Flying a National Airline Through Bankruptcy

You’ve had a remarkably varied career that included finance, e-commerce, CPG, and outsourcing. But prior to joining Philippine Airlines (PAL) in 2019 as president and COO, you had never worked in aviation.

I didn’t have any airline experience. Philippine Airlines’ billionaire owner, Lucio Tan, better known as Kapitan, recruited me because the airline was losing money and I’ve always been a turnaround guy.

Looking at the financials, I saw that the company was overstretched on debt, but Kapitan was willing to invest $225 million and commit $375 million more. That meant if we could grow PAL’s $3 billion in revenue at the historical pace and knock $100 million off the cost structure, we’d break even. We had a good plan and the support of the board.

I had come out of retirement and left my home and family in Los Angeles to join PAL in July 2019, so I gave myself three years, but by December 2019 I was confident we could do it by the second year. Then came 2020.

Running an airline is never easy, but 2020 must have been among the worst times for the industry.

At the end of 2019, we were hearing about a SARS-like virus in China. We started stockpiling N95 masks. Then, on January 12, 2020, the Taal volcano just south of Manila erupted. It spewed ash all over the airport. Hundreds of flights were canceled; 30,000 people were stranded. We gave out masks to employees and passengers. Our COVID supplies were gone before COVID hit.

On March 15, the government implemented one of the strictest shutdowns anywhere. Our revenues disappeared overnight. Everyone with tickets for thousands of canceled flights wanted a refund.

Fuel prices dropped through the floor—if we’d been flying, we’d have been making money hand over fist on our fuel hedges. But we weren’t flying. And because we had multi-year deals for hundreds of thousands of barrels of fuel a month at a fixed price—to protect us against price spikes—we still had to make good on those contracts.

We’d had $2 billion in revenue disappear. Nobody would lend to us. We had to pay employees. And we owed hundreds of millions on fuel contracts, ticket refunds, airplane leases, and debt servicing. I remember thinking, “It’s going to be an interesting ride to see how this thing shuts down.”

Why didn’t PAL shut down?

Everything about my time with Philippine Airlines was about “business and society.” It was clear that keeping the airline flying benefited the business, the employees, and the country.

The employees were the first reason we didn’t go under. There was COVID on a cruise ship, the Diamond Princess, in Yokohama Harbor, Japan. The passengers were quarantined for a time, then sent to their home countries. Most of the ship’s crew was Filipino. The Department of Foreign Affairs asked if we could get them home.

Philippine Airlines is the country’s flag carrier. We serve as the Philippines’ Air Force One and the equivalent of an emergency response airlift capability. Some on the board didn’t want to be blamed for bringing COVID into the country. We declined. The government asked again.

I told our board and leadership, “Before we say no, again, let’s see if we can even get a crew.” This was early on—we still didn’t know how COVID was transmitted. We did know anyone on these flights would be at risk, and we’d need two A330 planes to get all the Filipinos back. The crew is typically 14 people per aircraft.

I wasn’t sure we’d even get two crews, but hundreds of people volunteered. They said, “Get us PPE and we’ll go.” I got screenshots of text messages among employees saying, “Aren’t you afraid?” and, “Of course I am, but it’s our job to get them home.”

The second reason we survived was that Kapitan basically said, “I’m all in.” He would have sold everything else to keep the airline alive. It wasn’t pride; it was gratitude. As one of his children said, “He came here when he was three years old with nothing. The Philippines gave him everything.”

For decades, when the country was privatizing industries, it seemed that if anything ever came up with “Philippines” on it, he would try to buy it. He bought the Philippine National Bank. He bought the airline because it’s the flag carrier.

He made every business work except the airline. Out of the whole conglomerate, which includes tobacco, liquor, real estate, the bank, and other businesses, the only business card he carried said “Chairman and CEO, Philippine Airlines.”

Kapitan was in his late 80s when the pandemic hit. He got COVID and barely survived, but he fought tooth and nail for the airline.

You mentioned that PAL is the flag carrier. Why is it so important to the country?

