Philippines, Qatar Signed New Air Servives Agreement

Hamad International Airport

MANILA – The Civil Aeronautics Board (CAB) announced Friday that the Philippines and Qatar have signed, on May 28 in Doha, a new Memorandum Of Understanding on Air Services, increasing the maximum number of flights for each country from the current eight flights per week to 14, or an increase of 6 flights per week.

The parties also agreed to accommodate unlimited flights between Doha and other airports in the Phil, except Manila. Previously, the entitlements outside Manila were 14 per week to Clark and 14 per week to Cebu.

CAB Executive Director Carmelo Arcilla said that Qatar Airways is currently flying out of NAIA Terminal 1 eight times a week to Hamad International Airport.

Arcilla said that, as a result of the latest air talk agreement, the last one being held in 2009, Cebu Pacific could expect to start services between Manila and Doha on June 5, 2015.

CAB said that there are about 250,000 OFWs in Qatar.

There are six Middle East carriers that fly out of NAIA, Cebu and Clark: These are Qatar Airways, Saudi Arabia, Gulf Air, Emirates Airlines, Kuwait Airways and Etihad Airways.

Sources from the aviation industry note that Qatar is making this aggressive move, pushing to increase its flights, considering that the demand for air travel between the two countries are currently on the downtrend and that even the Middle East market is weak.

One logical explanation seems to be that Qatar is the sixth largest freedom hub airline that relies on the carriage of traffic between city pairs outside of its territory.


Philippine Air Traffic Hits 38.3M In 2014


MANILA – The country’s air passenger traffic reached 38.3 million in 2014, 610,291 more than the 37.7 million recorded in 2013, the Civil Aeronautics Board (CAB) said.

The 1.6 percent growth came amid the aggressive route expansion of Philippine Airlines (PAL) and Cebu Pacific.

CAB said international passenger traffic increased to nearly 18 million last year, 3.4 percent higher than the 17.3 million in 2013.

Domestic passenger traffic, however, was flat at 20.35 million in 2014 from 20.33 million in 2013.

For international flights, PAL and PAL Express flew a combined 5 million passengers while budget airline Cebu serviced 3.19 million passengers. Both airlines launched new long-haul routes and expanded international routes last year.

For domestic operations, PAL only flew 793,512 passengers, a drop of nearly 70 percent from the 2.58 million it serviced in 2013 as PAL Express took over most of domestic flights.

The volume of passengers carried by PAL Express to domestic destinations jumped 18 percent to 5.13 million last year from 4.35 million in 2013.

Cebu Pacific, on the other hand, flew 11.08 million domestic passengers, 8.2 percent higher than 10.24 million passengers in 2013.

Tiger Airway Philippines, which was recently rebranded to Cebgo, flew 1.3 million passengers, 34.5 percent more than the 969,753 passengers it serviced last year.

Data also show that 34.1 million international and domestic passengers used Ninoy Aquino International Airport (NAIA) last year, 4 percent higher than the 32.8 million in 2013.

Mactan Cebu International Airport Authority (MCIAA), meanwhile, saw a 2 percent decline in volume to 6.84 million last year from 6.99 million in 2013.

Government has been aggressive in pursuing air talks as part of its open skies policy. Air service deals with Singapore, Oman, and Australia were closed this year.

Air talks are set to be held with Mexico, Qatar, Australia, Russia, Turkey, Taiwan and Qatar within the year.

Last year, the Philippines signed air agreements with Ethiopia, South Africa, Macau, Canada, Myanmar, New Zealand, Singapore and France.


Welcome Back KLM?

MANILA, Philippines – KLM Royal Dutch Airlines is bullish on its operations in the Philippines amid the country’s strong economic growth as well as the strong load factor of its flight between Manila and Amsterdam.

Patrick Roux, senior vice president for Asia Pacific of KLM, said in an interview that the airline could revive direct flights between Manila and Amsterdam if market conditions continue to improve in the Philippines.

Roux pointed out that even Air France could revive flights to the Philippines once market conditions improve.

Aside from higher demand, he explained that there is also a need to allow KLM to carry passengers between Manila and Taipei.

“We don’t have the right so far to sell tickets between Manila and Taipei. That is what we would like to have as the next step to secure the operations, but that is not in our hands. It is linked to bilateral agreement between two governments so we are waiting hopefully for good news,” he said.

He explained that favorable response to its request to carry passengers between Manila and Taipei could entice the airline to expand its operations in the country by mounting direct flights between Manila and Amsterdam or the return of Air France to Manila.

Air France – KLM stopped its direct Manila – Amsterdam flights in March 2012 due to the failure of the government to lower or abolish aviation taxes. Instead, passengers from Manila would first fly to Taipei before proceeding to Amsterdam.

Air France and KLM merged in 2004 and now operate the leading long-haul network from Europe. KLM is the only European carrier operating to and from the Philippines for 64 years.

KLM operates seven weekly flights between Manila and Amsterdam via Taipei.

Roux disclosed that the load factor of its Manila to Amsterdam route is well over 90 percent.

KLM Philippines country manager Raymond Reedijk said traffic between Manila and Amsterdam is growing, prompting the airline to use Boeing 777-300 that carry over 100 more passengers.

Source: Lawrence Agcaoili, The Philippine Star

Philippine Airlines Flies to Auckland, New Zealand

Philippine Airlines will launch services to Auckland from Manila later this year.

