beyondbrics

Investors get ready. After a year of speculation, Cebu Pacific Air, the Philippines’ leading low-cost airline, has finally confirmed its IPO. It said on Friday that it plans to raise up to $730m in the offering, which will take place on the Philippine stock exchange on October 25.

Cebu wants the additional investment to expand internationally, ahead of an “open skies” agreement across southeast Asia. And that’s bad news for its rival – troubled national carrier Philippine Airlines.

Cebu is already the biggest domestic carrier in the Philippines – having taking little more than a decade to overtake Philippine Airlines. Its popularity grew in part thanks to innovations such as selling tickets through to to people without credit cards through payment centres and ATMs. It is owned by J G Summit Holdings, a quoted mini-conglomerate controlled by the Gokongwei family.

The airline already flies to over a dozen foreign destinations, including China and Singapore. But in 2015 the number of potential destinations will increase dramatically thanks to an open skies deal between the ten members of the Association of South East Asian Nations (Asean).

The open skies deal will open up routes between most cities in the region. Given that Asean has 600m people and an aggregate economy the size of India’s, the potential is very large indeed. So, in preparation, Cebu hopes to use the IPO to buy more planes; currently it flies mainly Airbus A320 and A319 jets, supplemented by smaller ATR turboprops.

Philippine Airlines is not keen on the open skies deal, fearing competition from Cebu and others. Already the national carrier is stuck with a legacy portfolio of “missionary” routes – unprofitable transport, almost as a social service, to unpopular domestic destinations. Moreover, the airline recently had to cancel many flights because some pilots had quit to earn more money elsewhere.

With five years until the Asean agreement comes into force, Philippine Airlines may have time to turn things around. But the Philippine president, Benigno Aquino III, seems to have run out of patience with the carrier, threatening early implementation of the open skies deal if a looming strike by cabin staff isn’t resolved.

Supporters of the national airline say that, if the strike doesn’t finish it off, the early introduction of open skies probably would. But Philippine Airlines’ woes could be Cebu’s gain. The IPO roadshow begins next week.

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