"This is not the first time that the airline has been in financial trouble."
Some of the biggest victims of the COVID-19 pandemic have been companies in the travel-tourism sector. One of the biggest of those has been the national flag-carrier, PAL (Philippine Airlines). PAL’s 2020 operations were greatly damaged by the pandemic. The full extent of the damage was discussed by the company’s chief executive officer (CEO) during its recent annual stockholders’ meeting.
Everything that could possibly go wrong for PAL went wrong in 2020, which was lockdown-less for only two and a half months. Revenues fell to P55 billion, expenses totalled P81 billion and operations ended in a whopping P71.8 net loss. As a result, the national flag-carrier recorded a capital deficiency of P74 billion for the year.
The rest of the financials were equally bad or worse. At the end of 2020, PAL’s current liabilities – liabilities maturing within one year — were approximately six times its current assets. Its lease liabilities totalled P152 billion and its secured loans totalled P32 billion.
All in all, PAL in its present financial condition is a perfect case study for a Harvard Business School class in corporate financial resuscitation.
The classic business-school formula for dealing with a financial situation like PAL’s is made up of three parts. The first part is to cut operating expenses wherever you can; PAL has thus far cut 3,000 persons from its work force and cancelled or reduced other dispensable expenses. The second part of the resuscitation formula is negotiation with creditors and lessons for the deferment of debt and lease maturities; PAL’s financial people have been hard at work on this, with varied degrees of success.
The third part of the resuscitation formula is to increase the company’s equity (i.e., non-borrowed) capital. In PAL’s case, this means getting Lucio Tan-controlled PAL Holdings Inc., PAL’s parent company, and Japanese strategic partner ANA holdings INC. to infuse more equity into the national flag-carrier. Mr. Tan appears likely to invest more money in PAL, but the Japanese company has thus far not clearly indicated whether it intends to increase its stake in PAL. It probably will decide to do so, if only to save the value of what it has already invested in PAL.
A few weeks ago there was talk in the media about PAL’s seeking temporary protection from its creditors through a filing under Chapter of the US Bankruptcy Act. This could well happen if PAL’s negotiations with its creditors and lessors do not go well. There is nothing ignominious about PAL’s doing a Chapter II filing; numerous big US companies have done that in the past and gone on to achieve financial rehabilitation. Besides, the cause of PAL’s doing a Chapter II filing – should it choose to do so – is the pandemic, not corporate mismanagement.
Is PAL likely to be able to survive and “fly the friendly skies” again? I think so. This is not the first time that PAL has been in financial trouble. PAL, after 75 years of operation – it is Asia’s oldest airline – has seen it all and it’s still there. The key question, perhaps, is whether the Philippine government will be willing to see PAL go down. After all, it is, and through those 75 years has been, the national flag-carrier. It is not possible to replicate 75 years of experience and history.
PAL can, and probably will be able to survive this latest bout with turbulence.