Investing in Cebu Pacific's Dancing Flight Attendants

"These days no one can make money on the goddamn airline business. The economics represent sheer hell."

— C. R. Smith, President of American Airlines from 1934 to 1968 and from 1973 to 1974

After 37 years from leaving American Airlines (AA), C. R. Smith's point was clearly made when news of what was once the largest U.S. airline carrier, is now filing for bankruptcy protection. Since learning of AA's demise, questions like, how the hell are companies in this industry going to make money and remain competitive with rising fuel costs and a declining economy, have been popping through my mind while I surf for cheap airline seats online. To make it more geographically relevant, how are private Philippine airline carriers, like Cebu Pacific (CEB), able to maintain a healthy profit margin while pegging itself as the country’s largest budget carrier?

With today being Bonifacio Day and I have no Bonifacio party to attend to, I decided to do something productive and research on whether or not I should put my money in the company now that it’s relatively (will get into that later) cheap. 

To start off, I motivated myself by watching a YouTube clip of their dancing flight attendants. 

Enticing but not compelling, enough. Hence, I had to watch some more. 

Talk about in-flight entertainment. Extra service with a happy ending, este, landing anyone?

Kidding aside, I decided to move on with my research by taking a look at their third quarter earnings report. Cebu Air Inc. has recently posted a net loss of PHP219.3 million ($5.1 million) in the third quarter, a reversal from a net profit of PHP1.67 billion in the year-earlier period. This was mostly due to higher fuel costs and expenses related to its fleet expansion as well as other expenses such as fuel hedging. Apart from the “fleet expansion” reason, which is a good reason for a company to be incurring expenses on, that still does not sound too good for my ears and my wallet.

However, CEB these past couple of days have been purchasing back, from the public, a total of 1,267,520 shares at PHP 70.00 each, increasing their treasury shares to a total of 5,584,280 (out of the 613,236,550 listed shares). This is usually a sign that a company, with cash to spare, believes that their stock is under-valued and is willing to invest in their own company for a potential future gain. Starting to sound better, eh? Now this may do a couple of things for the company. Firstly, it may bring the price up due to an increase in the buy side demand. Secondly, it allows them, at a future point in time, to sell the shares at a gain when they place it back into the secondary market. Lastly, it helps improve their Earning Per Share (EPS), a ratio that a lot of investors look at, when the succeeding earnings report comes out. With lesser amount of shares to divide their earnings with,  CEB’s EPS may translate to a better and more appealing figure.

Moving on, let's talk about it's current price. CEB last traded at PHP 70.00 a share on Tuesday, just above 4% from it's all time low at PHP 67.30. Revisiting it's IPO price of PHP 125.00 a share, CEB has dropped 44% since then.

Let's review CEB’s history a bit more closely here. At PHP 125 a share, Cebu Pacific's IPO was the largest ever conducted in the Philippines with it's share prices surging to as high as PHP 133. This was probably due to the following event (please refer to the picture below) that took place during their IPO at that day.

Who wouldn't go nuts for their stock becuase of this? I know the guy in the bottom left would.  

The beggining of CEB's price demise was ofcourse, shortly after they realized that the dacning alone was not enough to fuel and support their IPO price at 125 or at 120, or at 110, and at 100 and at 90 and, you know where i'm getting at. 

Furthermore, although the proceeds from the IPO would be used to boost its fleet, a deeper look into their prospectus would also indicate that it would be used to pay of debt. Therefore, their highly over-priced, over-rated, and over-hyped stock, eventually had no where else to go but down south.

Nevertheless, with where it's stock is trading at right now, is it worth investing in CEB? From a macro point-of-view, fuel prices, among other expenses, is largely going to affect the company's bottom line. In addition, their marketing and business stratedy to increase the top line by remaining as a budget carrier with unbelievable deals has still left me uncertain about how this will work out for them.

But perhaps it does make sense to be affordable during hard economic times. Or better yet, distancing ourselves from the troubled Airline industry in the US, we could place CEB in a better perspective since we can hire flight attendants that can both serve and etertain passengers under a single wage (I also don't think that their dance classes have significantly increased operational costs as well).

Going back to their third quarter loss, an added expense that raised to their net loss was due to fuel hedging. However, with this kind of foresight into fuel costs, we can expect better bottom line results from CEB in the future. Moreover, its purchase of new airplines may have currently dampened their operational costs this quarter but this expense will eventually transalte to increased revenue in the future. Furthermore, nine months prior to their September ending statement, CEB posted a net profit of PHP2.22 billion, which still brings them a net income of over PHP 2 billion year-to-date. In addition, a total of PHP 3.00 a share were paid in dividends earlier this year which brings CEB’s current dividend yield at 4.2%. That’s better than what most time deposit rates have to offer. With all of this in mind, Cebu Pacific is optimistically flying towards the right direction – expansion, growth, and shareholder value. Thus, at PHP 70 a share, CEB does look enticing. 

Disclaimer: The author may enter into a postion with CEB within the next couple of days. Especially after reviewing the fundamentals a bit further and watching more dancing flight attendants in action.