Colegio de San Juan de Letran Calamba

Bo. Bucal, Calamba City, Laguna

COMPARATIVE FINANCIAL RATIO FOR AIRLINE INDUSTRY

Prepared by

Marasigan, Jaelyn

Regalado, Marlene O.

Submitted to
Mr. Redentor Caguioa
Financial Management I
nd

2 Semester, A.Y. 2014-2015

Table of Contents
PAGE NO.

I.

Introduction

II.

Industry Background

III.

Summary of Ratios

IV.

Review of Financial Ratios

V.

Conclusion

Citation

Annex

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I.

INTRODUCTION

Ratios are helpful for understanding the financial position of a company. These ratios are
used by investors, management and creditors to analyze the financial situation of the company
for decision-making purposes. Ratios are important for judging the companys efficiency in
terms of its operations and management. They help judge how well a company has been able to
utilize assets and earn profits. Although ratios are used to analyze the company's past financial
performance, they can also be used to establish future trends of its financial performance. As a
result, they help formulate the company's future plans. It is essential for a company to know how
well it is performing over the years and as compared to the other firms of the similar nature.
Besides, it is also important to know how well its different divisions are performing among
themselves in different years.
This study was made for the purpose of comparing the financial ratios of the top 3
companies of the airline industry in the PhilippinesCebu Pacific, Philippine Airlines, and PAL
Express. However, this study will only compare Cebu Pacific and PAL Holdings Inc. since PAL
Express and Philippine Airlines are subsidiary companies of PAL Holdings Inc.

II. INDUSTRY BACKGROUND

Order by market share in the domestic market:

1. CEBU PACIFIC (50.36%)
Cebu Air, Inc., operating as Cebu Pacific Air, is an airline 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, Clark International Airport., Francisco Bangoy International Airport,
Iloilo International Airport and Kalibo International Airport.
The airline is a subsidiary of JG Summit Holdings. Cebu Pacific is currently
headed by Lance Gokongwei, presumptive heir of John Gokongwei, the chairman
emeritus of JG Summit. As of January 2013, The company has 3,297 employees. 2,565
were from operations, 429 from the commercial departments, and 303 from the support
departments. In October 2010, the airline completed an IPO of 30.4% of outstanding
shares. Cebu Pacific carried 12.3 million passengers in 2012 and is now the largest
carrier in the Philippines.
Cebu Pacific is a low-cost carrier following to a large degree the concept known
from other such carriers around the world.
2. PAL EXPRESS (21.39%)
PAL Express, formerly Air Philippines or Airphil Express, is operating under
business name of Air Philippines Corporation. After operating as PAL Express for a
while, the airline transformed again the brand into Airphil Express. It operates both
domestic and international scheduled services from Manila, Cebu, Davao City and
Zamboanga. The airline was re-branded for a number of times, first as Air Philippines,
then as PAL Express. After a series of financial losses, Air Philippines ceased operations
for a short while until it was acquired by investors from Philippine Airlines. After the
acquisition, the airline was re-launched as PAL Express, to operate some routes and slot
assignments of its sister company Philippine Airlines until the management decided to
re-brand the carrier as a budget airline now known as Airphil Express. However, in

March 2013, the company's CEO announced that the name will be reverted to PAL
Express. As a codeshare of Philippine Airlines, PAL Express will be operating as a full
service carrier with low-cost management.
3. PHILIPPINE AIRLINES (12.69%)
Philippine Airlines (PAL) (A trading name of PAL Holdings Inc.) (PSE: PAL), also
known historically as Philippine Air Lines, is the flag carrier of the Philippines.
Headquartered at the PNB Financial Center in Pasay City, the airline was founded in
1941 and is the first and 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, Philippine Airlines serves 31 destinations in the Philippines
and 36 overseas destinations in Southeast Asia, East Asia, Middle East, Oceania, North
America and Europe.
Formerly one of the largest Asian airlines, PAL was severely affected by the 1997
Asian Financial Crisis. In one of the Philippines' biggest corporate failures, PAL was
forced to downsize its international operations by completely cutting flights to Europe
and Middle East, cutting virtually all domestic flights except routes operated from Manila,
reducing the size of its fleet, and laying off thousands of employees. The airline was
placed under receivership in 1998, and gradually restored operations to many
destinations. PAL exited receivership in 2007, and following the brief management
takeover by the San Miguel group from 2012 to 2014, has been taking steps towards
reestablishing itself as one of Asia's premier carriers.
4. AirAsia Zest (9.78%)
5. Tigerair Philippines (4.77%)

III. SUMMARY OF FINANCIAL RATIOS

in Tabular Form

Ratio
Current Ratio
Quick Ratio
Debt-To-Equity Ratio
Asset-To-Equity Ratio
Receivable Turnover
Equity Ratio
Profitability Ratios:
Profit Margin
Return On Assets
Return On Equity
Interest Rate Coverage Ratio

Cebu Pacific
0.55
0.44
2.20
3.20
18.85
0.31

PAL Holdings Inc.

