Philippine Airlines Inc. 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 $2 billion in borrowings through a proposed restructuring plan, which needs court approval, it said. 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.
The restructuring plan will allow the carrier to reduce its fleet capacity by 25%, it said. The “recovery plan” will allow the airline to return at least 20 aircraft, the company’s management said in response to a Bloomberg News query. Philippine Airlines also cut 35% of its workforce early this year.
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 carrier will also complete a parallel filing for recognition in the Philippines under the insolvency and rehability law, it said in a statement.
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.
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. Tan has said previously that the airline, which was founded in 1941, was working on a comprehensive restructuring plan.
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.
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, PT Garuda Indonesia’s president said the carrier was considering options including restructuring debt and renegotiating contracts with aircraft lessors.
The challenges for PAL Holdings Inc., 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 ($1.4 billion) loss in 2020, compared with a 10.3 billion peso shortfall the year before. Shares of PAL Holdings have declined 7.6% this year, extending a 17% fall in 2020.
“After the restructuring, PAL Holdings will still be the major shareholder of PAL,” the management told Bloomberg News. “PAL Holdings is not filing and its status and shareholders will remain the same.”
The airline will continue to operate its passenger and cargo flights based on demand and travel restrictions. The company also said it expects to gradually add domestic and international flights as the market recovers, it said in the statement.
The company also received government support for being a partner of the state in the pandemic response, it said.
The case is Philippine Airlines Inc., 21-11569, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).
— With assistance by Harry Suhartono, and Claire Jiao