CAPA Aviation Outlook: Southeast Asia LCCs Still Dominate As Flag Carriers Restructure


Southeast Asia is a market of both challenges and promise. 2015 will mark the second consecutive year of slower growth and potentially the second consecutive year when most airlines ended in the red. But improving market conditions, lower fuel prices and restructuring efforts should at least reduce the losses/migrate to profit and allow new growth.

The region has emerged over the past decade as one of the world’s fastest growing emerging markets, capturing the attention of global suppliers. The rapid growth has primarily been driven by fast expansion of LCCs – both independent groups and subsidiaries of full service groups. Meanwhile, flag carrier growth has stagnated.

LCC capacity in Southeast Asia has increased eight-fold while Full Service Carriers only expanded by 45%

LCC capacity in Southeast Asia has increased eight-fold over the last 10 years, from about 25 million seats in 2004 to nearly 200 million in 2014. FSC capacity in the same period has increased by approximately 45%, or less than 5% per annum, from about 180 million seats in 2004 to 260 million seats in 2014.

A large portion of the FSC capacity gains in Southeast Asia have come from Gulf carriers, so, on top of their strategies for dealing with LCC competition, it is hardly surprising that several flag carriers in the region are now in restructuring mode.

All but one or two of Southeast Asia’s flag carriers were unprofitable in 2014 and will likely remain in the red in 2015. Of the four main flag carriers, three have newly appointed CEOs.

Malaysia Airlines, and Thai Airways in particular, face monumental challenges as they try to right the ship and chart a sustainable future. Both are expected to cut their long-haul networks at some point during 2015 and start to focus more on Asia-Pacific while relying on partners to provide global coverage. Garuda Indonesia and Philippine Airlines have also taken a step back from previous ambitions to pursue dramatic but risky expansion in Europe and are now focusing more on partnerships to cover long-haul markets. Even Singapore Airlines, which has barely managed to remain in the black, is not pursuing full service long-haul expansion and instead is focusing on increasing its presence in Asia-Pacific using both its full service and low-cost brands.

These are all sensible strategies given the rapid growth in Asia. But competition within the region will inevitably continue to intensify, putting further pressure on yields and profitability. 

LCCs already account for almost 60% of seat capacity within Southeast Asia

Moreover, they are rapidly making inroads in the medium-haul market, which will inevitably put further pressure on the legacy operators. Following the early 2015 launch of NokScoot there will be six medium/long-haul LCCs based in five Southeast Asian markets. The rest of the world only has four long-haul low-cost operators, two of which also serve Southeast Asia.

As of 1-Jan-2015, LCCs accounted for only 37 – or about 10% – of the 375 widebody aircraft in service at Southeast Asian carriers. But this figure is expected to increase by at least 10 aircraft per annum over the next several years. Meanwhile, the full service widebody fleet will see only modest growth as most orders in this sector are for replacements. The relatively limited widebody growth planned by full service carriers will also mainly be used to expand in medium-haul routes to North Asia and Australia – the same markets targeted by the fast-expanding medium/long-haul LCCs.

There will also be further capacity growth in the short-haul market as 1200 of the 1600 aircraft on order by Southeast Asian airlines are narrowbody jets. The current narrowbody jet fleet in the region consists of less than 900 aircraft, including about half at LCCs.

At the end of 2014, Southeast’s Asia overall LCC fleet stood at about 540 aircraft (including turboprops, narrowbodies and widebodies). This represents growth of about 60 aircraft, or 12% compared to the beginning of 2014. While still double digits, there was a significant slowdown compared to 2013, when the fleet grew by about 20%.

As of 1-Jan-2015, there were 22 LCCs based in Southeast Asia

Many of these are part of wider groups, including eight within the AirAsia or AirAsia X Groups and four within the Lion Group. Six of the 22 LCCs are affiliated with full-service groups (Citilink under Garuda; Jetstar Asia under Qantas; Jetstar Pacific under Qantas and Vietnam Airlines; Nok under Thai Airways; and Scoot and Tigerair under SIA;). But these LCCs only account for 86 aircraft, or 16% of the total fleet.

Two LCCs launched in Southeast Asia in 2014 – Thai AirAsia X (Jun-2014) and Indonesia AirAsia X (Dec-2014). Two more LCCs are planning to launch in early 2015, Thai VietJet Air and NokScoot, growing the field to 24 carriers. But the market could also see further consolidation. Tigerair Mandala suspended operations in 2014 while Tigerair Philippines transitioned from a Tigerair affiliate to a 100% owned subsidiary of Cebu Pacific.

LCC capacity growth also slowed significantly in 2014. Total LCC seats in the Southeast Asia market (to, from and within the region) increased by 30% in 2013, according to OAG data. In 2014, the rate of growth slowed to 13%. 

The slower LCC growth is by no means a result of more aggressive expansion from full service carriers. FSC capacity in the Southeast Asia market was up by only 3% in 2014, matching the 3% increase in 2013.

LCCs, including full-service airline group budget airline subsidiaries, are still driving most of the growth in Southeast Asia. This will continue through 2015 as the bottom end of the market is where most of the growth opportunities lie given the region’s fast expanding middle class and first time flyer population.

The slowdown in the growth rate over the last year can be viewed as a temporary hiccup. Market conditions were not favourable in 2014 and should improve in 2015.

Thailand was particularly set back by a prolonged period of political instability

Thailand is Southeast Asia’s largest international market and second largest domestic market. The region’s largest market overall, Indonesia, was impacted by the rapid depreciation of the rupiah, weaker economic growth and political instability ahead of the Jul-2014 presidential election. The MH370 and MH17 incidents contributed to a weaker demand environment in Malaysia.

As a hub for the region, Singapore was impacted by all these factors, leading to passenger growth of less than 2%. All the major Southeast Asian markets also experienced a sharp reduction in Chinese visitors, an important and what had been the fast growing source market for the region’s tourism sector.

