I flew back Tuesday night from the Philippines to Hong Kong, successfully making it into Hong Kong International Airport. There are new security measures in place to make sure only passengers get into the terminal after the airport was shut down for parts of two days last week by protesters.
My trip to Cebu City, the biggest city in the central Philippines, was on Cebu Pacific. The budget carrier is one of the most interesting Filipino companies and a successful competitor to the flagship carrier, Philippine Airlines.
Cebu Pacific just reported earnings that beat expectations. Its net profit for the first half of 2019 already accounts for 95% of full-year expectations, as estimated by analysts polled by Bloomberg. Lower fuel costs were one part of the explanation, but the more interesting part is that revenue rose 18% year on year. More on that later.
Parent Cebu Air PH:CEB has been a strong recent performer both in terms of share price and profits. That should continue as the carrier adds routes and increases the size of its aircraft. It's boosting the size from the Airbus A320 to the 330 without a noticeable drop in yields and loads, the brokerage Nomura notes.
I flew back Tuesday from Cebu via a stopover at Clark International Airport. It's at that former U.S. air force base that the airline is adding the most slots and seeing the biggest boost to business.
Clark was once the largest international outpost of the U.S. Air Force when it operated as Clark Air Force Base, named for the early military aviator Harold M. Clark, who made the first flight between the Hawaiian Islands. The Clark airport is now surrounded by the Clark Freeport Zone, outside Angeles, 40 miles north of Manila. The first of four new terminals is now under construction and is targeted to open next year, with the rest set to be in operation by 2025.
The Clark Freeport Zone and surrounding area are attracting a lot of the white-collar outsourcing business that the Philippines as a whole is drawing. Besides the tax breaks available, businesses and employees alike avoid the hellishly snarled traffic in Manila and breathe a little easier, too.
When you look at Cebu Air's stock price chart, you'll see a flash crash (particularly bad news for an airline, I guess) on July 9. The stock plunged 60% after a fat-fingered trader entered an order for 95,000 shares at 58 pesos, way lower than its price of 93.40 at the time.
It recovered the losses in the next two days; it's not clear exactly what happened to the trader's losses! The shares were trading for real around 58 pesos in November 2018 and except for a shaky patch this spring have been very much charting an upward course. That's an actual 60% gain in nine months.
The Philippines is currently an economic star in Asia, with rising economic growth set to hit 6.2% this year and Cebu Pacific is riding that wave. It benefits from the emergence of the white-collar, well-educated, English-speaking middle class in the Philippines. And the airline serves a solid base of expatriate workers who contribute 10% of the economy in remittances of foreign currency sent back home.
Philippine Airlines, like many national carriers, has sat on its laurels all too long. The share price of parent company PAL Holdings PH:PAL has been going nowhere for years. Indeed, you would have lost 29% of your money if you've held the stock since the start of 2018.
Cebu Pacific grew its capacity at Clark by a factor of 10 in the second quarter of this year. It's increasing the frequency of its profitable short-haul international routes and heading to intra-Asian destinations such as Narita in Tokyo and Shanghai. Total airline passenger numbers should rise 10% in 2019.
There are always going to be short-term operational issues with airlines. The most famous resort island in the Philippines, Boracay, was suddenly closed by government decree for six months in 2018 to clean up its environment. That destination is now providing high yields to Cebu Pacific, although the resort island attempts to keep tourist numbers at 19,000 on the island at any one time.
Hong Kong, on the other hand, is a traditionally profitable route that is seeing business decline due to the political protests in the city. Routes to Hong Kong account for 8% of revenue and forward bookings are down by 10 percentage points. Management says it's taking a "wait and watch" approach, and would eventually continue reallocating capacity to other routes if problems persist.
Cargo yields have fallen due to the U.S. vs. Everybody trade war. Global cargo demand is down for all airlines, and Cebu Pacific's yields fell 5.5% in the second quarter. However, domestic freight is not faring badly.
Cebu Pacific's shares are trading at only 6.6x 2019 earnings. Nomura, which has a buy rating on the stock, foresees a 59% upside on the current price, which would lift it to 145 pesos, meaning its upward journey is only halfway done.