1

Chapter 1
INTRODUCTION
Rationale of the Study
The global economic crisis that affected all industries including the aviation industry, has
forced airlines to adjust their business models to existing market conditions (Vidovi, timac and
Vince, 2013). As a result, low cost carriers (LCCs) emerged in the USA during the 70's of the last
century before spreading to Europe in the 1990's and then to the rest of the world.
In the Philippines, the LCC model was first adopted when Cebu Pacific Airtook to the
skies in March 1996 with Douglas DC-9s. Mr. John L. Gokongwei, Jr., a leading Filipino
businessman, experienced LCC in the US and thought to adapt the same concept in the
Philippines especially with the country being an archipelago of 7000+ islands and having a
population of 90 million (Donohue, 2012). After this initial flight, the LCC industry in the
Philippines grew in size and in the year 1996, other LCCs entered the Philippine Airline Industry.
PAL Express, AirAsia Zest, and AirAsia Philippineswere among the successful LCCs in the
country. This rapid growth in the LCC industry had forced airlines in the Philippines to seek
ways to be "competitive".
Competitive advantage according to Ehmke (2008), is an advantage gained over
competitors by offering customers greater value, either through lower prices or by providing
additional benefits and service that justify similar, or possibly, higher, prices. Essentially, it
answers the question, Why should the customer choose this company rather than the

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competition? It has been argued that having a competitive advantage allows a company to enjoy
productivity advantages and value advantages which ultimately leads to profitability. Customer
perception about a companys value was a great contributor to this gained advantage. Customer
satisfaction promoted customer loyalty and loyal customers were less likely to switch airlines.
Hence, this thesis studied competitive advantage modeling as a possible strategic
approach for a firm's "sustained earnings". It presented the arguments for viewing competitive
advantage as a concept closely related to a firm's success in general and sustained earnings in
particular. Furthermore, it reviewed existing competitive advantage literature in order to
determine how this could contribute to our understanding of sustained earnings.

THE PROBLEM
Statement of the Problem
The study aims to develop a competitive advantage model to achieve sustainable
earnings. Furthermore, the study addressed the following sub-problems:
1. What is an LCC Business Model?
2. What is Competitive Advantage in relation to the aviation industry?
3. How to measure sustainable earning?
4. What are the critical success factors relative to the earnings stability?

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Significance of the Study
The researchers conducted a directive study on Cebu Pacific Air. This study aimed to give
a clearer picture on the earnings sustainability of low cost carriers and how it would impact the
airline through its competitive advantage. This study is not just significant to the researchers but
also the employees and management of Cebu Pacific Air, the shareholders, the government and
the public.
To the employees of Cebu Pacific Air
This study serves as awareness to the employees. It would inform the employees of the
risk Cebu Pacific Air is taking and how it would affect their employment term and their
employment benefits.
To the management of Cebu Pacific Air
This study is crucial because it would assist the decision making processes of the
management on whether operating low cost carrier would be profitable in the long run through a
competitive advantage model.
To the shareholders
This significance of this study to the shareholders is similar with the management aspect.
This would inform the shareholders on whether it is beneficial to cut off low cost carrier or
sustain the approach.
To the government
This study is significant to the government because they are concerned as to the
compliance of the laws, rules and regulations of the Cebu Pacific Air.
To the public
This study is significant to the public because they are concerned on where they can

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purchase low cost fares and the continuance of the low cost carrier of Cebu Pacific would lead
them to purchase from the airline. Most of the customers of the airlines would find a cheaper fare
along the services provided.
This study will serve as an eye-opener to the public. Like the researchers, students,
particularly Accountancy students would make this study as an avenue to apply all theories,
principles and concepts that were learned from school and could hopefully be of aid to airline
business. These students were given the chance to study management accounting along with cost
accounting.

Limitations of the Study

In conducting this study, it was necessary for the researchers to acquire data from primary
sources, in this case, from Cebu Pacific Air. Due to the sudden change of management's decision
in allowing the researchers to use the airline as thesis subject, the researchers were not able to
conduct an interview with the airline's management and the data gathered were all from
secondary sources. The researchers acknowledge that secondary sources, especially the ones
from the airline's website, may project only those information that are beneficial to the airline
and thus may not be as reliable. Another limitation is the inability of the researchers to have an
in-depth study of the following: (1) Critical Success Factors and the (2) Competitive Advantage
of Cebu Pacific Air. Time constraint was an issue and the researchers decided to focus on the
areas that can help most in answering the problem in this study

DEFINITION OF TERMS
Terms are conceptually and operationally defined for better understanding of the readers.

5
Low Cost Carriers are airlines that generally has lower fares and fewer comforts. To
make up for revenue lost in decreased ticket prices, the airline may charge for extras like food,
priority boarding, seat allocating, baggage fees and etc.
Core Competencyis the main strengths or strategic advantages of a business. Core
competencies are the combination of pooled knowledge and technical capacities that allow the
industry to be competitive in the marketplace. Theoretically, a core competency should allow a
company to expand into new end markets as well as provide a significant benefit to customers. It
should also be hard for competitors to replicate.
Competitive Advantage is a medium or long-term factor that works in favor of
theorganization or at least, a restricted number of airline industries. Competitive advantages in
airlines are usually facets which are costly and time consuming for others to develop so that the
entry price is high. Typical competitive advantages are cost leadership, technological superiority
and uniqueness.
Generic Strategiesare the basic approaches to strategic planning that is adopted by the
airline to improve its competitive performance. The study focuses on Porters Generic strategies
that consists of (a) Cost Leadership Strategy which is reducing its overall costs, (b)
Differentiation strategy that concentrates on differentiating the products in some way in order to
compete successfully, and (c) Market Segmentation strategy that focuses on gaining a
competitive advantage through product innovation and/or brand marketing.
Earnings Sustainability is the likelihood that a businesss earnings will not be diminished
or destroyed by the strategic moves of competitive forces.
Value Chainis a series of activities the company performs in order to deliver a valuable
product or service for the market.

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Chapter 2
THEORETICAL BACKGROUND
Review of Related Literature
"Building Sustainable Earnings: Low Cost Model-Based Air Carriers in Europe"
By:Ebrahim Ahmed Awol Massamo Ayele Asele 2010
The history of flying has started in China and in several parts in Europe and North
America. After the world war,a deregulation in the airline industry has brought a new business
model throughout the world, the Low Cost Carrier Model. This study featured Ryanair Airline, as
a pioneer, EasyJet and Norwegian Air, who emerged years after, asLow Cost Carriers. This
model is known for its low fair and even believed to create a new market and affected the
industry. Although not all airlines in this model were successful, many has grown tremendously
and became major players in European airline industry. (Gillen & Lall, 2004, p.41).
This study is of great importance for the investigation of the sustainability of the earnings
of such airlines. As the value of some successful airlines is growing in stock market, there must
be a question of how long this can be sustained and what the investors who are already engaged
and those who seek to engage in it can look forward in the future. This study shows how to build
sustainable earning for low cost carriers. Currently, the two different business models, the
traditional airlines and low cost carriers, are operating in the airlines industry competitively in
Europe, and the rest of the world. Having in mind the competition of the two models and the
challenges in the industry, one should ask the nature of the performance in the long run.
This study define sustainable earnings as a source of earnings that is generated from

7
assets and capabilities that will continue further in the future of the company. These assets and
capabilities are typically proprietary which cannot be copied by other competitors easily, cheaply
or at all (Dodd and Favaro, 2007. P81). Earnings of a business are from operating and financing
income, where the financing components of earnings are dependent on the amount of debt
reported and the borrowing cost. The Penman & Zhang (2002) method of measuring
sustainability is used. It suggests that to calculate the growth of operating income for a company
for any year t, we can use the formula; OIt+1 = OIt + RNOAt+1 NOAt RNOAt NOAt-1.
This review also tests the airline sustainability using the RNOA as a measuring tool. Financial
statements for a number of years are being evaluated and compared. The conclusion of the study
was that there is a better chance for the experienced LCC to build more sustainable earrings than
the new entrants as they have less reaction for the new investments such as in aircrafts purchase.
Ryanair has been in the industry longer than EasyJet and Norwegian Air that it results to more
sustainable earnings. Norwegian as the youngest shows fluctuating results that leads to the
conclusion that the RNOA varies depending on the age of airline. Therefore, airlines could not
demonstrate their capacity to build sustainable earnings based on the used measurement tool for
the specific periods considered but of course to different level of RNOA.
Similarities: The fact that our thesis also aims to build a sustainable earnings for airlines
implementing the Low Cost Carrier business model. The focus of the two studies are the
pioneering airlines with the said model in each independent place. Competition between full.service airlines also exist. We also have adapted some of the measuring tools of sustainability
based on financial statements for three consecutive years. One of the objective is to investigate
and then prove the sustainability of the LCC earnings also by assuring the earnings stability of
the model, investors and potential investors would use such information for their future

8
decisions. We believe that the study will help shareholders to know the true value of the LCCs so
that they will make any decision based on such accurate information of the company.
Differentiation: The above study shows comparison of three airlines in terms of
sustainability of earnings. The place of study is Europe which means it is being governed and
affected by European culture. This means, sales and expenses being presented are not applicable.
Our study focused only on the Philippines' largest Low Cost Carrier namely, CEBU PACIFIC
AIR. It caters mostly Asians and Filipinos as customers. We aim to build sustainability of
earnings through a stable competitive advantage model.

An analysis of the European low fare airline industry - with focus on Ryanair
By: Thomas C. Sorensen
The research problem in this thesis revolves around the European low fare airline
industry and its outlook for the future. Based on a theoretical framework that starts off at the
macro-environmental level analyzing the external environment regarding the European airline
industry the thesis will move on towards micro-environmental aspects when analyzing
particularly the low fare airlines with focus on Ryanair. The overall aim of this thesis is to
provide and assess the range of strategic options available for airlines implementing the low fare
airline business model after having analyzed both the macro- and micro environment and assess
the outlook for the European low fare airline industry.
The research introduced concepts in strategy which are the positioning school and the
resource-based school. These focuses on, how it is possible for a company to achieve

9
competitive advantages, when companies are subjected to equal operational conditions. (Porter,
1980). The Porter's five forces model and genetic strategies were also highlighted. A Ryanair
case study is then analyzed as one of the best LCC airline. This consists of a financial and
strategic analysis of Ryanair, which has chosen to implement the low fare airline business model.
Porters generic strategies will be introduced, which will help us understand which generic
strategy Ryanair has used and the tools they use to achieve this strategy. Afterwards a
competition analysis shows the competitive environment of the European airline industry and the
strategic approaches. The thesis then continues by using the SWOT-model analyzing the
Strengths, Weaknesses, Opportunities and Threats of Ryanair within the frame of the earlier
macroeconomic analysis.
This thesis concludes that the overall principles behind the LFA business model are low
operational costs and high aircraft utilization. It is further concluded that the main factor in the
macro-environment that has influenced the emergence of LFAs in Europe is legislation on EUlevel liberalizing various aspects of the airline industry such as access to airport slots and
allowing sabotage. The rise of the Internet have also had a significant influence on the
emergence of LFAs as it has lowered their distribution costs but more importantly; it has also
given more transparent prices as a consumer can now within seconds search for the cheapest
flight at home without at intermediaries like travel agents and this transparency has attracted
more passengers to the low fare airlines as they often offer the cheapest travel option. It can also
be concluded that in order to be a successful low fare airline, it is also necessary to be a low-cost
airline because in order to offer lower fares than the competition one must also have lower
operational costs for it to be profitable. This goes in tandem with maximizingutilization of
aircraft capacity as one needs to have high load factors in order for off-set the lower fares,

10
thereby achieving economies of scale.
Similarities: Low cost carrier airlines were being analyzed of both studies. Porter's. Five
Forces model, competitive advantage and other theories were also used in our study. Most of the
data methodology and gathering in this study were adapted.
Differentiation: This research is a study about the airline industry itself. It focuses on how
the airline macro-environment affects its micro-environment. Therefore, some of the strategy
presented are not applicable to our study since we are focusing to a specific airline. Analysis are
European based while ours is more Asian specifically, Philippines.

