Philippine Airlines has filed for Chapter 11 bankruptcy in New York with a lender-supported plan that helps the country’s main carrier recover after the pandemic devastated global travel.
The company aims to cut US$2 billion in borrowings through a proposed restructuring plan, which needs court approval and will allow the carrier to reduce its fleet capacity by 25%, it said.
Philippine Airlines will also get US$505 million in equity and debt financing from its majority shareholder, as well as US$150 million of debt financing from new investors.
Chapter 11 lets a company continue to operate while it restructures. The filing on Friday comes after the airline spent months negotiating with its stakeholders. Billionaire owner Lucio Tan called the filing a “major breakthrough” for the carrier.
The restructuring plan allows the airline “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,” Tan, who’s the chairman and chief executive officer, said in a statement.
In response to the coronavirus outbreak, the Philippine government has banned travel to Hong Kong, along with Macau and mainland China.
The national carrier will cancel orders for some Airbus jets and push back the delivery of others beyond 2026, while also returning a “good number” of leased wide-body aircraft.
In addition to trimming its fleet, routes to London, New York and Toronto are expected to be cut.
How Covid changed the recovery flightplan
While an end to lockdowns eased the strain on travel at the start of the summer season in the Northern Hemisphere, the delta variant of Covid-19 has recently begun hurting many airlines, especially in the U.S. and China.
Philippine Airlines is the latest international carrier to reorganize in the United States, under U.S. bankruptcy code. By using Chapter 11, the company will subject its reorganization plan to the final decision of a U.S. judge.
A statement on the flag-carrier’s website says “Chapter 11 is a globally recognized U.S. legal process that many airlines have used to reinvent themselves into more successful companies. The restructuring will enable PAL to emerge with fresh capital, lower debt and a sturdier financial foundation for the future.”
Bankruptcy experts say the U.S. is often the preferred venue, in part because the law in America is more favorable to a company, and partly because creditor contracts are often based on state law in New York or Delaware.
Latam Airlines, based in Chile, Aeromexico and Colombia’s Avianca Holdings all sought court protection in New York last year, blaming the drop in air travel caused by the coronavirus.
The pandemic has forced airlines to suspend flights, lay off employees and seek financial help. In June, Garuda Indonesia’s president said the carrier was considering options including restructuring debt and renegotiating contracts with aircraft lessors.
The challenges for PAL Holdings, the holding company of Philippine Airlines, predate the pandemic. It has reported losses since the first quarter of 2017. The company suffered a record 71.8 billion pesos (US$1.4 billion) loss in 2020, compared with a 10.3 billion peso shortfall the year before.
The airline will continue to operate its passenger and cargo flights based on demand and travel restrictions, and promises that “All current and future tickets and travel vouchers will be honored, subject to the usual terms and conditions of use.”
The company also said it expects to gradually add domestic and international flights as the market recovers.
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