PAL & Chapter 11: FAQs

There have been media reports about PAL filing for Chapter 11. Here are some answers to the questions surrounding it. The opinions are my own and do not necessarily represent those of the PAL Board or its Management. They are a layman’s take on what can be a complex legal exercise.

What is Chapter 11?

Contrary to common belief Ch. 11 is neither a liquidation nor a bankruptcy. It is an accepted court proceeding filed in the U.S. that allows a company legal protection from creditors so it can reorganize its business in an orderly and fair manner. The process is overseen by a U.S. judge to whom the company management is accountable. Ch. 11, unlike Ch. 7 which is a liquidation, permits the company to conduct its business as usual, raise new money from investors and banks in so called “debtor-in-possession” financing, and fulfill its commitments to its clients, in PAL’s case its passengers.

Why would PAL file in the U.S. and not in the Philippines where it is registered?

Many of PAL’s creditors are foreign aircraft lessors with legal jurisdiction in the U.S. and Europe. Ch. 11 grants PAL worldwide protection. I understand Philippine courts will generally accept Ch. 11 proceedings. Many international carriers particularly from Latin America that have been affected by COVID; have filed for Ch.11

What will the judge consider before approving a Ch. 11 filing?

A judge will assess the extraordinary circumstances surrounding a company’s business, in PAL’s case the pandemic. Many companies filed for Ch.11 during the 2008 financial crisis. The judge will review the company’s plan of reorganization including its recovery strategy, the amount of new money to be raised, the level of creditors’ consents and the prospect of settling their claims over time. Much relies on the good faith of management. In certain instances, the judge will grant court protection even without a formal plan in a so-called “free fall” filing if there is an urgency to stave off unorganized creditors’ claims which will permanently damage a company. If and when it does, PAL expects to file for Ch. 11 with a proper plan of recovery approved by the vast majority of its creditors which should expedite its exit from Ch. 11 and its return to normalcy. 

How are PAL’s stakeholders affected by a Ch. 11 filing ?

Chapter 11 preserves an enterprise so essential to our country and protects jobs. PAL’s stakeholders – creditors, suppliers, employees, shareholders, passengers, the tourism industry – were all affected by the COVID shutdown of air travel. Ch. 11 is not something a company takes lightly unless it is the only viable way to defend it from an exogenous crisis. PAL (and Cebu Pacific) is too important to fail. PAL has during the pandemic brought home our stranded OFWs, kept critical supply chains running and with its unique cold storage facilities on air and land; transported our vaccines.

When does PAL exit Ch. 11?

Barring worsening COVID, PAL expects to emerge from any Ch. 11 within 3-6 months. Many established companies have entered and successfully exited Ch. 11. General Motors, Chrysler, and Texaco are among them. Hertz, the car rental company, filed for Ch. 11 last year and expects to exit this summer. In 1997 Apple was in trouble, considered Ch. 11 but was rescued by a Microsoft loan. Today Apple is a two trillion dollar company.

PAL has had a number of legacy issues over the years. What makes PAL different this time?

COVID forced all companies to reassess themselves. PAL was obliged to review its strategy, cost structure and culture; and change. The company hired Seabury, an internationally recognized aviation consulting affiliate of Accenture, to develop a recovery plan that already is in place. Top management has been professionalized. The family has invited established, strong willed directors from the business community to make up 40% of the Board. These independent directors chair the important Audit, Governance and Restructuring Committees. Board directors are not financially compensated. The employees have agreed to a retrenchment plan with fair settlements. Creditors have accepted in principle substantial hair-cuts with conversions of debt to equity. The Tan family has injected significant new monies into PAL with more to come. Private banks have stepped up with fresh loans. It will take PAL at least 2-3 years to fully recover but its business will go on and its planes will fly for many more years. The priorities of PAL are the travel and health safety of its passengers, their customer experience and support of the economy.

How has Government helped?

