Fuel Shock Sends PAL’s Earnings Into a Tailspin, but Cash Flow Holds Firm

The Philippine flag carrier raised fares and generated billions of pesos in cash, but higher fuel, fleet, and financing costs turned a strong first quarter into a first-half loss.

PAL Holdings, Inc. carried fewer passengers in the first half of 2026, charged them more, and still lost money.

The parent of Philippine Airlines, Inc. reported a net loss of ₱1.58 billion for the six months ended June 30, reversing an ₱8.23 billion profit a year earlier. Revenue rose 11.2% to ₱103.81 billion, but operating expenses climbed nearly twice as fast, increasing 20.3% to ₱101.81 billion.

The reversal illustrates the unforgiving arithmetic of the airline business. PAL managed to raise fares, expand cargo revenue and hold down several nonfuel expenses. None of that was enough to absorb a surge in jet-fuel prices, higher depreciation and a growing financing bill.

Operating profit fell 77% to about ₱2.01 billion, shrinking PAL’s operating margin to 1.9% from 9.3% a year earlier. Financing charges increased 36% to ₱4.01 billion, pushing the company into the red. The loss attributable to shareholders of PAL Holdings was larger at ₱1.84 billion, equivalent to six-month losses of about seven centavos a share.

The trouble was concentrated in the second quarter, when the airline reported a ₱6.18 billion net loss, compared with a ₱3.53 billion profit in the same quarter of 2025. Revenue increased 10.8% during the quarter, but flying-operations expense surged to ₱35.29 billion from ₱20.97 billion. PAL posted a second-quarter operating loss of ₱4.35 billion.

Based on the difference between the six-month and second-quarter figures, PAL had earned roughly ₱4.60 billion in the first quarter. That profit was erased over the following three months.

A Shock at the Fuel Pump

PAL’s biggest problem was fuel.

Fuel and oil expense climbed 56.3% to ₱40.65 billion, an increase of ₱14.65 billion from a year earlier. Average fuel prices rose roughly 50% to about $150 a barrel following disruptions in the Middle East, according to the company’s filing. Fuel accounted for almost 40% of operating expenses, up from roughly 31% in the first half of 2025.

Beginning Feb. 28, PAL suspended commercial flights to Dubai, Doha and Riyadh after airspace closures disrupted major aviation corridors across the Middle East. Service to Riyadh resumed April 10, while Doha flights restarted July 1. Dubai operations were scheduled to resume Oct. 2. PAL also operated two government-supported repatriation flights to Riyadh during March.

The route suspensions hurt traffic, but the wider financial damage came through energy markets. The disruption drove up crude oil and the Mean of Platts Singapore jet-fuel benchmark used for PAL’s purchases.

The airline had no outstanding fuel derivatives at the end of June, leaving it exposed to market prices. PAL said fuel surcharges had covered about 40% of fuel costs before the crisis. Regulators subsequently shortened the monitoring and implementation cycle for fuel surcharges, allowing airlines to adjust them more rapidly.

For airlines, however, passing along fuel increases is rarely immediate or complete. Higher surcharges can also weaken demand, particularly among price-sensitive travelers.

Higher Fares, Fewer Passengers

PAL carried 8.20 million passengers during the first half, 3.1% fewer than a year earlier. Revenue passenger kilometers declined 3%, while capacity, measured by available seat kilometers, edged up 0.4%. The passenger load factor fell to 78.87% from 81.64%.

The company offset the weaker traffic by raising fares and adjusting fuel surcharges. Passenger yield increased 9.2%, helping passenger revenue rise 9.7% to ₱88.27 billion.

That pricing power kept the top line growing, but not quickly enough to offset higher costs. Revenue per available seat kilometer increased 5.5%, while cost per available seat kilometer rose 13.9%. The gap between those two measures, closely watched in the airline industry, explains much of the profit decline.

A brighter signal lay beneath the fuel bill. Cost per available seat kilometer excluding fuel decreased 0.7%, suggesting PAL retained some control over its underlying operations.

Reservation and sales expense declined 11% as more customers booked through direct channels, reducing global distribution system fees. General and administrative expense fell 12.6%, helped by lower corporate costs and a smaller provision for doubtful receivables.

Cargo provided another lift. Cargo revenue increased 37% to ₱5.91 billion, supported by higher freight rates, stronger yields and a 2.2% increase in freight volume. Middle East airspace disruptions tightened the belly-hold capacity available for global freight, allowing PAL to charge more for the space it could offer.

Ancillary revenue rose 11.2% to ₱9.46 billion as customers purchased more premium-seat upgrades, prepaid baggage and other add-ons.

Not all of the reported growth came from selling more transportation. PAL estimated that approximately ₱4.96 billion of its ₱10.47 billion revenue increase resulted from translating its dollar-based airline operations into a weaker Philippine peso. Without that currency effect, revenue would have grown by about 5.9%.

