Courts oversee Southeast Asian airline reform
When Philippine Airlines filed for bankruptcy protection on 3-Sep-2021 it followed other major Southeast Asian airlines that have turned to courts to restructure their debts. The list of airlines in the region that have taken this course is steadily growing - and more are likely to follow before the COVID-19 crisis is over.
These airlines are restructuring to varying degrees, and therefore each bankruptcy process is different. Some are relatively quick as they have already reached agreement with creditors, while others are more contentious.
The airlines are also choosing a wide range of jurisdictions to file their bankruptcy petitions, using either their own countries or others with robust bankruptcy protection processes.
Some of the elements in these plans include cutting debt, renegotiating aircraft lease terms, and cancelling leases. Creditors have generally - but not always - accepted these relief proposals, thus avoiding liquidations.
For this reason there may actually be more airline start-ups than failures during the coronavirus pandemic period.
Summary:
- Malaysia Airlines obtained UK sign-off for its prearranged restructuring.
- AirAsia X, Nok Air are yet to gain all the creditor agreements they need.
- Thai Airways has secured approval from creditors and the Thai court.
- Philippine Airlines is the latest to file, and beleaguered Garuda could be next.
Malaysia Airlines was an early mover in court restructuring
Malaysia Airlines Berhad (MAB) was one of the first in the region to complete a restructuring of its lease arrangements.
The airline chose to file its plan in the UK, through what is known as a scheme of arrangement under the UK companies act. This was approved by a UK court on 22-Feb-2021. The airline had already gained unanimous support from the affected lessors.
This was part of MAB's broader restructuring effort, which involved separate negotiations with other stakeholders to reduce the airline's liabilities. The airline said that this initiative was needed before the government would inject more funding, and it warned that if the restructuring deals were not reached, a more drastic reset of the business would be necessary.
AirAsia X (AAX) is another Malaysian airline to undertake a debt restructuring. In this case the cuts were even more severe, with the proposal calling for almost all debt to be wiped. The airline indicated that it had no alternative aside from liquidation.
AAX filed through the Malaysian court system, although the matter has yet to be resolved. In Jun-2021 the Malaysian High Court granted the airline a nine-month extension to reach agreement with its creditors. Some lessors have filed separate suits against the airline in overseas courts for money owed by the airline.
Airlines have been keeping the Thai bankruptcy court busy this year
The Thai government chose to send Thai Airways to bankruptcy court late last year to restructure its debt, rather than bailing out the struggling airline again. The plan was agreed to by creditors, and the Central Bankruptcy Court in Bangkok approved the restructuring plan in Jun-2021.
Another Thai airline, Nok Air, is still mired in the legal process. The Thai Central Bankruptcy Court held a hearing on Nok's rehabilitation plan on 6-Sep-2021, but there were still some objections that could not be resolved. The court granted more time for negotiations and has scheduled the next hearing for 15-Sep-2021.
Garuda Indonesia is another example of a Southeast Asian airline that is in serious financial trouble.
The airline recently defaulted on a USD500 million Sukuk Islamic bond, and has faced multiple lawsuits from lessors in European courts regarding unpaid rentals. Garuda has been attempting to negotiate debt restructuring with its creditors, and it is believed to be planning a bankruptcy protection filing, possibly in the UK.
The Chapter 11 process was an attractive option for PAL
Philippine Airlines (PAL) elected to file in the US to take advantage of its well tested Chapter 11 bankruptcy process.
Many US airlines have been through Chapter 11 before, and some overseas airlines with links to the US also use this avenue. In addition to PAL, three major Latin American airlines have entered Chapter 11 proceedings since the pandemic began.
PAL launched discussions with its creditors and lessors last year. In this case the filing is essentially a way to formalise the concession deals that have been reached, rather than a way to gain protection from creditors while negotiations occur. Because of this, PAL's filing is expected to yield a faster Chapter 11 resolution than usual.
Due to the long history of airline Chapter 11 reorganisation cases, the US bankruptcy courts have considerable precedent and experience to draw on. This process is also widely recognised globally, and many of the major industry stakeholders have dealt with it before.
Seabury Capital was brought in to advise PAL on its debt restructuring and recovery plan. Douglas Walker, a managing director of Seabury Capital who led the advisory team, explained why the US bankruptcy court was selected.
"We considered a number of options, including the local insolvency laws of the Philippines, but [US] Chapter 11 offered a number of advantages", Mr. Walker told CAPA sister publication Aviation Week.
"Chapter 11 provides for a fair, orderly and transparent process, and also a relatively higher degree of familiarity and predictability for most parties. Especially in a pre-arranged case like this, where the focus from the beginning was on collaboration with key stakeholders, it made sense to offer a mechanism that was known to them."
Bankruptcy filings can often generate momentum among competitors
Whichever jurisdiction they are using, restructuring through the court system is clearly the best course for many Southeast Asian airlines - and in some cases they don't exactly have a choice in the matter.
Another factor is that the more airlines take advantage of this avenue, the greater the imperative for others to follow.
For example, when US airlines went through a phase of Chapter 11 filings in the early 2000s, those that resisted longest were at a competitive disadvantage to their rivals. This will likely also be the case in Southeast Asia.