Cebu Air Parent Sees Oil Bonanza Trumping Risks to Demand

  • Airline may carry more than 19 million passengers in 2016
  • Carrier is evaluating jet fuel strategy and may boost hedges

JG Summit Holdings Inc. expects its Philippine budget airline to carry a million more passengers this year, as decade-low prices for crude oil flow through to cheaper fares.

Cebu Air Inc. will probably carry more than 19 million passengers this year, up from more than 18 million in 2015, President Lance Gokongwei said in a Jan. 20 phone interview. 

JG Summit, which also owns 27 percent of Manila Electric Co., thinks power use will rise as cheaper fuel drives down electricity costs. The conglomerate’s petrochemical unit, which runs on feedstock from refined fuel, also will be more competitive, Gokongwei said.

Cheap fuel "is positive for us since we’re a transportation, manufacturing and industrial group,” said Gokongwei, 49. “We always had a good balance sheet. Now is the opportunity to strengthen it further.”

Cebu Air rose 0.5 percent to 76.40 pesos as of 10:19 a.m. in Manila trading, while JG Summit gained 2.2 percent to 61.30 pesos. The Philippine Stock Exchange Composite Index advanced 1.4 percent.

Some Drawbacks

Gokongwei said the drop in fuel prices does have its downsides.

“First is that fuel surcharges have been removed, so that has reduced yields” on Cebu Air flights, he said. “Second, it’s a manifestation of weaker economic growth globally, especially with concerns about China’s weakening economy. There also are currency fears in emerging markets.”

Daniel Lau and Edward Xu, analysts at Morgan Stanley, said 2016 could be a better year for carriers in the Association of Southeast Asian nations.

“We think that Asean airlines are likely to enjoy margin expansion, albeit on varying levels, as we do expect lower fuel prices to drive price competition as rivals pass on fuel cost savings to passengers,” the analysts wrote in a report dated Jan. 24. “We are raising our estimates for Asean airlines across the board as we adjust for lower fuel prices, offset by lower pax yield.”

Morgan Stanley is cutting yield growth expectations for low-cost carriers in Asean, given that the airlines will take the opportunity to pass on some fuel cost savings to passengers or reduce fare growth to entice air travel, it said in the report, which doesn’t mention Cebu Air specifically.

Cebu Air, which was unprofitable in the third quarter of 2015 due to fuel hedging and currency losses, is reviewing its fuel-purchase strategy and will consider adding more hedges to take advantage of the current low fuel price, Gokongwei said. Whether it can expand its fleet will depend on demand and the airline’s ability to add new destinations, he said.

Jet fuel bought at an average of $75 a barrel will account for about 25 percent of Cebu Air’s fuel needs this year and 18 percent in 2017, Gokongwei said. That’s an improvement from 2015, when it paid more than $100 a barrel for 30 percent of its fuel needs.

Two to Contango

“The market is in severe contango and that’s something we have to consider,” he said, referring to a situation where the spot price of fuel is lower than the forward price. “If I fix the price for 2017, am I going to pay $10 more to hedge compared to the spot price?”

Spot prices of jet fuel cargoes loaded from Singapore fell to $37.66 a barrel on Jan. 21, their lowest since Bloomberg began compiling the data in 2011.

Cebu Air, which will sell four jets this year and receive five new ones, doesn’t plan to increase its long-haul fleet for now, Gokongwei said. 

Slowing global growth, market turmoil and weakening currencies including the Philippine peso are risks for Cebu Air, Gokongwei said. The airline generates revenue in pesos but about 75 percent of its costs -- and almost all its debt -- are in U.S. dollars.

Mideast Concerns

Oxford Economics in December 2014 named the Philippines, which imports almost all the oil it needs, as the economy set to gain the most if crude fell to $40 a barrel. With fuel now at $30, though, pain among Middle East oil producers could hit the Philippines, which sends about 2.5 million citizens to the region for work.

“We haven’t seen any weakness yet but we have to anticipate a potential slowdown in demand for travel and overseas-worker traffic to the Middle East,” which is a big market for Cebu Air, Gokongwei said.

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