Several of the main players in the region – both LCC and FSC – responded to the unfavourable market conditions by slowing expansion through a combination of delivery deferrals, subleases or aircraft sales and reduced utilisation rates. Initially the region’s LCC fleet was expected to grow in 2014 by about 100 aircraft or 25%. In the end only slightly more than half of these aircraft were added.

LCC fleet growth will again be relatively modest in 2015

Several airlines have again deferred aircraft or suspended expansion. AirAsia is planning to grow its A320 fleet by only five aircraft in 2015 after deferring or selling 24 of its original 29 deliveries. Tigerair and Jetstar Asia have suspended expansion until at least 2016. Cebu Pacific, Citilink and Nok expansion will be modest – five additional aircraft for each carrier.

Only the Lion and VietJet groups for now do not show any signs of slowing down. Smaller but ambitious VietJet plans to add 12 aircraft in 2015 for an expected total of 32 as it closes the gap with larger rivals.

Lion is aiming to take a staggering 60 aircraft in 2015 – but it has allocated a significant chunk to full service subsidiary Batik Air and could also potentially use its leasing subsidiary Transportation Partners to place several aircraft outside the region.

Another year of relatively modest growth will give the market a chance to catch up and finally absorb the huge influx of capacity that was added in 2013 and the first part of 2014. As the region’s largest countries stabilise and demand recovers, the overcapacity concerns that have dogged Southeast Asia for the last 18 months should start to ease.

Yields could return to 2013 levels, providing a boost – along with the sharp reduction in fuel prices  – to the bottom line. A majority of Southeast Asian airlines were in the red in 2014, including both LCCs and FSCs.

But some airlines could respond aggressively to improving market conditions and the drop in fuel prices. Capacity expansion could be re-accelerated and strategic expansion could again be pursued in some markets at the expense of yields.   

Over the medium term, it is inevitable higher growth rates will eventually resume, given the huge order book. Southeast Asia is the only region in the world that has as many orders as active aircraft. 

Overall, Southeast Asia accounts for about 15% of the global order book although the region only accounts for 5% to 6% of the world’s current fleet. There are some legitimate questions surrounding the long-term viability of the region’s order book, particularly the LCC portion, as Southeast Asian FSCs only account for about 400 of the 1600 aircraft order with a majority being replacements. 

The return of 20% to 30% annual LCC growth rates, which some of the more ambitious players seem to be banking on, may not be realistic. The market is also now much more mature than it was a decade ago, when LCCs first entered the scene. LCCs now account for almost 60% of seat capacity within the region and more than 30% between Southeast Asia and Australia, which has quickly become the world’s most penetrated medium-haul market.

Southeast Asia should still be able to support further rapid growth

Despite the probably temporary slowdown, Southeast Asia should still achieve significan growth, given its relatively strong economic position and demographics. The fundamentals of the market remain favorable, particularly at the bottom end as the continued rise of discretionary incomes means more of the region’s 600 million people can afford to fly – and those that are already flying can afford to fly more often.

2015 could bring some more adjustments to the delivery stream along with consolidation. Capacity cuts by some of the flag carriers are also likely as they finally start to make some of the difficult decisions they have avoided for years.

Overall the short-medium term outlook for Southeast Asia remains relatively bright. For the medium-longer term there is the promise of continuing intensive competition – between a mix of major airlines, their affiliates and the major independent, newer airlines. This will be good news for consumers, for airports and for some of the successful airlines.

Source: CAPA, Centre for Aviation

http://centreforaviation.com/analysis/capa-aviation-outlook-2015-se-asia—lccs-still-dominate-the-agenda-as-flag-carriers-restructure-209083

CAPA Analysis: Southeast Asia LCC Fleet To Grow By Only 13% in 2015


Southeast Asia recorded a significant slowdown in LCC growth in 2014 as several airlines adjusted to challenging market conditions. The region’s LCC fleet expanded by 13% aircraft compared to about 20% growth in 2013.

A similar fleet growth rate of approximately 13% is likely in 2015, following further revisions to fleet plans in response to overcapacity, which has impacted most Southeast Asian short-haul markets since 2H2013. AirAsia in particular has slowed expansion and will take only five A320s in 2015 – although rival Lion Group is again not showing any signs of slowing and plans to take about 50 aircraft for the second consecutive year with over half ending up in the dynamic Southeast Asian LCC sector.

Growth rates could pick up again in 2016 or 2017 if market conditions improve. Higher growth rates ultimately will be required for Southeast Asia’s huge LCC order book, which consists of nearly 1,200 aircraft, to remain intact. The potentially huge impact of lower fuel prices could also reshape strategies in 2015, as some LCCs record a 20% reduction in total costs.

Southest Asia’s 21 LCCs ended 2014 with 536 aircraft (includes turboprops, narrowbodies and widebodies), according to the CAPA Fleet Database. This represents growth of about 60 aircraft or 13% compared to the beginning of 2014.

While still double digits there was a significant slowdown compared to 2013, when the fleet grew by about 20%.