Flag carriers represent the country. British Airways, Air France, Japan Airlines, and KLM are all flag carriers. There’s pride in being the flag carrier. They bear the country’s name, flag, or colors in their livery. For the 115 million people in the Philippines, air travel is exceptionally important. The country is made up of thousands of islands extending over 1,100 miles. Flying is much more convenient than land routes and ferries.

The precursor to Philippine Airlines was privately owned and largely served as an air taxi for wealthy businessmen. The company was reorganized after World War II and flew American GIs home to the U.S. using surplus C-47 aircraft. The Philippine government took it over in the 1970s. It was privatized after Ferdinand Marcos fell in 1986. By the early 1990s, Kapitan was the majority owner.

The employees and owner wanted the airline to succeed. But it owed money and didn’t have revenue. What happened next?

We stopped debt payments where we could. With the companies we leased planes from, I could say, “We’ll pay you when we can.” It’s not like they could take back the plane and lease it to another airline; no one was flying.

I couldn’t do that with the Philippine banks that we owed money to. We didn’t have the cash that one of the difficult banks wanted, so I said, “We would be happy to park an A330 right outside your building.”

My brand-new CFO and I got called to a Saturday meeting with one of our biggest bank creditors. They asked, “How much cash does Philippine Airlines have left?” He said what we had left—about $609,000.

The banker immediately started issuing orders to his team. “Get a press release ready. The airline will default. We’re going to have to provide for the loans.”

The bank was majority owned by Kapitan. I said, “I was told that Kapitan will support us.” The bankers said, “That’s not going to happen.”

On Monday, Kapitan wired $50 million to the Philippine Airlines accounts. The bank realized they’d made a bet against their own owner and backed off.

Shortly after that, the British embassy reached out about arranging flights to get their citizens home. We said, “Absolutely, but you’ll also have to pay for fuel for the empty return leg.” They agreed.

The logistics were complicated. We created a process online where thousands of British nationals could sign up to get assigned a flight home. We didn’t have a fresh crew waiting at the destination for the return flight, so each flight had a second crew onboard for the return flight. And both crews had to quarantine after each flight. We were improvising.

The Australian, Canadian, New Zealand, and American governments made similar arrangements. European countries arranged for us to get their citizens from outlying islands to two central airports. These improvised flights were turning into a commercial reality. We had revenue. We figured we’d keep the hamster wheel turning as long as we could.

That did involve sacrifice. For employees who weren’t flying or weren’t needed at the airports, we followed government guidelines that let us pay a fraction of their salary but everyone kept their healthcare. With most of our planes and most of our 8,000 employees idle, it was all we could do.

As all this was happening, in early May, I broke my back—literally. I knew I was stressed; I thought that’s why my back hurt. But one day I couldn’t walk. It was diagnosed as a progressive fracture of my L2 resulting from an autoimmune disorder.

I needed surgery. So many people were dying in hospitals, I didn’t want to go near one, but I had no choice. As I was wheeled into surgery, I wondered if I would ever see the light again.

When I did wake up post-op, my doctor had my wife there on FaceTime. The pain was gone from my back. I remember thinking, “Maybe I’m not going to die. Maybe the airline is not going to die.”

What did the next steps look like?

By June, governments around the world wanted foreign workers out, so we had work flying Filipinos home.

While we were arranging flights to repatriate Filipinos from countries like Dubai and Pakistan, cargo brokers trying to get medical supplies like latex gloves to buyers in the U.S. asked if we could help. We put them in the bellies of planes to Manila and then on to the U.S. when we next flew there. On some flights, we strapped boxes in empty seats. We did some cargo-only charters. Our cargo revenue went up over pre-pandemic.

Each one-off arrangement kept us going until another one-off arrangement appeared. We started calling it MDI—Management by Divine Intervention.

Did PAL get government support?

They paid us for the repatriation flights. And they paid in 30 days, which was really unusual.

But airlines around the world, including U.S. carriers, got bailouts and other support from their governments. We asked our government, but they had other priorities. At the time, the survival of the airline was at stake, so my view was less generous, but they did have the whole country to worry about. And they did pass rules to help, including some that allowed businesses to defer bank payments until the pandemic emergency was over.

As part of asking the government for support, we put together a financial plan that became the foundation for our bankruptcy filing. Without a bailout, more loans weren’t going to put us on a sustainable path, so the board organized a restructuring committee. We had $6 billion in debt. We went from 30 million passengers in 2019 to 7 million in 2020.

