‘Fuel, peso pressures test Cebu Pacific, PAL expansion plans’
High jet fuel costs and a weaker peso are putting pressure on Cebu Pacific and Philippine Airlines, 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.
High jet fuel costs and a weaker peso are impacting Philippine Airlines (PAL) and Cebu Pacific, two of the country's largest airlines, according to S&P Global Ratings. The credit agency predicts the airlines will face weaker earnings in the second quarter due to rising operating costs from fuel prices and currency depreciation, particularly affecting low-cost carriers like Cebu Pacific, where fuel makes up nearly 40 percent of expenses. S&P points out that only around 30 percent of full-service airlines' costs are fuel-related.
Cebu Pacific has taken steps to mitigate the impact by increasing its fuel hedging position following the Middle East conflict. However, most airlines in the region only hedge around 30 percent of fuel costs in the short term. Meanwhile, PAL faces a different set of challenges, as roughly 35 percent of its revenues come from dollars, with more than half of its expenses linked to the dollar and all borrowings in dollars.
While international revenues can provide some natural hedging against foreign exchange movements, carriers with mostly domestic revenues are more vulnerable to currency fluctuations.
Despite the cost pressures, S&P expects airlines to continue investing in new aircraft, as strong passenger demand and long delivery backlogs make delaying expansion costly. S&P cites PAL's $350-million offshore bond issuance in July as an example of airlines tapping international capital markets for fleet expansion. The debt watcher suggests a diversified mix of bank loans, leases, and domestic and offshore funding to help airlines meet their investment needs.
S&P anticipates airline margins to improve significantly from the fourth quarter, assuming Brent crude averages $110 per barrel this year, before declining to $80 in 2027. Passenger demand has remained resilient despite higher fares, with Asia-Pacific traffic falling only 1 to 2 percent year on year in May and June, and passenger yields increasing by an estimated 10 to 15 percent as airlines pass on higher costs.
Written by urgent.news from Philippine Star Business's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