Southeast Asia low-cost carriers ranked by fleet size: Jan-2015 vs Jan-2014 and Jan-2013

Rank Carrier Country  LCC Group  Fleet at

1-Jan-2015

Fleet at

1-Jan-2014  

Fleet at

1-Jan-2013

1 JT Lion Air Indonesia Lion 103 94 91
2 AK AirAsia Malaysia AirAsia 80 72 64
3 5J Cebu Pacific Air Philippines Cebu Pacific 48 48 41
4 FD Thai AirAsia Thailand AirAsia 40 35 27
5 QG Citilink Indonesia (Garuda) 32 24 21
6 IW Wings Air Indonesia Lion 30 27 27
7 QZ Indonesia AirAsia Indonesia AirAsia 29 30 22
8 TR Tigerair Singapore Tigerair 24 25 21
9 DD Nok Air Thailand Nok 24 17 15
10 D7 AirAsia X Malaysia AirAsia X 23 18 11
11 OD Malindo Air Malaysia Lion 19 11 0
12 3K Jetstar Asia* Vietnam Jetstar 18 19 18
13 VJ VietJet Air Vietnam VietJet 18 10 5
14 Z2 Zest AirAsia Philippines AirAsia# 14 15 15
15 SL Thai Lion Air Thailand Lion 9 2 0
16 TZ Scoot Singapore (Singapore Airlines) 6 6 4
17 BL Jetstar Pacific Vietnam Jetstar 8 5 5
18 DG Tigerair Philippines Philippines Cebu Pacific^ 4 5 5
19 Y5 Golden Myanmar Airlines Myanmar Golden Myanmar 3 2 0
20 PQ Philippines AirAsia Philippines AirAsia 2 2 2
21  XJ  Thai AirAsia X Thailand AirAsia X 2 0 0
N/A RI Tigerair Mandala Indonesia Tigerair 0 9 5
 TOTAL     536 476 399

Slower 2014 fleet growth driven by adjustments at AirAsia and Tigerair

At the beginning of 2014 the Southeast Asian LCC fleet was poised to grow in 2014 by slightly over 100 aircraft or about 22% to 580 aircraft. But the AirAsia and Tigerair groups made major adjustments in 1H2014, deferring A320 deliveries and subleasing or selling aircraft.

The Tigerair Group fleet in Southeast Asia dropped by 15 aircraft in 2014 as it closed its Indonesian affiliate and sold its Philippine affiliate to Cebu Pacific. As Tigerair suspended expansion in its original home market due to overcapacity in Singapore the aircraft that were overseas became excess and were grounded before eventually being subleased. (Note: Tigerair Australia and Tigerair Taiwan are excluded as this report focuses on the Southeast Asian market.)

The fleet at Cebu Pacific Air, which is the third largest LCC in Southeast Asia, ended flat at 48 aircraft. Cebu Pacific was initially planning to expand its fleet by four aircraft in 2015 but it ended up moving four of its aircraft to its new subsidiary, Tigerair Philippines. The five aircraft that were originally at Tigerair Philippines (which is expected to be rebranded in 2015) were returned to the Tigerair Group.

The AirAsia/AirAsia X fleet in Southeast Asia grew by about 15 aircraft as it deferred seven of the A320 deliveries which were originally slated for 2014. AirAsia was also hoping to sell 12 A320s during 2014 but ultimately was only able to sell one aircraft. (Note: AirAsia India, which began 2014 with three A320s, is also excluded as this report focuses on the Southeast Asian market.)

The Lion Group accounted for 27 or nearly half of the 60 aircraft added to the Southeast Asian LCC fleet in 2014. These figures exclude its full-service subsidiary Batik, which added more aircraft in 2014 than any of Lion Group’s LCC subsidiaries or affiliates, and aircraft placed outside the group by Transportation Partners.

Lion Air of Indonesia

Southeast Asian LCC fleet to grow by 13% in 2015, led by Lion Air

Lion Group carriers will again account for nearly half of the aircraft added to the Southeast Asian LCC fleet in 2015. The Lion Group plans to add about 50 aircraft in 2015 with an estimated 30 aircraft allocated to its four LCCs. The other 20 aircraft are projected to be used to further grow Batik or be leased out by Transportation Partners.

Overall CAPA projects Southeast Asia’s LCC fleet to grow by 13% for the second consecutive year in 2015 to slightly over 600 aircraft. Most of the figures below reflect current fleet plans while the figures for the Lion Group affiliates are estimates based on various sources. These are all net figures, taking into account retirements such as the six 777-200s at Scoot and the two A340-300s and one A330-200 at AirAsia X.

Projected fleet growth for Southeast Asian LCCs in 2015

Rank Carrier Country  LCC Group   Projected fleet

 for 31-Dec-2015

Fleet as of

1-Jan-2015

1 JT Lion Air Indonesia Lion  110 103
2 AK AirAsia Malaysia AirAsia  80 80
3 5J Cebu Pacific Air Philippines Cebu Pacific  52 48
4 FD Thai AirAsia Thailand AirAsia  45 40
5 QG Citilink Indonesia (Garuda)  37 32
6 IW Wings Air Indonesia Lion  33 30
7 QZ Indonesia AirAsia Indonesia AirAsia  29 29
8 OD Malindo Air Malaysia Lion  29 19
9 VJ VietJet Air Vietnam VietJet  28 18
10 DD Nok Air Thailand Nok  28 24
11 TR Tigerair Singapore Tigerair  24 24
12 D7 AirAsia X Malaysia AirAsia X  21 23
15 SL Thai Lion Air Thailand Lion  19 9
13 3K Jetstar Asia Vietnam Jetstar  18 18
14 PQ/

Z2

Philippines AirAsia/

Zest AirAsia*

Philippines AirAsia  14 16
16 BL Jetstar Pacific Vietnam Jetstar  10 8
17 TZ Scoot Singapore (Singapore Airlines)  9 6
18 DG Tigerair Philippines Philippines Cebu Pacific  5 4
19 XJ  Thai AirAsia X Thailand AirAsia X  5 2
20 Y5 Golden Myanmar Airlines Myanmar Golden Myanmar  3 3
21  Indonesia AirAsia X Indonesia AirAsia X  3 0
22  Thai VietJet Air Thailand VietJet  3 0
23  NokScoot Thailand Nok  3 0
 TOTAL      608 536

The upcoming launch of Indonesia AirAsia X, NokScoot and Thai VietJet will grow the total number of LCCs in Southeast Asia to 24. But the potential merger of Zest AirAsia with Philippines AirAsia (PAA) could reduce the total to 23.

