Cebu Pacific Strategic Management Paper

CEBU PACIFIC STRATEGIC MANAGEMENT PAPER A Final Paper Presented to the De La Salle University – Manila In Partial Fulfillment of the Course Requirements in STRATMA Presented to: Sir Jem Pampolina Presented by: Patricia Wijangco Submitted on: Term 1, AY: 2015-2016 November 21, 2015

Executive Summary

Cebu Pacific Air is currently the country’s leading domestic carrier, serving the most domestic destinations with the largest number flights and routes, and equipped with the youngest fleet. Cebu Air, Inc., operating as Cebu Pacific Air, is based on the grounds of Ninoy Aquino International Airport (Manila Terminal 3), Pasay City, Metro Manila, the Philippines. It offers scheduled flights to both domestic and international destinations. Its main base is Ninoy Aquino International Airport, Manila, with other hubs at Mactan-Cebu International Airport, Francisco Bangoy International Airportand Diosdado Macapagal International Airport.

Cebu Pacific has 2 major competitors, which are Philippine Airlines and Air Asia. This paper seeks to cite the different strategies of Cebu Pacific and how it was successfully been making them grow annually. Since, it is a low cost carrier airline, it is mentioned what strategy the company uses to be able to generate profit despite the low fare prices.

COMPANY BACKGROUND

Cebu Pacific is a low cost airline based in the Philippines. It offers a discount, no frills, and budget type of airline for both domestic and international flights. It is one of the major holdings of JG Summit Holdings under John Gokongwei. It is currently the biggest carrier in the Philippines and is mainly based in Ninoy Aquino International

Airport. Cebu Pacific is known for their low-cost approach. It offers no-frills, discounted and low budget fares. This also means fewer comfort. To make up for revenue lost in decreased ticket prices, the airline charges for extras like food, priority boarding, seat allocating, and baggage. Cebu Pacific offers 34 domestic flights and 26 international flights. They are more known for flying around the Philippines but are currently expanding their international destinations.

Founded on 1996 as Cebu Air, Cebu Pacific offers scheduled flights to 33 domestic destinations, and to 16 international destinations in 10 countries. It is currently the country's leading domestic carrier, serving the most domestic destinations with the largest number flights and routes, and equipped with the youngest fleet. Its main base is Ninoy Aquino International Airport, Manila, with other hubs at Mactan-Cebu International Airport, Francisco Bangoy International Airport and Diosdado Macapagal International Airport. The airline is a subsidiary of JG Summit Holdings, controlled by the Gokongwei family - one of the richest Filipino-Chinese families based in the Philippines. Cebu Pacific is currently headed by President and CEO Lance Gokongwei, presumptive heir of John Gokongwei, the chairman emeritus of JG Summit. With a company slogan, “It’s time every Juan flies” Cebu Pacific entered the market with a promise to give "low fare, great value" to every Filipino who wanted to fly. It operates a fleet of 25 Airbus (10 A319 and 15 A320) and 8 ATR 72-500 aircraft, the youngest fleet in the Philippines. Cebu Pacific remains to be the pioneer in creative pricing strategies as it manages to offer the lowest fare in every route it operates.

Industry Analysis

Air travel continues to be a growing industry because it facilitates economic growth, International investment, world trade and tourism and therefore is one of the main proponents of globalization. Airline companies have three main goals, providing good service to the customers, returning the investment with an increase to their shareholders, and lastly providing sustenance to nation’s economy (Alfelor, 2013). The airline industry must not only take in priority the goal they have set up for their company but also the dynamics that affect the improvement and success of their industry. Such as their airport capacity, route structures, technology, cost to leave or buy the aircraft. There are also some unpredictable dynamics that when unprepared can affect the whole industry like the weather that is irregular especially in Philippines where there are typhoons all year round. Fuel cost is also a main factor in the dynamics that could change the entire industry. Fuel is also the second largest expense and a significant portion of an airline total cost. One of the largest expenses, an airline can incur is labor that the airline must pay to its human stakeholders such pilots, flight attendants, dispatchers, bagger handlers, and others.

