Misamis University

Ozamiz City
College of Business and
Management

Cebu Air, Inc.

Financial Analysis

Bendiola, Ivan C.

Introduction

Cebu Air, Inc. (CEB) is the largest carrier in the Philippine air transportation industry
which was incorporated and organized in the Philippines on August 26, 1988 to carry on, by
means of aircraft of every kind and description, the general business of a private carrier or
charter engaged in the transportation of passengers, mail, merchandise and freight, and to
acquire, purchase, lease, construct, own, maintain, operate and dispose of airplanes and other
aircraft of every kind and description, and also to own, purchase, construct, lease, operate and
dispose of hangars, transportation depots, aircraft service stations and agencies, and other objects
and service of a similar nature which may be necessary, convenient or useful as an auxiliary to
aircraft transportation. The principal place of business is at 2nd Floor, Doa Juanita Marquez
Lim Building, Osmea Boulevard, Cebu City.
In 1991, pursuant to Republic Act No. 7151, Cebu Air was granted a franchise to operate
air transportation services, both domestic and international. In August 1997, the Office of the
President of the Philippines gave Cebu Air the status of official Philippine carrier to operate
international services. In September 2001, the Philippine Civil Aeronautics Board issued the
permit to operate scheduled international services and a certificate of authority to operate
international charters. Cebu Air is registered with the Board of Investments as a new operator of
air transport on a pioneer and non-pioneer status. Under the terms of the registration and subject
to certain requirements, the Cebu Air is entitled to certain fiscal and non-fiscal incentives,
including among others, an income tax holiday for a period of four to six years.
Cebu Air has nine special purpose entities (SPE) that it controls. On March 20, 2014,
Cebu Air acquired 100% ownership of Tiger Airways Philippines. In accordance with Philippine
Financial Reporting Standards (PFRS) 10, Cebu Air, its ten SPEs and Tiger, are consolidated for
financial reporting purposes. Cebu Airs common stock was listed with the Philippine Stock
Exchange on October 26, 2010, Cebu Airs initial public offering. Cebu Airs ultimate parent is
JG Summit Holdings, Inc.
The following pages present the consolidated financial statements of Cebu Air,
specifically its balance sheets and income statements, for the years 2012, 2013, and 2014 which
are being analyzed and interpreted utilizing the two analytical tools and techniques which are the
vertical and horizontal analyses. These analyses seek to evaluate the financial position and
performance of Cebu Air in the Airline Industry and Philippine market as a whole. The results of
this FS analysis will determine how well the company has been managed, discuss the companys
profitability and growth, and describe the significant business activities it undertook for the past
three years. Cebu Air, Inc. is particularly chosen in this study since the company plays a
substantial role in one of the pioneered industries in the world.

Horizontal analysis involves comparing figures shown in the financial statements of two
or more consecutive periods. The difference between the figures of the two periods is calculated,
and the percentage change from one period to the next is computed, using the earlier period as
the base. Using this analytical tool with the companys balance sheet, it can be observed that
Cebu Air experienced a decrease in net income from 2012 to 2013 by 86% and in its total
comprehensive income by 93%. The obvious reasons for this significant decrease can be traced
with the overall decrease in 2013 other income or expense of the company that resulted to a
negative amount of P2,299,204,404 representing an enormous decrease of 290% from the
previous years positive amount of 1,207,020,862. This unfortunate decrease was mainly caused
by the significant foreign exchange losses which constitutes a 271% decrease as well as a
decrease in interest income by 47% and an increase in the interest expense by 18%. The
company also did not incur any sale on financial assets in 2013 while in 2012 they gain
P5,764,090 from its sales.
In regards with Cebu Airs main operations, the company undergone an increase in
overall sales by 8% with a significant increase of 13% in its ancillary revenues and 10% increase
of its sale of air transportation services in terms of cargo. However, the company experienced a
greater increase in expenses by a total of 10%. The primary causes of this increase in expenses
lies in the disadvantaged increase in depreciation and amortization by 25%, followed by a 14%
increase in aircraft and engine lease expenses, and an 11% increase in repairs and maintenance.
These changes brought an overall decline of 2013 gross income by 10% as compared with the
2012 data.
Although the company experienced a major drawback in 2013, Cebu Air was able to
improve its financial performance in 2014 by an astounding increase of 315% or P806,838,462
in total comprehensive income and 67% increase in its net income. It can be noted that compared
with a measly 8% sales increase in 2013, Cebu Air had more than tripled its sales in 2014 in a
total increase of 27%. This time, the sales increase surpassed the increase in expenses by a
difference of 3% which resulted to an overall escalation of 73% representing P1,752,925,080
increase. In terms of other income and expenses, the huge difference of 897% hedging losses
from last years positive figure affected the overall performance by 43%, which means the
expenses it incurred in 2013 has been increased this year. This variation materially reduced the
gross income of P4,157,336,990 to P878,635,984. Accordingly, the benefit it got from the
income tax from last year which prevented the company to have a much lower total
comprehensive income, has been downgraded to a provision for income tax or a 106%
disadvantage. Furthermore, the losses the company had undertook last 2013 became gains or an
increase of a beneficial 182% in total. Even though the company improved its performance

