CEBU PACIFIC STRATEGIC MANAGEMENT PAPER

A Final Paper
Presented to the

De La Salle University – Manila

In Partial Fulfillment of the
Course Requirements in
STRATMA

Presented to:
Sir Jem Pampolina

Presented by:
Patricia Wijangco

Submitted on:
Term 1, AY: 2015-2016
November 21, 2015
Executive Summary

Cebu Pacific Air is currently the country’s leading domestic carrier, serving the most

domestic destinations with the largest number flights and routes, and equipped with

the youngest fleet. Cebu Air, Inc., operating as Cebu Pacific Air, is based on the

grounds of Ninoy Aquino International Airport (Manila Terminal 3), Pasay City, Metro

Manila, the Philippines. It offers scheduled flights to both domestic and international

destinations. Its main base is Ninoy Aquino International Airport, Manila, with other

hubs at Mactan-Cebu International Airport, Francisco Bangoy International Airportand

Diosdado Macapagal International Airport.

Cebu Pacific has 2 major competitors, which are Philippine Airlines and Air Asia. This

paper seeks to cite the different strategies of Cebu Pacific and how it was successfully

been making them grow annually. Since, it is a low cost carrier airline, it is mentioned

what strategy the company uses to be able to generate profit despite the low fare

prices.

COMPANY BACKGROUND

Cebu Pacific is a low cost airline based in the Philippines. It offers a discount, no frills,

and budget type of airline for both domestic and international flights. It is one of the

major holdings of JG Summit Holdings under John Gokongwei. It is currently the

biggest carrier in the Philippines and is mainly based in Ninoy Aquino International
Airport. Cebu Pacific is known for their low-cost approach. It offers no-frills, discounted

and low budget fares. This also means fewer comfort. To make up for revenue lost in

decreased ticket prices, the airline charges for extras like food, priority boarding, seat

allocating, and baggage. Cebu Pacific offers 34 domestic flights and 26 international

flights. They are more known for flying around the Philippines but are currently

expanding their international destinations.

Founded on 1996 as Cebu Air, Cebu Pacific offers scheduled flights to 33 domestic

destinations, and to 16 international destinations in 10 countries. It is currently the

country's leading domestic carrier, serving the most domestic destinations with the

largest number flights and routes, and equipped with the youngest fleet. Its main base

is Ninoy Aquino International Airport, Manila, with other hubs at Mactan-Cebu

International Airport, Francisco Bangoy International Airport and Diosdado Macapagal

International Airport. The airline is a subsidiary of JG Summit Holdings, controlled by

the Gokongwei family - one of the richest Filipino-Chinese families based in the

Philippines. Cebu Pacific is currently headed by President and CEO Lance

Gokongwei, presumptive heir of John Gokongwei, the chairman emeritus of JG

Summit.

With a company slogan, “It’s time every Juan flies” Cebu Pacific entered the market

with a promise to give "low fare, great value" to every Filipino who wanted to fly. It

operates a fleet of 25 Airbus (10 A319 and 15 A320) and 8 ATR 72-500 aircraft, the

youngest fleet in the Philippines. Cebu Pacific remains to be the pioneer in creative

pricing strategies as it manages to offer the lowest fare in every route it operates.
Industry Analysis

Air travel continues to be a growing industry because it facilitates economic

growth, International investment, world trade and tourism and therefore is one of

the main proponents of globalization. Airline companies have three main goals,

providing good service to the customers, returning the investment with an

increase to their shareholders, and lastly providing sustenance to nation’s

economy (Alfelor, 2013). The airline industry must not only take in priority the

goal they have set up for their company but also the dynamics that affect the

improvement and success of their industry. Such as their airport capacity, route

structures, technology, cost to leave or buy the aircraft. There are also some

unpredictable dynamics that when unprepared can affect the whole industry like

the weather that is irregular especially in Philippines where there are typhoons all

year round. Fuel cost is also a main factor in the dynamics that could change the

entire industry. Fuel is also the second largest expense and a significant portion

of an airline total cost. One of the largest expenses, an airline can incur is labor

that the airline must pay to its human stakeholders such pilots, flight attendants,

dispatchers, bagger handlers, and others.

The Airline industry must always put in mind the key factors that affect their

success. They should always strive to continue providing customer satisfaction,

competitive rates, adequate technology, and a wide variety of destinations.

