Cebu Pacific sees 2011 as a tough year amidst escalating fuel costs

MANILA, Philippines - Top officials of Gokongwei-controlled Cebu Pacific (CEB) said they expect 2011 to be a tough year for the company and the airline industry in general as fuel prices continue to rise amidst the turmoil in the Middle East and North Africa.

From an average price of $90 per barrel in 2010, jet fuel price surged to $130 per barrel as of March 2011. “Fuel accounts for almost half (48 percent) of our operating costs and fuel price volatility will impact margins,” CEB chairman Ricardo Romulo and president and CEO Lance Gokongwei told stockholders at the company’s annual meeting.

Gokongwei said that it will be tough to sustain decent margins but expect robust demand and increased forward bookings. “We also expect that ancillary revenues will drive growth. We are confident that CEB will come out stronger amidst this tough environment and that it will remain as the dominant low-cost carrier in the country,” he added.

CEB’s top two executives said the company will continue to pursue a disciplined growth strategy, adding that although they still see and capitalize on opportunities in the Philippine market, CEB expects its international sectors to grow at a faster rate.

“We plan to increase our international presence, particularly in the rapidly growing North Asia markets of Korea, Japan and China, and creating better linkages from these markets to the various tourist destinations in the Philippines. We have started expanding our Korea operations through additional services to Incheon and Pusan. We are also considering adding frequencies to China and Japan routes which we currently operate and also penetrating additional cities in these markets within the year,” they added.

They emphasized that CEB has developed an unrivalled domestic network which gives it a competitive edge over other local carriers. “We likewise have the lowest cost base and a strong brand which gives us the ability to offer low fares more than any of our competitors.”

Romulo and Gokongwei also noted that they expect competition from foreign carriers to increase further as the Philippine government takes a more liberal stance on aviation policies into the country by virtue of Executive Order 29 which grants unrestricted third, fourth and fifth freedom rights to airports other than NAIA. “We welcome competition as long as it is done on a level playing field. Aviation liberalization based on reciprocity will be a long-term gain for the Philippines and its local carriers. We have a sustainable first mover advantage being the only successful low-cost carrier (LCC) in the Philippines and we know we have the scale and the route network to compete head-on with any new entrant,” they said.

They noted that fuel may temper the planned expansion of their competitors, with some airlines already deferring aircraft deliveries or suspending underperforming routes to reduce their cost base. “We on the other hand have the balance sheet to grow beyond our current order and we are keen on taking advantage of the opportunity to accelerate growth,” they added.

CEB earlier announced that it is investing $3.8 billion for 37 new aircraft, the largest single aircraft order ever made by a Philippine carrier. This will double CEB’s fleet size by 2021.