By June 2020, the PAL Board had organized a Restructuring Committee and selected a New York City-based specialist in airline finance to advise us on options for restructuring PAL’s balance sheet.
The COVID-19 contagion was unlike anything the industry had ever faced. The damage was deeper and would last longer.
More importantly, it affected every airline, everywhere, all at once.
That meant airline lenders and lessors – finance companies that rented aircraft and engines to airlines – had no other airline customers for aircraft repossessed for non-payment.
The entire aviation ecosystem would have to depend on the carriers that could afford to keep flying.
Airlines that had received emergency loans or bailouts or were otherwise well-capitalized and well-run in markets with continuing demand, had the best chance of survival.
PAL didn’t quite meet those criteria.
Fleets of aircraft began stacking up in desert storage as airlines worldwide parked planes they couldn’t afford to fly. As demand became scarce, the few airlines still flying passengers attracted attention.
By mid-2020, millions of overseas Filipinos found it increasingly necessary to fly home, and the government that had denied PAL emergency funding began buying repatriation charters instead. PAL had become the government’s repatriation arm because it had rapidly and reliably executed those early, chaotic charters.
PAL also carried most of the COVID vaccines into and throughout the Philippines, and its cargo revenues during the pandemic exceeded those of previous years.
The geographic location of the Philippines and the sheer inventiveness of PAL’s cargo team saw critical supplies from around the world strapped to passenger seats and filling aircraft bellies on lucrative cargo-only charters to destinations such as Columbus, Ohio and back.
Some cash started flowing.
And in a desert, even a trickle of liquidity is life.
Those hundreds of volunteers who crewed the charters and then endured two weeks of quarantine were the reason we even flew.
PAL’s in-flight teams scheduled double crews around quarantine requirements. Flight operations, network revenue and cargo teams found ways to make charters and commercial flights work.
The tech ops team ensured aircraft were either operational or safely parked. Airport teams handled logistics from entry and quarantine through the domestic legs home.
Customer experience teams informed passengers and managed refunds. The safety and security team operated an RT-PCR testing service for passengers.
Treasury and finance teams sweated and stretched every precious dollar of liquidity. Human capital ran regular virtual employee town halls, while the medical unit ensured continuity of PAL’s medical facilities.
The aircraft acquisition team, led by a bald, phlegmatic Scot, met with lessors and lenders to keep them off our backs. Legal and communications teams met with government officials to keep us top of mind.
PAL’s unions remembered that we were family.
And a handful of us worked closely with the PAL Board and its Restructuring Committee to finalize a restructuring plan.
When asked, much later, what PAL had done to survive, I replied with a checklist:
Our shareholders infused emergency liquidity, and that lifeline bought us time.
We sold non-strategic assets.
Lessors and lenders deferred aircraft lease and loan payments.
Suppliers extended payment terms while continuing to provide goods and services.
The Bayanihan Act, passed by the Philippine Congress, provided about $4 million of assistance.
We stretched liquidity through extraordinary cost control and deferred capital expenditures.
Critically, employees contributed tens of millions of dollars through voluntary pay cuts and extended leaves without pay.
The unions made common cause and stood with us.
PAL preserved jobs and sustained employee medical benefits as the pandemic raged. We held off retrenchment until February 2021, when we separated 2,300 personnel, almost half voluntarily, with full severance and retirement pay.
But most importantly, PAL continued to fly, generating more than $400 million in contribution margin beginning in June 2020, when the government allowed flights to restart.
Finally, we restructured PAL under Chapter 11 of the US Bankruptcy Code in the Federal Court for the Southern District of New York.
Chapter 11
PAL was the first Philippine company to file for reorganization under Chapter 11 – a court-supervised restructuring process – of the US Bankruptcy Code.
Chapter 11 makes it possible for a company to continue
operating while raising new money and reorganizing its liabilities.
Instead of filing under Philippine law using the Financial Rehabilitation and Insolvency Act of 2010, we opted for a prearranged US Chapter 11 process because of its global recognition and effect and its familiarity to aviation creditors.
No parallel ‘English Scheme’ would be necessary.
A parallel FRIA filing would also be made to facilitate recognition of the US process.
PAL’s Board concurred.
This was not a value judgment on the legal system. PAL had already established that its 1998 reorganization was worthy of comity – equivalence to US law – when it filed what was then called a Section 304 ancillary petition to assist with a foreign insolvency, now Chapter 15, in San Francisco.
But PAL had spent nine years in receivership under Philippine SEC supervision before its shareholders and management could retake control.
PAL therefore executed a Pre-Arranged Chapter 11 filing.
Unlike other international airlines, PAL never sought to stay collection or litigation from creditors by seeking protection under Chapter 11 when its financials were in freefall.
Instead, PAL’s continuing flights during the pandemic convinced creditors that our plan was viable.
Dozens of bilateral creditor negotiations began in earnest by the summer of 2020. After more than a year of enormous effort, we entered the Federal Court for the Southern District of New York on Sept. 3, 2021, for the First-Day Motions with signed Restructuring Support Agreements from 92 percent of our creditors.
After less than four months, PAL exited Chapter 11 in mid-December 2021 without a creditor committee ever having been convened and with a 100 percent vote for the plan of reorganization.
This was unprecedented and remains unmatched by any other airline Chapter 11 process.
While this highly complex technical, legal and financial exercise seemed clinical and almost abstract, its benefits were profoundly real.
PAL reduced debt and financing payments by well over $2 billion in exchange for restructured debt and lease agreements, the return of more than 20 aircraft and the deferral of delivery of 13 more.
Suppliers were paid in full or on negotiated terms from the proceeds of the $505 million debtor-in-possession financing provided by Kapitan.
More than $400 million in refunds were ultimately paid in full.
Employees kept their medical benefits throughout the pandemic. Those who took voluntary pay cuts were returned to full pay, and those who were let go in the restructuring were paid their separation benefits in full.
Creditors with claims would eventually receive some equity as compensation.
PAL kept flying.
Kapitan retained majority control of PAL.
I was dismissed a month later.