Cebu Air: Watch Out For Rise in Fuel Expenses

Philippines’ low cost carrier operator profitability has been tested


(In the middle—Philippine President Rodrigo Roa Duterte and Lance Gokongwei, Cebu Pacific President, Chief Executive Officer and Director, screengrab from Presidential Communications)

On October 20, Philippine President Duterte attended the launch of CGY — the airport code for Cagayan de Oro — as the 7th domestic hub of Cebu Pacific at the Laguindingan Airport in Misamis Oriental.

According to the Presidential Communications, Cebu Pacific already operates six other regional hubs located in Manila, Cebu, Davao, Kalibo, Clark, and Iloilo.

In this occasion, a direct recognition was provided by the highest official of the Philippines, therefore, indicating more credibility to Cebu Pacific.

“Alam mo totoo lang, itong mga bright na tao pati un tatay niya, un Senior na Suma Cum Laude rin un. They have a knack of you know, looking for money. They understand the whole gamut of how men are gainfully employed, and how to run a business little by little.”

Philippine President Duterte

In its recent six months of operations that ended in June, Cebu Air reported an increase of 7.7% in its revenue to ₱35.7 billion (vs. 3-year average revenue growth +6.95%) and a contrasting 44% drop in profits to ₱4.33 billion (vs. 3-year average revenue growth +167%).

Cebu Air, a ₱68 billion Cebu City-based leading low-cost carrier in the Philippines, recorded nearly 17% rise in its expenses or ₱4.1 billion more compared to its year-ago period resulting in much lower profits for shareholders in the recent period.

In particular, Cebu Air’s Aviation fuel expense jumped ₱2.3 billion from last year or by 30%, therefore, siphoning off profits for the period.

Here is Cebu Air discussing its operating expenses for the recent six months.

“The increase was primarily due to the rise in fuel prices in 2017 coupled with the weakening of the Philippine peso against the U.S. dollar as referenced by the depreciation of the Philippine peso to an average of P49.93 per U.S. dollar for the six months ended June 30, 2017 from an average of P46.90 per U.S. dollar last year based on the Philippine Dealing and Exchange Corporation (PDEx) weighted average rates. The growth in the airline’s seat capacity from the acquisition of new aircraft also contributed to the increase in expenses.”

Cebu Air

Having recorded profits to ₱4.33 billion, Cebu Air declared a regular cash dividend of ₱1 per share and another special dividend of ₱1.75, which together amounted to ₱1.7 billion—about 39% of its profits.

Meanwhile, Cebu Air has ₱12.6 billion in cash and cash equivalents as of June (+₱1.2 billion more than a year ago) with ₱45.3 billion in debt (+₱7.1 billion more) and a debt-equity ratio of 1.25x compared with 1.22x last year.

Cebu Air’s equity (book value) also rose by ₱4.7 billion year over year to ₱36.2 billion resulting in a price to book ratio of 1.5x.

In the past three years, Cebu Air allocated ₱45.5 billion in capital expenditures, raised ₱9.5 billion in debt net repayments, and provided ₱2.7 billion in dividend payouts while having accumulated a net free cash flow deficit of -₱6.2 billion.

Founded in 1988, the leading low-cost carrier in the Philippines has been exemplary so far this year has provided a total return of 23.6%.

On October 18, COL Financial has a buy recommendation on Cebu Air.

On the other hand, asking a 20% margin from analysts’ average revenue estimates for the fiscal year 2018 indicated a per share figure of ₱102 compared to ₱112.20 at the time of writing.

In summary, Cebu Air has failed to generate any consistent positive free cash flow in recent years.

The significant bump in aviation fuel expenses just showed the company’s profitability is grossly susceptible to the oil commodity. Certainly, Cebu Air has brighter prospects moving forward but is definitely a pass at this time.

“Alam mo, kaibigan ko si Lance. I value his friendship.”

Philippine President Duterte

Disclosure: I do not have shares in Cebu Air.

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