Macro environmental analysis

POLITICAL ECONOMIC

- Airline industry is highly regulated - Increasing prices of different aircraft

- Government seeks to increase models

tourism - Dependence on craft, equipment and

fuel

-Maintaining and operating costs are

high

-Purchasing power of Filipinos are

getting higher
SOCIAL TECHNOLOGICAL

-Philippines is highly populated - Online booking is usually being

- More people want to travel utilized

- Increasing market for low-cost - Web check-ins and seat reservations

carriers are also done online

- Social media is highly used now

LEGAL ENVIRONMENTAL

- Strict rules and regulations regarding - Climate change affects flight

safety of flyers schedules

- Noise and Air Pollution

- Waste Management

Major players/ Competitor Analysis

Philippine Airlines
Philippine Airlines, Inc. commonly known as PAL, is the flag carrier and national

airline of the Philippines. Headquartered in the Philippine National Bank Financial

Center in Pasay City, the airline was founded in 1941 and is the oldest

commercial airline in Asia operating under its original name. Out of its hubs at

Ninoy Aquino International Airport of Manila and Mactan-Cebu International

Airport of Cebu City, Philippine Airlines serves nineteen destinations in the

Philippines and 24 destinations in Southeast Asia, Middle East, East Asia,

Oceania and North America.

Philippine Airlines Inc. owns and operates national and international flights. The

company’s fleet includes Boeing 747-400, Airbus A340-300, Airbus A320-200,

and Boeing 737-400. Its international destinations include Jakarta; Vancouver;

Los Angeles; Honolulu; and Shanghai and national destinations include Along,

Nag, Leaps, Butane, and Dalai. Philippine Airlines was founded in 1941 and is

headquartered in Makati, Philippines. Philippine Airlines Inc. operates as a

subsidiary of PAL Holdings, Inc.

Philippine Airlines is the only airline in the Philippines to be accredited with the

IATA Operational Safety Audit (IOSA) by the International Air Transport

Association (IATA) and has been awarded a 3-star rating by the independent

research consultancy firm Skytrax.

Air Asia

AirAsia Inc., operating as AirAsia Philippines is a low-cost airline based at Ninoy

Aquino International Airport in Metro Manila in the Philippines. The airline is the

Philippine affiliate of AirAsia, a low-cost airline based in Malaysia. It's

headquarters is in Clark, Pampanga. Orginally, the Filipino inventors were

Antonio O. Cojuangco, Jr, former owner of Associated Broadcasting

Company/owner of Dream Satellite TV; Michael L. Romero, a real estate

developer and port operator; and Marianne Hontiveros, a former music industry

executive and TV host. In 2013, a share-swap agreement with Zest Airways

added Alfredo Yao of Zest-O Corporation as an additional owner of the company.

Zest Airways was rebranded as AirAsia Zest and will operate as a separate brand

from AirAsia.

Mission

"Why everyone flies."

Cebu Pacific brings people together through safe, affordable, reliable, and fun-

filled air travel. We are committed to innovation and excellence in everything we

do. We are an employer of choice providing opportunities for professional and

personal growth. We have a deep sense of family values throughout our airline.

We enhance the quality of life of the communities we serve and are an active

partner in our nation's progress. We offer our shareholders a fair return on their

investments.
Vision,

It is to become the most successful low-cost carrier in the Asia-Pacific region; to

be the best domestic airline and the Filipino travelers' first choice, recognized

with unparalleled genuine, warm and caring service; to become the pioneer in

innovation and commitment to excellence.

Strategic and Financial Objectives

Cebu Pacific works under a budget airline business model. This strategy offers

unbundled fares, meaning the fares that they offer come with no frills and are

easy on the budget. For example, they cut down in-flight food service. This low-

cost carrier strategy appeals to a lot of Filipino consumers because it is a price

sensitive market. This low-cost carrier strategy enables them to have regular

customers who want to travel but also keep in mind their budget. For the

incoming years, Cebu Pacific aims to offer more international flight locations for

the airline. As of now, they currently have 26 international destinations.

Financially, it aims to increase their market share by 3.5% the incoming year. At

the same time, they want to increase their net operating income by 18%.
Reported Financial Performance

Industry Analysis Using the Five Forces Mode

Income Statement: Cost Analysis
YOY Change
Expense Accounts/ASK 3Q2013 3Q2014 9M2013 9M2014 3’^ QTR 9N
Flying Operations 1.337 1.317 1.352 1.341 -1.5% -0.8%
Fuel 1.230 1.171 1.213 1.1@ -4.8% -1.5P
Others 0.107 0.14* 0.140 0.147 36.1% 5.0P
Vlaintenance 0.244 0.217 0.244 0.22C -11.0% -6.0P
depreciation & Amortization 0.223 0.22C 0.213 0.21a -1.4% 0.8%
Aircraft & Traffic Servicing 0.215 0.23E 0.226 0.23. 10.0% 5.7%
Aircraft and Engine Lease 0.159 0.174 0.135 0.17£ 9.6% 32.0%
Reservation and Sales 0.082 0.104 0.103 0.10C 27.7% 6.2%
”assenger Service 0.053 0.061 0.054 0.05C 16.7% 9.1%
GeneralandAdmin 0.063 0.064 0.072 0.06s 1.5% -11.3P
TotalCostperASK 2.375 2.393 2.399 2.434 0.8°/ 1.4°/
Total Cost per ASK ex• 1.145 1.222 1.187 1.24t 6.8°/ 4.5°/
Fuel
Over the years, Cebu Pacific increased the seats sold and number of