There is existing and pending legislation to financially help the Philippine aviation industry. All national carriers in the world including the most prestigious  – Singapore Airlines, Cathay, Japan Airlines, the major U.S. and European carriers – have received massive lifeboats from their Governments. Our Dept. of Finance has committed in principle to helping our aviation industry but is constrained by many other demands. Cebu Pacific has been granted loans from the government financial institutions (GFIs). PAL has pending loan applications with DBP and Land Bank since last year but these are still under consideration. The GFIs understandably want to ensure they are not bailing out PAL at the expense of taxpayer money. PAL has met all the conditions requested by the GFIs namely burden sharing by all stakeholders, a recovery plan fully vetted by international experts, a strengthened Board and Management, counterpart funding from shareholders; and good collateral for any GFI exposure. PAL is not seeking a sweetheart deal. Hopefully the Government will give these due consideration.

What about non-financial Government assistance?

Our aviation industry has been affected by changing travel protocols as the pandemic continued to evolve. For some time only 1,500 incoming travelers were allowed daily (of which PAL’s cap was 500/day) into NAIA which is only about 5 plane loads. This resulted in chaotic scenes in foreign airports where now-unemployed and penniless OFWs could not return home with no place to stay abroad. For humanitarian reasons PAL has at times boarded excess passengers and paid the fines imposed to repatriate these hard hit heroes.The entry limit was recently increased to 2,000/day for NAIA (of which PAL gets a quota of 640) but that is still not enough. A DOT sponsored Green Lane for vaccinated passengers is now under study.

Government can only manage COVID not eradicate it. PAL’s forward sales are very strong indicating there is a huge demand from travelers but this is being constrained by health protocols. As in other countries we should allow entry of vaccinated, PCR tested passengers without quarantining them. There could be minimal COVID leakages but we must weigh this against the damage to our economy. There is no full assurance of anything. Even the vaccines are not 100% efficacious.

What is next for PAL?

PAL management is confident of its Reorganization Plan under the current COVID scenario. PAL is committed to honoring all forward bookings and refund travelers when it cannot because of Government restrictions. The Tan family has publicly expressed its support for PAL over what will still be an arduous journey to recovery. With the uncertainties of COVID PAL could use some financial support from Government now much reduced from its original request as private banks have stepped up to cover some of the shortfall. PAL welcomes a continuing dialogue with the health authorities and all concerned Government agencies and legislators on ways to securely open air travel and support our much needed economic recovery.

Can PAL passengers safely book their summer and Christmas travel?

Yes if the health authorities allow it. Ironically, if it happens, Ch. 11 is possibly the best assurance of this.

(The writer is a recently elected independent PAL director)

Looking For Big Ideas

“The greatest weakness of man is doubt”- Matthew

Our country needs some really big ideas.

 Pre pandemic we were able to grow by exploiting our natural resources and picking the low lying fruit of urban property, banking, retail and overseas remittances. These resulted in urban congestion, massive income inequality and unbalanced development. We became complacent with annual growth of 6% forgetting that, one, it is about the quality of growth, not the quantity; and two, like all successful businesses one has to continue to reinvest in the long term drivers of an economy. We have been eating into our educational, infrastructure and environmental capital without knowing it.

We need a forensic dive into the weaknesses of our economic model. The truly successful companies are those like Amazon that ignore short term results and invest for the future. We need to re-invent ourselves with outsize thinking out of the box. Thailand’s big idea was agriculture and tourism. The north Asian countries was technology. Vietnam today is about food efficiency and security and skilled value added manufacturing. The Philippine’s last big idea was BPOs and look how well it has done. However we cannot continue to rely on this one product, price dependent strategy because we will eventually lose our comparative advantage with upcoming countries like Bangladesh.

The big ideas for the Philippines have to come in the following areas: Education, rural development, technology, universal income and health; and infrastructure. These are the long term catalysts for sustainable growth.