One Wednesday night in late 2020, the CFO called. “We’re out of cash. We’ll miss payroll.” For us, missing payroll meant we’d shut down. It had been a possibility, so we had a plan in place. We’d announce indefinite suspension of operations at the close of business on a Friday, after all the flights from the U.S. and other countries had arrived and the fleet was home.

Everything was ready on Thursday night when the CFO called again. “The clearinghouses released enough cash from credit card payments to make payroll.” We kept going. Things like that happened many times.

We were good at our jobs, but we were also lucky, and maybe a little blessed. And we had all these people counting on us, supporting us, and praying for us.

You were operating on parallel tracks. One track was keeping operations going; the other was looking at bankruptcy.

We hired a New York-based specialist in airline finance. During our first Zoom call, they raised the possibility of using U.S. Chapter 11 bankruptcy. The Philippines’ Financial Rehabilitation and Insolvency Act (FRIA) from 2010 is modeled after Chapter 11. The general view was that there wasn’t any reason to go outside of our home country. They gave us common-sense advice on how to manage our financials: return aircraft we didn’t need, cut unprofitable routes. We began executing on it and exploring the FRIA process.

But we learned that with FRIA we would still have to go through additional processes in the U.S. and the UK to get the bankruptcy recognized by counterparties in those countries. While Chapter 11 has global recognition and effect. The European creditors who had been giving us a lot of trouble when we talked about going through a bankruptcy in the Philippines were fine with Chapter 11. It’s familiar. Even our Philippine creditors were ok with it.

It was clear to me that was the way to go. Some on the board were uncomfortable with moving things out of the Philippines, where Kapitan’s name and influence matter so much for getting good outcomes. But they agreed to a parallel FRIA filing that would formally recognize the Chapter 11 process.

What does Chapter 11 involve?

We had to decide whether to file “in free fall” or “debtor in possession.” Filing in free fall means you’re just making sure your creditors don’t seize your assets until there’s a plan. It’s what Aero México, LATAM, Avianca, and other airlines have done. Debtor-in-possession bankruptcy lets you keep your assets. It’s for businesses trying to sustain normal operations. The government had allowed us to resume flying. We were operating limited commercial flights.

The challenge with debtor in possession is that you need agreements with creditors representing two thirds of the debt and half of the total number of creditors. So we began dozens of bilateral negotiations. It took us over a year. Once you get some agreements signed, other creditors say, “We’ll get something if we sign; we may get nothing if we don’t.” By late summer 2021, we were ready to go.

On September 3, 2021, we filed in federal court in the Southern District of New York. We had signed restructuring support agreements from 92% of our creditors. We were out of bankruptcy in four months. It was the fastest Chapter 11 process ever for an airline. Two trade publications, Airline Economics and Airfinance Journal, named the restructuring the Asia-Pacific deal of the year.

Kapitan raised $505 million for debtor-in-possession financing, which let us pay refunds and supplier debts, return the employees we could retain to full salary, and cover severance to the 2,700 people we had to let go. We’d announced the layoffs in advance but waited until the reorganization was in place to make sure we could deliver on the severance payouts.

The airline has five independent, well-funded unions—a couple of them could be quite militant—but there were no strikes. In fact, about half of the people we let go were volunteers—people close enough to retirement age or with enough service to make the severance worth taking. The rest were the youngest employees. Union rules are last in, first out. That was awful because they were often the ones who had volunteered to fly early in the pandemic, who had said, “Isn’t it our job to fly Filipinos home?”

From a financial perspective, what did Chapter 11 do for the company?

It let the airline reset. With restructured debt and lease agreements, $2 billion in debt vanished. We had already started to break even on an operating-cap-profit basis before the Chapter 11 process was done.

The next 18 quarters were profitable—until the fuel price spike in the second quarter of this year caused a loss. They’ve ordered 35 aircraft. They’re clearly optimistic about the future. The balance sheet is stronger than it’s ever been in the airline’s history.

I was let go a month after the bankruptcy.

What lessons did you learn?