0.29
0.22
3.49
7.25
12.12
0.14

Average
0.42
0.33
2.85
5.23
15.49
0.23

0.01
0.04
0.83
1.12

(0.05)
(0.04)
(0.26)
(1.77)

(0.02)
0
0.29
(0.33)

IV. REVIEW OF FINANCIAL RATIOS

Current Ratio
The current ratio is widely regarded as a measure of short-term debt-paying ability. Cebu
Pacific has the higher current ratio than PAL. Generally, a current ratio which is less than 1
means a company may be having trouble paying of its liabilities. However, it does not
necessarily mean that the company will go to bankruptcy for there are many ways of financing.
Creditors are looking for higher current ratios because this means they have a greater chance of
being repaid within the next operating cycle.
Quick Ratio
The quick ratio is a more rigorous test of a companys ability to meet its short-term
debts. This is designed to measure how well a company can meet its obligations without having
to liquidate or depend too heavily on its inventory.
Cebu Pacific has a higher liquidity ratio of 0.44 compared to the 0.22 of PAL. This may
be due to the higher amount of total current liabilities of PAL.
Debt-to-Equity Ratio
Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity.
It is a leverage ratio and it measures the degree to which the assets of the business are
financed by the debts and the shareholders' equity of a business.
PAL Holdings has a lower debt-to-equity ratio making it a more favorable situation.
Lower values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-equity ratio
is unfavorable because it means that the business relies more on external lenders thus it is at
higher risk, especially at higher interest rates. A value higher than 1 means that more assets are
financed by debt that those financed by money of shareholders' and vice versa.
Asset-to-Equity Ratio
The asset/equity ratio shows the relationship of the total assets of the firm to the portion
owned by shareholders. This ratio is an indicator of the companys leverage (debt) used to
finance the firm.

PAL Holdings has the higher asset-to-equity ratio of 7.25 than the 3.20 ratio of Cebu
Pacific. A relatively high ratio (indicating lots of assets and very little equity) may indicate the
company has taken on substantial debt merely to remain its business but a high asset/equity
ratio can also mean the return on borrowed capital exceeds the cost of that capital.
Receivable Turnover
Accounts receivable turnover is the ratio of net credit sales of a business to its average
accounts receivable during a given period, usually a year. It is an activity ratio which estimates
the number of times a business collects its average accounts receivable balance during a
period.
Cebu Pacific has a higher turnover of 18.85 than the 12.12 turnover of PAL Holdings.
Generally a high value of accounts receivable turnover is favorable and lower figure may
indicate inefficiency in collecting outstanding sales.
Equity Ratio
The equity ratio is an investment leverage or solvency ratio that measures the amount of
assets that are financed by owners' investments by comparing the total equity in the company to
the total assets.
Cebu Pacific has a higher ratio of 0.31 than PAL Holdings with a 0.14. In general, higher
equity ratios are typically favorable for companies. This is usually the case for several reasons.
Higher investment levels by shareholders shows potential shareholders that the company is
worth investing in since so many investors are willing to finance the company. A higher ratio also
shows potential creditors that the company is more sustainable and less risky to lend future
loans.
Profitability Ratio
Profitability is the ability of a business to earn profit for its owners. While liquidity ratios
and solvency ratios are relationships that explain the financial position of a business profitability
ratios are relationships that explain the financial performance of a business.
a) Profit Margin
Net profit margin is the most basic profitability ratio that measures the percentage of net
income of an entity to its net sales. It represents the proportion of sales that is left over
after all relevant expenses have been adjusted.
Cebu Pacific has a positive 0.01 profit margin while PAL Holdings has a -0.05 margin
due to its net loss during the year. While companies in some industries are able to
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generate high net profit margin, other industries offer very narrow margins. It depends on
the extent of competition, elasticity of demand, production differentiation, etc. of the
relevant product or market.
b) Return on Assets
Return on assets is the ratio of annual net income to average total assets of a business
during a financial year. It measures efficiency of the business in using its assets to
generate net income.
Cebu Pacific has a positive 0.04 ROA while PAL has a -0.04 ROA due to its net loss. It
only makes sense that a higher ratio is more favorable to investors because it shows
that the company is more effectively managing its assets to produce greater amounts of
net income. A positive ROA ratio usually indicates an upward profit trend as well.
c) Return on Equity
The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm
to generate profits from its shareholders investments in the company. In other words, the
return on equity ratio shows how much profit each peso of common stockholders' equity
generates.
Cebu Pacific has a relatively high ROE of 0.86 than the PALs -0.26. Investors want to
see a high return on equity ratio because this indicates that the company is using its
investors' funds effectively.
Interest Rate Coverage Ratio
The times interest earned ratio, sometimes called the interest coverage ratio, is a
coverage ratio that measures the proportionate amount of income that can be used to cover
interest expenses in the future.
Cebu Pacific once again has the advantage here because of its higher 1.12 ratio
compared to PALs ratio of -1.77. Creditors would favor a company with much higher times
interest ratio because it shows the company can afford to pay its interest payments when they
come due. Higher ratios are less risky while lower ratios indicate credit risk.

V. CONCLUSION

It is to be concluded for this study that the quantitative information derived from the
computation of ratios based on the companies financial statements shows that during the year
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2013, Cebu Pacific Air Inc. had a better financial position and was more financially healthy than
PAL Holdings Inc. since the latter has been experiencing huge financial losses during the past
years.
However, it would be very difficult to make a decision about the firms performance and
measurement tools used, because formulas and functions are applied to attain a specific
requirement of the firm as the part of the firms financial strategy, and because qualitative
information must also be considered.

CITATION

http://accountingexplained.com/financial/ratios/
http://accountlearning.blogspot.com/2010/02/importance-and-advantages-of-ratio.html
http://investopedia.com
http://www.stockopedia.com
http://www.myaccountingcourse.com/financial-ratios

ANNEX

A. Independent Auditors Report for Cebu Air, Inc.

B. Cebu Air, Inc. and Subsidiaries Consolidated Financial Statements
C. Independent Auditors Report for PAL Holdings, Inc.
D. PAL Holdings, Inc. and Subsidiaries Consolidated Financial Statements

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