THE wave of misery that has drowned at least eight significant airlines in bankruptcy so far this year is apparently now lapping at Philippine shores, with the country’s largest carrier Cebu Pacific announcing the cancellation of hundreds of flights due to unspecified “factors occurring all at the same time.”
The disruptions will affect Cebu Pacific’s schedule through at least May 10, but the company is already hinting things may not return to normal for some time, as it is “currently reviewing adjustments required for June and beyond.”
It may seem a stretch to conclude that Cebu Pacific, which until last Friday appeared to be a reasonably healthy airline, is headed for bankruptcy or some other form of dissolution, and I would expect the company to vigorously disagree with that hypothesis. Recent events, however, are difficult to dismiss as simple bad luck or coincidence, as they fit a pattern that has already been seen in numerous other recent airline failures.
The pattern begins with a sharp negative change in an airline’s financial performance. In March, Cebu Pacific reported its net income for 2018 dropped by more than 50 percent from the previous year, from P7.9 billion to P3.9 billion. This was in spite of revenue increasing by about 9.0 percent year-on-year, driven by a substantial increase in cargo traffic and an increase of about 2.7 percent, or about 500,000 in passenger numbers.
Cebu Pacific attributed the downturn to a “challenging environment,” citing higher fuel prices, a weaker peso, and the six-month closure of Boracay as factors eroding its income in 2018. Yet, rival (and perennial loss-maker) Philippine Airlines, faced with precisely the same challenges, had what would be considered a very successful year by its standards. PAL cut its net loss by more than 40 percent, to P4.33 billion from P7.33 billion in 2017, and increased its revenues by 16.2 percent. It also more than doubled Cebu Pacific’s gain in passenger numbers, carrying 15.9 million passengers in 2018 compared to 14.5 million in 2017.
Thu, Cebu Pacific’s woes are attributable to something internal, which also fits the pattern. What that might be is subject to some speculation in the absence of a forthright explanation from the company, but a good guess will be its strategy of upgauging, or increasing capacity by switching out smaller planes for larger ones on high-demand routes. When done properly, that is, when the new, larger and costlier aircraft can be filled and kept filled, the strategy is effective and profitable. If the company misses the mark, however, and finds that the larger capacity is not being fully utilized, then it has just turned a potentially profitable route into a potential loser.
The second part of the pattern is just what Cebu Pacific is experiencing now, actual operational difficulties attributed to vague causes. Cebu Pacific’s official word on the unusual number of flight cancellations is that they are the consequence of maintenance issues – the company disclosed that one aircraft recently suffered a bird strike – and to some extent, traffic congestion at Manila. The latter cause can probably be ignored, because again, other airlines such as PAL have not been similarly affected. A cause like “maintenance issues,” however, cannot. It fundamentally means that Cebu Pacific is struggling to keep its planes in the air. Whether that is a matter of inefficiency, bad planning or simple bad luck, only the airline can say; whatever the reason, the key point is that the solution is a financial issue – keeping planes in the air instead of on the ground requires spending. Whatever the underlying causes, Cebu Pacific is evidently not spending, or not spending enough, and that is an alarming sign to the airline’s stakeholders.
If what is happening now to Cebu Pacific is the beginning of a collapse, the next signpost along that path will be a drop in passenger numbers. Iceland’s WOW Air, an airline very similar to Cebu Pacific that abruptly folded in February, had its highest passenger numbers (about 15 million) in 2017, but then began to lose passengers last year as it struggled to keep its fleet active. Falling passenger numbers aggravated already tight financial conditions, and put the airline into a spin it could not recover from.
Hopefully, that is not the case with Cebu Pacific, although the auguries at this point are a bit troubling. Even though the airline gives the traveler the impression that it is little more than a fleet of buses with wings, Filipino consumers have a paucity of choices as it is, and it would be most unfortunate to lose one.