The AirAsia Group launched PAA in 2012 and acquired Zest in early 2013. Zest adopted the AirAsia brand in late 2013 but the two carriers have since been operating separately. The AirAsia Group plans to seek approval in 2015 to remove the Zest brand and combine its two Philippine affiliates.

In 2014 the number of Southeast Asian LCCs stayed flat at 21 as Thai AirAsia X launched but Tigerair Mandala suspended operations. (Note: Indonesia AirAsia X, NokScoot and Thai VietJet all received their first aircraft in late 2014 but these aircraft are not included in the year-end 2014 tally as these carriers have not yet launched scheduled services and have so far only operated charter flights. These initial aircraft will be placed into scheduled services over the next few months and the fleets will subsequently grow as more aircraft are delivered.

The relatively modest fleet growth for 2015 comes after several airlines have again deferred deliveries or suspended expansion. AirAsia is planning to take only five A320s in 2015 after deferring or selling 24 of its original 29 deliveries.

AirAsia X also has deferred two A330-300s, giving it six deliveries. AirAsia X is also returning its two A340-300s and one A330-200 in 2015, resulting in a net gain at the long-haul low-cost group of only three aircraft.

Both of Singapore’s short-haul LCCs, Tigerair and Jetstar Asia, have suspended fleet expansion until at least 2016. Cebu Pacific, Citilink and Nok expansion will be relatively modest – four to five additional aircraft for each carrier.

Lion and VietJet continue to pursue rapid expansion

Only the Lion and VietJet groups for now do not show any signs of slowing down. VietJet plans to add another 10 aircraft in Vietnam and also launch its first joint venture, Thai VietJet, which plans to begin operating scheduled services in Mar-2015.

As CAPA highlighted on 20-Jan-2015, VietJet has already surpassed Tigerair and Jetstar Asia to become the eighth largest LCC in Southeast Asia based on current capacity. VietJet will surpass likely Indonesia AirAsia and potentially Nok in 2015.

Southeast Asia’s top 10 LCCs ranked by seat capacity: 19-Jan-2015 to 25-Jan-2015

Rank Airline Total Seats
1 JT Lion Air* 1,083,194
2 AK AirAsia 550,260
3 5J Cebu Pacific Air 366,997
4 FD Thai AirAsia 338,040
5 QG Citilink 230,760
6 DD Nok Air 218,204
7 QZ Indonesia AirAsia 198,360
8 VJ VietJet Air 156,060
9 D7 AirAsia X 122,148
10 TR Tigerair 120,240

AirAsia and Lion will remain by a large margin the largest players in the Southeast Asian LCC market, accounting for over half of the total fleet and over half of the total seat capacity. Both AirAsia and Lion are also now among the largest four LCCs in the world – a remarkable accomplishment given that Southeast Asia only accounts for less than 6% of the global fleet.

AirAsia is still larger than Lion based on capacity and fleet size, but only when considering AirAsia and AirAsia X as one entity (technically they are separate groups although they share a brand, website and distribution network). Also Lion is larger when also counting Batik but for this report Batik is excluded because it is positioned as a full-service carrier and has a separate brand.

Global top 10 LCC groups ranked by seat capacity: 19-Jan-2015 to 25-Jan-2015

Rank Airline Group Total Seats
1 Southwest Airlines Co. 3,287,734
2 Ryanair 1,610,280
3 AirAsia/AirAsia X Groups 1,330,774
4 Lion Group 1,243,712
5 Gol 1,160,288
6 EasyJet plc 999,888
7 Jetstar Airways Group 762,646
8 JetBlue Airways 760,878
9 IndiGo 711,720
10 Azul 578,669

Southeast Asian LCC groups fleet size and orders: as of 1-Jan-2015

Rank Airline Group number of

carriers

 number of

aircraft

aircraft

on order*

1 AirAsia/AirAsia X Groups 7 190 415
2 Lion Group 4 163 549
3 Cebu Pacific Group 2 52 40
4 Citilink (Garuda) 1 32 47
5 Jetstar Group 2 26 0
6 Tigerair Group 1 24 37
7 Nok 1 24 17
8 VietJet 1 18 61
9 Scoot 1 6 20
10 Golden Myanmar 1 3 0
TOTAL 21 538 1,186

Philippines-Middle East Market: Philippine Airlines Woos Etihad, Cebu Pacific Expands, Emirates Seeks More Rights


A380

Competition in the PhilippinesMiddle East market continues to intensify as Cebu Pacific expands and Philippine Airlines (PAL) looks to enhance its partnership with Etihad. But Emirates could see its share of the market decline unless it succeeds at securing new traffic rights, an initiative its Philippine competitors seem eager to block.

Cebu Pacific recently launched services to three destinations in the Middle East, giving it a total of four destinations in the region. PAL also now serves four destinations in the Middle East, all of which were launched in 2H2013, and is upgrade Abu Dhabi to daily on 1-Dec-2014.

PAL could potentially add more capacity to Abu Dhabi under an enhanced partnership with Etihad which could see PAL use Etihad to provide offline access to continental Europe and parts of North America. Eithad rival Emirates however could be forced to reduce capacity as a consequence of its recently terminated codeshare with PAL.

This is the second in a series of reports on the dynamic Philippine market.

The first report looked at the fleet challenges facing PAL’s new ownership and executive group and potential changes to the flag carrier’s business plan. This report looks at the intensifying competition between the Philippines and the Middle East and the intriguing options PAL now faces in serving this market.

Philippines-Middle East capacity has doubled in less than two years

The Philippines-Middle East market saw a rapid surge in capacity in 4Q2013 as Philippine carriers added six new routes. Cebu Pacific launched daily service from Manila to Dubai as its first long-haul route in Oct-2014. PAL re-entered the Middle East market after a several year hiatus by launching service to Abu Dhabi in Oct-2014. This was quickly followed by the launch of Dubai and Doha in Nov-2014 and the launch of Dammam and Riyadh in Dec-2014.