It will be the first time the airline has ever operated in New Zealand.

Philippine Airlines will operate four A320 services a week from December 1.

The flights will stop over in Cairns and provide competition to Air New Zealand on that route.

Auckland Airport’s general manager aeronautical commercial, Norris Carter, said the airline’s arrival was great news for the New Zealand tourism industry and the economy.

“This new service will see 64,500 seats per year on the Manila to Auckland route, contributing an estimated $41 million per year to the New Zealand economy.”

New Zealand had experienced “solid growth” from the Philippines market in recent years.

The largest market of visitors from the Philippines was travellers coming to New Zealand to visit friends and relatives, followed closely by travellers coming for leisure.

“This new service will provide more options for these visitors when travelling to New Zealand and also for New Zealanders wishing to visit the Philippines.”

The stopover in Cairns would be good news for Kiwis wanting to travel to the northern Queensland city and visitors from there wanting to travel to New Zealand.

The Auckland-Carins route is served by Air New Zealand now, also using an Airbus A320.

Philippine Airlines’ president and chief operating officer, Jaime J. Bautista said the route would stimulate passenger traffic along three travel streams – Manila and Cairns, Manila and Auckland as well as Cairns and Auckland.

“With close to 40,000 Filipinos residing in New Zealand, the new service is their convenient link to their home country.”

The flights are subject to regulatory approval.

The Herald last month reported the service was being looked at closely by the airline which operates a network of services within the Philippines as well throughout Asia, North America, Australia and the Pacific.

It has more than 70 planes including Boeing 777s and Airbus A340s.

House of Travel commercial director Brent Thomas said then the Philippines was growing in popularity as a holiday destination for Kiwis.

Source: Grant Bradley, NZ Herald

Cebu Pacific Sets 2015 Capex at P13.1B


MANILA, Philippines – Cebu Air Inc. (Cebu Pacific) raised its capital expenditure commitments by 12.3 percent for the acquisition of aircraft fleet as part of its massive fleet renewal program.

Cebu Pacific said in a report to the Securities and Exchange Commission that its capital expenditure commitment for the acquisition of aircraft would amount to P13.1 billion this year or P1.44 billion higher compared to P11.66 billion in 2014.

Likewise, the low cost carrier also increased its investment commitments over the next five years by 3.1 percent to P67.23 billion instead of P65.2 billion.

As part of its fleet renewal program, Cebu Pacific is scheduled to take the delivery of seven airbus A320 and 30 A321 neo aircraft between this year and 2021.

As early as 2007, the budget carrier entered into a purchase agreement with Airbus S.A.S covering the purchase of 10 A320 aircraft and the right to purchase five option aircraft. It exercised its option to purchase the five additional aircraft in 2009 and placed an order for five additional option aircraft.

Cebu Pacific exercised its option to purchase five additional option Airbus A320 aircraft in 2010 and entered into a new commitment to purchase two A320 aircraft to be delivered between 2011 and 2014.

Business ( Article MRec ), pagematch: 1, sectionmatch: 1

In 2011, the airline exercised its options for seven A320 to be delivered in 2015 to 2016 and entered in a new commitment to purchase firm orders of 30 new A321 NEO Aircraft and ten addition option orders.

It also entered into an agreement with United Technologies International Corp. Pratt & Whitney Division in 2012 to purchase new PurePower® PW1100G-JM engines for its 30 firm and 10 options A321 NEO aircraft to be delivered beginning 2017.

The airline has signed a forward sale agreement with Las Vegas-based Allegiant Air for the sale of its six Airbus A319 to be delivered until 2016.

Cebu Pacific’s 55-strong fleet is comprised of 10 Airbus A319, 31 Airbus A320, six Airbus A330, and eight ATR 72-500 aircraft.

The airline reported a 1,255 percent jump in net income to P2.22 billion in the first three months of the year from P161.16 million in the same period last year. Revenues increased 20.7 percent to P14.2 billion from P11.76 billion.

Passenger revenues went up by 22.1 percent to P10.81 billion from P8.85 billion as volume of passengers rose 13 percent to 4.3 million compared to 3.8 million while the number of flights increased by 14.3 percent with the arrival of additional aircraft.

During the period, Cebu Pacific said average fares went up 8.1 percent to P2,525 from P2,336.

It also managed to limit the increase in operating expenses to one percent to P11.37 billion in the first three months of the year from P11.25 billion in the same period last year.

Cebu Pacific operates an extensive route network serving 55 domestic routes and 36 international routes with a total of 2,597 scheduled weekly flights.

Source: Lawrence Agcaoili, Philippine Star

CAAP Suspends SEAIR-i, SkyJet Operations

MANILA, PHILIPPINES – Various safety “observations” were cited by the Civil Aviation Authority of the Philippines (CAAP) in suspending the Air Operator Certificate (AOC) of low-cost carrier South East Asian Airlines (SEAIR International Incorporated) and leisure airline Magnum Air (SkyJet) Incorporated effective Monday, May 18.

CAAP ordered both airlines to “cease ALL its operations effective immediately.”

The agency took SEAIR-i to task for its management structure, flight safety program, and its rules on accident prevention. For SkyJet, the reasons cited for the suspension of its operations were its flight data monitoring, as well as quality assurance airworthiness and maintenance control.