Integrating Business Models and Strategy for Sustained Competitive Advantage

By: Caroline Ramos Korsaa Cand
This thesis studies the business model as a possible integrator of different strategic
perspectives on firms. It presents different arguments in viewing a business model as a closely
related to strategy and competitive advantage in particular. Furthermore, it reviews existing
business model literature in order to determine how this field can contribute to our understanding
of sustained competitive advantage. Despite the increase of interest in the term business model
by academics and managers, no common definition has yet been accepted by the business
community (Shafer et al., 2005).
On one hand, Porter (2001) argues that the talk about business models has substituted the
talk about strategy and competitive advantage and that the business model approach to

11
management is an invitation for faulty thinking and self-delusion. On the other hand, the study
conducted in this thesis and the review of existing business model literature show that the
business model can in fact be integrated with strategy in order to create a wider understanding of
a firms sustained competitive advantage. Hence, based on a theoretical framework, this thesis
proposes a business model which integrates components from both Industrial Organization and
the Resource-Based View of the firm as well as components from the business model literature.
The business model proposition is based on the hypothesis that the sustainability of
competitive advantage depends on a strategic fit. In order to test the business model proposition
and hypothesis, an empirical investigation of the Irish airline and industry leader Ryanair is
conducted. The conclusion of the study carried out in this thesis is, that including important
elements from different perspectives allows for a greater complexity when evaluating firm
performance. This complexity comes from the wider scope of analysis which is a result of
working with the several components included in the business model proposition. Working with
these components makes it possible to pull apart aspects of the firm in order to look closely at the
firms fundamental functions and this, in turn, enhances our understanding of sustained
competitive advantage.
Similarities: Review airline's competitive advantage, business model and strategies. The
studies used Michael Porter's theories and principles as guidelines.
Differentiation: This thesis proposes their own business model for competitive advantage
based on hypothesis and prove it through an airline analysis. It also highlighted false beliefs and
lapses about the theorists presented. This is focused on the competitive advantage in the different
assumption namely: Industrial Organization (I/O) and the Resource-Based View (RBV) of the

12
firm. Our study expects to create a stability scheme for competitive advantage to sustain earnings
based on theories and financial statements.

Theoretical Framework
Low Cost Carrier
Business Model

Porters Five Forces

Model

Cebu Pacific
Competency Analysis
Critical Success
Factors

Competitive
Advantage Model

SWOT Analysis
Figure 1 Theoretical Framework

As illustrated in Figure 1, the framework of this thesis starts by describing the business
model, its competitive advantage, concept of strategy and profitability as these issues will lead to
the core aim of the study. Different viewpoints will be highlighted regarding the terms and theory
of strategy.
First, the study introduces the concept of low cost carriers business model, how it
emerged in the Philippines and understanding of its different approaches. Second is the

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introduction of the Porters Five Forces model, a tool for an industry analysis. It introduces five
forces which influence the industry. The model has been chosen in order to analyze the current
stage of the airline industry as it easily enables the reader to get an overview of the major
influential factors in the industry and their levels of influence. Third, Cebu Pacific Analysis will
be performed. This consists of the airlines own financial and strategic analysis. Porters core
competency strategy will be introduced. These include generic strategy, value chain, cost,
differentiation and etc. These would help the researchers to understand which generic strategy
Cebu Pacific is adopting and the tools they used to achieve this strategy. Fourth, a competition
analysis that shows the competitive environment of Cebu Pacific will be tested. Fifth, the thesis
continues by using the SWOT model analyzing the Strength, Weaknesses, Opportunities and
Threats. These would provide current and future outlook for the industry. Lastly, the critical
success factors evaluated will lead us to construct a competitive advantage model.

Michael Porters Competitive Advantage and Strategies

Five Forces Model. This theory is based on the concept that there are five forces that
determine the competitive intensity and attractiveness of a market. Porters five forces help to
identify where power lies in a business situation. This is useful both in understanding the
strength of an organizations current competitive position, and the strength of a position that an
organization may look to move into.
1. Bargaining Power of Suppliers.
An assessment of how easy it is for suppliers to drive up prices. This is driven by the:
number of suppliers of each essential input; uniqueness of their product or service;

14
relative size and strength of the supplier; and cost of switching from one supplier to
another. Supplier groups possess control if the following apply:

It is dominated by a few companies and is more concentrated then the industry it

sells to

It is not obliged to compete with other substitute products for sale to the industry

The industry is not an important customer of the supplier group

The suppliers products are differentiated or it has built up switching costs

The supplier group poses a credible threat of forward integration

2. Bargaining Power of Buyers.

An assessment of how easy it is for buyers to drive prices down. This is driven by the:
number of buyers in the market; importance of each individual buyer to the organization;
and cost to the buyer of switching from one supplier to another. If a business has just a
few powerful buyers, they are often able to dictate terms. Buyers are powerful if the
following circumstances are present:

They are concentrated or purchase large volumes relative to seller sales

The products they purchase from the industry represents a significant fraction of
the buyers costs or purchases

The products they purchase from the industry are standard or undifferentiated

They face low switching costs

They earn low profits with the purchased goods

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They pose a credible threat of backward integration

The industrys product is not important to the quality of the buyers products or
services

They have full information

3. Competitive rivalry among competitors

The main driver is the number and capability of competitors in the market. Many
competitors, offering undifferentiated products and services, will reduce market
attractiveness. Intense rivalry is the result of a number of interacting structural factors:

Numerous or equally balanced competitors

Slow industry growth

High or fixed storage costs

Lack of differentiation of switching costs

Capacity augmented in large increments

Diverse competitors

High strategic stakes

High exit barriers

4. Threat of substitution
Where close substitute products exist in a market, it increases the likelihood of customers

16
switching to alternatives in response to price increases. This reduces both the power of
suppliers and the attractiveness of the market.
5. Threat of new entry
Profitable markets attract new entrants, which erodes profitability, unless incumbents
have strong and durable barriers to entry. Newcomers are in a very difficult position if the
entry barriers are high, making the threat of entry low. There are seven major entry
barriers:

Economies of scale

Product differentiation

Capital requirements

Switching costs

Access to distribution channels

Cost disadvantages independent of scale

Government policy

Theory of Generic Strategies. Michael Porter states that positioning determines whether a
firms profitability is above or below average, meaning that a company that is able to position
itself well in the market can be profitable although the market in general is not. This can be
achieved through following one of the generic strategies:
Cost leadership
Cost leadership strategy advocates gaining competitive advantage due to the lowest cost

17
of production of a product or service. Lowest cost need not mean lowest price. Costs are
removed from every link of the value chain- including production, marketing, and
wastages and so on. The product could still be priced at competitive parity (same prices
as others), but because of the lower cost of production, the company would be able to
sustain itself even through lean times and invest more into the business all throughout.
Differentiation
Differentiation strategy a company is also operating at a broad scope but looking for a
product or service that is perceived as unique in the industry and is widely valued by
customers. A company is compensated for its exclusivity by a premium price. The types
of differentiation are diverse in each industry. It is very important to stress though, that
this approach does not allow the company to ignore costs, but the costs are a secondary
strategy target.
Focus
The 'focus' strategy involves focusing on a narrow, defined segment of the market, also
called a 'niche' segment. Companies shape their strategy to serve their narrow strategic
target more effectively and efficiently than the other participants that are competing on a
broader scale. Therefore companies achieve differentiation either because of being able to
meet the needs of a certain target group due to lower costs in serving this target group or
both. Even though the focus strategy does not achieve a low cost strategy or
differentiation, it does achieve one or both of these positions with respect to its narrow
target group.

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Measuring Earning Sustainability

Sustainable earnings are generated from assets and capabilities that will continue further
in the

future of
Return On Net Operating Assets = Operating Income / Net Operating
Assets
the
Where:
Operating Income = Revenue Expenses
NOA= Operating Assets Operating Liability
company. These assets and capabilities are typically proprietary which cannot be copied by other
competitors easily, cheaply, or at all (Dodd and Favaro, 2007. P81). These are the major
components of one's investing future. Evaluating and analyzing the sustainability of earnings will
give investors an indication of how earnings will behave in the future (Nguyen, 2010).
Sustainable earnings are also known as core earnings which are generated by core
business operating activities. These core activities are bases of durable competitive advantage for
the company. On the other hand, a company financial statements consist of transitory
earnings/unusual items. This category includes items that will not be repeated in the future as
well as items that appear each period that cannot be forecasted (Penman, 2009, p.394-396). In
our study, we used the sustainability measurement formula:
Formula 1 Return on Net Operating Assets
Return on operating asset is derived from the operating income and net operating asset. In
turn, operating income is derived from operating asset and operating income while the net
operating asset is the difference between operating liability and operating asset. This metric
measures how effectively the company produces income from its assets.
Change in Return On
Net Operating Assets =
Assets

Return On
Return On
Net Operating Assets - Net Operating
Current Year

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Formula 2 Change in Return on Net Operating Assets
In measuring the sustainability of operating income, we have to adjust for changes in
income arising from changes in investment, since it depends on the new investments on assets.
Change in Return on Net Operating Assets is the key financial ratio used for analyzing LCC
Model sustainability of earnings in this study.

Conceptual Framework

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Figure 2 Conceptual Framework

As illustrated in Figure 2, the thesis starts with the identification of the effect of the
customers and suppliers toward the Airline as well as the generic strategy used by the company.
Knowing these variables, the strategy used can now be assessed on whether or not it is effective
and would lead to a competitive advantage.
Competitive advantage greatly affects the companys earnings and thus, should be
maintained and protected. The study then proposed to construct a Competitive Advantage Model
which will serve as a guide to the subject company in their efforts to stabilize their competitive
advantage. This would hopefully lead to the sustainability of their earnings specifically and the
success of their company as a whole.

Chapter 3
RESEARCH METHODOLOGY

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To achieve the objectives stated above, the researchers came up with a research method
that served as a basis to determine who the respondents are, where the research is to be
conducted, what instruments are to be used and how the needed data is gathered and treated.
Directive research method is the type of research used in this study. This encompassed a
detailed structure that finds out new information or facts and figures with a definite purpose of
what the overall outcome of the research will be. Therefore, it would lessen the problems stated
in the study. Directive research determines what should be done based on the findings and results
that are bought about in the study.