Education – The Biden Administration just launched a massive drive into pre-K and shortened post high school education. It is now acknowledged that children’s development starts at the pre-kindergarten level. Pre-K will allow young mothers to work. On the other side, experts now believe two years of good community college is all that is needed for many technical tasks. Google now offers certification courses and a guarantee of employment for such graduates. Vocational schools are arguably more critical to good jobs than a mediocre 4 year liberal arts degree. The focus on community colleges means students can be released earlier into the work force and accelerate income and demand. The budgetary savings from going from 4 years to two years can be devoted to improving the quality of the degrees and the teachers. 

Private sector schools should be harnessed into this self improvement. They receive substantial fiscal incentives so they should give some of this back with outreach programs and increased scholarships. The size of the tax forbearance they enjoy might be measured against the direct support for poor students and assistance to public institutions of learning.

Rural development – The countryside is home to over 2/3 of the population and yet agriculture continues to be neglected. This has resulted in a massive migration to cities, urban congestion and poverty; and vulnerability to pandemics. 

We must make it easy for Filipinos to return to their roots. With the reformulation of LGU’s  share in the revenue take of Government, LGUs now have more money to invest in schools and health facilities. We should condone farmer loans under the Land Reform program much of which is in default anyway. Farmers should  be protected with fair farm gate prices and import monitors. Food cartels should be dismantled. We should improve irrigation and clean water facilities, build farm to market roads, provide inexpensive broadband and disperse education and health through a Peace Corp-like program to encourage graduates and residents to spend time in the communities. Businesses should be given fiscal incentives and labor security to locate to the provinces.

Technology – The internet is the biggest economic equalizer. We need a universal broadband program. California currently provides the poor a free handset and unlimited data. It is financed by a tax on mobile phones and usage. We should consider a tax on high end phones and excessive use of broadband most of which goes to entertainment, unproductive games and social interaction. This could finance free but limited data and inexpensive phones for the marginalized; and a rollout in the countryside using satellite low orbit technology. The mobile penetration will allow for digital banking to unserved areas. 

Government should develop a comprehensive Management Information System. This will allow it to efficiently allocate resources, oversee programs, improve tax collections and strengthen distribution of relief funds.

Universal income – The idea that all citizens should have a minimum basic income is taking hold in many countries. COVID accelerated this thinking. The Philippines has a Conditional Cash Transfer program that has many weaknesses but is generally considered to be a success. The concept of a safety net that includes unemployment insurance funded by business payrolls should be studied.

How will all these programs be funded? We have touched on a progressive tax on broadband usage. There are enough revenue streams for health if only we can stop the corruption in Philhealth and the DOH. Property taxes should be increased. E-commerce should be taxed if only to take away their advantage versus struggling bricks-and-mortar businesses. We might consider special assessments on big businesses for dedicated initiatives just like condos impose on unit owners for one time capital expenditures. We should increase the tax on non-OFW travel and plough it into tourism. Lastly we should borrow if necessary. The return on investment on big ideas is a multiple of the cost and service of such loans. Look at the experience of Silicon Valley, South Korea, China and Taiwan.

Every Government agency should be challenged to produce at least one Big Idea. In some cases it may not require re-tooling or money but simply a shift in mind set, a Cultural Revolution. The private sector should be brought into the conversation. Public Private Partnerships are focused on infrastructure but it should be more than transactional, it should be a continuing dialogue on priorities, processes and common goals.

The elections are soon upon us. Candidates might wish to adopt some of these universal themes to bolster their policy credentials. Legislators may want to craft the laws needed to make things happen.

 Quantum ideas are the product of creative, critical and disruptive thinking. I do not profess to know any or all the answers but I do know we need a discussion of our future, how to up our game and not be content with mediocrity and marginal improvements. The challenge is in the execution. Big ideas involve massive change so will meet with bureaucratic and even private sector resistance. They will not show immediate results being generational in nature so they will face public skepticism and impatience. Outsize thinking will need enormous political will in the face of doubt and obstruction. But that is the test of true leadership, the ability to persevere over time.