In college, I studied engineering. I understood formulas. At SOM, I was a quant jock. After Yale, I did management consulting with Booz Allen Hamilton. I realized I was interested in situations where something needed fixing.

When I moved from consulting to internal roles, I learned that the intellectual exercise of figuring out how to fix a company is secondary to the ability to execute when you run into all sorts of problems. Often those problems come down to people.

At PAL, I knew all the technical knowledge on earth wouldn’t keep the airline alive if people didn’t trust my team. I thought the group-dynamics classes at Yale SOM were interesting, but I was skeptical. I’m glad I paid attention because 35 years later, I was living in an organizational behavior experiment.

We were holding weekly town hall meetings through a lot of this. We were open about how vulnerable the airline was. We were clear that we were putting forward the best plan we could come up with. We didn’t know if it would be enough, but we promised to keep at it until the airline failed or we got through it.

There were so many changes to plans. And each time I thought it was important to say, “Look, I said this the last time. Here’s what happened. Here’s what we’re going to try now.” Rank-and-file workers understood our circumstances. Acknowledging what I said last time and how things had changed added credibility; it didn’t diminish it.

As I said, the employees are why the airline survived. We had so many challenges, but with the people on our side, it was almost like we were on rails. Whatever we needed, they made it happen.

Would you give an example?

Early on, we flew the bodies of 55 Filipinos who had died of COVID and other causes back from Saudi Arabia. In full PPE, the ground crew brought the caskets onto the tarmac. The Air Force band played the national anthem. We didn’t want to turn our backs on the caskets to face the flag over the airport, so we put our hands over our hearts and faced the flag on the tail of the plane. When the dignitaries left, vehicles from funeral parlors collected each casket. Making all of that happen—that was our job.

And over the course of the pandemic, we brought hundreds of thousands of Filipino workers home in Philippine Airlines planes. People who had gone overseas to help their families then lost their jobs and gotten stranded by COVID. We flew them to Manila, transported them to where they could quarantine, and when they were cleared flew them to their home provinces.

The government paid us to do it. And moving people from place to place is what we do, but none of this was normal business.

So many times it would have been easy to melt down from stress, depression, homesickness, or anger. I held it together because so many people were counting on me. Not just employees but people around the country who needed PAL. And with all they had to worry about, I was getting messages: “It must be really tough not having your family here with you. We’re praying for you.”

After we did the layoffs, I was walking on a beach on a weekend. Someone called to me. I turned and this young, really big guy came over. He says, “I was flight crew. I got axed.” I’m thinking, “Oh, this could get interesting.” Then he says, “I understand exactly why you needed to do it. Thank you for everything you’ve done for the airline. Can I buy you a beer?”

A guy who’s been laid off from his first job by me is buying me a beer. I felt terrible, but he says, “I’ll manage. Don’t worry.” He’d already found work for a company in Dubai.

Was this like any other job you’d had?

The work I did around outsourcing helped build a $40 billion-a-year industry in the Philippines from scratch. That had more economic impact than what I did at PAL, but the nation’s pride around the airline is real and important. The “You take care of them; they’ll take care of you” approach we’d taken through the pandemic worked. Seeing that I’d kept my credibility with that young man and many others that I have met since then—that psychic reward made it all worthwhile.

Today, almost everyone who was laid off has been rehired, including the big guy who bought me a beer on the beach. When I fly on PAL flights, there’s almost always someone on the flight crew that I fired. And I will get recognized and welcomed. Once I was greeted by a pilot. He kept calling me sir. I said, “Look, I’m no longer your president.” He says, “You’ll always be our captain.”

How did you choose Yale SOM?

My then girlfriend, now wife, was going to Columbia to get a PhD. I figured if she went to the U.S. without me, I’d lose her, so I applied to U.S. business schools. When I got into Yale, I pulled out an atlas and saw that New Haven was just north of New York City. That’s how I decided.

On top of that, I had an aunt who was a nurse at Yale New Haven Hospital. Between tuition assistance from the school and being able to sleep on a futon in her apartment, it worked out. Really well—Yale SOM made me. Looking back, a lot of my life has been Management by Divine Intervention.

“The Yale School of Management is the graduate business school of Yale University, a private research university in New Haven, Connecticut.”

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