Research Environment
This study is limited to airlines operating in Mactan-Cebu International Airport. MactanCebu International Airport is the second busiest airport in the Philippines. There are numerous
airlines operating in Mactan-Cebu International Airport but the researcher gathered data from
Cebu Pacific Airs website, Securities and Exchange Commission, and other internet sources.

Research Respondents
The concerned respondent is the famous Low Cost Carrier in the Philippines which is the
Cebu Pacific Air. Although there is no further personal communication with their corresponding
management due to internal conflict and with a sudden change of mind of their representative,
Cebu Pacific Air will still be considered as respondents for they still supply the necessary and
relevant secondary data through their annual and sustainability reports, as well as their company
website, and are substantially the subjects of the study.
The Low Cost Carrier chosen is Cebu Pacific Air because they are the largest and leading

22
LCC not only in the Philippines but also in the ASEAN Region.

Research Instrument
In collecting data, the researchers used a questionnaire. The questions were formulated to
glean respondents opinions, thoughts, evaluations and reactions concerning Cebu Pacific Air's
sustainability. The researchers decided to use questionnaires because they provide a high
response rate, require less time and energy to administer and the consistency of how it is
presented lessens any bias.
However, questionnaires also have their disadvantages. The validity and accuracy of the
respondents' answers are not assured as they might try to please the researchers than to state their
true opinions.
Another method that would be used to gather primary data is the management and staff
interviews. Guide questions were prepared by the researchers beforehand in order to gather
crucial information useful in the study. Interviewing management and staff will help verify the
validity and accuracy of the data gathered using the questionnaires. Also, interviews give
management and staff their side of the story.

Research Procedures
Gathering of Data The study gathered entirely from secondary sources along with, but not
limited to annual reports, applicable corporate social responsibility framework, audited financial

23
statements (AFS), corporate websites, government policy statements, international standard
pronouncements, sustainability reports, previous research papers and other related literature and
studies. Because the aforementioned secondary data would come from both electronic and
printed sources, the gathering of data will involve a variety of data gathering laws and
procedures particularly, (a) Download SEC Form 17-Q or the quarterly reports, (b) Copy the
relevant information found in corporate websites, (c) download applicable CSR frameworks and
international standards and (d) Compile related government policies, researches and literature.

Chapter 4
PRESENTATION, ANALYSIS& INTERPRETATION OF DATA
Cebu Pacific Air Low Cost Carrier Model
Brief History Cebu Pacific Air entered the aviation industry on March 1996 and
pioneered the low fare, great value strategy. The company has flown over 80 million

24
passengers and counting. Cebu Pacific is the largest carrier in the Philippine air transportation
industry, offering low-cost services to more destinations and routes with higher flight frequency
within the Philippines than any other airline. The company also operates flights to 24 cities in 13
countries in North Asia, ASEAN and the Middle East. Cebu Pacific Air is a low cost carrier
based on Ninoy Aquino International Airport Philippines.
Cebu Pacific is the first local airline to introduce self-check-in, web check-in, E-ticketing,
and seat selection in the Philippines. It is the only airline in the Philippines operating a 100%
brand-new fleet with 37 Airbus (10 A319, 26 A320 and 1 A330) and 8 ATR 72-500 aircrafts. It is
also the preferred and dominant air cargo carrier in the Philippines, linking islands together
through exchange of goods; the only domestic carrier that offers fun in the skies with its Fun
Flights games on board, together with its entertaining in-flight magazine Smile and has
partnered with various destination hotels, car rental service, travel insurance, and entertainment
ticketing service to provide its passengers a more convenient travel experience. Cebu Pacific
remains to be the pioneer in creative pricing strategies as it manages to offer the lowest fare in
every route it operates.

a. Cebu Pacific's 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.

25
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.
b. Vision:
Cebu Pacific: The most successful low-cost carrier in the world
General Strategies These are plans that determines how a company is able to position
itself well in the market can be profitable.
Cost Leadership
Low-cost airlines allow business travelers, who could not fly in First Class, to
enjoy a premium service. Accordingly, elements of the customer perspective focusing on
frequent point-to-point flyers, limited service and refundable ticketless flight. Frequent
flyers are people, mostly business, who frequently travel between destinations that are
600-900 miles apart.
The airline industry is prone to constant threats - be they economic, political or
operational and only those carriers exhibiting strong cost leadership will be equipped to
prosper. Cebu Pacific offers very low ticket prices. Cebu Pacifics lower prices are to
some extent achieved by offering customers lower service levels. This phenomenon
occurs both pre-flight and in-flight. Pre-flight option of business lounges is not possible
and there are also no pre-assigned seats on the flight as passengers can take any seat they
wish as they embark the aircraft. Regarding delays or cancellations, customers can also
not expect that meals and/or accommodation will be provided. No free food and drinks
are generally available in-flight but may be purchased at relatively high prices. This turns

26
cost into a potential source of revenue instead.
Cebu Pacific is generally pursuing a strategy of a homogenous fleet with only one
type of aircraft. Cebu Pacific continues to invest in improved aircrafts with the best
versatility feature- enabling carriers to benefit from the aircrafts range options and seat
layout flexibility. This allows for top-of-the-range comfort with generous seat width, or
an extra-wide aisle for fast turnarounds. The principal layout of the aircraft is still the
same and that is important as it saves cost in pilot training and maintenance.
Differentiation
Cebu Pacific is known to be the pioneering low cost carrier and took that first
mover advantage.
Table 1. Differentiation of Strategy between Low Cost Carriers from Full Service Airlines
Low Fare Airlines

Full Service Airlines

Generally lower service levels, preflight- in-flight and post-flight

Faster turnaround times

Generally higher service levels, preflight- in-flight and post-flight

Slower turnaround times

Homogeneous fleet

Heterogeneous fleet

Point-to-point system

Hub-and-spoke system

Higher seat density

Lower seat density

Secondary and regional airports

Primary airports

Online and direct booking and

distribution of tickets

More emphasis on intermediaries such as

travel agents

Table 2. Differentiation of Operations between Low Cost Carriers from Full Service Airlines
Characteristics

Low Cost Carrier

Full-service Carrier

27

Brand
Price
Distribution
Checking in
Airport
Network
Classes
During flight
Aircraft usage
Aircraft type
Turnaround times
Product
Secondary revenue
Seating
Customer service
Operational
activities
Target group

One brand: low pricing

Simple pricing structure
Internet, direct booking
No ticket
Mostly secondary
Point-to-point
One class
Unbundling (pay for extras)
Very intensive
One type
25 minutes
One product
Advertisement, onboard
selling
Tight, no reservations
Overall bad
Outsourcing (focused on
flying)
Mostly tourists

Extended brand: price and service

Complex pricing structure
Internet, direct, and travel
organization
No ticket, IATA ticket contract
Primary
Hub-and-spoke
Multiple classes
Bundling (free extras)
Average intensive
Multiple types
Slow: congestion/work
Multiple integrated products
Focused on primary product
Flexible, reservations
Reliable service
Extending (maintenance, cargo)
Tourist and business

Cebu Pacific Air is continually giving seasonal and all year round promo just like
the PISO FARE Promo. This cheap airline tickets are great for the months of April, May,
June, July, August, September, October, November and December. All Cebu Pacific
destinations are also part of this Piso Fare Promo. Earlier this year, customers can get the
best and most affordable tickets for their travels in the Philippines as well as those in
Malaysia, Indonesia, Thailand, Cambodia, Japan, Singapore, Hong Kong, Macau and
more. Cebu Pacific also offers loyalty cards with more benefits to enjoy.
Global Onboard Partners and Cebu Pacific India are now offering an exciting,
innovative way to advertise through onboard media campaigns. Increase brand awareness
by targeting a captive audience and positioning your brand and message onboard every
plane throughout Cebu Pacifics range of destinations from Asia.

28
With Global Onboard Partners new graphic technology, an advertiser is now able
to brand the interior of the cabin using eye-popping graphic imagery and key messages
that are in view to the passenger on average of 2.5 hours. No other venue provides this
type of phenomenal impression time in an environment that is virtually free of day-to-day
Airline

Roundtrips
Cebu
Cebu
Hong Kong Singapore
Php 18, 783 Php 16, 927

Cebu Cebu
Cebu Manila
Davao
Beijing
PAL Express
Php 7930 No direct
$ 597
flight
(Php 30, 527)
AirAsia Philippines
Php 7958 No Direct
No Flights
No Flights
No Flights
Flight
Available
Available
Available
Cebu Pacific
Php 8825 Php 10, 215 Php 10, 884 Php 17, 393 Php 13, 478
distractions that typically compete with your brand for the consumers attention.

Table 3. Prices of Selected Destinations

The table above shows the relationship between the prices of specific airlines toward
specific destinations. The researchers decided to compare the prices of Cebu Pacific Air from
PAL Express and AirAsia Philippines as he latter airlines represent the top two competitors of
Cebu Pacific Air.
For local destinations, it is clearly seen that Cebu Pacific Air, despite branding
itself as a low cost carrier, has higher prices as compared to the other two airlines.
However, for international destinations, Cebu Pacific Air prices are competitive and
sometimes even lower than PAL Express. AirAsia Philippines however, does not have
any flights available towards most of the specific destinations chosen by the researchers.
This just shows that Cebu Pacific Air has an extensive route system which compels the

29
public to choose the airline over the other airlines.

Key Considerations for Choosing Cebu Pacific Air These are factors gathered by the
researchers from customers (blogs) on why they prioritize the airline:
Price
Cebu Pacific offers fares that are viable and within the travelers budget. Their
business model revolves around reducing unnecessary costs. Cebu Pacific Air only have
single-seat class, no blankets, no pillows and dont serve meals as they target price
conscious individuals that prefer less comfort more travel for a short flight.
Flight Frequency and routes
Most travelers found their airline destination with their preferred departure date in
Cebu Pacific. This is because Cebu Pacific had their recent expansion and have partnered
with other airlines. Cebu Pacific currently operates a fleet of 50 aircraft comprised of 10
Airbus A319, 29 Airbus A320, 3 Airbus A330 and 8 ATR-72 500 aircraft. Between 2014
and 2021, Cebu Pacific will take delivery of 12 more Airbus A320, 30 Airbus A321neo,
and 3 Airbus A330 aircraft. Cebu Pacific Air also currently flies to 34 domestic
destinations and 24 international destinations in 14 countries across Asia. It has the most
extensive route network in the Philippines. Cebu Pacific does usually arrive on time but
travelers have to be very punctual. Cebu Pacific has a penchant for bumping off their
passengers. Strict check in time of 45 minutes before the flight is practiced because most
airports have killer queue at the entrance.
Safety
Airline safety is an important issue, the safety of Cebu Pacific is well regulated,

30
and the number of incidents continues to drop significantly. Survival kits and instructions
are demonstrated easily on board. Well-constructed and high-end aircrafts are used. The
airline also has commitments and capacity to adhere to international standards that
allowed them to enter the industry (e.g. European Airline Industry). Budget airlines are
cheap, easy to access and to a certain extent; they cover the safety of the passengers with
insurance. In response to increasing trends of budget airline mishaps, Cebu Pacific
introduced their travel insurance program that can be applied online as customers
purchase their ticket.
Well-priced ancillary fees
Another consideration is that Cebu Pacific does not charge excessive fees for
baggage handling on each ticket purchased. Some of the fees will depend upon the city
from which a customer departs as well as his destination city, though some fees are all the
same.
Good Customer Service
Service and comfort levels are important to the customers and Cebu Pacific didnt
fail to deliver. Cebu Pacific has very great service and very customer oriented staff and
knowledgeable and intelligent staffs. The company with their service agreement web and
phone internet connection support along with case management tracking. After all,
technical issues can ground the business faster than just about anything else.
Accessibility
For hurried travelers, it is convenient to have fast, easy, quick electronic
processing to do it themselves from a personal computer to the airport check-in itself.
Cebu Pacifics website allows customer to check destinations, arrival, and departure or

31
purchase ticket online 24/7.