compared from last year, still it hasnt able to match its performance in 2012, thus, it is not a
direct basis that the company had actually achieved a relevant progress.

A closer look at Cebu Airs balance sheet reveals that there is a continuous decline of
cash and cash equivalents with 44% in 2013 and 25% or 2,092,199,120 decrease in 2014. The
company did not report any possession of financial assets in 2014 which represents a decline of
100%. When it comes to its other current assets, the company has an increase of 49% or
422,357,991 in 2013 and a total of 58% increase in 2014. All these notable activities, however,
caused a decline in the total current assets both in 2013 and 2014 with 24% and 15% decreases,
respectively. Nevertheless, the company experienced an overall increases in terms of noncurrent
assets in 2013 and 2014. A general increase of 19% in 2013 as compared to the 2012 data is
primarily caused by the 77% increase in other noncurrent assets and the incurrence of
112,156,602 amount of deferred tax assets. On the other hand, the 195% or 759,957,932 increase
in other noncurrent assets, and the incurrence of 566,781,533 goodwill have led the 17% increase
in total noncurrent assets in 2014. All these changes caused increases in the total assets of the
company with 6,113,579,919 or 10% from 2013 and 13% increase in 2014.
As per the companys current liabilities, there is a 36% increase in current short portion
of long term debt in 2013 and 25% in 2014. Meanwhile, a 2,260,559,896 of financial liabilities
was incurred in 2014 which it didnt have in the last two years. Resulting total current liabilities
in 2013 increased unfavorably by 11% or 18,338,199,535 from 16,564,777,628 in 2012 and an
unfavorable increase of 31% in 2014. As per the companys noncurrent liabilities, there is a 2013
increase of 27% and 14% in 2014 in long-term debt since the company has additionally availed
matured bonds payable and long-term loans. There was no deferred tax liabilities in 2013 but in
2014, a total amount of 129,160,379 deferred tax liabilities was present the company due to
decline in deferred tax assets on unrealized market loss on hogs valuation and recognition of
deferred tax liability on unrealized foreign exchange gain. Total liabilities increased unfavorably
by 23% or 5,295,722,932 from 22,811,691,514 from 2012 to 28,107,414,446 in 2013, whereas in
2014, there is also a lower unfavorable increase of 8% or 2,355,091,456.
As per Cebu Airs equity, the amount of common stock, paid-in capital, and treasury
shares have been maintained by the company both in 2013 and 2014. The only notable difference
lies on the other comprehensive loss with 297% unfavorable increase in 2013 and favorable
change of 61% in 2014, and with the retained earnings showed with unfavorable decrease of 5%
or 699,960,431 in 2013 and 2% favorable increase in 2014. Total equity resulted 4% decrease in
2013 and an increase of 2% in 2014.

Vertical analysis is the process of comparing figures in the financial statements of a single
period. It involves converting the figures in the statements to a common base. This is
accomplished by expressing all the figures in the statements as a percentage. For the income
statement, the net sales figure or net operating revenue is set at 100%. Each item in the income
statement is divided by net sales (or net operating revenue) to express such items as percentages
of net sales.
In Cebu Airs common size income statement, the expenses are maintained at about 92%
in 2014 and 94% in 2013. This means that there is only a slight change in mark up on the goods
sold during the three-year period which only varies by more or less 2%. The increase in gross
income was due mainly to the increase in sales. Moreover, the company was not able to maintain
consistency in terms of other income and finance charges in 2013 as compared to 2012 and it
even continued to decline in the succeeding year by 0.7%. As a result the income before income
tax decreased 9.95% from 10.21% in 2012 to 0.26% in 2013. Furthermore, the net income
favorably rose 1.41% from 0.63% in 2013 to 2.04% in 2014.