And The Winner Is …..

In less than a year we will be into the most exceptional and critical election of our history.

Whatever the Government tells us the economy will still be in trouble. Our dismal first quarter numbers confirm we are behind the curve and will again be in the second.

COVID will not have gone away. With worldwide vaccine shortages, our management record, the refusal by many to be inoculated, the complex roll out and the variant, we will still not be herd immune by this time next year which is also when many will need to be-revaccinated. Duque cannot even jab our President without creating a stir.

The pandemic will change the electoral process. Limited public gatherings will make it hard for political challengers to launch which favors the incumbents. The elections may even be deferred creating constitutional confusion.

COVID will affect voter turnout. Registered voters are projected to reach 62 million. If the turnout is unchanged from 2016 at 78%, in a three party race at least 19 million votes or 40% of the total is probably needed to win. In 2016 President Duterte won with 16 million or 39% of the votes overwhelming Mar (23%) and Poe (22%).

Our voting population will be younger, mobile penetration deeper. The winner must run smart with technology, social media, big data and artificial intelligence. The messaging must be tailored to the new demographics.

May 2022 will see a generational shift in our political leadership. In 2016 the youngest among the top contenders was Grace Poe, this time she will be the oldest. The average age of the four front runners is 47.

There will be less money to go around. Candidates will have to prune their schedules, air and ground budgets and rely more on social media and radio to get their messages out. With ABS-CBN gone there will only be one major TV outlet.

Not since Marcos have we had a President so totally and openly committed to extend his term through family. We will see what this means.

The latest Pulse Asia poll ranks the top seven candidates with Sara at 27%, Marcos 13%, Poe and Moreno 12% each, Pacquiao 11%, Leni 7%, Bong Go 5%. The short list could be down to 3-4 as I expect Marcos, Bong Go, Leni and possibly Isko or Grace to eventually opt out.

Surveys show Sara way ahead but that must be contextualized: One, polls can be remarkably wrong.

Two, the outcome will depend on the spread of the field. For example if Poe, Moreno and Leni were to morph into one candidate he/she could mathematically garner 33% of the vote. If Marcos and Bong Go stood down the field could suddenly become competitive. We cannot assume a vote for the two is automatically a vote for Sara.

Three, the key is not poll numbers but voter turn out. The latter hinges on the ground game, the money and the messaging.

Four, much could swing with the ticket. A Sara/Pacquiao tandem would be near unbeatable. A Pacquiao/ Isko ticket would seriously rival a Sara/Marcos slate. Then there is a Sara/Digong combination but that may be a family too many. In 2010 Duterte ran as Vice-Mayor with Sara as Mayor after his three consecutive terms expired.

Five, the candidates with money – Sara and Manny – have still not flashed their cash. The polls will change once the marketing gets going.

Six, the President’s health could upend all predictions. Leni would become President. Sara would benefit from the sympathy vote. Manny could emerge stronger with Sara no longer enjoying the power of the incumbent.

Here its what may be needed from the leading candidates:

Sara – If she decides to run, Inday’s biggest challenge is to prove she will not be more of the same, a helpless Government dealing with a raging pandemic and a battered economy. She must chart her own vision and assemble a team that is not simply the remnants of her Dad’s. She has the benefit of time before declaring but if she overplays it her lead could narrow quickly. Her father continues to be trusted but the family name is at risk of fading. When left unattended political brands lose their shine and travel badly across a generation. Witness the Kennedys.

Sara’s strongest opponent is Pacquiao. She might choose Bongbong Marcos as her running mate to add the solid north and NCR to her Mindanao bailiwick. Isko would also be a strong choice but he is unlikely to play second fiddle to her and her father.

Pacquiao – Manny is starting to assert himself. He sided with Kiko Pangilinan, an avid critic of the Administration, on the killings of lawyers and judges, he has called for Duque to resign and has now accused the President of being soft on the Spratleys. He will probably eventually resign as President of PDP-Laban.