An AOR is granted to an aircraft operator allowing it to conduct charter (low or high capacity), flight training, and regular public transport purposes, among other related activities.

The observations were in reference to the report by the European Union (EU) Assessment Team that visited the country in April and looked into the safety situation in a number of Philippine airlines such as Air Asia Zest, PAL Express (formerly Air Philippines Corporation), Island Aviation Incorporated, and Tiger Airways Philippines .

In a letter addressed to Avelino Zapanta of SEAIR-i and Captain Teodoro Fojas of Magnum Air, CAAP informed the two airline officials of the suspension order of its AOCs due to various safety shortcomings on the rules and standards prescribed under the Philippine Civil Aviation Regulations (PCAR).

The letter, signed May 15 by Director General William K Hotchkiss lll, said the results of the assessment visit and investigation made by him and his office require that the safety concerns be immediately corrected by the two companies.

The suspension order takes effect Monday. CAAP said the suspension remains until SEAIR-i and Magnum Air have complied with the aviation safety standards set by CAAP.

SEAIR-i flies from Manila to Basco, Batanes; Caticlan; and Tablas Island, Romblon. Magnum Air flies from Manila to Basco and Busuanga, Palawan.

The European Union (EU) air safety assessment team is expected to announce by July if Philippine low-cost carriers will be allowed to fly to Europe. (READ: PH carriers to know by July if they can fly to Europe)


CAPA Analysis: Philippine Airlines’ Outlook Improves Following 2014 & 1Q2015 Profits


Philippine Airlines was back in the black in 2014 and 1Q2015

Publicly listed PAL Holdings reported in mid-Apr-2015 a net profit of PHP127 million (USD3 million) for 2014 compared to a loss of PHP12.9 billion (USD305 million) for the 12 months ending 31-Dec-2013. In early May-2015 PAL Holdings reported a net profit of PHP 3.711 billion (USD84 million) for 1Q2015 compared to a net loss of PHP1.069 billion (USD24 million) in 1Q2015. (PAL financial statements for the first quarter typically are published only a few weeks after financial statements for the full year as the full year figures are not released until they go through a comprehensive annual audit.)

PAL Holdings includes Philippine Airlines and non-airline subsidiaries but does not include PAL Express. The Lucio Tan Group owns a 100% stake in PAL Express and about an 89% stake in PAL Holdings with the remaining 11% held by individual investors under the public float.

The small annual profit for the year ending 31-Dec-2014 represents the first time PAL Holdings/Philippine Airlines was in the black since the year ending 31-Mar-2011 (referred to as FY2010 in the chart below). PAL in 2013 changed the end of its financial year from March to December.

PAL Holdings turned an operating profit of PHP2.373 billion (USD54 million) in 2014 compared to an operating loss of PHP6.455 (USD152 million) for 2013. The company reported an operating profit of PHP3.158 billion (USD71 million) in 1Q2015 compared to an operating loss of PHP801 million (USD18 million) in 1Q2014.

PAL was profitable in 2Q2014 and 4Q2014 while it incurred losses in 1Q2014 and 3Q2014. The second and fourth quarters are typically by far the most profitable quarters for Philippine carriers. PAL’s 1Q2015 profit of about USD84 million is therefore particularly impressive and leaves the PAL Group well placed to remain in the black throughout 2015 and improve on the modest full-year profit figure from 2014.

PAL annual revenues surpass PHP100 billion

PAL Holdings also reported record annual revenues for the 12 months ending 31-Dec-2014 of PHP100.954 billion (USD2.278 billion). This represents a 36% increase compared to the PHP74.295 billion (USD1.754 billion) in revenues generated for the 12 months ending 31-Dec-2013. For 1Q2015 PAL holdings reported a 29% increase in revenues to PHP27.858 billion (USD628 million).

The revenue growth for 2014 and 1Q2015 is partly driven by expansion of PAL’s international network. But the growth is also somewhat misleading as a large portion of the revenue gains booked in 2014 and 1Q2015 were generated from PAL’s interline/codeshare arrangement with PAL Express.

PAL currently sells all PAL Express-operated flights. Before it rebranded and transitioned to a full-service regional model in 2013, PAL Express was known as AirPhil Express and operated independently as an LCC.

As CAPA highlighted in a Nov-2014 analysis report, the PAL Express domestic operation was profitable in 2014 but this was offset by large losses on its only international route, ManilaDubai. PAL Express handed the Dubai route and its small fleet of single-class A330-300s to PAL mainline at the end of Mar-2015 and is now focusing entirely on the Philippine domestic market. As a result PAL Express should be able to generate a profit in 2015.

PAL is still underutilising its A330 fleet

are in single-class 414-seat configuration and seven aircraft which are in two-class 368-seat configuration. Eliminating the sub-fleet at PAL Express is a sensible move as operating only two widebody aircraft and one long-haul route was inefficient.

PAL has been seeking to reduce the size of its A330 fleet through subleases since Lucio Tan took back control in late Oct-2014. As CAPA highlighted in early Nov-2014, PAL’s new management team determined the carrier only needed seven or eight of the 15 A330-300s. All 15 of these A330s were ordered by the previous management team and ownership group and delivered within a remarkably quick span of 15 months between Sep-2013 and Nov-2014.

PAL has since been able to improve utilisation of the A330 fleet by starting to use the type on the Honolulu, Melbourne and Sydney routes. But based on current schedules in OAG, PAL is still only utilising its A330 fleet an average of about nine hours per day.