passengers riding the planes because of how they utilized their airbus fleet by

having 6.5 flights per day. Cebu Pacific also acquired Tiger Air, which increased

their market share. As of date, they have most number of passengers carried and

highest seat load factor. Cebu Pacific has generated revenues higher than the

revenues earned during the year of 2013. Their revenues from passengers

increased mainly because of their increase in passenger volume compared to

2013. As they added new aircraft to their fleet which can carry more passengers.
Driving Forces

NEW ENTRANT

Currently, there are no new entrants of airlines in the market, altough, Cebu

Pacific acquired Tiger Air and renamed it to CEBGO as of early 2015.

CONSUMERS

There are many possible consumers for Cebu Pacific. First are the tourists, those

who are from the Philippines and those who are foreign. These are for the people
who want to tour the Philippines, visit the Philippines, or visit other countries for

travel and leisure. Another consumer would be a businessman for business trips

and meetings. OFW's are also consumers when they need to travel to their

provinces from arrival in Manila. Students are also consumers for when they go

on educational trips, tours or study abroad.

COMPETITORS

Philippine Airlines is considered as the legacy and national carrier of the

Philippines and has been around for a long time. They are a known airline in the

Philippines that serve international and domestic flights. They have more

destinations internationally compared to Cebu Pacific. PAL express is under

Philippine Airlines but offers local flights at cheaper prices compared to Philippine

Airlines. Another is AirAsia which used to be Zest Air. They are not as big as

Cebu Pacific but cater to some Asian international destinations and local

destinations.

SUBSTITUTES

Substitutes for Cebu Pacific would be travelling through sea. It's not really the

same as using an airplane as transportation due to time and comfort. It will take a

lot longer to certain destinations, and it might not be practical to use it for

international destinations. Another substitute would be rental of personal planes

or jets but it is too costly.

SUPPLIERS

Currently, Cebu Pacific accepts payment through credit cards such as Visa and

Mastercard. They also accept through bayad centers such as Western Union.

CEB orders their aircrafts from Airbus S.A.S and ATR. In addition, Petron is their

supplier for airplane fuel.

Strategic Group Map

TOWS Analysis

STRENGTHS WEAKNESSES
 1. Currently the most 1. Limited destinations

known low cost carrier in 2. Add-ons such as

the Philippines baggage, meals, and

2. User-friendly website entertainment in flight are

3. Customer Loyalty not included

3. Poor customer service

OPPORTUNITIES S/O STRATEGIES W/O STRATEGIES

1. More destinations - More people are able to - They should expand

2. Increasing number of travel because of the their destinations since

OFW's affordable prices that more people are willing

3. Higher purchasing Cebu Pac offers to travel

power of consumers - Since there are more - They should improve on

destinations, OFWs can customer service so that

travel directly to their consumers will still avail

loved ones using Cebu of their service

Pacific

- Customers who have

been loyal will come back

because of the

destinations offered
 THREATS S/T STRATEGIES W/T STRATEGIES
1. Oil Price is not

constant -Even if oil price is not

2. Economic instability constant, Cebu Pacific - They should continue to

3. Increasing Inflation can still compete with the promote and agressively

Rates other brand because of advertise their promo

their lower prices fares because this is

- Despite the economic what makes a lot of

instability, Cebu Pacific consumers impulsively

can continue to offer travel despite different

promo fares for their loyal economic instability

customers
Benchmarking
Value Chain
Generic Strategies

Cebu Pacific practices Cost Leadership Strategy. This is when profits are

increased due to the decrease of cost, lowering of prices but still having

reasonable profit because of reduced costs. In Cebu Pacific's case, they try to

cut costs by increasing seats in all the planes. If an airbus originally has a certain

number of seats, Cebu Pacific tries to add more so they can take in more

passengers. Also, they try to increase their profits through their add-ons such as

meals and baggage.

CEBU PACIFIC
Implementation

Proposed Strategy (overall)

Cebu Pacific’s main goal is to provide an opportunity for everyone to travel

anywhere and everywhere they wanted with a fun-filled experience that is

conveyed with passion for excellent service, using a strategy that imbibes certain

characteristics of the other type of competitive strategies, but more dominantly

combines strategic emphasis on low cost and differentiation.

Cebu Pacific will use Best-Cost Provider strategy because goes well with the

company’s objective which is to become global, offer premium service that will

attract customers, becoming their preferred airline that will meet customers'

needs. Using Best-Cost Provider strategy can attain a competitive edge over

rivals in hitting a broader market which is composed majority of consumers

seeking for a low cost opportunity to travel.

