Misamis University Ozamiz City College of Business and Management
Cebu Cebu Air, Air, Inc. 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 organied in the Philippines on August !", #$%% to carry on, by &eans o' aircra't o' every ind and description, the general business o' a private carrier or charter engaged in the transportation o' passengers, &ail, &erchandise and 'reight, and to acuire, purchase, lease, construct, own, &aintain, operate and dispose o' airplanes and other aircra't o' every ind and description, and also to own, purchase, construct, lease, operate and dispose o' hangars, transportation depots, aircra't service stations and agencies, and other ob*ects and service o' a si&ilar nature which &ay be necessary, convenient or use'ul as an au+iliary to aircra't transportation. he principal place o' business is at !nd Floor, -oa /uanita 0arue 1i& Building, 2s&ea Boulevard, Cebu City. In #$$#, pursuant to 3epublic Act 4o. 5#6#, Cebu Air was granted a 'ranchise to operate air transportation services, both do&estic and international. In August #$$5, the 2''ice o' the President o' the Philippines gave Cebu Air the status o' o''icial Philippine carrier to operate international services. In 7epte&ber !88#, the Philippine Civil Aeronautics Board issued the per&it to operate scheduled international services and a certi'icate o' authority to operate international charters. Cebu Air is registered with the Board o' Invest&ents as a new operator o' air transport on a pioneer and non9pioneer status. :nder the ter&s o' the registration and sub*ect to certain reuire&ents, the Cebu Air is entitled to certain 'iscal and non9'iscal incentives, including a&ong others, an inco&e ta+ holiday 'or a period o' 'our to si+ years. Cebu Air has nine special purpose entities (7PE) that it controls. 2n 0arch !8, !8#;, Cebu Air acuired #88< ownership o' iger Airways Philippines. In accordance with Philippine Financial 3eporting 7tandards (PF37) #8, Cebu Air, its ten 7PEs and iger, are consolidated 'or 'inancial reporting purposes. Cebu Air=s co&&on stoc was listed with the Philippine 7toc E+change on 2ctober !", !8#8, Cebu Air=s initial public o''ering. Cebu Air=s ulti&ate parent is /> 7u&&it ?oldings, Inc. he 'ollowing pages present the consolidated 'inancial state&ents o' Cebu Air, speci'ically its balance sheets and inco&e state&ents, 'or the years !8#!, !8#@, and !8#; which are being analyed and interpreted utiliing the two analytical tools and techniues which are the vertical and horiontal analyses. hese analyses see to evaluate the 'inancial position and per'or&ance o' Cebu Air in the Airline Industry and Philippine &aret as a whole. he results o' this F7 analysis will deter&ine how well the co&pany has been &anaged, discuss the co&pany=s pro'itability and growth, and describe the signi'icant business activities it undertoo 'or the past three years. Cebu Air, Inc. is particularly chosen in this study since the co&pany plays a substantial role in one o' the pioneered industries in the world.
