Investment

Research Proposal

Briones • Leviste • Santos • Velayo

UNDERSTANDING THE BUSINESS
INTRODUCTION
● Important for the Philippines as an archipelago to have an efficient and
effective air flight travel service provider
● Cebu Pacific Air is an airline travel service provider popular for being the
leading low-cost carrier in the Philippines
● It operates by providing air travel service to passenger across different
destinations and additional in-flight services.
A BRIEF HISTORY
● 1988 - Company’s incorporation
● 1991 - 40-year legislative franchise
● 1996 - First domestic flight from Manila to Cebu
● 1997 - License to operate international routes
● 2001 - First international flight from Manila to Hong Kong
● 2005 - Adopted the LCC business model
● Today - 76 domestic and 37 international destinations
COMPANY OPERATING RISKS
● Strict domestic and international regulations
● Fluctuations in fuel prices
● International and foreign economic conditions
● Safety and security
● Unforeseen circumstances in foreign countries
CUSTOMERS’ PERSPECTIVE
● Core customers are air travelers who wish to travel across different
destinations.
● LCCs attract price-sensitive consumers.
● Customer loyalty program and treatment of customer concerns are general
considerations to determine customer-orientedness.
● Cebu Pacific Air alleviates the pain of expensive flight travel
EVALUATING THE STRENGTHS AND
WEAKNESSES OF THE BUSINESS AND
INDUSTRY
STRENGTHS
● Strong fleet network
○ 65 aircrafts
○ 2,485 weekly flights
● Strong market position
○ 51% domestic market share in the PH
○ 40% market share in Manila-Sydney route
● Profitability
○ About PHP 68 billion in revenues in 2017
○ 9.9% increase from 2016
COMPARATIVE ADVANTAGE
● Switching costs
○ Costs of choosing alternative methods used to be low
○ Low-cost airlines’ tickets tend to be cheaper nowadays
○ Known for frequent Piso fare promotions
● Brand loyalty
○ Getgo rewards system
○ Loyal clients may get free flights
○ Promotions - only need 1 point for the base fare of your chosen flight
WEAKNESSES & THREATS
● Cost efficiency
○ Percentage of operating expenses to revenue
○ 80.2% in 2016 to 85.1% in 2017
● Price-sensitivity
○ Reliance on online sites and mobile apps to find cheap fares
○ Only one class (economy) available in Cebu Pacific
○ Incentivized by price since they are not concerned about level of service received
○ Overall, STRONG price-sensitivity
○ Alternatives like AirAsia or ferries are available
TRANSPORTATION (AIRLINE) INDUSTRY
● Return on Invested Capital
○ Cebu Pacific: 13.17% 2017 2025
○ Industry range: -2.45%–15.82%
Jobs 1.2 million 3.4 million
○ Industry average: 8.84%
● Market value GDP USD 9.2 billion USD 23 billion
○ Growing rapidly since 2010
○ Forecasted CAGR at the end of 2014-2019 = 8%
● Market volume
○ 56.2 million passengers at the end of 2019 (37.2% increase from 2014)
● Contribution to PH economy
TRAVEL AND TOURISM INDUSTRY
● Healthy and accelerated growth
● Market value
○ 2018 growth = 4.6%
○ 2023 forecasted growth = 29.7%
● Tourist arrivals
○ 11% growth in 2017
○ South Korea, China, US, Japan
● Millennials (students, young professionals) love to seek for adventures
COMPETITION
● Defined by large market players––Philippine Airlines & AirAsia
● Codeshare agreements and partnerships
○ Increase their size and reach
● Foreign airlines with flights to and from their country
○ Jeju Air’s Manila to Seoul flights
● Lack of differentiation of LCC
○ One coach class
○ All other services must be paid for
○ Capitalize on price differentiation
COMPETITION
● Minimizing costs
○ Same business model
○ Attempt to protect profit margins while growing revenues
MEASURING THE OPERATING AND
FINANCIAL HEALTH OF THE BUSINESS
Fundamentals of the Business
● Important for the company to maintain flights per day and maximize
passengers.
● Operating metrics to consider are number of passengers carried, number of
available seats, seat load factor, revenue passenger kilometer, average seat
kilometer, number of sectors flown, and fleet size.
○ SLF = Seats occupied / Number of seats
○ RPK = revenue passengers * distance travelled
○ APK = number of seats * distance travelled
Operating Metrics of Cebu Pacific
Cebu Pacific vs PAL
Key Risks
● Cost and availability of fuel
● Intense competition on its domestic and international routes
● Economic downturn which affects the spending habits of its consumers
● Availability of debt financing
● Reliance on airport operational efficiency
● Reliance on third party facilities and service providers
● Safety and security
● Stringent regulations and restrictions
● Incidental catastrophes beyond the airline’s control
Inflation
● Severely affects the company as it increases cost of fuel, drives the prices of
tickets upward, and negatively affects the price-sensitive market.
Strength of Balance Sheet
● With a current ratio and a quick ratio less than one at 0.75 and 0.56
respectively, Cebu Pacific Air does not have enough current assets to meet
its short-term obligations.
● With a debt ratio less than one at 0.42, Cebu Pacific Air has more assets than
debt signifying the strength of its balance sheet.
● With a debt-to-equity ratio at 1.34 (as compared to 7.73 of PAL Holdings) the
company has a strong balance sheet within the airline industry. In the airline
industry, it is common for players to result to debt financing in order to
finance its large operating costs.
Return on Invested Capital
● Measures the profit a firm's business investors have earned on their
invested debt or equity capital.
● Cebu Pacific ROIC = 13.17%
● PAL ROIC = -11.40%
EVALUATING THE DISTRIBUTION OF
EARNINGS (CASH FLOWS)
Accounting Standard