In addition to Honolulu and Australia, PAL currently operates A330s on all of its Middle East routes – Abu Dhabi, Dammam, Dubai and Riyadh. According to OAG data, PAL also currently deploys the A330 on some regional international flights to Bangkok, Hong Kong and Tokyo and some domestic flights to Cebu and General Santos.

All four of the Middle East routes as well as London were launched in 2H2013 as part of an ambitious international network expansion initiative under San Miguel. Not surprisingly PAL’s international operation was highly unprofitable as these routes spooled up, particularly as the expansion occurred during a period of intensifying competition in the Philippines-Middle East and Philippines-Europe markets.

PAL’s international operation achieves significant improvements

Conditions in the Philippine international market improved significantly in 4Q2014 and 1Q2015. At the same time PAL’s new international routes have started to mature as it has now been over one year since they were launched. But most significantly PAL has benefitted from the sudden reduction in fuel prices, which has caused several international routes to swing from losses to profits.

London, which was launched in early Nov-2013 and incurred large losses in its first year of operation, has particularly benefitted from lower fuel prices as the route is operated with inefficient A340s. PAL also has benefitted from securing Russia overflight permissions in late Oct-2014. In its first year of operating to London PAL had to use a longer less efficient route that avoided Russian aerospace.

PAL’s London performance should improve even further from 2Q2015 as in late Mar-2015 it was finally able to reschedule its London flights. PAL had to make do initially with an afternoon arrival slot in Heathrow, which required an early morning departure from Manila, making it impossible to pursue connecting passengers. Its London flight now departs Manila in the early afternoon and lands in London in the evening.

PAL still has too many widebody aircraft

PAL wisely slowed down the rate of international growth in 2014, dropping plans to add new long-haul destinations in Australia, continental Europe and the Middle East. PAL also plans to pursue only modest international growth in 2015.

New York, Port Moresby in Papua New Guinea and Quanzhou in China are the only planned new international destinations for 2015. New York was launched in Mar-2015 as a tag to some of PAL’s A340-operated Vancouver flights while Port Moresby and Quanzhou are slated to be launched in Jun-2015 with A320s. All the new routes are relatively low risk as Port Moresby and Quanzhou are low frequency short-haul routes while New York is being operated as an additional sector from Vancouver with pick-up rights.

The decision to slow down the expansion of the long-haul network however has led to an excessively large widebody fleet. In addition to the under-utilised 15 A330s PAL under San Miguel acquired six ex-Iberia A340-300s which delivered in 2013 and early 2014. These aircraft are now used on the Manila-London and Manila-Vancouver-New York routes as well as on some flights from Manila to Los Angeles and San Francisco. Most of PAL’s Los Angeles and San Francisco flights as well as the Manila-Vancouver-Toronto route is operated with its much more efficient fleet of six 777-300ERs.

PAL should be able to further improve its international performance if it is able to succeed at reducing the size of its A330 fleet. PAL’s new management team continues to seek out potential sublease deals although finding airlines has been challenging, particularly for the single-class aircraft which PAL is more keen to remove.

The new PAL management team is also keen replace the A340-300s as soon as possible, although the reduction in fuel prices perhaps reduces the urgency to acquire new widebody aircraft.

PAL’s A321 deferrals solves the narrowbody aircraft issue

Lucio Tan also inherited an overly ambitious narrowbody fleet plan when it took back control of PAL. But PAL’s new management team was able to quickly address this issue by deferring 10 A321 deliveries that were initially scheduled for 2015 and 2016 as part of a deal with Airbus that was forged in Jan-2015. This reduced PAL’s A321 delivery commitments for each year from 10 to a more manageable five aircraft.

PAL initially placed orders in 2012 for 44 A321s, including 34 A321ceos and 10 A321neos. In Mar-2014 PAL exercised eight A321neo options as part of a deal with Airbus which reduced its A330-300 commitments from 20 to 15. As part of the Jan-2015 deal forged by the new management team, 10 A321ceos were deferred from 2015 and 2016 to 2020 to 2024 and converted into A321neos. In addition PAL ordered two more A321neos. This lifted PAL’s A321neo commitments from 18 to 30 aircraft while reducing its A321ceo commitments from 34 to 24 aircraft.

The PAL Group’s narrowbody jet fleet currently consists of 18 A321s and 22 older A320s, according to the CAPA Fleet Database. The A320s are spread across PAL mainline and PAL Express with some of the PAL Express-operated aircraft in single-class configuration. All the PAL mainline A320s and A321s are in two-class configuration.

The 18 A321s are all from the order placed in 2012 and include two aircraft which were delivered in 1Q2015 and two aircraft which have been delivered so far in 2Q2015. The fifth and final A321 delivery for 2015 is expected by the end of 2Q2015, giving the group a narrowbody fleet of 41 aircraft consisting of 19 A321s and 22 A320s. The Group also has a fleet of nine Bombardier Dash 8 turboprops which are operated by PAL Express in regional markets, primarily to airports which cannot accommodate jets.

PAL Group fleet: as of 15-May-2015

The original plan for 10 A321 deliveries in 2015 was overambitious and would have likely resulted in overcapacity in the Philippine domestic and/or regional international markets. Five aircraft is more manageable as it results in relatively modest growth for PAL in the domestic and regional international markets.