?oriontal analysis involves co&paring 'igures shown in the 'inancial state&ents o' two or &ore consecutive periods. he di''erence between the 'igures o' the two periods is calculated, and the percentage change 'ro& one period to the ne+t is co&puted, using the earlier period as the base. :sing this analytical tool with the co&pany=s balance sheet, it can be observed that Cebu Air e+perienced a decrease in net inco&e 'ro& !8#! to !8#@ by %"< and in its total co&prehensive inco&e by $@<. he obvious reasons 'or this signi'icant decrease can be traced with the overall decrease in !8#@ other inco&e or e+pense o' the co&pany that resulted to a negative a&ount o' P!,!$$,!8;,;8; representing an enor&ous decrease o' !$8< 'ro& the previous year=s positive a&ount o' #,!85,8!8,%"!. his un'ortunate decrease was &ainly caused by the signi'icant 'oreign e+change losses which constitutes a !5#< decrease as well as a decrease in interest inco&e by ;5< and an increase in the interest e+pense by #%<. he co&pany also did not incur any sale on 'inancial assets in !8#@ while in !8#! they gain P6,5";,8$8 'ro& its sales. In regards with Cebu Air=s &ain operations, the co&pany undergone an increase in overall sales by %< with a signi'icant increase o' #@< in its ancillary revenues and #8< increase o' its sale o' air transportation services in ter&s o' cargo. ?owever, the co&pany e+perienced a greater increase in e+penses by a total o' #8<. he pri&ary causes o' this increase in e+penses lies in the disadvantaged increase in depreciation and a&ortiation by !6<, 'ollowed by a #;< increase in aircra't and engine lease e+penses, and an ##< increase in repairs and &aintenance. hese changes brought an overall decline o' !8#@ gross inco&e by #8< as co&pared with the !8#! data. Although the co&pany e+perienced a &a*or drawbac in !8#@, Cebu Air was able to i&prove its 'inancial per'or&ance in !8#; by an astounding increase o' @#6< or P%8",%@%,;"! in total co&prehensive inco&e and "5< increase in its net inco&e. It can be noted that co&pared with a &easly %< sales increase in !8#@, Cebu Air had &ore than tripled its sales in !8#; in a total increase o' !5<. his ti&e, the sales increase surpassed the increase in e+penses by a di''erence o' @< which resulted to an overall escalation o' 5@< representing P#,56!,$!6,8%8 increase. In ter&s o' other inco&e and e+penses, the huge di''erence o' %$5< hedging losses 'ro& last year=s positive 'igure a''ected the overall per'or&ance by ;@<, which &eans the e+penses it incurred in !8#@ has been increased this year. his variation &aterially reduced the gross inco&e o' P;,#65,@@",$$8 to
P%5%,"@6,$%;. Accordingly, the bene'it it got 'ro& the
inco&e ta+ 'ro& last year which prevented the co&pany to have a &uch lower total co&prehensive inco&e, has been downgraded to a provision 'or inco&e ta+ or a #8"< disadvantage. Further&ore, the losses the co&pany had undertoo last !8#@ beca&e gains or an increase o' a bene'icial #%!< in total. Even though the co&pany i&proved its per'or&ance
co&pared 'ro& last year, still it hasn=t able to &atch its per'or&ance in !8#!, thus, it is not a direct basis that the co&pany had actually achieved a relevant progress.
A closer loo at Cebu Air=s balance sheet reveals that there is a continuous decline o' cash and cash euivalents with ;;< in !8#@ and !6< or !,8$!,#$$,#!8 decrease in !8#;. he co&pany did not report any possession o' 'inancial assets in !8#; which represents a decline o' #88<. hen it co&es to its other current assets, the co&pany has an increase o' ;$< or ;!!,@65,$$# in !8#@ and a total o' 6%< increase in !8#;. All these notable activities, however, caused a decline in the total current assets both in !8#@ and !8#; with !;< and #6< decreases, respectively. 4evertheless, the co&pany e+perienced an overall increases in ter&s o' noncurrent assets in !8#@ and !8#;. A general increase o' #$< in !8#@ as co&pared to the !8#! data is pri&arily caused by the 55< increase in other noncurrent assets and the incurrence o' ##!,#6","8! a&ount o' de'erred ta+ assets. 2n the other hand, the #$6< or 56$,$65,$@! increase in other noncurrent assets, and the incurrence o' 6"",5%#,6@@ goodwill have led the #5< increase in total noncurrent assets in !8#;. All these changes caused increases in the total assets o' the co&pany with ",##@,65$,$#$ or #8< 'ro& !8#@ and #@< increase in !8#;. As per the co&pany=s current liabilities, there is a @"< increase in current short portion o' long ter& debt in !8#@ and !6< in !8#;. 0eanwhile, a !,!"8,66$,%$" o' 'inancial liabilities was incurred in !8#; which it didn=t have in the last two years. 3esulting total current liabilities in !8#@ increased un'avorably by ##< or #%,@@%,#$$,6@6 'ro& #",6";,555,"!% in !8#! and an un'avorable increase o' @#< in !8#;. As per the co&pany=s noncurrent liabilities, there is a !8#@ increase o' !5< and #;< in !8#; in long9ter& debt since the co&pany has additionally availed &atured bonds payable and long9ter& loans. here was no de'erred ta+ liabilities in !8#@ but in !8#;, a total a&ount o' #!$,#"8,@5$ de'erred ta+ liabilities was present the co&pany due to decline in de'erred ta+ assets on unrealied &aret loss on hogs valuation and recognition o' de'erred ta+ liability on unrealied 'oreign e+change gain. otal liabilities increased un'avorably by !@< or 6,!$6,5!!,$@! 'ro& !!,%##,"$#,6#; 'ro& !8#! to !%,#85,;#;,;;" in !8# @, whereas in !8#;, there is also a lower un'avorable increase o' %< or !,@66,8$#,;6". As per Cebu Air=s euity, the a&ount o' co&&on stoc, paid9in capital, and treasury shares have been &aintained by the co&pany both in !8#@ and !8#;. he only notable di''erence lies on the other co&prehensive loss with !$5< un'avorable increase in !8#@ and 'avorable change o' "#< in !8#;, and with the retained earnings showed with un'avorable decrease o' 6< or "$$,$"8,;@# in !8#@ and !< 'avorable increase in !8#;. otal euity resulted ;< decrease in !8#@ and an increase o' !< in !8#;.