Competitive Advantage in Airline Industry

Porters Five Forces Model This model recognize companys ability to position itself in
the market and how to mitigate weaknesses or risks.
Bargaining Power of Buyers
Switching costs are those incurred by customers when switching from one
supplier to another. For Cebu Pacific, customers who cancel their flights are fined, and
penalties are given to those who make changes in their flight information or flight
bookings. Therefore, switching costs for Cebu Pacific customers are high and thus the
bargaining power of buyers is low.
Prices from the different airlines are accessible in the internet. Customers can
compare prices among airlines and choose what fits their budget. This high level of
accessibility gives customers high bargaining power due to airlines competing among
themselves, driving down the prices.
In conclusion, bargaining power of buyers of Cebu Pacific is medium to high
because although switching cost is high, it is offset by the high accessibility of
information.

Competitive rivalry among competitors

Competitive Rivalry is high. Airline industry is completely saturated. There are
more service providers than needed in both local as well as international markets. The

32
various airlines are competing for the same customers. The airlines are continually
competing against each other in terms of prices, technology, in-flight entertainment,
customer services etc.
According to CAPA, Standard Chartered Research as of April 2013, the airline
industry market shares are as follows:

Figure 3. Domestic Market Share (% of seats)

Figure 4. International Market Share (% of seats)

As shown in the chart above, the biggest competitor for Cebu Pacific in the
domestic market is PAL Express while in the international market, it is Cathay Pacific. In

33
terms of the domestic market, the rivalry within the industry has low intensity with Cebu
Pacific owning almost half of the market share. This shows that domestically, competitors
are not strategically diverse and brand loyalty is significant. However, when you base it
in the international market, the rivalry within the industry has a high level of intensity
because the airlines are aggressively targeting its markets and aggressively pricing
products and service.
Threats of substitute
There is low threat of substitutes for Cebu Pacific Air. In determining, time,
money, personal preference and convenience in the air travel industry should be
considered. Availability of substitute in the industry is the likelihood that someone would
choose other mode of transportation for his destination as well as the improving
technology that limits travelling.
I. Modes of transportation
A. Other Low Cost Airlines and Full Service Airlines
Philippines AirAsia is a joint venture between Filipino investors and AirAsia
International. It is a low cost carrier business model and offers largely similar services
with Cebu Pacific. AirAsia offers "Snack Attack," a buy on board program offering food
and drinks for purchase. Air Asia is accredited by the KL Syariah Index, and in
accordance with law it does not serve alcohol or pork. However, this applies only to the
regional AirAsia group flights, and not to the AirAsia X flights, which do sell wine and
beer on board. AirAsia is taking the first steps towards starting its own frequent-flyer
program. The airline has signed an agreement to start a joint venture with financial
services firm Tune Money to launch a program called "BIG". Under this program it will

34
issue loyalty points to AirAsia customers and third-party merchants. Points can then be
used to redeem AirAsia flights.
PAL Express is Philippine Airlines' answer to Cebu Pacific Air's dominance on
the low cost travel market in the Philippines which significantly shrunk its market share
and relegated it to the no. 2 spot from its dominant no. 1 position since inception. It
allowed PAL to focus on the premium market where it does not have competition in the
domestic Philippine market. Air Phil Express gained significant increase in passengers
following its launch as a low-cost carrier competing head on with Cebu Pacific Air. The
airline is currently on fleet acquisition mode to support its planned domestic and
international route expansion plan. Air Phil Express currently holds the no. 3 position
among Philippine-based airlines with 19% market share.
Philippine Airlines also known as PAL, is the flag carrier and national airline of
the Philippine. It is a traditional full-service business model. The Philippines Airlines
offers services at reasonable, competitive prices, and at the highest level of quality
consistent with such prices. It meets the needs of the public for moving people, goods,
information, and in particular for safe and reliable travel, transport, communication,
distribution, and related services. It generally has higher prices inclusive of all services
and amenities.
B. Bus services
An enormous number of bus services cover the Philippines and generally do it
quite cheaply and reliably. Island-hopping on a bus is even an option; in fact, people can
travel all the way from the northernmost tip of Luzon to the southernmost corner of
Mindanao without getting your feet wet. Departures are usually quite frequent. Most of

35
the time, drivers leave earlier than the set time when bus is already full. Many Filipinos
like to travel early in the morning or after nightfall, when it's cool, so there are often more
buses at this time. It needs a high attention to passenger's baggage while buses load and
unload. Rates are roughly calculated and the time of bus journey will take based on
distance. Regular buses generally cover a bit less than 2km per peso and the average
speed is about 50km per hour. A 100km journey costs Php 50 or so and takes two hours.
A passenger must anticipate a slide rule and a crystal ball to factor in chickens crossing
the road, the number of flat tires, heart-stopping spurts of speed and so on, all of which
seem to have been magically factored into the actual price you pay. Air-conditioned buses
are around 15% to 20% more expensive than ordinary buses, and trips on gravel roads are
normally pricier than travel on sealed roads.
C. Ferry and fast craft services
The Philippines is an archipelago with around seven thousand islands with wide
body of water in between. Ferries of all descriptions and levels of seaworthiness ply the
waters between islands. They are often overcrowded; cramming every inch of leaky tubs
with passengers doesn't make them watertight, but it does increase the probability of the
ship sinking, especially in heavy seas. Fast craft are becoming an increasingly common
sight between islands. These are smaller, lighter and newer than the ferries, and are well
fitted, reliable and safe. They aren't called fast craft for nothing, as they can cut long rides
by half. One modern convenience used to excess on these spiffy ships is air-conditioning,
which is permanently set to 'arctic' - take a sweater or fleece. Though service on the main
routes is pretty reliable, frequent changes in the itinerary is a problem. Adverse weather
conditions (especially during the typhoon season) or renovation of a ferry can totally alter

36
the sailing times and boats used for various trips. As with planes, boats fill to overflowing
during Christmas, New Year, Holy Week and All Saints' Day/All Souls' Day, as well as to
the locations of major festivals. On board, there are several levels of comfort and cost.
Bunks on or below deck on 3rd class should be fine, as long as the ship isn't
overcrowded. Ferry prices vary widely but, as a guide, the fare for the 22-hour voyage
between Manila and Cebu City costs Php 1768 to Php 6414 on WG&A/Super ferry,
depending on which class you choose to travel. Before purchasing your ticket, it pays to
ask about discounts. Ferries, like airlines, offer promotional discounts. Also inquire about
student discounts: some shipping lines knock 15% to 30% off if you can show a valid
student ID.
II. Increased technology
The increased use and developments of technological innovations such as
videoconferencing, Skype, WeChat, etc. may limit the need for face-to-face meetings,
which would require air travel if these individuals are geographically far apart.
Threat of New Entrant
Cebu Pacific's threat of new entrants is low. The airline industry is so saturated
that there is hardly space for a newcomer even to squeeze its way in. The main concern
for this is the cost of entry. The airline industry is one of the most expensive industries,
due to the cost of buying and leasing aircrafts, safety and security measures, customer
service and manpower.
Airport slot availability is one of the constraints a new entrant to the industry must
consider. In the first quarter of 2014, Cebu Pacific took over of international airline
branch, Tigerair Philippines. It is a defensive move to prevent another airline group from

37
making an entry. The significance of the possible slot acquisition by Cebu Pacific as it
would increase the airline's share of slots in Manila to nearly 38 percent. That would put
it ahead of Philippine Airlines and PAL Express that hold a current combined share of 35
percent of all slots at the congested Ninoy Aquino International Airport. Cebu Pacific
currently holds just 34.6 percent of slots while Tigerair Philippines maintains a 4 percent
share. Cebu Pacific may use the additional slots to expand its leading share of the
domestic market or fuel further international expansion. Cebu Pacific dominates in such
way.
Predatory pricing as a barrier to entry. The concept of predatory behavior is based
on incumbents in an industry to squeeze out new entrants by temporarily lowering their
prices to match the new competitor or even introduce prices below the levels of these
new entrants, who often do not have enough capital to survive such a price war, until they
have been driven out of the market. After the new entrant has lost this price war, the
incumbent then increases its prices back to pre-competition levels.
Product differentiation and branding to the brand name of existing airlines and it
is really difficult to lure customers out of their existing brands. Cebu Air, Inc. was
incorporated in 1988 and was given a 40-year legislative franchise to operate
international and domestic flights in 1991. In 1995, the JG Summit group acquired the
airline, holding the shares through its wholly-owned subsidiary, CPAir Holdings Inc.
(Exhibit 19). Based in Manila, Cebu Air began operations in 1996 as a domestic carrier
before commencing international operations in 2001. It adopted its low-cost business
model in 2005. Since then, it continually performed well and got the first mover
advantage as the pioneering Low Cost Carrier Business Model in the Philippines.