Aside from focusing in using a low-cost strategy Cebu Pacific also push into

achieving it through maintaining tight control over production and overhead costs

but still provide with an upscale product at much lower cost than the competitor

in the airline industry. Because of this advantages are competitors are likely to

avoid a price war, since the low cost firm will continue to earn profits after
competitors compete away their profits especially in airline industry. also

powerful customers that force firms to produce goods/service at lower profits

may exit the market rather than earn below average profits leaving the low cost

organization in a monopoly positions. Buyers then loose much of their buying

power. It is also hard for new entrants to move in the industry because low cost

leaders create barriers to market entry through its continuous focus on efficiency

and reducing costs.

Aside from that using this strategy also improve Cebu Pacific’s ability to adapt to

environmental changes, learn new skills and technologies, and more effectively

leverage core competencies across business units and products lines which

should enable the firm to produce produces with differentiated features at lower

costs.

Cebu pacific will also use under market penetration such as effective

advertisements will be made for the Cebu pacific in the TV and radio ads, print

newspapers and magazines. There will also have an establishment of Research

and Development (R&D) Unit which has a special economic significance apart

from its conventional association with scientific and technological development.

R&D investment generally reflects a government’s or organization’s willingness

to forgo current operations or profit to improve future performance or returns, and

its abilities to conduct research and development. Some Secondary Strategies

Cebu Pacific could use is Under Horizontal Integration which will have to do with

Merging with other Airlines. In microeconomics and strategic management, the

term horizontal integration describes a type of ownership and control. It is a

strategy used by a business or corporation that seeks to sell a type of product in

numerous markets. Horizontal integration in marketing is much more common

than vertical integration in production. Horizontal integration occurs when a firm

in the same industry and in the same stage of production is being taken-over or

merged with/by another firm which is in the same industry and in the same stage

of production as of with the merged firm. Cebu Pacific has a good financial

position therefore; it has the capacity to merge with another hotel company in the

industry. If Cebu Pacific merge with another airline, it would be possible for both

companies to compete not only in the Philippine industry but also with the other

foreign countries as well.

Renovation of Cebu Pacific facilities to a more modern and futuristic style can

also affect some good impact to consumers. New facilities design and

development is more than often a crucial factor in the survival of a company. In

an industry that is fast changing, firms must continually revise their design and

range of facilities. This is necessary due to continuous technology change and

development as well as other competitors and the changing preference of

customers. A system driven by marketing is one that puts the customer needs

first, and only produces services that are known to customers. Market research is

carried out, which establishes what is needed. If the development is technology

driven then it is a matter of changing what it is possible to make. The facilities are

developed so that hotel processes are as efficient as possible and the services

are technically superior, hence possessing a natural advantage in the market

place.
Implementation

Sales and Marketing

The marketing department can seek to increase market share for present

products or services in present markets through greater marketing efforts. This

strategy is widely used alone and in combination with other strategies. Market

strategies include increasing the number of salespersons, increasing advertising

expenditures, offering extensive sales promotion items, or increasing publicity

efforts.

Operations:

This department can assure the quality of the operations in Cebu Pacific. They

should follow the practice of on-time performance while is in accordance with the

industry standards. This means that the aircraft must not leave more than 15

minutes from the assigned scheduled department time. This is something that

consumers really look for when it comes to their flights.

Finance:

Its role is to make sure In order to meet the obligation of the business andto have

enough cash and liquidity. It is the responsibility of a financial manager to decide

the ratio between debt and equity. The finance department should also be able to

allocate the funds and do profit planning.

IT/MIS:

IT is in charge of all the web-based technology and must coordinate with Sales

and Marketing for them to implement their strategies on their website. They are in

charge of the e-commerce side of the brand.

Financial Projections
 Income Statement Evolutlon
Kebu Air Inc
2010 2011 2012 2013 2014 2015e 2016e 2017e

25Y

20Y

M Sales Operating profit M fJet Income -•- Net Margin • Operatlng Margln
-:raders.com - Thon son Reuters

CRbU Air Inc cEB.PHS0

B4.15 4 1.35 / 1.58 80.41k 6 17.896 0.8903
%
CLOSE IN PHP TODAY’S CHANGE SHARES TRADED 1 YEAR CHANGE BETA

Dala c alayed a1 Ieas1 15 mi nu1es, as of Nov 2*• 2C 1E 03 :ñ3 GMT.

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www.slideshare.net/catansay/airline-industry-1044666 7 http://www.cebupacificair.

com/pages/aboutus.aspx http://www.cebupacificair.com/Quarterly

%20Reports/CEB_17Q_Sep2012.pdf http://en.wikipedia.org/wiki/Performance_a

ppraisal

Alfelor, Jangaile (2013). Strategic Marketing Plan for Cebu Pacific Air Inc.