- PAL believes it can complete the Chapter 11 process before the end of 2021.
- The A330, A350 and 777 will pay the price for fleet reductions.
- Flights from Toronto, New York and London will be removed from the PAL network.
- Orders for A321neo have been pushed back and a decision of 777 is looming.
- PAL faces strong competition for market share from LCCs.
With the financing and concession agreements in place, Chapter 11 should go smoothly
A first hearing on the Chapter 11 filing was held in New York’s Southern District Bankruptcy Court on September 9. PAL’s detailed restructuring plan is expected to be submitted to court in a few weeks.
The company has gained almost full creditors’ support for its plan, so there is unlikely to be much opposition to the restructuring proposal. PAL aims to get out of Chapter 11 by the end of 2021.
PAL’s majority owner has agreed to inject $ 505 million in new debt and equity financing to provide liquidity during the airline’s takeover. The airline arranged an additional $ 150 million in debt financing from other private investors “to facilitate post-restructuring activities,” PAL said.
The airline has also struck deals with the majority of its lessors and other creditors for more than $ 2 billion in payment cuts. Much of this has to do with early returns of leased aircraft and reductions in lease payments.
About half of PAL’s wide-body aircraft will be phased out of the fleet as part of the restructuring plan
PAL’s restructuring proposal will reduce its fleet capacity by 25% from its pre-pandemic size, with 21 aircraft departing from its current fleet of over 90. There will be reductions in all types of aircraft. fleet, but wide-body aircraft will be the most affected.
In the long-haul fleet, the airline is expected to return all but two of its six Airbus A350s, according to Aviation Week. It will also cut four of its 10 Boeing 777-300ERs, two owned and two leased.
PAL considered returning all A350s to leave a single long-haul type, but ultimately decided that two types would give it more versatility. For example, the A350s are considered better suited than the 777s for flying on the airline’s Vancouver route.
The other aircraft scheduled to leave the fleet are seven of PAL’s 15 A330s, four A320 Family aircraft and two Q400 turboprops. Some of the smaller planes are operated by the PAL Express subsidiary of PAL.
The airline still has 13 A321neo on order, which were previously due for delivery over the next few years. PAL has negotiated postponements for these, and they are now expected to arrive after 2025.
The next fleet issue PAL faces will be a potential replacement for its 777s.
Its remaining six 777s are mostly leased, and their leases are scheduled to expire within the next five years. PAL may decide to order newer widebody aircraft to replace the 777s, although it may also extend leases and delay the replacement decision.
The longest roads will be removed, but the main gateways to the west coast of North America will be retained
Fleet changes are linked to network cuts planned by PAL.
PAL will cut its three longest routes to London, New York and Toronto, which were served by the A350s before the pandemic. Connections to destinations on the west coast of North America – Los Angeles, San Francisco and Vancouver – will remain.
Some reductions will be made on medium-haul routes operated by A330s, while there will be relatively few reductions on short-haul and domestic services. The changes align with the industry-accepted premise that short-haul markets will recover fastest after the pandemic and long-haul will be the slowest to recover.
The graph below shows which were PAL’s top 20 international routes as of January 2020, before the pandemic hit.
The major routes from the west coast of the United States to Los Angeles and San Francisco ranked fourth and sixth on the list. Vancouver was 11e. The airline’s longest connections to New York and Toronto were 18e and 19e, and London is off the chart at 28e.
The only other route on the top 20 list outside of Asia-Pacific was to Riyadh.
North America has long been a key market for the Philippines.
The graph below shows that in 2019, the United States was the country’s third-largest source of inbound tourism, behind only South Korea and China (the pink segment collectively represents several smaller markets).
Canada was ranked seventh, and the two North American neighbors collectively accounted for nearly 16% of tourists. Even with the loss of Toronto and New York from its network, PAL will still have its main North American gateways on the West Coast.
Putting in place a revised network plan will still take time
Of course, much of the PAL network remains on hold due to COVID-19 travel restrictions. The airline said it only operated 21% of its flights before the pandemic, although it is gradually rebuilding the network.
The graph below illustrates the very slow progress PAL has made so far.
Service cuts have wiped out more than $ 2 billion in revenue since the start of the pandemic.
Due to the large loss of revenue, PAL has already downsized. The airline announced in February 2021 that it was to cut 2,300 employees, which was completed in March 2021.
Despite streamlining, some of PAL’s pre-COVID headaches will remain
The airline faced challenges before the pandemic arrived. It faced stiff competition from low-cost carriers on short-haul routes, particularly from its Filipino rival Cebu Pacific. Cebu held a dominant share of national capacity as of January 2020, as shown in the graph below.
PAL was the leading player in the pre-pandemic international market, with 25.1%. However, here, too, it was under pressure from LCCs and other full-service airlines on long-haul routes.
PAL launched a turnaround effort in 2019 to improve its financial performance. A new president and a new management team were appointed, but they were only just beginning to implement changes when the COVID-19 crisis arrived.
Today, the airline is considering a more significant restructuring.
Reduction to grid limits aligns with probable post-pandemic scenario
Reducing its long-haul fleet and at least temporarily reducing its network will undoubtedly be a difficult pill for PAL to swallow.
The A350s were the airline’s new flagship fleet and were less than three years old. But the pandemic is forcing many airlines to make difficult choices of this nature.
Withdrawing from its longest routes and focusing on its main trans-Pacific markets also makes sense in this context. More information on the airline’s plan will be revealed as the Chapter 11 process progresses.
But there is no doubt that a streamlined PAL will be in a better position to respond to what could be a protracted recovery in international markets. It will also have the option of further expanding its widebody fleet and possibly resuming some of its canceled routes when demand eventually returns.
Obtaining the agreement of its creditors and presumably a smooth passage through bankruptcy court will be major steps for PAL. But he is still far from being out of the woods, and he still has difficult months before a meaningful recovery takes hold.