When also factoring in Emirates’ late Oct-2014 launch of service from Dubai to Manila alternative airport Clark, total seat capacity in the Philippines-Middle East market roughly doubled in Dec-2014 compared to Dec-2013 levels. This included capacity growth of over 120% in the Philippines-UAE market, roughly 70% in the Philippines-Saudi Arabia market and about 30% in the Philippines-Qatar market.

The expansion was clearly unsustainable and not surprisingly two of the new route were quickly dropped –PAL’s service to Doha in Apr-2014 and Emirates’ service to Clark at the beginning of May-2014

But Cebu’s recent launch of services to Dammam and Riyadh and Kuwait and the upcoming launch of Muscat-Manila by Oman Air add new capacity that offsets the reductions from PAL’s Doha and Emirates’ Clark services. As a result total capacity in the Middle East-Philippines market will be about flat in Dec-2014 compared to Dec-2013 at approximately 40,000 weekly one-way seats. Again this represents a doubling of capacity compared to the roughly 20,000 weekly one-way non-stop seats back in Dec-2012.

The UAE is the largest Middle East destination from the Philippines and accounts for slightly over half of the 80,000 weekly return seats between the Middle East and the Philippines. The UAE is now the fifth largest international destination from the Philippines overall after South Korea, Hong Kong, Singapore and Japan.

 

Rank Airport Total Seats
1 DXB Dubai International Airport 27,482
2 AUH Abu Dhabi International Airport 15,204
3 RUH Riyadh King Khaled International Airport 10,628
4 DOH Doha Hamad International Airport 9,410
5 DMM Dammam King Fahad International Airport 6,454
6 KWI Kuwait International Airport 2,616
7 BAH Bahrain International Airport 2,580
8 JED Jeddah King Abdulaziz International Airport 1,732
9 MCT Muscat Seeb International Airport 1,296

The surge in capacity was not necessarily irrational

The increase in capacity since 4Q2013 has significantly intensified competition and impacted yields and load factors. But the new flights from the Philippine carriers have mainly attracted passengers that were flying between Manila and the Middle East via sixth freedom hubs such as Brunei, Hong Kong and Singapore. There is a huge Filipino worker population throughout the Gulf but the Middle Eastern carriers were only accounting for a relatively small portion of this traffic as they have been using most of their Manila capacity to attract passengers flying beyond their hubs, particularly to Europe.

Cebu Pacific and PAL have also been able to stimulate demand by offering lower fares. Both carriers operate their routes to the Middle East with high density A330-300s, a sensible strategy given it is a price sensitive market with limited premium demand.

Cebu’s A330-300 fleet is configured with 436 seats in all-economy configuration. PAL serves Dubai, Dammam and Riyadh with 414-seat A330-300s in all-economy configuration while Abu Dhabi is served with 368-seat two-class A330-300s that include a business class cabin with 18 lie flat seats. The Dubai route is operated by PAL Express while the group’s other three routes to the Middle East are operated by PAL mainline.

Both of PAL’s A330 configurations include extra legroom seats in the front of the economy cabin that are sold as premium economy. The entire economy cabin features nine seats abreast and wireless IFE, which requires passengers to bring their own tablets, instead of seatback monitors. Almost all full-service carriers operate A330s with an eight seat abreast economy cabin while LCCs generally have nine seats abreast including AirAsia X and Cebu Pacific.

PAL currently operates 13 A330-300s, all of which were delivered since Sep-2013, with two more to be added by the end of 2014. Cebu Pacific currently operates five A330-300s, all of which were delivered since Jun-2013. The carrier is committed to adding a sixth A330-300 in early 2015 and has been looking at leasing two more aircraft which could be delivered by the end of 2015. An eight aircraft A330 fleet at Cebu Pacific would match the number of A330s that PAL has in all-economy configuration.

PAL and PAL Express offer frills on their all-economy A330 flights – including meals, drinks and bags. But their economy seat has a similar spec to Cebu Pacific, which charges for all items.

PAL becomes largest player in UAE-Middle East market

PAL currently offers 19 weekly flights to the Middle East, including seven to Dubai (operated by PAL Express), five to Abu Dhabi, four to Riyadh and three to Dammam. PAL plans to increase Abu Dhabi to daily at the beginning of Dec-2014, giving it 21 weekly flights to the Middle East.

The 21 weekly flights will give PAL and PAL Express almost 8,400 weekly one-way seats to the Middle East, enabling PAL to overtake Emirates as the largest group in the Philippines-Middle East market. Emirates currently operates three daily 777-300ER flights from Dubai to Manila, giving it about a 20% share of total non-stop seat capacity between the Philippines and the Middle East.

Philippines to Middle East non-stop capacity (seats) by group: 1-Dec-2014 to 7-Dec-2014

Rank Airline Total Seats
1 PR/2P Philippine Airlines/PAL Express 16,744
2 EK Emirates 15,582
3 5J Cebu Pacific Air 13,080
4 EY Etihad Airways 10,276
5 SV Saudia 9,526
6 QR Qatar Airways 9,410
7 GF Gulf Air 2,580
8 WY Oman Air 1,296

Cebu Pacific is now the third largest carrier in the market, slightly ahead of Etihad and Qatar. Etihad and Qatar each operate two daily flights to the Philippines.

Saudia, Gulf Air, Kuwait Airways and soon Oman Air also serve the Philippines. Saudia currently operates 11 weekly flights, Gulf Air seven and Kuwait six. Oman is launching three weekly flights to Manila on 2-Dec-2014. (The Kuwait Airways flights all operate via Bangkok and therefore are not included in the chart above.)