Manny is seen to be a titular head who will be managed by his handlers. He must prove to the business sector and the intelligentsia that he can run with better company and will be backed by a strong economic team.

Manny almost certainly has been offered to run as VP to Sara. It is a job that would suit him well, a little authority with no responsibility and the promise of support for a 2028 presidency. If Manny declines and pursues his presidential quest the Administration will put a squeeze on him but that could backfire which will hurt Sara.

Manny might offer Isko the VP slot with a promise he will be more than a spare tyre. He might also look at somebody like Vilma Santos (67). Vilma brings star power, maturity, experience as former Mayor, Governor, and now Congresswoman, and the female vote which is al least 50% of the total. Demographically she would add Central Luzon to Manny’s hold in the south.

Grace – Grace has few places to go and little money and organization to do it with. She remains a viable contender but has no room to maneuver. Sara has the Duterte base, Manny the disenchanted and his fans. That leaves her with the intelligentsia, the Liberals (perhaps), 1Sambayan, a small business element and FPJ’s followers. She could improve her chances with a VP like Ping Lacson for macho heft and derring do; but these will not be enough.

Isko – Does Isko run for President, VP or Manila Mayor? The latter is a sure thing. The Presidency is a stretch. He needs to be more fully formed. He has great potential but not yet for the starring role. He would probably win as VP particularly if tethered to Pacquiao, besting Bongbong. This would be the same playbook as when he hung around as Vice-Mayor until he beat Erap in 2016. He is a man in a hurry but may need to bide his time while continuing to improve himself.

These are early days. There are many moving parts. Currently this is Sara’s race to lose but the ground is giving way. COVID, China, Corruption and the Economy (CCC&E) will not go away by May next year. If this baggage gets any heavier that may be too much for her to carry even with the backing of her father. To win she must show she is more than her father’s daughter, a leader with a clear, caring and broader vision for the country.

If the candidates were stocks, Sara would be fully valued with no clear catalyst to take her from 27% of the vote to at least the 40% needed to win. Manny is the growth stock with the narrative, the momentum and the promise of change but he must work on his weaknesses. Grace or Isko are the dark horse but the handicap looks too large to overcome unless Sara and Manny consume each other.

It will be an interesting race even if there is little in it for us to desire.

The (Non) Candidate: Part IV

The most important candidate running for President next year will not be in the ballot come the filing for candidacies in October.

His name is Rodrigo Roa Duterte. Here are his strengths (S), weaknesses (W), opportunities (O) and threats (T).

(S) Duterte’s biggest strength is his understanding of the political psyche. Duterte, like Shakespeare, believes life is a stage and political life the biggest stage of them all. He sees politics as a performing art and politicians as performers. In this theater the best politicians- and D30 is one – are those who do not play their true selves but play the characters the voting audience wants them to be.

Duterte is a hard man to read and it is by design. He projects simplicity but is far from simple. He can be a charmer, a task master, a friend, an enemy, a killer or a caregiver, whatever the role requires. Duterte has the rare ability to connect with the masses with a combination of candor, profanity, native wisdom, folksiness, sternness and mischief. He loves to play with people’s minds, he thrives on hyperbole. His words could be a directive, a policy, a threat or a joke; the purpose being to destabilize you. He is amused people actually believe he will jet ski to the Spratleys or ride quietly into the sunset.

Duterte is an unorthodox leader. He has that intelligence which to paraphrase F. Scott Fitzgerald is the ability to hold two contradicting thoughts at the same time. Thus Duterte publicly acknowledges we have a “great debt to China” while admitting they are our invaders. He says he cannot wait to retire while preparing his family to carry on. He will praise the tycoons for their charity while scouring them for their abuses. He can marry ideology and pragmatism without blinking an eye.