38
Frequent-flyer programs are marketing schemes by airlines giving customers a
gift, usually free travel, when customers have conducted a certain amount of business
with the airline. These programs have made many customers, especially business
travelers, prefer a certain airline or airline alliance as they would receive bonus flights,
free hotel accommodation or other free gifts the scheme provides, although they may be
able to buy a cheaper flight at another airline. Cebu Pacific has their different marketing
and loyalty programs. Cebu Pacific offers low fares thru their Lite Fare available all-year
round. With Lite Fare, customers can go see their family or go have a vacation. But to
have the lowest possible fares, they need to go book quickly. The earlier you book, the
lower the fares.
Bargaining power of Suppliers
There is low bargaining power of suppliers. The airline suppliers are mainly
aircraft manufacturers, airports, fuel companies and there isn't a lot of cutthroat
competition among suppliers. Also, the likelihood of a supplier integrating vertically is
rare.
Manufacturers: The Toulouse, France based international aircraft manufacturer,
Avions de Transport international (ATR) is the world leader in the 50 to 74 seat turboprop
market. Lance Gokongwei, CEB President and CEO explained that the move to further
expand its fleet with the ATR fleet is a continued manifestation of CEBs commitment to
bring air travel closer to more Filipinos and to bring them to new destinations which CEB
cannot operate to at the moment due to runway length and strength limitations. Cebu
Pacific will use the aircraft to launch long haul operations in the second half of 2013 and
these will be the first Trent engines in the carriers fleet. The airline will then acquire up

39
to 14 ATR72-500 aircraft worth more than US$ 250 million from the said manufacturer.
CEBs 50-strong fleet is comprised of 10 Airbus A319, 29 Airbus A320, 3 Airbus A330
and 8 ATR-72 500 aircraft. Between 2014 and 2021, Cebu Pacific will take delivery of 12
more brand-new Airbus A320, 30 Airbus A321neo, and 3 Airbus A330 aircraft.
Fuel: Phoenix Petroleum Philippines Inc. is the biggest supplier of fuel to Cebu
Pacific for its nationwide routes. Just this September, 2014, it renewed its fuel supply
deal with the Gokongwei-owned Cebu Pacific with some added features on the array of
services to be provided by the oil firm for another ten years. In the renewed contract,
Phoenix Petroleum has committed to construct a Jet A-1 storage facility in Tayud,
Consolacion in Cebu for the storage of the airliners fuel requirement. This industrial
account is an oil firms core market strength because the requirements are purchased in
bulk and covered by relatively longer term arrangements. For 10 years of strong
partnership, Phoenix Petroleum and Cebu Pacific are leaders in their own fields. Phoenix
is the number one independent oil firm, with more than 400 retail stations nationwide,
and is the 36th largest corporation in the country. Cebu Pacific is the largest domestic
airline operator in the country, flying to 24 international and 33 domestic destinations. It
is the sixth largest low-cost carrier in the Asia-Pacific region. (Velasco, 2014)

Core Competencies. Cebu Pacific Air has a number of advantages against other low cost
carrier airline.
Pioneered the low fare, great value strategy and Strong Branding
Since Cebu Pacific entered the aviation industry, it had continually offers
affordable fare rates. It is identified as their first mover advantage. Cebu Pacific make

40
sure it dominates the domestic market and is priced lower than Philippine Airlines, its
main competitor. Its main positioning creating its brand identity is Why everyone flies.
It signifies the capability of the Filipino citizen to afford a good airline experience. Cebu
Pacific believe that most customer considered price as the heaviest factor upon choosing
an airline. It is because they want to maximize their money. Cebu Pacific was also the
first to introduce Lite Fares, encouraging passengers to carry less baggage by offering
fare discounts. At the time of booking, passengers can now pre-purchase baggage
allowance to save on time and money at check-in. Cebu Pacific Air remains to be the
pioneer in creative pricing strategies as it manages to offer the lowest fare in every route
it operates.

Youngest Fleet and Most Destinations

Cebu Pacific Air is currently the countrys leading domestic carrier, serving the
most domestic and competitive international destinations with the largest number flights
and routes, and equipped with the youngest fleet. Cebu Pacific has the youngest fleet in
the Philippines and continues to differentiate itself. It operates a fleet of 25 Airbus (10
A319 and 15 A320) and 8 ATR 72-500 aircraft. More fleets are to be delivered in late
2014. Expected airline connections with other countries open another opportunities for
airline expansions.
Table 4. Cebu Pacific Air Fleet

41

Table 5. PAL Express Fleet

Table 6. AirAsia Philippines Fleet

The preceding tables show the fleet of Cebu Pacific Air, PAL Express, and
AirAsia Philippines. Among the three airlines, it is clear that Cebu Pacific Air has the
largest number of active aircrafts and has the most variety of aircraft models. This allows
the airline to offer more flights thus giving the airline the advantage of catering to more
customers which lead to more profit.
Cebu Pacifics E-commerce website
They have initialized the first local airline to introduce e-ticketing, prepaid excess
baggage and seat selection in the Philippines. Through the website, customers can check

42
flight destinations, fares, promotion and can even check in for their flight 48 hours up to
4 hours before departure time. In this way, transaction time will be cut down by avoiding
airport counter lines. Cebu Pacifics website is acknowledged as most visited travel
website from 2008- June 2010 according to Alexa Top Sites. Cebu Pacific leverages on
their strong internet presence to advertise sales promotions. They also use social network
sites to promote sales. The use of social networking sites is also a form of Word of
Mouth Marketing
Innovation
It is one of the keys of Cebu Pacifics Market Dominance. Customers choose
Cebu Pacific over other airlines because of price, service, safety, extensive distribution
coverage, on-time flights, and brand promise of a Fun Flight experience. They are the
only domestic carrier that offers fun in the skies. It offers games on board popularly
known as Fun Flights, together with its entertaining flight magazine entitled, Smile.
Cebu Pacifics employees are not only pleasing, helpful, hardworking, etc. but also
talented. Cebu Pacifics safety demo dance even went viral. Through this, passengers pay
more attention to instructions and had fun while learning. Cebu Pacific also uses print
and TV advertising, supported by radio and outdoor advertising.

SWOT Analysis The purpose of this analysis is to show Cebu Pacific Airs position in the
airline industry and its future outlook within the theoretical framework of Strength, Weakness,
Opportunities and Threats.
Strengths
Pioneered Low Fare

43
Cebu Pacific Air is the first to apply the low cost carrier business model in the
Philippines. This has given them an edge to other airlines in the Philippines in terms of
meeting the needs of the people
New Aircrafts, Technologies, and Equipment
Cebu Pacific Air continues to strengthen their position by investing in new
aircrafts, technologies and equipment. The airline now owns 52 aircrafts composed of 10
Airbus A319, 30 Airbus A320, 4 Airbus A330 and 8 ATR-72 500 aircraft. Between 2014
and 2021, Cebu Pacific will take delivery of 11 more Airbus A320, 30 Airbus A321neo,
and 2 Airbus A330 aircraft. The airline also introduced travelers to on-time service, eticketing and on-line booking, setting the standards for online innovation in the local
aviation industry.
Partnership with Different Organizations
Cebu Pacific Air partners with organization whose visions and goals are in line
with theirs. The airline gives back to the community with the help of the following
organizations: GMA Kapuso Foundation, Bright Skies for Every Juan, World Vision, and
Gawad Kalinga.
User-friendly Website
Cebu Pacific Air has developed a website that allows the public to easily access
information about the airline. Once the site is opened, users can easily book a flight or
check out their other services and promotions.
Weaknesses
Delayed Flights
According to Passenger Traffic, NAIAs total annual passenger in 2012 was

44
33,889,532 and the second highest only had 6,712,293 passengers. NAIA is struggling to
handle the increasing number of passengers leading to bottlenecks. Since NAIA is the
base terminal of Cebu Pacific Air, the airline experiences difficulties in managing their
flights on time. Thus, passengers blame the airline.

Limited Destinations
Cebu Pacific Air does not cater to all destinations around the world due to
restrictions placed to the Philippines by other countries. Since long haul flights are
expensive, cost limits the ability of the airline to expand its routes.
Poor Customer Service
Cebu Pacific Air requires additional fees for ancillary services which may disappoint
customers who expects these comfort during their flights.
Opportunities
Expanding Travel Destinations
Cebu Pacific Air has been expanding their destinations. Most of the airlines routes
are in Asia and with their new acquisition of Tigerair Singapore, Cebu Pacific Air has
now expanded their destinations. As they expand their destinations, the airline also
increases the number of their aircrafts to cater the higher demand of flights.
Rising Number of Foreign Students and Visitors
People nowadays come to the Philippines for education and leisure purposes. The
increasing number of people who wants to come to the Philippines is a great opportunity
for Cebu Pacific Air to offer group packages.

45
Technological Advances
These technological advances can help Cebu pacific Air reduce their cost and be
more efficient in their operations.

Threats
Economic instability
Economic instability affects the prices of the commodities used in flight
operations. This influences Cebu Pacific's ability to offer fares that suite the customer's
decision to buy.
Terrorism
Terrorism threatens the profitability of Cebu Pacific due to low bookings.
Oil price instability
Fuel is the largest composition for any airline's operating expense. In Cebu
Pacific's Quarterly Report as of June 30, 2014, fuel cost is 49% of the total operating
expense. With this statistics, any sudden change in oil prices will greatly affect the
airline's expenditure for operations.
Competition within Key Destination
The Philippines has the highest LCC penetration in the world with a rate of 78.4%
in 2012 according to Standard Chartered research. The domestic market is served by
Cebu Pacific Air, PAL Express, AirAsia Zest, and AirAsia Philippines with the former
having the highest domestic market share of 49.9%. However, all LCCs in the Philippines

46
have routes similar to Cebu Pacific Air which affect the airlines profit due to divided
customer bases.

Blacklist due to Subpar Safety Standards

In 2008, the International Civil Aviation Organization issued a warning against
the Philippines stating that the Philippines Standards in Aviation Safety has significant
safety concerns that must be addressed by the Philippine government. This warning lead
to the banning of Philippine aircrafts in the European Union and in the United States.
This ban has greatly hampered the ability of Cebu Pacific to enter this potentially
profitable international market. Fortunately, just this March 2013, the ban has been lifted.
The Philippines now has the responsibility to maintain the quality of their Safety
Standards or risk the reinstatement of the said ban or blacklisting.
Regulation
Philippine Regulation for Aviation must be strictly complied by all airlines
operating in the Philippines whether or not this is disadvantageous to the said airline.
Furthermore, these regulations can be amended which may affect the legality of a certain
act or object.

Measuring Earnings Sustainability

Cebu Air, Inc. is an airline that operates under the trade name Cebu Pacific Air and is
the leading low-cost carrier in the Philippines. It pioneered the low fare, great value strategy in

47
the local aviation industry by providing scheduled air travel services targeted to passengers who
were willing to forego extras for fares that are typically lower than those offered by traditional
full-service airlines while offering reliable services and providing passengers with a fun travel
experience.
For the past years, Cebu Pacific set their own performance measures to assess its overall
state of corporate health. The table below shows their performance measures that they believed
as reliable indicators. Analyses were employed based on the financial data as of 2012 to June
2014.
Table 7. Key Performance Indicators of Cebu Pacific

Total Revenue (in billion Php)

Pre-tax Core Net Income (in billion Php)
EBITDAR Margin
Cost per Available Seat Kilometer (ASK)(Php)
Cost per ASK (U.S. cents)
Seat Load Factor

2012
19.729
1.349
21%
2.54
5.91
84%

2013
21.726
2.638
26%
2.41
5.85
85.4%

Jun-14
26.717
2.581
26.1
2.44
5.49
85.5%

The following measures are computed as:

Total Revenue

The sum of revenue obtained from the sale of air transportation

services for passengers and cargo and ancillary revenue.