PAL does not have any A320s leases expiring in 2015 but does have some leases expiring in 2016, which should give the PAL Group the flexibility of keeping its narrowbody fleet at about the 41 aircraft level in 2016 as the final five A320ceos are delivered. The group will also have the flexibility of maintaining the current size of its narrowbody fleet over the long term as the 30 A321neos that are now on order can be used to replace the existing A320ceos and eventually the A321ceos.

PAL resumes domestic expansion after ceding market share

PAL has use the additional narrowbody capacity from the recent deliveries to expand in the regional international and domestic markets. In the domestic market the PAL Group has resumed six point to point domestic routes from Cebu.

PAL Express launched at the end of Mar-2015 services from Cebu to Bacolod, Butuan, Cagayan de Oro, Davao, Iloilo and Tacloban. All these routes were dropped by the PAL Group in early 2014 and have since been only served by Cebu Pacific and – in the case of Cagayan de Oro and Davao – by AirAsia.

PAL Express also has re-launched at the end of Mar-2015 point to point domestic services form Iloilo to General Santos and from Davao to Zamboanga. Cebu Pacific was similarly left as the only operator on these routes after PAL pulled out in early 2014.

Under San Miguel, the PAL Group implemented a new domestic strategy which resulted in a large drop in domestic capacity as the group suspended point to point routes bypassing Manila and transferred almost all domestic trunk routes from PAL mainline to PAL Express. Prior to San Miguel taking control in 2012, PAL and PAL Express (then known as AirPhil) both operated domestic trunk routes with PAL focusing on the top end of the market and AirPhil the bottom end.

In 2014 PAL mainline carried slightly less than 800,000 domestic passengers, representing a 69% reduction compared to 2013, according to Philippine CAB data. This was partially offset by an 18% increase in domestic passenger traffic at PAL Express to 5.1 million passengers. The PAL Group overall saw its domestic market share slip from 33% in 2013 to 29% in 2014.

Philippines domestic market share (% of passengers carried) by carrier: 2014 vs 2013



As outlined in Part 3 in this series of reports, the PAL Group has steadily seen its market share erode over the last 10 years as Cebu Pacific and other LCCs have rapidly expanded. In 2005 the PAL Group captured 63% of the Philippine domestic market. Cebu Pacific overtook the PAL Group as the largest domestic player in the Philippine market in 2009 and has since continued to widen the gap.

The domestic expansion planned by the PAL Group for 2015 could result in the group regaining domestic market share and narrowing the gap with market leader Cebu Pacific, but only very slightly. The expansion is still very modest relatively to the capacity cuts implemented by the PAL Group in recent years. The capacity added by the PAL Group and similar domestic expansion by other carriers should also be absorbable given the fact that the overall Philippine domestic market saw flat domestic passenger growth in both 2013 and 2014.

PAL outlook improves as market conditions in the Philippines becomes more favourable

All Philippine carriers have benefitted from consolidation in the domestic market, driven by the capacity reductions at the PAL Group, the Philippines AirAsia-Zest partnership (which should eventually result in the two carriers merging) and Cebu Pacific’s acquisition of Tigerair Philippines, which was recently rebranded as Cebgo. The consolidation has resulted in only three players competing on domestic trunk routes compared to as many as six in 2012.

Domestic yields and load factors improved significantly across all Philippine carriers in 2014, boosting profitability of the Philippine airline sector. As CAPA previously highlighted, the Philippines was the only market in Southeast Asia which saw an improvement in profitability in 2014.

More improvements are likely in 2015, leading to potentially even higher profits in the Philippine domestic market. The Philippine regional international market could however be more challenging in 2015 due to capacity growth in most North Asia markets. New bilateral agreements have created opportunities for expansion in the Philippines-Hong Kong and Philippines-Taiwan markets while Philippines-Japan continues to see rapid growth after initially opening up in late 2013.

But inbound demand from North Asia is also growing. And Philippine carriers are well positioned to pursue some strategic growth in the increasingly competitive Philippines-North Asia market given the lower oil prices and the profits they are able to generate in domestic and other international markets.

Overall the PAL Group along with its two main local competitors – Philippines AirAsia/Zest and Cebu Pacific/Cebgo – are well positioned to continue posting improvements to their bottom lines. Market conditions are favourable across most sectors with capacity and demand relatively well balanced.

PAL has been able to avert overcapacity by making adjustments to its fleet plan. A few more tweaks, particularly with the A330 fleet, would be ideal and would further brighten the group’s outlook. But even if it continues to struggle to find homes for its excess A330s PAL’s turnaround should be sustainable for at least the short-term.


Tigerair is now Cebgo

THE airline formerly known as Tigerair Philippines is signalling a change in fortunes and direction through its rebrand to Cebgo, the budget carrier announced yesterday.

Acquired in its entirety by Cebu Pacific Air (CEB) in March 2014, Tigerair Philippines will now operate as Cebgo and continue to fly from Ninoy Aquino International Airport Terminal 4 and Clark International Airport to its 16 destinations.

Cebgo’s new identity includes a new logo in CEB colours to reflect its ties to parent company CEB, and flight and ground crew will don Cebgo uniforms in the near future.

“The new Cebgo brand clearly identifies us as part of the CEB group, and streamlines our operations further. Cebgo will continue to leverage on CEB’s distribution channels and network, and work together to serve more guests,” said Michael Ivan Shau, Cebgo president and CEO, in a press release.