ertical analysis is the process o' co&paring 'igures in the 'inancial state&ents o' a single period. It involves converting the 'igures in the state&ents to a co&&on base. his is acco&plished by e+pressing all the 'igures in the state&ents as a percentage. For the inco&e state&ent, the net sales 'igure or net operating revenue is set at #88<. Each ite& in the inco&e state&ent is divided by net sales (or net operating revenue) to e+press such ite&s as percentages o' net sales. In Cebu Air=s co&&on sie inco&e state&ent, the e+penses are &aintained at about $!< in !8#; and $;< in !8#@. his &eans that there is only a slight change in &ar up on the goods sold during the three9year period which only varies by &ore or less !<. he increase in gross inco&e was due &ainly to the increase in sales. 0oreover, the co&pany was not able to &aintain consistency in ter&s o' other inco&e and 'inance charges in !8#@ as co&pared to !8#! and it even continued to decline in the succeeding year by 8.5<. As a result the inco&e be'ore inco&e ta+ decreased $.$6< 'ro& #8.!#< in !8#! to 8.!"< in !8#@. Further&ore, the net inco&e 'avorably rose #.;#< 'ro& 8."@< in !8#@ to !.8;< in !8#;.
For a balance sheet, total assets represent #88< and the other ite&s are e+pressed as percentages o' total assets by dividing each ite& by total assets. ith the co&pany=s 'inancial position, it &ay be noted that the current assets in !8#; are ##.!#< o' total assets, lower than #;.%"< in !8#@, and &uch lower when it co&es to !8#! with !#.@"<. Current liabilities, on the other hand, increased 'ro& !".$5< to !5.#"< in !8#@, and @#."@< in !8#;. As 'or the other noncurrent liabilities, the co&pany was able to &aintain its position between !8#! and !8#@ but allowed it to 'avorably decline by al&ost 68< in !8#;. -espite these activity, the overall stand in liability was un'avorably increasing. his is an indication o' a slight decline in woring capital position. here is also no signi'icant change but a s&all series o' reductions in the total euity.
Findings
Based on the given discussions 'ro& the preceding pages, the overall 'indings can be su&&aried as 'ollows For horiontal analysis #. here is an %"< decline in net inco&e in !8#@ 'ro& !8#! due to overall decrease in !8#@ other inco&e or e+pense o' the co&pany that resulted to a negative a&ount o' P!,!$$,!8;,;8; representing an enor&ous decrease o' !$8< 'ro& the previous year=s positive a&ount o' #,!85,8!8,%"!. !. Cebu Air was able to i&prove its 'inancial per'or&ance in !8#; by an astounding increase o' @#6< or P%8",%@%,;"!