Analysts are puzzled by Duterte’s formidable poll ratings after a year of COVID, mishandled health protocols, a failed war on drugs and on corruption, a foreign policy conundrum, and an economy in disarray. Voter approval and voter trust are seen as synonymous when they are not. Voters may not approve of the Presidents handling of our crisis but they trust he is doing the best he can. Filipinos have bought the President’s narrative that COVID, China and Corruption are beyond his control. “Pasyensiya na lang”. For COVID wait for the vaccine, for Chiina beg for mercy, for corruption roll your eyes in despair.

After generations of neglect and abuse, Filipinos have very low expectations of Government. They believe all politicians are corrupt. So the measure of their vote is not deliverance but empathy. Filipinos do not expect a solution, just care and understanding. Empathy is the cheapest, most underutilized and most effective political asset and the President gives Filipinos lots of it. In 2016 the Liberals ran on a platform of performance, of strong economic growth and they were demolished at the ballot. They might have done better leading with the heart.

The President would like two things to go away, China and COVID (and perhaps Pacquiao but more on this later). The policy response to the Chinese invasion is if you are raped you might as well enjoy it; but that is not a constitutional argument. As a lawyer, Duterte argues Chinese possession is 99% of the law but detractors say you have to keep trying and certainly not suck up to the offender.

COVID has ransacked the economy which could haunt Duterte & Co. come May 2022. The President continues to entrust the pandemic to someone who is incompetent at iba pa; which begs the question why. Actually that person is a convenient foil for the failures of Government. Without him, the President would have to own the story which he really does not want to.

(O) The President has the opportunity to fulfill every politician’s dream, build a family dynasty. Not since Marcos is an incumbent so unapologetically working to effectively extend his term. To his credit, there is no attempt to hide the plan. President Duterte has unabashedly said he will back the presidency of either his daughter Sara or his quasi-offspring, Bong Go. He did it in Davao City which has had a Duterte as mayor and/or vice-mayor continuously since 1988, an uninterrupted reign of 33 years. To put it in perspective Sara was only 9 years old then, now here she is possibly running for President.

All political leaders want to preserve their legacy, their ideology, their resources and their freedom. Call it good estate planning. Family dynasties are hardly an uncommon practice in the Philippines but this time it is for all the marbles. The danger is in the quest to perpetuate themselves, the incumbents will over-reach.

The continuance of power by a President as popular as Duterte may arguably be defended if conducted in the normal course of business. To be fair, Duterte has not dismantled our democratic institutions although he flirted with charter change; but he has populated them so that the people who make the laws, interpret them and execute them are now of one mind. That may be in poor taste but is not illegal, it is just political wizardry and efficiency. If there is a critique it is not the President has amassed near total power but that he has not done more with it. Singapore has had a one party system since its independence and has benefitted from it. But in the Philippine context of corruption, political greed and patronage, the odds are not in our favor. Over time the structural damage becomes cumulative to the point democracy becomes unrecognizable. It has also the permanent effect of poisoning the values and future of generations to come.

(T) The threats to the President’s plans are, in my opinion, his health, Pacquiao, COVID, the economy, the Spratleys and possibly the U.S. in some sequence. The Government claims the Communists are the real problem which makes us the only country in the world where it is. Then of course there are the community pantries.

The President needs to stay healthy for at least another year. He must tame the pandemic and the economic depression this year. He must get the Champ to stand down – or better yet to join up – to allow Sara a clear path to the Presidency. He must kick the China can down the road. He needs to marginalize the U.S. but must be circumspect less the security apparatus gets restless. The latter which is culturally and financially one with the Americans is by his own admission the key to his and his family’s political life.

Duterteism has the opportunity to live for another six years barring unexpected health issues, extra constitutional upheavals or unacceptable damage to the economy. Despite the moro-moro Sara, if healthy, will almost certainly run for President and be a if not the leading finalist. She cannot deny a father who asks for the one thing every father wants, for a member to carry on the family business.

The President wil not be the main event in May 2022 but his fingerprints will be all over the outcome.