Cebu Pacific sees decline in earnings due to forex losses

Cebu Pacific Air, the Philippines’ dominant budget airline, expects earnings in the first half of 2014 to decline—weighed down significantly by foreign exchange losses—as the airline industry continues to reel from lower yields and volatile fuel prices.

Cebu Pacific announced late Thursday that profits in 2013 hit P511.9 million—85 percent lower than the P3.57 billion reported the previous year. But total revenues, 80 percent of which came from ferrying passengers, rose 8 percent to P41 billion.

Operating expenses were up 9.7 percent to P38.6 billion, Cebu Pacific said.

The company tagged foreign exchange losses, amounting to P2.1 billion, as the cause for the steep profit decline.

According to Cebu Pacific CEO Lance Gokongwei, the company expects meager margins in the first half of the year as the peso continues to weaken, tempering the airline’s earnings while it expands its long-haul operations.

“We see the first half this year significantly worse than the first half last year,” Gokongwei said in a conference call with investors and the media.

Cebu Pacific said that its outstanding debt, pre-delivery payments, fuel purchases, leases and certain maintenance expenses were pegged on the US dollar. The peso depreciated by 8.1 percent to P44.395 last year, and weakened further by 0.84 percent as of March 6.

But Gokongwei noted that the latter part of the year could improve partly due to “better integration” with Tigerair Philippines, which Cebu Pacific fully acquired last month for $15 million.

Market observers hailed the deal—part of a broader strategic alliance between Cebu Pacific and Singapore’s Tiger Airways—saying it would help “rationalize” the current industry structure and improve yields moving forward.

With 48 planes by the end of 2013, Cebu Pacific has cornered half of all domestic flights, and will likely continue to remain dominant, Gokongwei said.

The remainder is split between Philippine Airlines, sister-firm PAL Express, and the domestic units of Malaysia’s AirAsia through Philippines AirAsia and AirAsia Zest.

The company hopes to continue its strategy to expand long-haul routes despite the tough competition. It started this segment through flights to Dubai last October. For the first half of 2014, Cebu Pacific is planning flights to Japan via Narita and Nagoya. In the second semester, it may launch flights to Saudi Arabia and Australia.

Noting that its Dubai business “was improving, Gokongwei said the company would likely see “start-up losses” in its upcoming long-haul routes.

The company is also looking to add flights to Malaysia, Singapore and China, based on briefing materials provided by the airline.