Qatar Airways currently serves both Clark and Manila while the other six Middle Eastern carriers that serve the Philippines only serve Manila. Qatar launched services from Doha to Clark in late Oct-2013, but this did not result in any changes to Qatar’s capacity in the Philippines-Middle East market as one of its two daily flights to Manila was dropped when Doha was launched.

Cebu Pacific quickly grows Middle East network

Cebu Pacific now operates 15 weekly flights to the Middle East including seven to Dubai and three each to Riyadh, Kuwait and Dammam. Manila-Kuwait, which is not served non-stop by any other carrier, was launched in early Sep-2014 while Dammam and Riyadh were launched in early Oct-2014.

Cebu’s expansion to Saudi Arabia and Kuwait is part of a dramatic expansion of the LCC’s long-haul network from one to five routes in the span of less than five weeks. Cebu also launched Sydney in early Sep-2014, which is currently served with four weekly flights increasing to five in Dec-2014.

With the exception of Kuwait all five new routes are highly competitive markets that have also seen large increases in capacity from PAL. But Cebu Pacific CEO advisor Garry Kingshott says all the new routes are tracking at or above expectations with Sydney performing particularly well. Mr Kingshott told CAPA TV recently that the performance of the Dubai route, which was shaky in the initial spool up period, also performed well in the northern hemisphere summer 2014 season.

The Middle East remains the main focus of Cebu’s long-haul unit. Australia and Hawaii, which is now expected to be launched in late 2015, are important destinations as it provides some diversification. But the impetus of establishing the long-haul unit was to meet the huge demand of Filipino expatriates working in the Middle East. (Cebu Pacific previously was looking to launch Hawaii in early 2015 but now expects it will take about another year to secure the 180min ETOPS rating required for the Manila-Honolulu route.)

As CAPA has previously suggested, Cebu Pacific is keen to pursue further expansion in the Middle East as early as 2015. While it has looked at several markets including Abu Dhabi, Bahrain, Doha, Oman and Jeddah, the most likely next destination is Sharjah. Cebu Pacific briefly served Sharjah from 1-May-2014 to 20-Jul-2014 during runway construction works in Dubai and was pleased with bookings, including passengers that connected to flights operated by Sharjah-based LCC Air Arabia.

Cebu Pacific is confident of securing more traffic rights to the UAE

Cebu Pacific is seeking seven additional traffic rights for the UAE, which would enable it to launch flights to Sharjah. Cebu Pacific is confident it will receive the rights as seven of the 28 weekly frequencies to the UAE available to Philippine carriers are now unused.

PAL currently holds traffic rights for 14 weekly frequencies while PAL Express and Cebu Pacific each hold seven. PAL is now using only five (soon seven) for Abu Dhabi. It had been using the other seven until the end of Oct-2014 under a controversial codeshare arrangement with Emirates in which Emirates was able to use PAL traffic rights although it was the operating carrier.

Cebu Pacific has been a longstanding critic of Philippine authorities allowing Philippine carrier traffic rights to be used by foreign carriers under the guise of codeshares. Emirates and previously Qatar were seen as essentially trading traffic rights from PAL. In theory PAL had codeshares with both carriers but the codeshares were very limited and it is unusual in the global industry for the traffic rights to be held by the marketing rather than operating carrier.

The PAL-Qatar Airways arrangement ended in Oct-2013, forcing Qatar to move one of its two daily Manila flights to Clark. As Clark is an open skies airport it does not count for entitlements under the bilateral. Qatar has only seven weekly traffic rights to Manila.

End of Emirates-PAL codeshare leaves Emirates seeking more rights

Philippine authorities decided earlier this year to not allow the PAL-Emirates arrangement to be extended beyond Oct-2014. But the PAL-Emirates codeshare would likely have ended anyway due to the partnership PAL forged with Emirates rival Etihad in Jul-2014.

Emirates stopped carrying PAL’s code on Dubai-Manila in late Oct-2014. Emirates for now has been able to maintain its thrice daily service to Manila using seven temporary traffic rights as well as its 14 permanent rights. Emirates continues to include three daily flights in its forward schedules but there is a risk the temporary rights will not be extended beyond an initial one or two months.

The UAE is pushing for new bilateral talks with the Philippines which would potentially give Emirates 21 (or more) permanent rights to Manila. But these talks have been pushed back to 1Q2015 at the earliest. Further delays are possible as Philippine carriers do not see a need for a further expansion of the bilateral agreement with the UAE.

It is clearly in Cebu’s and PAL’s interest for Emirates to be forced to reduce Manila to 14 weekly flights as both operate the Dubai route. Total capacity on the Manila-Dubai route has increased by about 160% since Nov-2012, when there was a total of only two daily non-stop flights in the market (both from Emirates). An overall reduction would benefit both Philippine carriers.

Emirates is unlikely to resume Clark and unable to use A380 to serve Manila

Emirates does have the option of maintaining its total capacity in the Philippine market by moving one of its three daily Manila flights to Clark. But Clark proved to be a difficult market for Emirates in late 2013 and early 2014. Emirates obviously prefers to maintain three daily flights in Manila and ideally it would also gain the flexibility to increase in Manila to four daily flights.

Unfortunately for Emirates it does not have the option of maintaining capacity in the Manila market by switching from three 777-300ER to two A380 flights. The Philippines-UAE bilateral is based on frequencies rather than seats and in theory would allow A380 operations. But Manila Airport has decided it cannot accommodate A380s following a trial with an ad hoc Emirates A380 flight.

Due to the limited separation between the airport’s main runway and a parallel taxiway Manila has determined it would need to shut down a parallel taxiway every time an A380 landed. This is seen as an unacceptable compromise as Manila is a very busy airport. Closing a main taxiway once or twice a day would be an inconvenience for other airlines, particularly the two main Philippine carriers.

