Cebu Pacific’s historic plane order comes with risks – analysts

MANILA, Philippines — Cebu Pacific may be flying high with its milestone of placing the largest aircraft order in Philippine aviation, but experts believe that certain risks could clip the airline’s wings.

Analysts interviewed by The STAR said Cebu Pacific would require a number of economic factors to favor its $24-billion bet to buy 152 aircraft from Airbus to bear financial gains.

China Bank Capital Corp. managing director Juan Paolo Colet said Cebu Pacific would receive price flexibilities for its latest order, lowering the closing rate of the transaction.

“This landmark deal is a massive bet on the future demand for air travel and growth of tourism. Though the terms of the deal have yet to be finalized, it will likely include certain flexibilities to calibrate the order, and the actual price could come in much lower than the disclosed list prices,” Colet said.

However, Colet warned that Cebu Pacific would incur new expenses in fuel, labor and maintenance with the entry of new aircraft. Air travel demand also has to increase at the pace projected by the airline for all of the jets to be maximized.

“If projections pan out, then the airline will be well-positioned to capture demand expansion and thereby boost profitability, (but) on the flipside, a sudden downturn in air travel or a spike in fuel costs are key risks that they will seek to manage,” Colet said.

Regina Capital Development Corp. head of sales Luis Limlingan also flagged the financial cost that Cebu Pacific has to shoulder in acquiring the aircraft.

In particular, Limlingan is concerned that the $24 billion order may force Cebu Pacific to take on fresh debts even though borrowing rates have yet to come down.

“It offers significant growth potential by expanding capacity and improving efficiency, but it also poses some risks to Cebu Pacific’s profitability like increased indebtedness, integrated challenges and market saturation. Success will hinge on its effective execution and a stable macroeconomic backdrop,” Limlingan said.

Financially, Cebu Pacific is starting to sustain its altitude in the pandemic aftermath. The carrier owned by the Gokongweis turned in a profit of P7.9 billion in 2023, reversing its net loss of P14 billion in 2022.

Moreover, Colet believes that airline competition will only get tighter in the future, and this will require Cebu Pacific to do more than just purchase new aircraft.

“On the international front, (Cebu Pacific) also has to contend with intensified competition from the subsidized airlines,” Colet said.

Cebu Pacific on Tuesday locked in an order for 152 aircraft from Airbus for $24 billion, or roughly P1.4 trillion, marking the biggest plane order in Philippine history.

The leading airline in the Philippines will buy 152 narrow-body aircraft in the form of A321neos, preparing its fleet for future demand. The deal covers firm orders for 102 A321neos, including 50 purchase rights.

Similarly, Cebu Pacific selected aviation supplier Pratt & Whitney to manufacture the jet engines for the new aircraft that it will procure from Airbus. The airline opted to sign Pratt & Whitney in spite of production issues it has previously faced with the company.

The decision to pick Airbus also handed another loss for its American counterpart Boeing, which Cebu Pacific was also considering even though it is dealing with a safety crisis.

Cebu Pacific currently operates one of the youngest fleets in the world, handling eight A330s, 39 A320s and 21 A321s, aside from 15 turboprops, enabling it to serve 35 Philippine routes and 25 international cities.