continuing business operations."

Both Tantiangco and Pangan said the airline's move will not dent operator PAL Holdings shares.

The trading of PAL Holdings shares was suspended since mid-June after its independent auditor did not provide an opinion on the company’s financial statements.

"Once it resumes trading, the filing of Chapter 11 may have limited impact on sentiment towards PAL. This is because investors are also weighing the current situation in the overall aviation industry," Tantiangco said in a separate interview.

"Airlines are still struggling due to limitations amid the ongoing COVID-19 situation wherein cases are still rising. At the same time our economic condition has led to lower incomes on a macro-scale which in turn may weigh on the demand for airline services," he added.

Regina Capital Development Corp. managing director Luis Limlingan, meanwhile, said the current shareholders were betting on PAL's recovery.

"[They] have probably been aware of those risks for sometime when the bought the shares during the pandemic," he said. "Perhaps next they will be watching the next steps such as what will be done with the existing assets and how to repay the debt."

Will the reduction in fleet volume result in another round of layoff?

Aniceto said that there is a possibility that the airline will decide to cut its workforce anew if its fleet capacity would drop by 25%.

Tantiangco, however, shared a different insight. "If the fleet capacity that they are going to let go of is not being utilized in the first place given the current weakness in the demand for airline services, then it may not have an impact on their workforce."

PAL did not answer when asked about the number of aircraft that would be let go, and if there would be potential dismissal.

Its spokesperson Cielo Villaluna said questions from the media will be entertained in a press briefing set on Monday.