PAL could potentially pursue further expansion in Manila-Abu Dhabi market

Emirates’ success at securing more traffic rights to Manila could ultimately hinge on whether Cebu Pacific succeeds at securing the rights that had been used by the now terminated Emirates-PAL codeshare. PAL could end up keeping these rights by adding a third flight in the Philippines-UAE market, which would quickly change Cebu’s position that an expanded bilateral with the UAE is not needed.

PAL could potentially start using the seven unused rights to support a second daily flight to Abu Dhabi as part of an expanded partnership with Etihad. PAL president Jaimie Bautista recently told CAPA that PAL is interested in expanding its codeshare with Etihad to cover destinations in Europe and the US.

The two carriers currently only codeshare on their respective services between Abu Dhabi and Manila as well as domestic connections within the Philippines.

PAL could use Etihad and Etihad Alliance carriers to serve Europe

Abu Dhabi could emerge as a transfer point for continental Europe as PAL’s new ownership and management team is not interested in implementing the business plan of former controlling shareholder San Miguel, which envisioned several new destinations in continental Europe. PAL is instead now focusing on trying to improve its performance on Manila-London Heathrow and using partnerships to cover the rest of Europe.

PAL currently does not have any European codeshare partner. Etihad is a logical partner for PAL in the European market as Abu Dhabi is well connected to Europe. Etihad also has stakes in several European carriers that could also end up as PAL partners.

PAL also does not have any codeshare partners for the US market. PAL is interested in using Etihad to serve offline destinations in the eastern half of the US. A combination of Etihad and other potential new or existing partners, such as All Nippon Airways, could be used by PAL to improve its position in the North American market.

An expanded partnership with Etihad could potentially include Etihad placing its code on PAL-operated international flights beyond Manila. Guam and Honolulu could be two markets Etihad serves via Manila.

With the right connections, an expanded partnership could justify additional flights between the two hubs. Etihad is currently capped at two daily flights but PAL could potentially further increase its capacity to Abu Dhabi to match the two daily fights operated by Etihad.

PAL clearly has sufficient capacity to operate a second daily flight to Abu Dhabi as it is now significantly under-utilising its A330 fleet, as outlined in the first part of this series. In fact PAL could even been attracted to operate A330 flights beyond Abu Dhabi with Etihad’s support, particularly if PAL does not succeed in its current effort to sublease or sell several of its A330s.

PAL will need to move fast on a potential increase on Manila-Abu Dhabi as otherwise the seven weekly traffic rights that it has been using for the Emirates codeshare will be allocated to Cebu Pacific. PAL may not be able to conclude an expanded partnership with Etihad quickly enough, resulting in Cebu receiving the rights.

PAL Express may drop Manila-Dubai

But PAL also has the option of potentially moving its Dubai flight to Abu Dhabi, which would allow PAL to increase Abu Dhabi to double daily while still giving Cebu Pacific the 14 rights it seeks without requiring an expanded bilateral.

PAL Express’ Dubai flight has been highly unprofitable as competition with Cebu Pacific and Emirates has been intense, impacting load factors and yields. PAL’s Abu Dhabi route has been performing better, with the Etihad partnership likely helping.

PAL Express now has two A330s in its otherwise all-narrowbody fleet just for the Dubai route, resulting in a very low average aircraft utilisation rate. It would be sensible for these two aircraft and the route to be operated by PAL, which operates the rest of the group’s A330 fleet. But the traffic rights for Manila-Dubai are currently held by PAL Express.

Shifting the traffic rights now held by PAL Express to PAL would require relinquishing the rights held by PAL Express. This would allow other Philippine carriers, particularly Cebu Pacific, to bid for the rights. PAL may not want to risk losing these rights but as seven other frequency rights are currently available, it probably could be successful at transferring the rights if it makes a move now.

PAL Express giving up its UAE rights would increase the pool of available UAE rights to 14. With 14 rights available, Cebu Pacific would likely receive seven and PAL the other seven, enabling PAL to either take over PAL Express’ Dubai flight or add a second daily flight to Abu Dhabi.

Philippines-UAE market has become a high stakes chess game

Clearly there is a lot at play – and at stake. The ball is primarily in PAL’s court as it has several options for the Middle East component of its new business plan.

An expanded partnership with Etihad is highly likely as it would be a win-win for both carriers. Manila is Etihad’s second largest international market after Bangkok. As an added incentive Etihad would be able to potentially increase its share of the Philippine market at the expense of Emirates.

The best scenario for Emirates – and Filipino consumers – would be an expansion of the UAE-Philippines bilateral. But that is far from guaranteed, as the Philippines will also take into account what it sees as being in the best interests of its airlines.

Qatar so far has been unable to get the seven additional traffic rights that would allow it to revert back to its original double daily Manila schedule. It will be fascinating to see if Emirates can avoid a similar fate.

Source: http://centreforaviation.com/analysis/philippines-middle-east-market-pal-woos-etihad-cebu-pacific-expands–emirates-seeks-more-rights-195300

 

 

 

 

 

Cebu Pacific: CAPA Asia Pacific LCC of the Year for 2014


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The CAPA Asia Pacific LCC of the Year for 2014 is Cebu Pacific, accepted by Garry Kingshott, Chief Executive Advisor.

“Our LCC of the Year has endured a tumultuous period in its home market, but maintained its focus and reported its highest ever quarterly profit in 2Q2014 and had the highest operating profit margin in the Asian airline industry”, said Mr Harbison. “The carrier has launched a long-haul operation which strategically improves its long-term position by opening up new markets, while quickly responding to challenges in this segment. Cebu Pacific has been active in the M&A market, enabling further gains in market share and key slots at its hub, and it was able to quickly turn-around the new subsidiary. The carrier has steadily grown its domestic market share, which now exceeds a powerful 60% and forged an alliance with another LCC group, recognising the need to adapt as competition intensifies”.

