Is there a safety net for Phl LCCs?

Does the Marcos administration have an airline industry sector financial support plan for the country’s local airlines in the face of dwindling supply of jet fuel and its increasing cost?

I am asking this vital question following the first quarter financial report of  low-cost carrier Cebu Pacific which posted a net loss of P400 million (a reversal from its P466-million profit a year ago) as a result of the continuing Middle East conflict that has raised crude oil prices.

Aviation jet fuel has nearly doubled to  $200 per barrel.

Aside from Cebu Pacific, two other LCCs operating in the country are Philippine Airlines’s PAL Express and Air Asia Philippines.

The escalating aviation fuel cost for Philippine air line operators is further aggravated by the weaker peso against the US dollar, which some traders say may further deteriorate as the Middle East conflict continues to drag on. Additionally, inflation has also spiked upward, forcing monetary regulators to adjust upwards interest rates and thus increasing  financing costs for LCCs.

According to a Japan Times article written by Juliana Liu of Bloomberg, the global jet-fuel crunch is hitting Asia’s low-cost airlines much harder than full-service airlines.

Liu expressed the view that “governments should be preparing financial or operational support to avoid further flight cancellations during the busy summer travel season – as well as outright shutdowns like the collapse of America’s Spirit Airlines. Discount carriers like Malaysia’s AirAsia X, Indonesia’s PT Lion Mentari Airlines and Cebu Air of the Philippines are already bearing the brunt of the energy shock. Policymakers must consider targeted measures in the form of loans, grants or fuel price relief.”

Liu cited that Asia is  “most exposed to the conflict in the Strait of Hormuz, taking more than 80 percent of Middle Eastern oil and gas. The countries are divided between those poised to weather a scarcity of jet fuel and those that are not. Wealthier economies like China, Japan and South Korea are using their financial resources to procure fuel. They’ve also employed strategies like cutting exports or fuel hedging – using contracts to lock in prices in advance – to maintain supply.”

However, she wrote, “Southeast Asia has fewer options. It’s home to a number of budget carriers that didn’t hedge when crude prices were low, meaning they must now pay the market rate. Airlines had started the year expecting cheap aviation fuel, their biggest single expense.”

Liu further expressed concern that “the current price is unsustainable for privately owned low-cost carriers. AirAsia X is a case in point. Founded in 2001, the region’s largest budget airline was decimated by the pandemic and was just getting back on its feet following a restructuring when the Iran war began. With fuel accounting for up to 40 percent  of costs and 70 percent of total expenses denominated in US dollars, according to Hong Leong Investment Bank, the airline is highly exposed to external disruptions. A $1 increase in jet-fuel prices cuts earnings by around 80 million ringgit ($20 million), while a 10-Malaysian sen decline in the currency can affect profits by 280 million ringgit, the bank says. It’s not hard to see how the current shocks would eat into operating margins, which stood at 5.9 percent last year.”

Liu’s article acknowledged that “there haven’t been any murmurs so far about Asian budget carriers falling into insolvency like Florida-based Spirit, for which surging fuel costs were the final straw. But governments shouldn’t be complacent. Still, with hard-hit countries like the Philippines declaring a state of emergency in response to fuel shocks, it’s worth asking whether public resources should go to bailing out airlines.Unlike the region’s flagship carriers, low-cost providers aren’t backed by sovereign wealth funds. And in Malaysia, Indonesia and the Philippines, they carry more passengers, too. The trio have a vast number of islands that cannot be connected by land transport, so affordable air travel offers a vital lifeline and should be supported to avoid further slowdown in business activity.”

She continued that assistance “could include subsidies, tax incentives or access to low-cost financing backed by public lenders.”

“The energy crisis has affected nearly all aspects of the global economy. It’s not easy for governments under severe strain to figure out what to prioritize. But in Southeast Asia, discount airlines offer a crucial service. Helping them shouldn’t be left too late, “ Liu concluded.

Aviation industry analysts have pointed out that  airlines with high lease exposure, limited fuel hedging, weak liquidity and sustained negative unit economics are increasingly vulnerable in the current operating environment, particularly if fuel prices remain elevated or further external shocks emerge.

To be fair, the government has already ordered the Civil Aviation Authority of the Philippines to reduce  key take-off, landing and parking fees to lower fixed operating costs for domestic airlines. CAAP has also  reduced passenger terminal fees across government-operated airports to help airlines maintain passenger demand despite rising ticket prices.

The Department of Transportation (DOTr) has also authorized airlines to compress and optimize flight schedules, giving flexibility to Cebu Pacific and Philippine Airlines to trim underutilized routes and mitigate the high cost of jet fuel.

However, one form of support that it has extended which is also costly on the national coffers is government-aviation partnerships of state-funded repatriation contracts – chartering flights from local carriers to evacuate overseas Filipino workers (OFWs) from conflict zones in the Gulf region. Such arrangements supposedly provides airlines with guaranteed revenue streams for long-haul operations. Question is – how quickly does the government pay the airlines?

Lastly, under the national energy emergency, the government is supposedly collaborating with private energy stakeholders to guarantee that local airlines maintain an uninterrupted supply of jet fuel.