Pre-tax Core Net Income

Operating income after deducting net interest expense and adding

equity income/loss of joint venture

EBITDAR Margin

Operating income after adding depreciation and amortization and

aircraft and engine lease expenses divided by total revenue

Cost per ASK

Operating expenses, including depreciation and amortization

expenses and the costs of operating leases, but excluding fuel
hedging effects, foreign exchange effects, net financing charges and
taxation, divided by ASK

48
Seat Load Factor

Total number of passengers divided by the total number of actual

seats on actual flights flown

These indicators are key informants about the companys success and direction but these
were not absolute measures of sustainable earnings. The performance of Cebu Pacific looked
growing and expanding in the past years with ups and downs due to some definable reasons such
as economic recession and fuel price increase in the Philippines.
Here are some figures and graphs of Cebu Pacifics core activities and sustainable
activities measurement, which the financial statements used to valuate companies sustainable and
transitory earnings.
Table 8. Statement of Comprehensive Income Comparison
Statement of Comprehensive Income (PHP)

2012
2013
Jun-14
19,729,242,32 21,726,461,85 26,717,179,71

Operating Revenue

6
5
7
18,298,565,30 18,884,591,22 23,755,383,34

Less: Operating Expenses

Operating Income

3
2
9
1,430,677,023 2,841,870,633 2,961,796,368

Cebu Pacific Operating Income

3,000,000,000
2,500,000,000
2012

2,000,000,000

2013

1,500,000,000

2014

1,000,000,000
500,000,000
0
Years

Figure 5. Cebu Pacific Operating Income Comparison

49

Cebu Pacific Airs generated operating revenue increased to almost 10% each year.
Growth in revenues was accounted for passenger, cargo and ancillary revenues. Passenger
volume increased as driven by the increased number of flights each year. This resulted due to the
continued investment on aircrafts to cater more customer seats. Cargo revenues grew by Php
211.971 million or 17.3% to Php 1.437 billion for the six months ended June 30, 2014 from Php
1.226 billion for the six months ended June 30, 2013 following the increase in the volume and
average freight charges of cargo transported in 2014. It was with the same increasing pattern
with the past years. Improved online bookings, together with a wider range of ancillary revenue
products and services, also contributed to the increase of ancillary revenues. Operating Expenses
also had increased due to more flight destination, depreciation and amortization, aircrafts repair
and maintenance, etc.

Table 9. Statement of Financial Position Comparison

Statement of Financial Position (PHP)

2012
2013
2014
61,336,318,90 67,527,191,29 74,393,140,99

Operating Assets

5
6
2
46,445,613,98 46,445,613,98 50,133,742,10

Less: Operating Liability

1
1
4
14,890,704,92 21,081,577,31 24,259,398,88

Net Operating Asset

50

Cebu Pacific Net Operating Asset

30,000,000,000
25,000,000,000
2012

20,000,000,000

2013

15,000,000,000

2014

10,000,000,000
5,000,000,000
0

Years

Figure 6. Cebu Pacifics Net Operating Asset Comparison

Operating Assets increased as cash and cash equivalents increased due to the higher
revenue. Collections are the results of the expansion as evidenced by the growth in each year.
There was a higher increase in other current asset in 2014 due to prepaid lease payment for A330
Airbus aircraft delivered in 2014, advances to suppliers for purchases of spare engines and
engine parts used in the restoration of certain leased aircraft to its original condition at the end of
the contract period and unamortized prepaid healthcare insurance covering the remaining 6
months in 2014.
There had also been increased operating liability due to additional loans to finance the
purchase of more aircrafts, more airport rights, increased taxation, etc.

Table 10. Return on Net Operating Asset Comparison

Return On Net Operating Asset

2012
1,430,677,02

2013
2,841,870,63

Jun 2014
2,961,796,36

Operating Income
Divided by: Net Operating Asset

3
14,890,704,9

3
21,081,577,3

8
24,259,398,8

51
24

15

88

0.10

0.13

0.12

Return On Net Operating Asset

(percentage)

Table 11. Change in Return on Net Operating Asset Comparison

Change in Return On Net Operating Asset
Return On Net Operating Asset (percentage)
Change in Return On Net Operating Asset

2012
10%

2013
13%

Jun 14
12%

(percentage)

N/A

3%

1%

Drivers of RNOA
80,000,000,000
70,000,000,000
60,000,000,000
50,000,000,000
40,000,000,000
30,000,000,000
20,000,000,000
10,000,000,000
0
2012

2013

Operating Revenue

Operating Expense

Operating Assets

Operating Liability

41791

Figure 7. Drivers of Return on Net Operating Asset Comparison

According to the argument of Penman presented in the third chapter, Cebu pacific should
have sustainable earnings that would be a constant RNOA from year to year from its core
activities. This was because the increase or decrease in income and revenue should be
proportional with the asset size.
The RNOA for Cebu Pacific as shown in the table above was 10% which was the
quotient of OI for 2012 and NOA for the same year. We used the RNOA of 2012 as a reference
for the next year (2013) to test if this same rate had continued or had changed. As one can see

52
from the same table, RNOA for year 2013 was 13%, which left the researchers with the
approximate difference of 3%. As the researchers kept on analyzing that change, from the almost
three years considered, year 2013 had the highest RNOA which resulted in the highest RNOA.
When the researchers further analyzed the drivers of the RNOA, NOA increased with the
previous year while OI had also increased in a higher rate. The analysis of OI was based on the
operating revenue and operating expenses. The operating revenue had increased in the higher
rate than the operating expenses. This effect was reflected in the rate of RNOA.

Critical Success Factors

Rockart (2011) defines Critical Success Factors (CSFs) as the limited number of areas in
which results, if satisfactory, will ensure successful competitive performance for the
organization. They are the few key areas of activity that should receive constant and careful
attention from management. For the Aviation Industry, the following were considered critical
success factors:

Strong Management
Management is the driving force behind any business. Therefore, having a strong
and competent management allows the airline to reach its goals and objectives.
Furthermore, a good management team will impact the airline's reputation in a way that
good management brought about customer trust and confidence in the airline's capability
of meeting their needs.

Capable Workforce

53
Cebu Pacific is a service-oriented entity and therefore needs a significant number
of workforce. Having highly qualified and capable employees will ensure that operations
will run efficiently and effectively.

Promotions and In-flight Services

Promotions foster customer loyalty because these let customers feel the airline.
Also, in-flight services like Cebu Pacific's on-board games allow customers to enjoy their
trip despite the limited services being offered by the airline in its implementation of its
LCC business model.
Non-stop Flying and Routes System
Multiple flight schedules and intensive route system attracts customers because
these allows them to choose their desired destination without transferring to another
airline at a time that is convenient for them.

Financial Management
A good financial management system allows an airline to achieve short and longterm financial objectives. This also gives the airline a good credit rating which makes it
easier for management to borrow money or to apply for loans for immediate and future
financial needs.

Efficient Management of Cost

Costs decrease the profitability of an airline. Managing costs efficiently ensures
that the limited resources were used properly. This involves short-term and long-term

54
planning which prioritized incurring relevant costs or those that are essential to the
airlines operations.

Safety
In the Philippines, aviation safety is regulated by the Civil Aviation Authority in
the Philippines (CAAP). This independent regulatory body created by Republic Act 9497
or otherwise known as Civil Aviation Authority Act of 2008 establishes and prescribes
rules and regulations concerning air travel including inspection and review of the safety
standards of all aircraft owned and operated in the Philippines such as those owned by
Cebu Pacific Air. Cebu Pacific Air complies with all CAAP rules and regulations and
implements safety protocols including safety demonstration procedures performed
through a safety demo dance done at cruising altitude right before the airline's trademark
Fun Flights. Also, the airline implements an enhanced pilot training curriculum by Airbus
standardized trainers and conducts an independent review of their flight operation
systems and processes. This strict compliance to CAAP mandates has given the airline
good ratings from the said Authority and the airline's initiatives concerning safety shows
the public the airline's commitment of safe air travel which earned them a loyal customer
base.

Impact of Air Traffic Congestion on Cebu Pacific Airs Earnings Low Cost Carriers rely
on operational efficiency to reduce unit costs and offset the effect of low fares to overall
company profit. Operational efficiency however, is affected by flight delays which in turn are
affected by the airports capacity and facilities. The airlines branding and reputation also hinges

55
greatly on customer satisfaction and on-time flights.
Ninoy Aquino International Airport (NAIA) Terminal 3 is Cebu Pacific Airs main airport
hub. It is the largest airport in Manila and can handle 13 million passengers annually. The center
of the building contains the head house where passenger processing is centralized and a total of
24 boarding gates accommodate 4,000 peak hour one-way passengers. This however, still could
not handle the overwhelming amount of passengers and air traffic congestion is still a problem.
Air traffic congestion (ATC) in NAIA can cause delays from 4 minutes to 81 minutes
per flight. An aircraft assigned for a roster of flights experiencing delays due to ATC can end up
with a domino effect of delays, to the disadvantage of the passenger, said CEB VP for Flight
Operations Capt. Victor Custodio. In 2010 alone, Cebu Pacific Air recorded almost 6,800 minor
and major delayed flights caused by air traffic in Manila. The accumulated delay caused by ATCs
last 2010 was approximately 38,000 minutes or 633 hours.
Aviation business revenues depend on both the number of departing passengers and
aircraft movements (departures, landings, parking etc.), and on aviation regulated fees (Failla,
Bivona, Ventola, 2013). Air traffic congestion greatly hampers these aircraft movements and
decrease operational efficiency, not to mention, increase customer dissatisfaction. Unsatisfied
customer equal loss in profit and low operational efficiency equals higher operational expenses.
Moreover, unsatisfied customers may choose other airline that will cater to their specific needs.
The overall effect these have in the company is declining aviation business revenues.
Top Three Factors Affecting Cebu Pacific Airs Earnings The researchers have gathered
information from Cebu Pacific Website and news articles regarding issues that affect the airlines
earnings
Service and Safety

56
The variety of what Cebu Pacific Air offers affects its earnings. Aside from ticket
purchasing, it offers a number of ancillary products that forms part to its income.
Customer service of the airline helps create customer loyalty that would help increase
revenue. Safety is the form of being protected from the event or from exposure to
something that causes health or economic losses. To keep customers safety, airlines must
invest more in new and high tech aircrafts as well as survival paraphernalia. These are
large investment that would increase airline expense.
Any event that impacts a business's income will, in turn, affect retained earnings.
Retained earnings increase when a business receives income, whether through profits
gained by providing customers a service or a product or through capital stock
investments.
Branding and Customer Loyalty
Cebu Pacifics branding statement, Where everyone flies! gives the reputation
of the company that anyone can affordably travel. The tag line initially create a
connection between customers and the company. This in turn makes building brand
loyalty with price as the key decision criteria. Understanding that price will always be at
the core with these players means there is an opportunity for these brands to add more
dimension to the value for money concept.
Customer Loyalty Programs provide more experience-driven approach creates a
bigger window of opportunity to establish a bond with consumers and create a real reason
for them to come back. For example, loyal customers can get exclusive perks on promos
and the hottest seat sale deals.
Branding and customer service increase companys earnings through its

57
continuing sales. As the brand become familiar and loyal customers as promoters of their
experience, this would target new customers to choose the airline without inflicting too
much cost in advertising.
Weak peso and fairly elevated price of fuel and other expenses
Cebu Pacifics outstanding debt, pre-aircraft delivery payments, fuel purchases,
leases and certain maintenance expenses were pegged on the US dollar. This is the reason
why foreign exchange digits matter. The peso depreciated by 8.1 percent to P44.395 last
year, and weakened further by 0.84 percent as of March 2014. This result to Cebu Pacific
to have lower revenues from flying passengers (mostly in Peso denomination) instead of
a higher one since operating expense continually increase in dollar denomination.
The company meagre margins in the first half of the year, 2014 as the peso
continues to weaken, tempering the airlines earnings while it expands its long-haul
operations. But the strategy to expand long-haul routes despite the tough competition is
continued. Long-haul routes would open additional flights to Japan, Saudi Arabia,
Malaysia, Singapore, China and etc. Newly delivered aircrafts would cater a number of
passengers that would increase sales.