The Airline industry must always put in mind the key factors that affect their success. They should always strive to continue providing customer satisfaction, competitive rates, adequate technology, and a wide variety of destinations.

Macro environmental analysis POLITICAL

ECONOMIC

- Airline industry is highly regulated

- Increasing prices of different aircraft

- Government seeks to increase

models

tourism

- Dependence on craft, equipment and fuel -Maintaining and operating costs are high -Purchasing power of Filipinos are

SOCIAL

getting higher TECHNOLOGICAL

-Philippines is highly populated

- Online booking is usually being

- More people want to travel

utilized

- Increasing market for low-cost

- Web check-ins and seat reservations

carriers

are also done online

- Social media is highly used now LEGAL

ENVIRONMENTAL

- Strict rules and regulations regarding

- Climate change affects flight

safety of flyers

schedules - Noise and Air Pollution - Waste Management

Major players/ Competitor Analysis

Philippine Airlines

Philippine Airlines, Inc. commonly known as PAL, is the flag carrier and national airline of the Philippines. Headquartered in the Philippine National Bank Financial Center in Pasay City, the airline was founded in 1941 and is the oldest commercial airline in Asia operating under its original name. Out of its hubs at Ninoy Aquino International Airport of Manila and Mactan-Cebu International Airport of Cebu City, Philippine Airlines serves nineteen destinations in the Philippines and 24 destinations in Southeast Asia, Middle East, East Asia, Oceania and North America.

Philippine Airlines Inc. owns and operates national and international flights. The company’s fleet includes Boeing 747-400, Airbus A340-300, Airbus A320-200, and Boeing 737-400. Its international destinations include Jakarta; Vancouver; Los Angeles; Honolulu; and Shanghai and national destinations include Along, Nag, Leaps, Butane, and Dalai. Philippine Airlines was founded in 1941 and is headquartered in Makati, Philippines. Philippine Airlines Inc. operates as a subsidiary of PAL Holdings, Inc.

Philippine Airlines is the only airline in the Philippines to be accredited with the IATA Operational Safety Audit (IOSA) by the International Air Transport Association (IATA) and has been awarded a 3-star rating by the independent research consultancy firm Skytrax.

Air Asia AirAsia Inc., operating as AirAsia Philippines is a low-cost airline based at Ninoy Aquino International Airport in Metro Manila in the Philippines. The airline is the Philippine affiliate of AirAsia, a low-cost airline based in Malaysia. It's headquarters is in Clark, Pampanga. Orginally, the Filipino inventors were Antonio O. Cojuangco, Jr, former owner of Associated Broadcasting Company/owner of Dream Satellite TV; Michael L. Romero, a real estate developer and port operator; and Marianne Hontiveros, a former music industry executive and TV host. In 2013, a share-swap agreement with Zest Airways added Alfredo Yao of Zest-O Corporation as an additional owner of the company. Zest Airways was rebranded as AirAsia Zest and will operate as a separate brand from AirAsia.

Mission

"Why everyone flies." Cebu Pacific brings people together through safe, affordable, reliable, and funfilled 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. 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.

Vision, It is to become the most successful low-cost carrier in the Asia-Pacific region; to be the best domestic airline and the Filipino travelers' first choice, recognized with unparalleled genuine, warm and caring service; to become the pioneer in innovation and commitment to excellence.

Strategic and Financial Objectives

Cebu Pacific works under a budget airline business model. This strategy offers unbundled fares, meaning the fares that they offer come with no frills and are easy on the budget. For example, they cut down in-flight food service. This lowcost carrier strategy appeals to a lot of Filipino consumers because it is a price sensitive market. This low-cost carrier strategy enables them to have regular customers who want to travel but also keep in mind their budget. For the incoming years, Cebu Pacific aims to offer more international flight locations for the airline. As of now, they currently have 26 international destinations. Financially, it aims to increase their market share by 3.5% the incoming year. At the same time, they want to increase their net operating income by 18%.

