- PAL expects it can complete the Chapter 11 process before the end of 2021.
- The A330, A350 and 777 will bear the brunt of the fleet reduction.
- Flights to Toronto, New York and London will be removed from the PAL network.
- A321neo orders have been pushed back and a 777 decision is imminent.
- PAL faces tough competition for market share from LCCs.
With financing and concession deals completed, Chapter 11 should run smoothly
An initial hearing on the Chapter 11 motion was held in the New York City Southern Bankruptcy Court on September 9th. PAL’s detailed restructuring plan is expected to be presented to the court within a few weeks.
The company has received almost the full support of its creditors for its plan, so there will be little resistance to the restructuring proposal. PAL aims to emerge from Chapter 11 by the end of 2021.
The majority owner of PAL has agreed to provide $ 505 million in new debt and equity financing to provide liquidity during the airline’s recovery. The airline has arranged an additional $ 150 million in additional debt financing from other private investors “to facilitate post-restructuring activities,” PAL said.
The airline has also entered into payment cut agreements with the majority of its lessors and other creditors amounting to more than $ 2 billion. Much of this is related to early return of leased aircraft and cuts in lease payments.
Approximately half of PAL’s wide-body aircraft will leave the fleet as part of the restructuring plan
PAL’s restructuring proposal will reduce its fleet capacity by 25% compared to its pre-pandemic size, with 21 aircraft departing from its current fleet of more than 90. There will be reductions in all types of fleets, but wide-body aircraft will be the hardest hit.
In the long-haul fleet, the airline is expected to return all but two of its six Airbus A350s to lessors, according to Aviation Week. It will also cut four of its ten Boeing 777-300ERs, two owned and two leased.
PAL considered returning all of the A350s to leave a single long range type, but eventually decided that two types would give it more versatility. For example, the A350 are considered better suited than the 777 to fly the airline’s Vancouver route.
Other aircraft to leave the fleet include seven of PAL’s 15 A330s, four A320 Family aircraft and two Q400 turboprops. Some of the smaller aircraft are operated by the PAL subsidiary PAL Express.
The airline has ordered 13 more A321neos that will be delivered over the next few years. PAL has negotiated deferrals for this, and it is now expected to occur after 2025.
The next fleet issue PAL faces will be a potential replacement for its 777.
The six remaining 777s are mostly leased and their leases are expected to expire within the next five years. PAL could decide to order newer widebodies to replace the 777, though it could also extend the leases and delay the replacement decision.
The longest routes will be canceled, but the main gateways on the North American west coast will remain
The changes to the fleet are related to the planned network cuts by PAL.
PAL will cancel its three longest routes to London, New York and Toronto, which were served by the A350 before the pandemic. Routes to destinations on the west coast of North America – Los Angeles, San Francisco, and Vancouver – will remain in place.
Some cuts will be made on medium-haul A330-operated flights, while there will be relatively few cuts on short-haul and domestic flights. The changes are in line with the industry’s accepted premise that short haul markets will recover the fastest and long haul markets the slowest after the pandemic.
The graph below shows what PAL’s top 20 international routes were in January 2020 before the pandemic broke out.
The US West Coast’s core routes to Los Angeles and San Francisco were fourth and sixth on the list. Vancouver was 11NS. The airline’s longer routes to New York and Toronto were 18NS and 19thNS, and London is at 28. From the tableNS.
The only other route on the top 20 list outside of the Asia-Pacific region was to Riyadh.
North America has long been a key market for the Philippines.
The graph below shows that the US was the third largest source of incoming tourism in the country in 2019, behind South Korea and China (the pink segment together represents several smaller markets).
Canada was the seventh largest, and the two North American neighbors together accounted for nearly 16% of tourists. Even with Toronto and New York lost from its network, PAL will continue to have its main North American gateways on the west coast.
The development of a revised network plan will still take some time
Of course, much of the PAL network remains closed due to COVID-19 travel restrictions. The airline said it was only operating 21% of its flights prior to the pandemic, although it is gradually rebuilding the network.
The graphic below illustrates the very slow progress that PAL has made so far.
The benefit cuts have wiped out more than $ 2 billion in revenue since the pandemic began.
Due to the strong loss of sales, PAL has already reduced its workforce. The airline announced in February 2021 that it would be cutting 2,300 employees and this was completed in March 2021.
Despite the streamlining, some of PAL’s pre-COVID-19 headaches will remain
The airline faced challenges prior to the pandemic. On the short-haul route, it faced stiff competition from low-cost airlines – particularly from its Filipino competitor Cebu Pacific. Cebu had a dominant share of domestic capacity in January 2020, as the graph below shows.
PAL was the leading player in the international market before the pandemic, at 25.1%. But here, too, she was under pressure from LCCs and other full-service airlines on long-haul routes.
PAL initiated a turnaround in 2019 to improve its financial performance. A new president and leadership team were appointed, but it had only just started making changes when the COVID-19 crisis hit.
The airline is now examining a more comprehensive restructuring.
Scaling back at the network edges depends on the likely post-pandemic scenario
Reducing the long-haul fleet and downsizing the network, at least temporarily, will undoubtedly be a difficult pill for PAL.
The A350s were the airline’s new flagship fleet, and they were less than three years old. But the pandemic is forcing many airlines to make difficult decisions of this kind.
The withdrawal from the longest routes and the focus on the transpacific core markets also makes sense in this context. More information on the airline’s plan will be shared during the Chapter 11 process.
But there is no question that an optimized PAL is better suited to respond to a potentially protracted rebound in international markets. It will also have options to re-expand its widebody fleet, and perhaps resume some of its canceled routes if demand returns at some point.
The approval of the creditors and an expected smooth passage through the bankruptcy court will be important steps for PAL. But it is far from out of the woods, and there are tough months to come before a meaningful recovery sets in.