58

Chapter 5
SUMMARY, CONCLUSION AND RECOMMENDATION
Summary of Findings
This study aimed to give a clearer picture on the earnings sustainability of low cost
carriers and how it would impact the airline through its competitive advantage. Directive
research method is the type of research used in this study. This encompassed a detailed structure
that finds out new information or facts and figures with a definite purpose of what the overall
outcome of the research will be. Therefore, it would lessen the problems stated in the study.
Directive research determines what should be done based on the findings and results that are
bought about in the study. The respondent which is Cebu Pacific Airs respective managements
had a sudden change of mind in cooperating to our study.
In the Philippines, the LCC model was first adopted when Cebu Pacific Air took to the
skies in March 1996 with Douglas DC-9s. Mr. John L. Gokongwei, Jr., a leading Filipino
businessman, experienced LCC in the US and thought to adapt the same concept in the
Philippines especially with the country being an archipelago of 7000+ islands and having a
population of 90 million (Donohue, 2012). After this initial flight, the LCC industry in the
Philippines grew in size and in the year 1996, other LCCs entered the Philippine Airline Industry.
PAL Express, AirAsia Zest, and AirAsia Philippines were among the successful LCCs in the
country. This rapid growth in the LCC industry has forced airlines in the Philippines to seek
ways to be "competitive".

59
After extensive research, the researchers were able to find out that the Philippine Airline
industry is so saturated that there is hardly space for a new entrant to squeeze in. First, this
situation limits the future competitor of Cebu Pacific Air. New entrants find it hard to interfere
also because of Cebu Pacifics strong branding. Second, there is low bargaining power of
suppliers since there are mainly aircraft manufacturers, airports, fuel companies and cut-throat
competition is rare. Second, the availability of substitute in the industry is low. The likelihood
that someone would choose other modes of transportation for his destination is lesser than
deciding to choose low cost carriers. Fourth, Competitive Rivalry is high. Airline industry is
completely saturated. There are more service providers than needed in both local as well as
international markets. The various airlines are competing for the same customers. The airlines
are continually competing against each other in terms of prices, technology, in-flight
entertainment, customer services etc. Lastly, bargaining power of buyers of Cebu Pacific is
medium to high because although switching cost is high, it is offset by the high accessibility of
information. Switching costs are those incurred by customers when switching from one supplier
to another. For Cebu Pacific, customers who cancel their flights are fined, and penalties are given
to those who makes changes in their flight information or flight bookings.
Cebu Pacific makes low cost business model possible and create values through
implementation of its key generic strategies to achieve their set mission and vision. As a low cost
carrier, it offers very low fares, low airport fees, no air freight, no hub services and low
maintenance but high resource productivity and profitability. To retain customers, Cebu Pacific
offers loyalty programs with additional benefits when availed. Cebu Pacific Air is also
continually giving seasonal and all year round promos just like the PISO FARE Promo. Cebu
Pacific is now offering an exciting, innovative way to advertise through onboard media

60
campaigns. Increase brand awareness by targeting a captive audience and positioning your brand
and message onboard every plane throughout Cebu Pacifics range of destinations from the
Philippines to the whole Asia.
Cebu Pacific Air is the first to apply the low cost carrier business model in the
Philippines. This has given them an edge to other airlines in the Philippines in terms of meeting
the needs of the people. Cebu Pacific Air continues to strengthen their position by investing in
new aircrafts, technologies and equipment. Cebu Pacific Air also partnered with organization
whose visions and goals are in line with theirs. The developed airline website allows the public
to easily access information about the airline. Once the site is opened, users can easily book a
flight or check out their other services and promotions.
According to Passenger Traffic, NAIAs total annual passenger in 2012 was 33,889,532
and the second highest only had 6,712,293 passengers. NAIA is struggling to handle the
increasing number of passengers leading to bottlenecks. Since NAIA is the base terminal of Cebu
Pacific Air, the airline experiences difficulties in managing their flights on time. Cebu Pacific Air
does not even cater all destinations around the world due to restrictions placed to the Philippines
by other countries. Another Cebu Pacific Airline weakness is their poor customer service.
Cebu Pacific Air has been expanding their destinations that lead to increase the number of
aircrafts to cater the higher demand of flights. The rising number of foreign students and visitors,
as well as the technological advances, open doors for Cebu Pacific to more opportunities.
Economic instability affects the prices of the commodities used in flight operations. This
influences Cebu Pacific's ability to offer fares that suite the customer's decision to buy. Fuel is
the largest composition for any airline's operating expense. The oil price instability affects

61
airlines stability. Other threats to airline profitability and operations are competition within key
destination, blacklist due to subpar safety standards and the Philippine regulations.
Conclusions
The entirety of the study conducted in this thesis led the researchers to conclude that
Cebu Pacific Air is in the competitive advantage in the domestic setting. The company have
successfully implemented their low cost carrier business model and have gained competitive
advantage through their best cost provider strategy. The company has a high customer base and
intensive routes system which allowed them to dominate the domestic market shares.
However, increasing industry competitors, technological advancement and oil price
fluctuations threatens their position within the industry. Therefore, Cebu Pacific Air management
has to decide what actions to take in order to stay in their game.

Recommendation
Based on the finding, the researchers would highly recommend the company to take into
consideration our proposed business model and entertain this idea as an avenue to maintain and
hopefully improve the company's current standing in the aviation industry as a whole and sustain
company earnings specifically.
For future studies, it would be better if Cebu Pacific Air can give their full support
concerning research of this kind. It would also be interesting to expand the scope of the study,
from earnings sustainability into a company-wide sustainability using a triple bottom line
approach that considers economic, ecological and social well-being.

62

COMPETITIVE ADVANTAGE MODEL

Earnings Sustainability

Competitive Advantage Model

Continuous Improvement

Critical Success Factors

Innovation

Value
Network
Partners
Suppliers
Customers

Porters 5 Forces Model

Industry Rivalry
Threats to New Entrants
Threats to Substitute Products
Bargaining Power of Suppliers
Bargaining Power of Buyers

Generic Strategies
Cost Leadership
Differentiation Leadership
Focus Leadership

Value
Core Competencies
Network
Reward System
Figure 8. Competitive Advantage Model

Our competitive advantage starts with the identification of Cebu Pacific's value network
Stabilization
composed of partners, suppliers and
customers. Afterwards, the company should evaluate
themselves through Porter's Five Forces Model and generic strategy analysis in order to

63
distinguish their core competencies. A review on company vision, mission and goals will then
follow to discern the critical success factors affecting the entity.
The next stage will then be the stabilization of the airline's core competencies and critical
success factors. This, together with the researchers' proposed Value Network Reward System,
can hopefully add value to the company and strengthen the relationship of Cebu Pacific and its
value network. Lastly, the proposed business model emphasizes that to achieve sustainability,
continuous improvement and innovation should be promoted.

BIBLIOGRAPHY

64
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Appendix A
QUESTIONNAIRE
Date:

68
Company name:
Name:
Educational Attainment:
Bachelors Degree Course:
Profession / Discipline:
Nature of Present Job:
Titles of relevant trainings and seminar:
Place of assignment
LCC Business Model:
1. Cebu Pacific Air considers itself as a Low Cost Carrier. Given such, how do you define
an LCC? Or when can you say an airline is an LCC?
a. Its the physicality or size of the carrier that makes it an LCC.
b. Its the target customers who make the carrier an LCC.
c. The operating model makes the carrier an LCC.
d. Others: (specify)
1. How does Cebu Pacific Air implement or uphold its LCC business model? (E.g. No free
meal during flights, stock-piling fuel)
a. Lowering operating costs, as well as capital costs. Overall cost reduction.

69
b. Vary the costs on the customers willingness to avail the services.
c. Offer unbundled services where additional services require additional fees.
d. Others (Specify)
Competitive Advantage:
Would you argue that Cebu Pacific Air is in a competitive position since their first flight in 199?
Explain.
Industry Structure:
1. How would you assess the degree of rivalry within the airline industry?
a. High intensity of rivalry that airlines are aggressively targeting each others markets
and aggressively pricing products and services.
b. Low Intensity of rivalry that competitors are not strategically diverse and brand
loyalty is significant.
c. No intensity of rivalry where the airlines implement their business model without
considering the models of their competitors.
d. Others (Specify)

70
2. How would you assess the likelihood of new entrants for this industry?
a. High barriers to entry that has less risk from new entrants because the airline is too
large and established and the services are difficult to compete, with customers that are
loyal to an airline company.
b. Low barriers to entry that has higher risk from new entrants because there is low
investment requirement, scale is small in size and there are low regulatory
requirements.
c. Medium barriers to entry
d. Others (Specify)
3. Do Cebu Pacific Airs main suppliers (e.g. Boeing, fuel suppliers, and airports) have a
high or low bargaining power?
a. There is high bargaining power of suppliers for there are limited/ few suppliers, the
buyer switching costs are high, the suppliers produce the products themselves,
customer (Airline) is not price sensitive, suppliers product is highly differentiated
and substitute products are unavailable in the market place.
b. There is a low bargaining power of suppliers for there are a number of suppliers with
competitive prices, low switching costs, no threat of forward integration, more buyer
price sensitivity, well-educated buyers, buyers that purchase large volumes of
standardized products and substitute products are readily available.

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c. Cebu Pacific Air supplies their products.
d. Others (Specify)

4. Do Cebu Pacific Airs customers have a high or low bargaining power?

a. There is a high bargaining power of buyers for there is low buyer switching costs,
there is high threat of backward integration, buyers (1) are price sensitive; (2) are
well-educated regarding the product; and (3) purchases products in high volume,
prices are undifferentiated and substitutes are readily available.
b. There is a low bargaining power of buyers because buyer switching costs are high,
there is low threat of backward integration, buyers are not price sensitive, is
uneducated about the product, they purchase in low volumes, products are highly
differentiated and there are no substitute products.
c. Others (Specify)
5. How strong do you consider the threat of substitutes (e.g. road, rail, marine,) for Cebu
Pacific Air?
a. Strong for there are no or low switching costs, their prices are more reasonable than
then our prices and they might have a higher quality of services and products.
b. Weak because there is high switching costs. Our prices are reasonable than the
substitutes prices, we have a higher quality of services and products.