For a balance sheet, total assets represent 100% and the other items are expressed as
percentages of total assets by dividing each item by total assets. With the companys financial
position, it may be noted that the current assets in 2014 are 11.21% of total assets, lower than
14.86% in 2013, and much lower when it comes to 2012 with 21.36%.
Current liabilities, on the other hand, increased from 26.97% to 27.16% in 2013, and
31.63% in 2014. As for the other noncurrent liabilities, the company was able to maintain its
position between 2012 and 2013 but allowed it to favorably decline by almost 50% in 2014.
Despite these activity, the overall stand in liability was unfavorably increasing. This is an
indication of a slight decline in working capital position. There is also no significant change but a
small series of reductions in the total equity.

Findings

Based on the given discussions from the preceding pages, the overall findings can be
summarized as follows:
For horizontal analysis:
1. There is an 86% decline in net income in 2013 from 2012 due to overall decrease
in 2013 other income or expense of the company that resulted to a negative
amount of P2,299,204,404 representing an enormous decrease of 290% from the
previous years positive amount of 1,207,020,862.
2. Cebu Air was able to improve its financial performance in 2014 by an astounding
increase of 315% or P806,838,462 in total comprehensive income and 67%
increase in its net income.
3. There were increases in the total assets of the company with 6,113,579,919 or
10% from 2013 and 13% increase in 2014.
4. Total liabilities increased unfavorably by 23% or 5,295,722,932 from
22,811,691,514 from 2012 to 28,107,414,446 in 2013, whereas in 2014, there is
also a lower unfavorable increase of 8% or 2,355,091,456
For vertical analysis:
5. In Cebu Airs common size income statement, the expenses are maintained at
about 92% in 2014 and 94% in 2013
6. The income before income tax decreased 9.95% from 10.21% in 2012 to 0.26% in
2013 and the resulting net income favorably rose 1.41% from 0.63% in 2013 to
2.04% in 2014
7. The current assets in 2014 are 11.21% of total assets, lower than 14.86% in 2013,
and much lower when it comes to 2012 with 21.36%.
8. The overall status in the company liability was unfavorably increasing by 2-4% in
the past three years which is an indication of a slight decline in working capital
position.

Recommendations

Though as merely as an outsider which do not have much interest and in-depth
background on the company, the following personal recommendations for the presented findings
are still being prepared in order for the company to stabilize and improve its financial
performance and position, this is based only on a direct observation in its financial statements
with a limited point of view and not of a professional analyst:
1. Since the company has outstanding fuel hedging transactions in 2012 and 2013, the
company should carefully exercise these options at the most favorable combination of
specific quantities based on the given calculation dates because as provided, the
notional quantity is the amount of the derivatives underlying asset or liability,
reference rate or index and is the basis upon which changes in the value of derivatives
are measured.
2. The company should continue to conduct more proper and accurate estimates of the
future rates in order to carry on with the favorable remeasurement effects recognized
in other comprehensive income
3. Cebu Air should continue making appropriate prepaid payments such as rentals
particularly in aircrafts and insurance as well as advances to suppliers and regular
maintenance complimenting with the companys financial capability.
4. The company should maintain a healthy cash flows and make a more thorough
analysis when it comes to investing or borrowing at the most favorable interest rates.

Conclusion
The entire analysis with regards to the balance sheets and income statements of Cebu Air,
Inc. using the horizontal and vertical techniques has been a loathsome and time-consuming
activity since it actually involves a deeply thorough evaluation, analyzation, and critical
examination of the actual figures being presented in the financial statements. Though the process
is being described in a direct and simple manner, it is actually a different perspective and much
complex when these analytical techniques are being applied to large and structurally complicated
companies such as Cebu Air.
Based on the results of these analyses, Cebu Air, Inc. did not actually experience a
consistent growth in terms of financial performance for the last three years despite the fact the
company is coined as a leading air carrier in the country. Normally, the causes of these instability
lies more with the outside factors such as the unpredictable changes in interest and discount
rates, the dependence of the company to diversified or atypical suppliers involving foreign
companies, and other extensive considerations. Fair estimations and overlooked predictions
should also be minimized in the company as possible to prevent material consequences in the
future.
Nevertheless, Cebu Air has been commendable in managing its financial position in the
last three years. It successfully sustained its assets, and only made slight flaws or changes in its
liabilities which is quite reasonable. Actually, there were no significant unsteadiness that can be
observed from the companys financial position that can affect its overall financial status or
progress.
In general, this analysis activity provided me the opportunity to have deeper
understanding and be able to refine my practical knowledge in the horizontal and vertical
analyses of the financial statements which are basically important and helpful in directly
evaluating a certain company.