in total co&prehensive inco&e and "5<
increase in its net inco&e. @. here were increases in the total assets o' the co&pany with ",##@,65$,$#$ or #8< 'ro& !8#@ and #@< increase in !8#;. ;. otal liabilities increased un'avorably by !@< or 6,!$6,5!!,$@! 'ro& !!,%##,"$#,6#; 'ro& !8#! to !%,#85,;#;,;;" in !8#@, whereas in !8#;, there is also a lower un'avorable increase o' %< or !,@66,8$#,;6" For vertical analysis 6. In Cebu Air=s co&&on sie inco&e state&ent, the e+penses are &aintained at about $!< in !8#; and $;< in !8#@ ". he inco&e be'ore inco&e ta+ decreased $.$6< 'ro& #8.!#< in !8#! to 8.!"< in !8#@ and the resulting net inco&e 'avorably rose #.;#< 'ro& 8."@< in !8#@ to !.8;< in !8#; 5. he current assets in !8#; are ##.!#< o' total assets, lower than #;.%"< in !8#@, and &uch lower when it co&es to !8#! with !#.@"<. %. he overall status in the co&pany liability was un'avorably increasing by !9;< in the past three years which is an indication o' a slight decline in woring capital position.
Recommendations
hough as &erely as an outsider which do not have &uch interest and in9depth bacground on the co&pany, the 'ollowing personal reco&&endations 'or the presented 'indings are still being prepared in order 'or the co&pany to stabilie and i&prove its 'inancial per'or&ance and position, this is based only on a direct observation in its 'inancial state&ents with a li&ited point o' view and not o' a pro'essional analyst #. 7ince the co&pany has outstanding 'uel hedging transactions in !8#! and !8#@, the co&pany should care'ully e+ercise these options at the &ost 'avorable co&bination o' speci'ic uantities based on the given calculation dates because as provided, the notional uantity is the a&ount o' the derivatives= underlying asset or liability, re'erence rate or inde+ and is the basis upon which changes in the value o' derivatives are &easured. !. he co&pany should continue to conduct &ore proper and accurate esti&ates o' the 'uture rates in order to carry on with the 'avorable re&easure&ent e''ects recognied in other co&prehensive inco&e @. Cebu Air should continue &aing appropriate prepaid pay&ents such as rentals particularly in aircra'ts and insurance as well as advances to suppliers and regular &aintenance co&pli&enting with the co&pany=s 'inancial capability. ;. he co&pany should &aintain a healthy cash 'lows and &ae a &ore thorough analysis when it co&es to investing or borrowing at the &ost 'avorable interest rates.
Conclusion he entire analysis with regards to the balance sheets and inco&e state&ents o' Cebu Air, Inc. using the horiontal and vertical techniues has been a loathso&e and ti&e9consu&ing activity since it actually involves a deeply thorough evaluation, analyation, and critical e+a&ination o' the actual 'igures being presented in the 'inancial state&ents. hough the process is being described in a direct and si&ple &anner, it is actually a di''erent perspective and &uch co&ple+ when these analytical techniues are being applied to large and structurally co&plicated co&panies such as Cebu Air. Based on the results o' these analyses, Cebu Air, Inc. did not actually e+perience a consistent growth in ter&s o' 'inancial per'or&ance 'or the last three years despite the 'act the co&pany is coined as a leading air carrier in the country. 4or&ally, the causes o' these instability lies &ore with the outside 'actors such as the unpredictable changes in interest and discount rates, the dependence o' the co&pany to diversi'ied or atypical suppliers involving 'oreign co&panies, and other e+tensive considerations. Fair esti&ations and overlooed predictions should also be &ini&ied in the co&pany as possible to prevent &aterial conseuences in the 'uture. 4evertheless, Cebu Air has been co&&endable in &anaging its 'inancial position in the last three years. It success'ully sustained its assets, and only &ade slight 'laws or changes in its liabilities which is uite reasonable. Actually, there were no signi'icant unsteadiness that can be observed 'ro& the co&pany=s 'inancial position that can a''ect its overall 'inancial status or progress. In general, this analysis activity provided &e the opportunity to have deeper understanding and be able to re'ine &y practical nowledge in the horiontal and vertical analyses o' the 'inancial state&ents which are basically i&portant and help'ul in directly evaluating a certain co&pany.