Following CEB’s acquisition of the LCC in March last year, Cebgo has trimmed its financial losses and introduced 10 new services.

The airline has 55 aircraft in its fleet and is scheduled to take delivery of seven more Airbus A320s and 30 Airbus A321neo aircraft by 2021.

Gov’t Dangles Perks For Airlines In Mactan-Cebu Int’l Airport

MANILA, Philippines – The government is set to offer perks to airlines operating at Mactan-Cebu International Airport as part of efforts to decongest the Ninoy Aquino International Airport (NAIA).

Nigel Paul Villarete, general manager of the Mactan-Cebu International Airport Authority (MCIAA), said in a notice that it would conduct a public hearing on May 20 on the proposed incentive plan for landing and take-off fees at the country’s second busiest airport.

“MCIAA is cordially inviting the public, especially the air carrier concerned, to attend and participate in the public hearing to express their views on the matter,” Villarete said in the notice.

He also encouraged shareholders to submit position papers on the proposed incentives before or during the scheduled public hearing.

Under the proposal, MCIAA would extend rebates between 30 percent and 75 percent on landing and take-off charges for long-haul international routes as well as between 30 percent and 65 percent for short to medium-haul routes depending on the number of flights per week.

Likewise, MCIAA would grant rebates between 25 percent and 65 percent of landing and take-off fees for domestic routes depending on the frequency of flights per week.

There are currently 13 airlines led by Philippine Airlines Inc. (PAL) and budget airline Cebu Air Inc. (Cebu Pacific) operating at the Mactan Cebu International Airport.

Data showed an average of 154 commercial daily aircraft operation (landing and take-offs) at the Mactan Cebu International Airport.

MCIAA data showed that the number of domestic and international aircraft that landed and took off from the gateway declined by 13 percent to 56,281 last year from 64.945.

The volume of domestic and international passengers retreated 2.1 percent to 6.84 million last year from 6.99 million in 2013. The number of domestic passengers fell 3.9 percent to 5.16 million from 5.37 million while the number of international passengers decreased by 3.7 percent to 1.68 million from 1.62 million.

However, international passenger traffic grew by an average of 17 percent per year while domestic passenger traffic rose by an annual average of seven percent over the last 24 years.

Source: Lawrence Agcaoili, Philippine Star

CAPA: Philippines AirAsia/Zest AirAsia Rallies As It Prepares For IPO, But Challenges Remain

AirAsia is optimistic its Philippine operation has turned the corner after a challenging initial three years. Philippines AirAsia has been highly unprofitable since its 2012 launch while Zest also has remained loss-making since AirAsia acquired a stake in the carrier in 2013.

AirAsia has restructured its Philippine operation over the last year, making several network adjustments while cutting overall capacity and reducing the size of its Philippine-based fleet. Costs have been reduced and unit revenues have improved through a combination of load factor and yieldimprovements.

But AirAsia still faces challenges in the Philippines market which will have to be overcome for its Philippine operation to become profitable on a sustainable basis and for IPO ambitions to become realistic. AirAsia is planning further expansion at Kalibo, a gateway for the popular tourist island ofBoracay where demand has been growing rapidly. The performance of its Kalibo operation could be impacted by the upcoming completion of a runway extension and airport upgrade project at Caticlan, a smaller airport which is much closer to Boracay.

AirAsia’s Philippine JV has had a rough initial three years

The AirAsia Group launched Philippines AirAsia (PAA) in late Mar-2012. PAA was a problematic franchise from the beginning as it faced lengthy start-up delays which forced its first A320 to remain grounded for seven months before the airline finally secured approval to commence operations.

PAA was highly unprofitable in its one year as an independent carrier, accumulating losses of about USD30 million from 1-Apr-2012 to 30-Mar-2013, which equated to approximately USD70 per passenger carried. PAA also incurred losses of about USD9 million during the longer than anticipated pre-launch phase in 2H2011 and 1Q2012.

As CAPA previously reviewed, PAA struggled to gain traction in a crowded and highly competitive domestic market which at the time had six competitors on trunk routes. PAA’s average seat load factor was only 56% in 2012.

Yields were also unsustainably low while PAA’s costs were relatively high as it failed to achieve economy of scale. The PAA fleet never expanded beyond the initial two aircraft as the AirAsia Group was reluctant to allocate more aircraft to the affiliate, given its initial challenges.

The Zest acquisition improves the outlook but the merger process has been very slow

PAA tried to improving its position by forging a partnership with Zest Air in Mar-2013, or just one year after it launched operations. The initial deal included PAA, which is 40% owned by the AirAsia Group, taking a 49% stake in Zest Air, with the expectation the airlines would eventually merge.

Zest was a much more established and larger carrier, having served the Philippine market for two decades (originally as Asian Spirit). But Zest was also struggling and losing market share. The PAA-Zest deal kickstarted much needed consolidation in the Philippine market and improved the long-term outlook for both carriers – and the AirAsia Group – in the Philippine market.

But the process of bringing the two airlines together has been extremely slow due mainly to the several layers of approvals required in the Philippines. PAA and Zest continue to operate under their own AOCs although the AirAsia Group has been seeking approval to transition the two affiliates to a single operation. Zest’s original owner, the Yao Group, still currently owns a majority 51% share but is expected to sell part or all of its stake to PAA.

