‘Fuel, peso pressures test Cebu Pacific, PAL expansion plans’

MANILA, Philippines — High jet fuel costs and a weaker peso are putting pressure on Cebu Pacific and Philippine Airlines (PAL), but the country’s two largest carriers are taking steps to cushion the impact while keeping their expansion plans intact, according to S&P Global Ratings.

S&P said Asia-Pacific airlines face weaker earnings from the second quarter as elevated fuel prices and currency depreciation raise operating costs, with low-cost carriers such as Cebu Pacific particularly vulnerable.

“High jet fuel costs and currency depreciation against the dollar will hit Asia-Pacific airlines, especially low-cost carriers,” S&P said in a report.

The credit watcher estimated that fuel accounts for nearly 40 percent of costs for low-cost carriers, higher than around 33 percent for full-service airlines.

S&P said Cebu Pacific was among the few airlines in the region that increased its fuel hedging position following the Middle East conflict.

About half of the 22 carriers covered by the report do not hedge fuel, while those that do typically hedge only around 30 percent over the short term.

PAL, meanwhile, faces a different set of currency exposures. S&P estimates that around 35 percent of the flag carrier’s revenues are generated in dollars, while more than half of its expenses are dollar-linked and all of its borrowings are denominated in dollars.

Airlines with largely domestic revenues are more vulnerable to currency weakness because fuel, maintenance, leases and aircraft purchases are typically dollar-denominated. However, international revenues can provide some natural hedge against foreign exchange movements.

Despite the cost pressures, S&P expects carriers to continue investing in new aircraft as strong passenger demand and lengthy delivery backlogs make delaying expansion increasingly costly.

“Giving up aircraft would put them too far back in the line, given lengthy delivery times,” it said.

PAL’s $350-million offshore bond issuance in July was cited by S&P as an example of airlines tapping international capital markets to finance fleet expansion.

S&P said a diversified mix of bank loans, leases and domestic and offshore funding should help carriers meet their investment needs.

The debt watcher expects airline margins to recover more meaningfully from the fourth quarter as seasonal demand strengthens. It assumes Brent crude will average about $110 per barrel this year before easing to $80 in 2027.

Passenger demand has so far remained resilient despite higher fares. Asia-Pacific traffic fell only one to two percent year on year in May and June, while passenger yields increased by an estimated 10 to 15 percent as airlines passed on higher costs.

S&P stressed that the report does not constitute a rating action and that it does not publicly rate Cebu Air Inc. or PAL Holdings Inc.