Reported Financial Performance

Industry Analysis Using the Five Forces Mode

Over the years, Cebu Pacific increased the seats sold and number of passengers riding the planes because of how they utilized their airbus fleet by having 6.5 flights per day. Cebu Pacific also acquired Tiger Air, which increased their market share. As of date, they have most number of passengers carried and highest seat load factor. Cebu Pacific has generated revenues higher than the revenues earned during the year of 2013. Their revenues from passengers increased mainly because of their increase in passenger volume compared to 2013. As they added new aircraft to their fleet which can carry more passengers.

Driving Forces NEW ENTRANT

Currently, there are no new entrants of airlines in the market, altough, Cebu Pacific acquired Tiger Air and renamed it to CEBGO as of early 2015.

CONSUMERS There are many possible consumers for Cebu Pacific. First are the tourists, those who are from the Philippines and those who are foreign. These are for the people

who want to tour the Philippines, visit the Philippines, or visit other countries for travel and leisure. Another consumer would be a businessman for business trips and meetings. OFW's are also consumers when they need to travel to their provinces from arrival in Manila. Students are also consumers for when they go on educational trips, tours or study abroad.

COMPETITORS

Philippine Airlines is considered as the legacy and national carrier of the Philippines and has been around for a long time. They are a known airline in the Philippines that serve international and domestic flights. They have more destinations internationally compared to Cebu Pacific. PAL express is under Philippine Airlines but offers local flights at cheaper prices compared to Philippine Airlines. Another is AirAsia which used to be Zest Air. They are not as big as Cebu Pacific but cater to some Asian international destinations and local destinations.

SUBSTITUTES Substitutes for Cebu Pacific would be travelling through sea. It's not really the same as using an airplane as transportation due to time and comfort. It will take a lot longer to certain destinations, and it might not be practical to use it for international destinations. Another substitute would be rental of personal planes or jets but it is too costly.

SUPPLIERS Currently, Cebu Pacific accepts payment through credit cards such as Visa and Mastercard. They also accept through bayad centers such as Western Union. CEB orders their aircrafts from Airbus S.A.S and ATR. In addition, Petron is their supplier for airplane fuel.

Strategic Group Map

TOWS Analysis STRENGTHS

WEAKNESSES

1. Currently the most

1. Limited destinations

known low cost carrier in

2. Add-ons such as

the Philippines

baggage, meals, and

2. User-friendly website

entertainment in flight are

3. Customer Loyalty

not included 3. Poor customer service

OPPORTUNITIES

S/O STRATEGIES

W/O STRATEGIES

- More people are able to

- They should expand

2. Increasing number of

travel because of the

their destinations since

OFW's

affordable prices that

more people are willing

3. Higher purchasing

Cebu Pac offers

to travel

power of consumers

- Since there are more

- They should improve on

destinations, OFWs can

customer service so that

travel directly to their

consumers will still avail

loved ones using Cebu

of their service

1. More destinations

Pacific - Customers who have been loyal will come back because of the destinations offered

THREATS 1. Oil Price is not

S/T STRATEGIES

W/T STRATEGIES

constant

-Even if oil price is not

2. Economic instability

constant, Cebu Pacific

- They should continue to

can still compete with the

promote and agressively

other brand because of

advertise their promo

their lower prices

fares because this is

- Despite the economic

what makes a lot of

instability, Cebu Pacific

consumers impulsively

can continue to offer

travel despite different

3. Increasing Inflation Rates

promo fares for their loyal economic instability customers

Benchmarking

Value Chain

Generic Strategies

Cebu Pacific practices Cost Leadership Strategy. This is when profits are increased due to the decrease of cost, lowering of prices but still having reasonable profit because of reduced costs. In Cebu Pacific's case, they try to cut costs by increasing seats in all the planes. If an airbus originally has a certain number of seats, Cebu Pacific tries to add more so they can take in more passengers. Also, they try to increase their profits through their add-ons such as meals and baggage.

