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)
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