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c. there is no threat because there are no substitutes
d. Others(Specify)
Generic strategies
1. In relation to Porters generic strategies i.e. Cost leadership, Differentiation or Focus,
Cebu Pacific Air has, as evidenced by its implementation of the LCC Business Model,
chosen the cost leadership strategy and thus managed to differentiate itself from
competitors. How has Cebu Pacific Air managed to sustain their position as the leading
LCC in the Philippines in spite of the increase in competition?
a. It is because of market segmentation. Cebu Pacific Air have made strategic decisions
based on increasing their competitive edge, the main one becoming involved in
attracting customers at both ends of their routes.
b. The firm manages to maintain its cost leadership despite the presence of other low
cost airlines in Europe. The source of competitive advantage of the company is its
ability to drive down costs to sustain low fares while at the same time remains
profitable.
c. Cebu Pacific Air uses the prescriptive and emergent corporate strategy. A prescriptive
corporate strategy is one where the objective has been defined in advance and the
main elements have been developed before the strategy commences.an emergent
corporate strategy is one whose final objective is unclear and whose elements are
developed during the course of its life, as the strategy proceeds

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d. Others (Specify)
Resources
1. If we define Cebu Pacific Airsphysical resources as e.g. plant and equipment, geographic
location, access to raw materials etc.: Could you mention physical resources of Cebu
Pacific Air, which are valuable, rare, difficult to imitate, difficult to substitute?

2. Concerning Cebu Pacific Airshuman resources, i.e. intangible assets include the training,
experience, judgment, intelligence, relationships, and insight of individual managers and
workers in the firm: Could you mention human resources in the company, which are
valuable, rare, difficult to imitate, difficult to substitute?
3. Concerning Cebu Pacific Airs financial resources, how big a role does it (financial
resources) play in Cebu Pacific Airs ability to be competitive in the industry?
Core competence
1. Does Cebu Pacific Air possess a core competence (a core competence is the collective
learning in the organization, especially the coordination of production skills and the
integration of technologies)?
2. If yes, could you describe, what Cebu Pacific Airs core competence is?
Sustainable Earnings
1. Sustainable earnings is defined as the likelihood that a business earnings will not be
diminished/destroyed by the strategic moves of competitors. After reading the above
definition, can you say that your companys earnings are sustainable? Explain.
2. What earnings do you consider sustainable?
a. Income from fare

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b. Income from ancillary fees (e.g. baggage handling, seating options)
c. Income from merchandise
d. Others (please specify)
3. Are your earnings
a. Repeatable (earnings can be generated and dividends can be paid for shareholders
even in economic down season by selling assets)
b. Controllable (companies do not control all factors affecting earnings such as
exchange rates and inflation.
c. Bankable (most companies, enter sales as revenues though the amount of the sale
has not deposited to the bank and of course there could be a chance that customers
can cancel or refuse to pay and it creates uncertainties, which lower earnings
quality)
d. Others (please specify)
Critical Success Factors
1. Which of these do you consider your critical success factor:
a. Strong management
b. Capable workforce
c. Promotions and in-flight services
d. Non-stop flying
e. Financial management
f. Efficient management of cost
g. Route system

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Appendix B
CIVIL AVIATION AUTHORITY ACT OF 2008 (RA 9407)

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Appendix C
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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Appendix D
CURRICULUM VITAE

Rhomy Baguhin
4151 H Labra St., Guadalupe Cebu City
+639222177437
Rhomy.baguhin@gmail.com
Educational Background

University of San Carlos

Address: P. del Rosario St., Cebu City, Cebu Philippines
Program Taken: Bachelor of Science in Management Accounting
Estimated Year to Graduate: 2015

Saint John the Baptist Academy

Address: West Poblacion Garcia-Hernandez, Bohol, Philippines
Year Graduated: 2008

Garcia-Hernandez Central Elementary School

Address: West Poblacion Garcia-Hernandez, Bohol, Philippines
Year Graduated: 2004

Organizational Affiliations

Junior Philippine Institute of Accountants

Member
Since 2008

University of San Carlos Dance Club

Member
2010

Seminars and Trainings Attended

USC Accountancy Convention

SM Trade Hall, SM City Cebu, North Reclamation Area
Cebu City, 6000, Metro Cebu
September 6, 2014

Skills

Fluent in English

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Computer literate

Easily adapts to any working environment

Able to maintain confidentiality

Able to multitask

Related Work Experience

Microsoft Technical Support

Convergys
IT Park, Lahug, Cebu City, Cebu, Philippines

Claims Specialist
Teleperformance (JP Morgan Chase & Co.)
IT Park, Lahug, Cebu City

Ezra Charisse P. Dayanan

Lt. 12, Blk. 5, Redstone Lane, South Hills Subd.
Tisa Cebu City, Cebu, Philippines
+329053338766
ezra_charisse@yahoo.com
Educational Background

University of San Carlos

85
Address: P. del Rosario St., Cebu City, Cebu Philippines
Program Taken: Bachelor of Science in Accounting Technology
Estimated Year to Graduate: 2015

Cebu City National Science High School

Address: Salvadore St., Labangon, Cebu City, Cebu Philippines
Year Graduated: 2011

University of San Jose - Recoletos

Address: Basak, Pardo, Cebu City, Cebu, Philippines
Year Graduated: 2007

Organizational Affiliations

Junior Philippine Institute of Accountants

Member
Since 2011

Junior Financial Executives

Member
2014

Seminars and Trainings Attended

BSP Forum on New Generation Currency

Theodore Buttenbruch Hall
University of San Carlos
P.Del Rosario St., Cebu City
2012

A Symposium on Investment Banking

Gansenwinkel Hall
University of San Carlos
P.Del Rosario St., Cebu City
August 29, 2014

USC Accountancy Convention

SM Trade Hall
SM City Cebu, North Reclamation Area
Cebu City, 6000, Metro Cebu

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September 6, 2014

Skills

Computer literate

Has great attention to details

Able to coordinate and work with a team

Good leadership skills

Has entrepreneurial skills

Easily adapts to any working environment

Able to maintain confidentiality

Able to multitask

Good budgeting skills

Able to speak and write fluently in English

Related Work Experience

Part-time Finance Clerk

Mekanel Industrial Corporation
Bulacao, Pardo, Cebu City, Cebu, Philippines
Summer Job from April 2012 May 2012

SHERILYN C. FELISILDA
Maria Gochan St., Sitio San Bernardino,
Mambaling, Cebu City, Cebu
+63943 810 2600
sherilynchiong.sc@gmail.com

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Educational Background
University of San Carlos
P. del Rosario St., Cebu City
Bachelor of Science Accounting Technology
Estimated Year to Graduate: 2015

Don Vicente Rama Memorial National High School

Macopa St., Basak Pardo, Cebu City
Valedictorian
2007-2011

Don Vicente Rama Memorial Elementary School

Macopa St., Basak Pardo, Cebu City
Fourth Honorable Mention-Special Science Class
2001-2007

Organizational Affiliations
Junior Philippine Institute of Accountants
Member
Since 2011

Junior Financial Executives

Member
2014

Cebu Federation-Sangguniang Kabataan

Member
2010-2013

Barangay Basak San Nicolas-Childrens Organization

Member
2010-2013

Seminars and Trainings Attended

Cebu City Chapter Benchmarking
Participant
Metro Manila, Cavite and Baguio City
August 20-25, 2013

BSP Forum on New Generation Currency

Theodore Buttenbruch Hall
University of San Carlos
P. del Rosario St., Cebu City

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2012

Child Trafficking Orientation and Drug Awareness Seminar

Facilitator
Cremdec, Sister Cities Drive,
Tap-tap, Cebu City
October 29-30, 2011

Barangay Childrens Summer Camp

Participant
Carmen, Cebu
May 9-13, 2011

A Symposium on Investment Banking

Gansenwinkel Hall
University of San Carlos
P.Del Rosario St., Cebu City
August 29, 2014

USC Accountancy Convention

SM Trade Hall
SM City Cebu, North Reclamation Area
Cebu City, 6000, Metro Cebu
September 6, 2014

Skills
Good communication skills

Sound Knowledge of Accounting, Auditing and Finance

Proficient in Microsoft Office program (Word, Excel, PowerPoint)

Able to work in teams

Pleasing Personality

Good in Planning and Organizing

Able to be productive even with work pressure

MARY DAVINALENE Y. ONG

18 Mt. Banahaw St., Singson Village, Tipolo, Mandaue City, Cebu
(032) 420 1032 / +63922 470 6949
marydavinaleneong@gmail.com

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Educational Background
University of San Carlos
P. del Rosario Street, Cebu City
Bachelor of Science Accounting Technology
Year to Graduate: 2015

Sacred Heart School Ateneo de Cebu

H. Abellana Street, Canduman, Mandaue City, Cebu
Year Graduated: 2011

Sacred Heart School Jesuit

H. Abellana Street, Canduman, Mandaue City, Cebu
Year Graduated: 2007

Organizational Affiliations
Junior Philippine Institute of Accountants
Member
Since 2011

Junior Financial Executives

Member
2014

Seminars and Trainings Attended

BSP Forum on New Generation Currency
Theodore Buttenbruch Hall
University of San Carlos
P.Del Rosario St., Cebu City
2012

1st Student Finance Convention (FINCOM 2013)

Convention Hall
J Centre, Mandaue City, Cebu
2013

A Symposium on Investment Banking

Gansenwinkel Hall
University of San Carlos
P.Del Rosario St., Cebu City
August 29, 2014

90

USC Accountancy Convention

SM Trade Hall
SM City Cebu, North Reclamation Area
Cebu City, 6000, Metro Cebu
September 6, 2014

Skills
Sound Knowledge of Accounting, Auditing and Finance

Mastery of Microsoft Office program (Word, Excel, PowerPoint)

Pleasing personality with excellent oral and written communication skills

Ability to adapt in the working environment

Ability to work well with a team or group

Ability to maintain confidentiality

Detail-oriented with effective time management techniques

MELISSA TABAAG
Uldog Street, Poblacion, Talisay City, Cebu, Philippines
+63916 699 2294
melissatabanag@yahoo.com

Educational Background
University of San Carlos
P.Del Rosario St., Cebu City, Cebu Philippines

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Bachelor of Science in Accounting Technology
Estimated Year to Graduate: 2015

Cebu City National Science High School

Salvador Street, Labangon, Cebu City, Cebu Philippines
Year Graduated: 2011

University of San Jose - Recoletos

Basak, Pardo, Cebu City, Cebu Philippines
Year Graduated: 2007

Organizational Affiliations
Junior Philippine Institute of Accountants
Member
Since 2011

Junior Financial Executives

Member
2014

Seminars and Trainings Attended

BSP Forum on New Generation Currency
Theodore Buttenbruch Hall
University of San Carlos
P.Del Rosario St., Cebu City
2012

1st Student Finance Convention (FINCOM 2013)

Convention Hall
J Centre, Mandaue City, Cebu
2013

A Symposium on Investment Banking

Gansenwinkel Hall
University of San Carlos
P.Del Rosario St., Cebu City
August 29, 2014

92

USC Accountancy Convention

SM Trade Hall
SM City Cebu, North Reclamation Area
Cebu City, 6000, Metro Cebu
September 6, 2014

Skills
Good Oral and Written Communication Skills

Sound Knowledge of Management, Accounting, Auditing and Finance

Proficient in Microsoft Office Programs (Word, PowerPoint, Excel)

Able to Multitask

Able to Adapt in a Working Environment

Able to Work with Grace under Pressure

Able to Work in a Group or Team

Able to Manage Time Efficiently and Effectively

Good Attention to Detail

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