● Conservative
○ NIRC of 1997 (imposition of a 2.00% MCIT on the gross income)
○ R.A. No 7151 (benefits from tax privileges and exemptions enjoyed by its competing airlines)
○ R.A. 9517 (depreciation of its assets and the carry over as a deduction from taxable income
Revenues

● From one-off transactions: dependent on their passengers availing their air

travel services
Cyclical, Countercyclical, or Recession-resistant?

● Cyclical: depends on general economic conditions.

○ players in the airline industry greatly depend on periods of economic prosperity as its
customers are price-sensitive
Impact of Operating Leverage

● Requires a high operating leverage given a high labor component (pilots,

flight attendants, customer service representatives, internal employees, etc)
and its high capital-expenditure requirements.
● Affect the company’s earnings
○ Revenue depends on the productivity of its employees and the efficiency of its fleet.
Impact of Working Capital to Cash Flows

● Changes in the company’s short-term working capital needs:operating cash

flow.
● Positive working capital: inflow of cash for the period
● Negative working capital: cash used in managing the working capital or
commitments within the year>the cash brought in. Net working capital of
the business in 2017 is -P7,554,785,042 and -P8,758,218,221. However, it still
works in favor of the company since there is a continuous growth in sales,
9.9% in 2017 and 8.96% in 2018.
Impact of Working Capital to Cash Flows

● Net working capital

○ 2017: -P7,554,785,042
○ 2018: -P8,758,218,221

● Still works in favor of the company: continuous growth in sales

○ 2017: 9.9%
○ 2018: 8.96%
Capital Expenditures

● High capital-expenditure requirements.

○ Economic barriers to enter the industry are high given initial fixed costs that require an
up-front outlay to obtain aircraft (MarketLine, 2015).

● Obtains aircraft
● Maintains its fleet: high level of investment for operational efficiency.
EVALUATING GROWTH
OPPORTUNITIES
Growth of the Business
● Internal growth
○ Maintaining a good image to their customers
○ Providing high quality service
● Allocation of funds
● Annual assessments
○ Overall performance
○ Alignment of standards to its core vision
● Aviation sector
○ Increased tourism in the country
○ Holds 20% share in the industry
Future in the industry
● Continuous growth
○ More routes and travel options
○ Expansion of fleet - new aircrafts
○ More affordable prices and promos
● Fast paced
○ Adapt to the rapid movement in the industry and market
○ Utilize resources
○ Cater to the demands of its customers
Thanks!

Briones • Leviste • Santos • Velayo