CEB: Sunny with a chance of rain
Shares of Cebu Pacific (ticker: CEB) have been performing well lately, rising by 18.6 percent for the year-to-date period.
Its strong performance is not surprising given the airlines’ favorable outlook in 2025.
Cebu Pacific is well positioned to capitalize on the strong demand for travel. After performing poorly in the third quarter of last year, it saw passenger volume recover by 31.7 percent year-on-year in the fourth quarter. Volume growth also remained strong in January at 33.3 percent, as the number of both domestic and international passengers increased by 34.6 percent and 29.9 percent, respectively.
Strong growth in passenger volumes will most likely be sustained for the rest of the year amid increased capacity and more routes.
Note that the airline added 14 new planes to its fleet last year. Passenger volumes grew strongly in the fourth quarter as it opened 123 new routes, equivalent to 15 percent of its existing routes.
Management said Cebu Pacific would continue to add routes to popular destinations to capitalize on its larger fleet size. For 2025, the company is targeting to grow its seat capacity by 20 percent.
Given the highly leveraged nature of the airline business, Cebu Pacific’s margins will also benefit from its higher passenger volumes and revenues. Plans to reduce capital expenditures (capex) to P30 billion this year from P60 billion last year should also help boost margins, as this would lead to slower growth in depreciation expense and financing costs.
Recent developments such as the weaker dollar and the drop in oil prices should benefit the company even further.
After hitting a high of 109.956 in January, the dollar index has been trending lower and is now down 4.4 percent for the year-to-date period. The weakness of the dollar is largely responsible for the appreciation of the peso. As of this writing, the peso is stronger by 1 percent compared to its end-2024 level.
A stronger peso is favorable for Cebu Pacific as 60 percent to 70 percent of its costs are dollar-denominated while bulk of its revenues are peso-denominated.
Meanwhile, oil is now down 6.3 percent for the year-to-date period. It could stay weak given the growing likelihood that the war between Russia and Ukraine will end soon brought about by US President Donald Trump’s decision to suspend military aid to Ukraine.
Lower oil prices are good for the airline, as oil accounts for around 35 percent of its total cost.
Nevertheless, uncertainty remains. Since New Naia Infrastructure Corp. took over the operations of Ninoy Aquino International Airport (Naia), it has implemented various fees such as landing, takeoff and parking to improve the services and facilities of the country’s main gateway.
With this, Cebu Pacific expects costs to increase by around P600 million per quarter in 2025. Although the airline will eventually pass on these additional costs to passengers, it will take time for it to do so, resulting in a temporary drag on margins.
Unless the benefits brought about by the higher passenger volume, lower capex, stronger peso and lower oil prices are large enough to exceed the added costs of operating Naia, profits could disappoint, leading to volatility in the company’s share price in the short term.
This is a threat that investors who buy CEB should be aware of.