Zest was able to adopt the AirAsia brand in late 2013, resulting in a quasi-merger. All Zest flights have since been sold alongside PAA-operated flights on the AirAsia website and other AirAsia distribution channels.

AirAsia’s passenger numbers in the Philippines have dropped

The AirAsia Group also began including Zest figures under PAA in May-2013. Zest and PAA combined incurred a loss of about USD22 million in 2014. AirAsia Group reported a loss in the Philippines of about USD29 million in 2013, when market conditions in the Philippines were more challenging. (The combined losses of PAA and Zest were higher in 2013 as the USD29 million figure included Zest for only part of the year.)

PAA and Zest combined carried 3 million passengers in 2014 with an average seat load factor of 70%, according to AirAsia Group financial reports. The AirAsia Group stated its Philippine affiliates carried 2.2 million passengers in 2013 with an average load factor of only 63%. But in reality passenger traffic for the two carriers shrank slightly in 2014 as the 2.2 million figure for 2013 only includes Zest for part of the year while the 2014 figure of 3 million includes Zest for the full year.

The passenger traffic reported for 2H2014 compared to 2H2013 is more indicative as Zest figures are included in both sets of data, providing a like for like comparison. For 3Q2014 AirAsia reported a 15% drop in passenger numbers for its Philippine affiliates to 618,000. In 4Q2014 the drop in passenger traffic accelerated to 24% as 594,000 passengers were carried.

Based on Philippine CAB data, Zest carried 2.6 million passengers in 2013 (1.989 million domestic and 617,000 international) while PAA carried 372,000 (157,000 domestic and 215,000 international). In 2012, the last year full year both carriers operated independently, Zest transported 2.4 million passengers (2.061 domestic and 324,000 international) while PAA carried 270,000 (159,000 international and 111,000 domestic). Note that the AirAsia Group reported 311,000 passengers for PAA in 2012 but counts all revenue passengers including no-shows while the CAB excludes no-shows as it only counts passengers that boarded.

Full year 2014 data is not yet available as the CAB has not yet reported international figures for 2014. But Zest’s domestic traffic dropped by 15% in 2014 to 1.7 million, according to Philippine CAB data.

Zest’s share of the Philippine domestic market has been declining

Zest domestic traffic has dropped steadily since reaching a high of 2.2 million in 2011. At that point Zest captured an 11.5% share of the domestic market. In 2014 Zest’s domestic share was only 8.4%.

Zest domestic annual passenger traffic and market share: 2008 to 2014

As CAPA highlighted in the last instalment in this series of reports, the AirAsia Group’s share of the Philippine domestic market dropped in 2014 to only 9.8%. In addition to the 8.4% share for Zest this includes a 1.4% share for PAA.

Zest has cut domestic capacity significantly since it essentially merged with PAA in 2013. After the deal was completed Zest quickly pulled out of regional markets as it grounded its fleet of Xian MA60 turboprops. The AirAsia Group was keen to phase out the turboprop operation as it adheres to a strict single-type model with all its affiliates operating all-A320 fleets.

In 2014 Zest continued to reduce domestic capacity as its fleet of A320 family aircraft reduced from 15 to 13 aircraft. The AirAsia Group ended 2014 with only 15 aircraft in operation in the Philippines, including 13 A320s at Zest and two A320s at PAA. The group reported a 32% reduction in seat capacity for its Philippine affiliates for 4Q2014 as three aircraft were removed from service.

The AirAsia Group stated in its 4Q2014 results presentation that the group’s Philippine-based fleet will shrink to only 14 aircraft by the end of 2015. But capacity could increase as PAA and Zest have been improving aircraft utilisation rates, which had been below LCCnorms. Higher average utilisation rates are one of several initiatives identified by the group as part of an initiative to reduce unit costs.

AirAsia sees encouraging cost and revenue trends with its Philippine operation

The AirAsia Group reported a 24% reduction in CASK for its Philippine operation in 4Q2014. The group is expecting a further reduction in unit costs in 2015 as a cost optimisation project continues to be implemented.

The group also stated that its Philippine affiliates started recording unit passenger revenue and RASK growth in 4Q2014. Exact yield figures were not provided but PAA/Zest did report an 8ppt improvement in seat load factor for 4Q2014 to 72%. The AirAsia Group also stated in its 4Q2014 results presentation that RASK at its Philippine affiliates was up 30% in Jan-2015 while load factor was up 12ppts, giving it the confidence that the turnaround around is nearly complete.

The AirAsia Group’s Philippine affiliates likely remained in the red in 1Q2015 but are expected to be profitable in 2Q2015. This would mark the first profitable quarter for AirAsia in the Philippines.

While a profit for 2Q2015 would be meaningful, the second quarter is typically by far the strongest quarter in the Philippine market. Most of the profits generated by Cebu Pacific and PAL in 2014 were booked during the second quarter.

AirAsia will need to show its operation is profitable for the full year before any turnaround is deemed complete. The group’s Philippine affiliates have so far accrued losses totalling about MYR260 million (USD72 million based on the current exchange rate).

Quarterly net losses (in MYR millions) reported by AirAsia Group for PAA*

Network restructuring improves AirAsia’s position in the Philippine market

AirAsia has clearly benefited from improved market conditions in the Philippines. The two largest carriers in the Philippines, Cebu Pacific and Philippine Airlines (PAL), both posted significant improvements to their bottom line in 2014.

