Name: Giducos, Grazelle Marie M.

Section: 3DAC

News Article Analysis

Aug. 20, 2013 Prof. Jackqui Moreno

CebuPac to raise fares on 11 international, domestic routes

News Article: MANILA, Philippines - Budget airline Cebu Air Inc. (Cebu Pacific) is set to raise fares for certain international and domestic routes as rising aviation jet fuel prices continue to eat up into the companys earnings. Cebu Pacific is seeking the green light from the Civil Aeronautics Board (CAB) to raise the fuel surcharge imposed on passengers of seven international routes and four domestic destinations. The low cost carrier has filed a petition seeking to impose an eight percent increase in fuel surcharge imposed on passengers of Manila to Incheon, Manila to Busan, Cebu to Incheon, and Cebu to Busan flights to $54 per passenger from the current $50 per passenger. It also filed a separate petition for authority to impose upward adjustment of fuel surcharge ranging between 20 percent and 48 percent on its international passenger tickets for five other international routes. It intends to raise the fuel surcharge on passengers of Manila to Shanghai flights by 48 percent to $37 per passenger from $25; Manila to Beijing flights by 43 percent to $50 from $35; Manila to Giangshou flights by 40 percent to $35 from $25; Manila to Xiamen flights by 30 percent to $26 from $20; and Manila to Siam Rep flights by 20 percent to $30 from $25. Cebu Pacific is also set to raise the fare imposed on passengers of four domestic destinations as it is seeking an increase in fuel surcharge by as much as 25 percent. The budget airline is seeking a 12.5 percent increase in fuel surcharge for its Manila to Pagadian flights (P450 from P400), a 17 percent increase for its Cebu to Clark (P350 from P300), a 20 percent increase for its Cebu to Cagayan de Oro flights (P300 from P250), and a 25 percent increase of its Cebu to Bacolod flights (P250 from P200). On the other hand, Cebu Pacific decided to cut the fuel surcharge on Manila to Dipolog flights by 11 percent to P400 from P450 and the Manila to Zamboanga flights by 25 percent to P300 from P400. The CAB allows airlines to impose fuel surcharge on international and domestic passengers as a temporary relief to help them recover losses arising from the increase in jet fuel prices in the world market. Latest results of the Jet Fuel Price Monitor of the International Air Transportation Association (IATA) showed that average price of jet fuel rose one percent to $123.8 per barrel from a month ago level nearing the full year target of $124 per barrel set by IATA. Source: http://www.philstar.com/business/2013/08/17/1099011/cebupac-raise-fares-11-international-domesticroutes

Summary: Cebu Pacific plans to raise fares for certain international and domestic flights because of continuous rise in aviation jet fuel. Cebu Pacific is set to raise prices on seven international routes and four domestic destinations. The low cost carrier has filed a petition seeking to impose an 8% increase in fuel surcharge imposed on passengers of seven international routes mainly Manila to Incheon, Manila to Busan, Cebu to Incheon and Cebu to Busan. The airline is also seeking a 12.5% increase in fuel surcharge for its Manila to Pagadian flights (P450 from P400), a 17% increase for its Cebu to Clark (P350 from P300), a 20% increase for its Cebu to Cagayan de Oro flights (P300 from P250), and a 25% increase of its Cebu to Bacolod flights (P250 from P200). On the other hand, Cebu Pacific decided to cut the fuel surcharge on Manila to Dipolog flights by 11% to P400 from P450 and the Manila to Zamboanga flights by 25% to P300 from P400. Nature of Transaction: The business transaction that I find relevant in this article is the raising of prices. Since Financial Management is clearly about management and control of money, Cebu Pacifics move is clearly related to our subject. Financial Effect: The effect in Cebu Pacifics accounts would be an increase in their assets such as cash and a decrease in liability such as payables. The intention of Cebu Pacific to raise prices is for the fact that they want to maximize their profit since the raise of aviation jet fuel price continues. As we have discussed last time about the low cost strategy of the company, they store of fuel for future use and sell tickets at a very low price. Now that aviation jet fuel prices increase, they have no other choice but to put a raise on their ticket prices to minimize their operating expenses. Justifications for the Decision: I think that Cebu Pacific made a good decision regarding the raise of fares due to the fact that they might incur a heavy loss if ever they dont recover the expenses of their company on aviation jet fuel. 1 gallon of jet fuel is equal to P118.66 (as of June 2013) which increased by P6 in one month and constitutes over 40% of the airlines operating costs. This indicates that price increases unfortunately stimulate an almost inverse correlation relationship, where costs increase on one side and yields soften as discretionary spending slows. One knee-jerk response to these increases is to insert fuel surcharges, even where this runs the risk of dampening demand. This becomes a tipping point for the company and will progressively force more changes in the way CebuPac operate. Up to a certain level, incremental fuel price changes can be met by similarly incremental pricing adaptation. Reflection: If the rise in prices of jet fuel continues, flight prices will also increase. Negative effects may occur because of this. One is that fewer tourists may book a flight because of higher fares. Second is that some routes or destinations may be terminated and thus fewer tourists will visit in certain places (as mentioned above). Jet fuel prices have risen dramatically over the last few years, driven by strong global demand, limited spare oil production capacity, and continuing political instability in certain oil producing regions. In short, our economy may not recover fully if fuel price increases continue.