CEBU PACIFIC

Implementation

Proposed Strategy (overall) Cebu Pacific’s main goal is to provide an opportunity for everyone to travel anywhere and everywhere they wanted with a fun-filled experience that is conveyed with passion for excellent service, using a strategy that imbibes certain characteristics of the other type of competitive strategies, but more dominantly combines strategic emphasis on low cost and differentiation. Cebu Pacific will use Best-Cost Provider strategy because goes well with the company’s objective which is to become global, offer premium service that will attract customers, becoming their preferred airline that will meet customers' needs. Using Best-Cost Provider strategy can attain a competitive edge over rivals in hitting a broader market which is composed majority of consumers seeking for a low cost opportunity to travel. Aside from focusing in using a low-cost strategy Cebu Pacific also push into achieving it through maintaining tight control over production and overhead costs but still provide with an upscale product at much lower cost than the competitor in the airline industry. Because of this advantages are competitors are likely to avoid a price war, since the low cost firm will continue to earn profits after

competitors compete away their profits especially in airline industry. also powerful customers that force firms to produce goods/service at lower profits may exit the market rather than earn below average profits leaving the low cost organization in a monopoly positions. Buyers then loose much of their buying power. It is also hard for new entrants to move in the industry because low cost leaders create barriers to market entry through its continuous focus on efficiency and reducing costs. Aside from that using this strategy also improve Cebu Pacific’s ability to adapt to environmental changes, learn new skills and technologies, and more effectively leverage core competencies across business units and products lines which should enable the firm to produce produces with differentiated features at lower costs. Cebu pacific will also use under market penetration such as effective advertisements will be made for the Cebu pacific in the TV and radio ads, print newspapers and magazines. There will also have an establishment of Research and Development (R&D) Unit which has a special economic significance apart from its conventional association with scientific and technological development. R&D investment generally reflects a government’s or organization’s willingness to forgo current operations or profit to improve future performance or returns, and its abilities to conduct research and development. Some Secondary Strategies Cebu Pacific could use is Under Horizontal Integration which will have to do with Merging with other Airlines. In microeconomics and strategic management, the term horizontal integration describes a type of ownership and control. It is a

strategy used by a business or corporation that seeks to sell a type of product in numerous markets. Horizontal integration in marketing is much more common than vertical integration in production. Horizontal integration occurs when a firm in the same industry and in the same stage of production is being taken-over or merged with/by another firm which is in the same industry and in the same stage of production as of with the merged firm. Cebu Pacific has a good financial position therefore; it has the capacity to merge with another hotel company in the industry. If Cebu Pacific merge with another airline, it would be possible for both companies to compete not only in the Philippine industry but also with the other foreign countries as well. Renovation of Cebu Pacific facilities to a more modern and futuristic style can also affect some good impact to consumers. New facilities design and development is more than often a crucial factor in the survival of a company. In an industry that is fast changing, firms must continually revise their design and range of facilities. This is necessary due to continuous technology change and development as well as other competitors and the changing preference of customers. A system driven by marketing is one that puts the customer needs first, and only produces services that are known to customers. Market research is carried out, which establishes what is needed. If the development is technology driven then it is a matter of changing what it is possible to make. The facilities are developed so that hotel processes are as efficient as possible and the services are technically superior, hence possessing a natural advantage in the market place.

Implementation Sales and Marketing The marketing department can seek to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies. Market strategies include increasing the number of salespersons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts. Operations: This department can assure the quality of the operations in Cebu Pacific. They should follow the practice of on-time performance while is in accordance with the industry standards. This means that the aircraft must not leave more than 15 minutes from the assigned scheduled department time. This is something that consumers really look for when it comes to their flights. Finance: Its role is to make sure In order to meet the obligation of the business andto have enough cash and liquidity. It is the responsibility of a financial manager to decide the ratio between debt and equity. The finance department should also be able to allocate the funds and do profit planning. IT/MIS: IT is in charge of all the web-based technology and must coordinate with Sales and Marketing for them to implement their strategies on their website. They are in charge of the e-commerce side of the brand.

Financial Projections

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