But restructuring initiatives also has been a contributor to the improvement at PAA and Zest. Cost reductions and network changes in particular has put AirAsia in a better position in the Philippine market.

PAA and Zest have suspended several routes. The network changes began in 2013 as PAA dropped its base at Manila alternative airport Clark to focus on Manila International, where PAA was able to expand using slots from new sister carrier Zest.

More changes were implemented in 2014 as AirAsia increased focus on the international market. Several new routes were launched 2014 and 1H2015 while others were suspended.

PAA and Zest combined currently operate 11 domestic and 9 international routes, according toOAG data. This includes nine international and eight domestic routes at Zest and three domestic routes at PAA.

Zest international routes ranked by seat capacity: 4-May-2015 to 10-May-2015

The above chart excludes Manila-Hong Kong, which Zest plans to launch on 8-May-2015 with four weekly flights. Hong Kong, which is made possible by the recent extension of the Philippines-Hong Kong air services agreement, will be Zest’s seventh international destination after Seoul (ICN), Kuala Lumpur (KUL), Kota Kinabalu (BKI), Shanghai (PVG), Busan (PUS) and Macau (MFM).

Seoul, Zest’s largest international destination, is currently served from Manila (MNL), Cebu (CEB) and Kalibo (KLO). Zest also now serves Kota Kinabalu from both Manila and Cebu, having added Cebu-Kota Kinabalu in late Mar-2015. Busan and Shanghai are only served from Kalibo while Kuala Lumpur and Macau are only served from Manila.

Domestically AirAsia operates six routes from Manila and two routes from Cebu. All three of PAA’s domestic routes are also served by Zest.

Zest domestic routes ranked by seat capacity: 4-May-2015 to 10-May-2015

PAA domestic routes ranked by seat capacity: 4-May-2015 to 10-May-2015

PAA and Zest currently provide about 91,000 weekly seats, according to CAPA and OAG data. About 22% of this capacity, or 20,000 seats, is in the international market. But the AirAsia Group overall has about 25,000 weekly seats in the Philippine international market when including flights operated by its Malaysia-based subsidiary.

Malaysia AirAsia currently operates three routes to the Philippines including Kuala Lumpur-Kalibo (daily), Kuala Lumpur-Clark (four times per week) and Kuala Lumpur-Cebu (three times per week). Zest does not serve any of these routes but serves Kuala Lumpur from Manila with two daily flights. (PAA served the Kuala Lumpur-Clark route until it dropped its Clark base in 2013.)

AirAsia builds up its international operation at Cebu and Kalibo

Manila continues to be the main hub for Zest and PAA, where the group has been keen to use Zest’s slot allocation fully. But AirAsia has been expanding its international operations from secondary cities in the Philippines, where it sees opportunities to stimulate growth in underserved markets.

For example total AirAsia capacity at Cebu, the second largest city in the Philippines, has increased over the last year by 45%. The AirAsia Group currently has about 30,000 weekly seats at Cebu compared to slightly over 20,000 seats in May-2014, according to CAPA and OAG data. The group now has three domestic and three international routes at Cebu.

AirAsia has said further expansion at Cebu is planned for 2015 including new international routes to Hong Kong, Japan and Singapore. There is plenty of room for the group to grow at Cebu as it currently only has about a 14% share of total seat capacity at Mactan-Cebu International Airport. But AirAsia will have to overcome stiff and intensifying competition as Cebu Pacific and PAL have also been pursuing expansion there.

The AirAsia Group is also planning to pursue further expansion at Kalibo and is looking at potentially operating international routes from emerging Philippine tourist destinations such as Puerto Princesa. AirAsia currently only serves Puerto Princesa, which is located on the island of Palawan, from Manila.

The AirAsia already links Kalibo with four international destinations – Busan, Kuala Lumpur, Seoul and Shanghai. Manila-Kalibo is also the group’s second largest domestic route after Manila-Cebu.

AirAsia currently accounts for a leading 38% share of total seat capacity at Kalibo (includes PAA, Zest and Malaysia AirAsia). Cebu Pacific has about a 35% share (includes Tigerair Philippines) while the Philippine Airlines Group (includes PAL Express) has about a 24% share, according to CAPA and OAG data.

Kalibo capacity share (% of seats) by carrier: 4-May-2015 to 10-May-2015

Kalibo expansion plans may need to reviewed ahead of an IPO

AirAsia is bullish on further growth at Kalibo, which recently completed an expansion project. But the Kalibo market could be impacted by the upcoming completion of an airport expansion project at Caticlan, which is located opposite Boracay. Kalibo is about 70km from Boracay and the journey from the airport to the island typically takes at least two hours compared to less than a half hour for the ferry from Caticlan to Boracay.

Caticlan can only currently accommodate turboprops. But the newly extended runway, which is expected to be open by the end of 2015, will be able to handle narrowbody aircraft. The terminal is also being upgraded to handle international flights.

The anticipated launch of international services at Caticlan could impact AirAsia’s position at Kalibo just as PAA tries to complete a turnaround and pursue an initial public offering (IPO).

PAA has begun preparing for an IPO in 2016. But potential investors will likely prefer to see consistent profitability at AirAsia’s Philippine affiliates and some evidence that the multiple challenges AirAsia has faced since establishing its joint venture in the Philippines have been completely overcome.