Cash Flow Offers a Counterpoint

The income statement looked bleak, but PAL continued to generate cash.

Net cash from operating activities totaled ₱14.44 billion, down from ₱17.19 billion a year earlier but well above the reported loss. Depreciation and amortization, a noncash charge, rose to ₱14.14 billion as PAL added aircraft and recognized more leased assets.

Advance ticket sales also helped. Unearned transportation revenue rose 9.5% from the end of 2025 to ₱27.40 billion, reflecting higher collections for future travel. Although recorded as a liability until passengers fly, the cash provides PAL with working capital.

Cash and cash equivalents increased to ₱28.68 billion from ₱25.97 billion at the end of December, even after ₱6.69 billion of investing outflows and ₱6.40 billion of financing outflows.

That cash generation makes the first-half loss less alarming than it may have initially appeared. It doesn’t eliminate the balance-sheet risks.

A Bigger Fleet, and a Bigger Debt Load

PAL ended June with 85 operating aircraft, up from 82 at the end of 2025. The additions included an Airbus A350-1000 and two A320-200 aircraft. The company also extended operating leases on 12 aircraft, pushing some commitments out to 2043.

Property and equipment increased to ₱194.34 billion, including assets recorded at cost and appraised values. Total assets rose nearly 20% to ₱275.80 billion.

The expansion was financed largely through leases and borrowings. Total liabilities increased 24% to ₱229.80 billion, while lease liabilities jumped to ₱116.54 billion from ₱80.31 billion. Overall long-term obligations, including current maturities, reached ₱136.29 billion.

PAL Holdings’ debt-to-equity ratio rose to 2.98 times from 2.18 times at the end of December. Interest coverage declined to 0.57 times from 3.93 times a year earlier, meaning first-half operating earnings didn’t cover financing costs. PAL’s debt-to-EBITDA ratio stood at 3.78 times, above management’s target of no more than 3.5 times.

The company also had ₱93.24 billion in current liabilities against ₱54.94 billion in current assets. That mismatch is partly characteristic of airlines, which collect ticket payments before providing flights, but it places a premium on reliable cash generation.

PAL moved to reinforce its finances after the reporting period. Its subsidiary Primero Agila Limited issued $350 million of senior unsecured notes carrying a 7.75% coupon and maturing in 2031. The notes were priced at yields of approximately 8% and guaranteed by PAL and Air Philippines Corporation.

The airline also secured a $200 million increase to an asset-backed borrowing facility, drawing $100 million in July.

Betting on a Larger Network

Even as near-term margins tightened, PAL continued preparing for a larger long-haul operation.

At the end of June, the company had 21 scheduled aircraft deliveries through 2029, comprising eight A350-1000 wide-body aircraft and 13 A321neo aircraft. PAL later signed nonbinding agreements with The Boeing Company covering 15 Boeing 787-10 aircraft and with Airbus for nine additional A350-1000 aircraft.

The tentative orders are part of a plan to replace older wide-body aircraft, expand long-haul service and improve fuel efficiency. They also represent a sizable long-term commitment for a carrier whose margins remain vulnerable to energy prices and whose leverage has already increased.

PAL received separate invitations during the first half to strengthen both its market access and financing credentials. In June, the airline was invited to become the 16th member of Oneworld, subject to completing integration requirements by the end of 2027. Membership could provide PAL with connecting traffic, reciprocal loyalty benefits and access to a wider international network.

Moody’s and Fitch also assigned the airline first-time ratings of Ba2 and BB, respectively, both with stable outlooks. The ratings remain below investment grade but give PAL broader access to international capital markets.

The Next Test

PAL enters the second half with more cash, higher forward bookings and a broader strategic plan. It also enters with thin margins, higher fixed obligations and no fuel hedges.

The third quarter is traditionally the airline’s weakest period because of the Philippine rainy season and the resumption of school. That seasonality makes the timing of the fuel shock especially difficult.

For investors, PAL’s first-half results offer two competing stories. One is an airline that retained pricing power, lowered nonfuel unit costs, and generated more than ₱14 billion in operating cash despite a severe external shock. The other is a highly leveraged carrier whose profits disappeared when one major input moved sharply against it.

Both are true.

The deciding factor for the remainder of 2026 will be whether fuel prices retreat faster than passenger demand weakens, and whether PAL can fill more of the seats it is already flying. Revenue growth alone is no longer the challenge. The challenge is converting that revenue into profit before the expanding fleet and its financing costs take off.

We’ve been blogging for free. If you enjoy our content, consider supporting us!

Disclaimer: This is for informational purposes and is not investment advice. Figures come from company disclosures and exchange data; valuation ratios reflect the author’s calculations based on cited inputs.