80% of Southeast Asian Carriers Are Unprofitable In 1H, 2014


 

Rank Airline Country

1H2014

operating result

1H2013

operating result

1. Malaysia AirAsia Malaysia $122m profit $151m profit
2. Cebu Pacific Philippines $67m profit $69m profit
3. Philippine Airlines Philippines $13m profit $49m loss
4. SilkAir Singapore $7m profit $31m profit
5. Thai AirAsia Thailand Break Even $55m profit
6. Nok Air Thailand $4m loss $24m profit
7. Singapore Airlines Singapore $12m loss $16m profit
8. Philippines AirAsia Philippines $12m loss $14m loss
9. Citilink Indonesia $18m loss $41m loss
10. SIA Cargo Singapore $38m loss $64m loss
11. Tigerair Singapore Singapore $39m loss $22m profit
12. Malaysia Airlines* Malaysia $41m loss $84m profit
13. AirAsia X Malaysia $52m loss $15m profit
14. Indonesia AirAsia Indonesia $56m loss $14m profit
15. Tigerair Mandala# Indonesia $102m loss $37m loss
16. Garuda Indonesia Indonesia $234m loss $44m profit
17. Thai Airways* Thailand $265m loss $52m profit
TOTAL $664m loss $372m profit

 

Southeast Asian airlines have faced extremely challenging market conditions in 2014, resulting in an alarming amount of red ink. Of the 17 airlines in Southeast Asia that report earnings only four posted operating profits in 1H2014 compared to 12 in 1H2013.

Among the nearly 50 airlines based in Southeast Asia, excluding small regional and charter operators, approximately 80% were not profitable in 1H2014. Losses are likely to continue through at least 3Q2014 but there are indications market conditions will start to improve by 4Q2014 or 1H2015.

Several Southeast Asian airlines have responded to overcapacity by and cutting capacity or slowing their expansion. Markets that have seen political and economic instability are also starting to stabilise.

Southeast Asian market has suffered from overcapacity since 2H2013

The Southeast Asian airline sector has generally been profitable in recent years, particularly the larger airlines or groups which account for the majority of capacity. Rapid economic growth and an expanding middle class have provided an ideal foundation for passenger growth and – until this year – profitability.

The same favourable market fundamentals are still there but conditions started deteriorating in 2H2013, when already rapid capacity growth accelerated while demand in some countries started to slow. Most markets in Southeast Asia have since suffered from overcapacity. The overcapacity problems peaked in 1H2014 as new aircraft continued to be added at a rapid pace.

Meanwhile political instability in Thailand, which is Southeast Asia’s second largest market (based on system-wide capacity), impacted demand throughout 1H2014. The rapid depreciation of the Indonesian rupiah also has impacted demand and profitability in the region’s largest market, Indonesia since 2H2013. Meanwhile the MH370 incident has impacted inbound visitor traffic throughout Southeast Asia from the region’s largest and fastest growing source market, China, since late 1Q2014.

Southeast Asia’s publicly traded airlines incurred operating losses of over USD600 million in 1H2014

Only four of the 17 publicly traded airlines or subsidiaries in Southeast Asia were profitable on an operating basis in 1H2014 – Cebu Pacific, Malaysia AirAsia, Philippine Airlines (PAL) and SilkAir. One of the other 13 airlines was break even – Thai AirAsia – while 12 reported operating losses. Of these 13, nine had been profitable in 1H2013.

Combined this sampling of 17 airlines incurred operating losses of about USD660 million in 1H2014 compared to an operating profit of about USD370 million in 1H2013. As a result there was a year over year swing of over USD1 billion at the operating or EBIT level.

(This sample of 17 airlines includes subsidiaries or affiliates that report figures along with their parent company results. But it excludes subsidiaries of publicly traded groups that do not report results such as Scoot and Firefly. Jetstar Asia, which is part of Australia’s Qantas Group, is excluded because only full year data is provided.)

Philippines proves to be the exception

The fact two of the four publicly traded profitable airlines from Southeast Asia in 1H2014 hail from the Philippines would surprise most industry observers. But the Philippine market experienced significant capacity adjustments and consolidation in 2013 and 1Q2014, putting it in a much better position in 2Q2014 compared to the other Southeast Asian markets.

2Q2014 marked a turning point with Cebu Pacific recording a record profit and Philippine Airlines swinging back in the black. Both had operating and net profits which were enough to easily offset the net losses from 1Q2014.

Only Philippine AirAsia, which in 2013 merged with Zest Airways (now Zest AirAsia), remains unprofitable. But Philippine AirAsia was able to narrow its losses in 1H2014 and is confident it can turn the corner – and start to benefit from the favourable market conditions in the Philippines – in 2H2014.

Southeast Asia’s smaller airlines continue to struggle

There are no publicly traded airlines in Southeast Asia’s other five markets – Vietnam, Myanmar, Cambodia, Brunei and Laos. Of these markets only Vietnam is of a significant size.

Vietnam’s international market is only slightly smaller than the Philippine market but is about three times larger than the Cambodian international market and about four times larger than the Myanmar international market. (Vietnam also has the region’s fifth largest domestic market, following Indonesia, Malaysia, Thailand and the Philippines.)

None of the main airlines in the four smaller markets of Myanmar, Cambodia, Brunei and Laos are believed to be profitable. Airlines from these markets have faced challenging conditions for some time as they lack the scale to effectively compete against larger Southeast Asian carriers in their small international markets. These four countries combined account for less than 5% of the total international capacity in Southeast Asia.

Conditions in these smaller markets have generally become even more difficult over the last year as competition has further intensified. Of these four countries only Myanmar has a sizeable domestic market but has been suffering from overcapacity as a result of an overly crowded playing field featuring eight carriers, several of which have been pursuing rapid expansion.

In Vietnam market conditions are generally more favourable. Demand for both domestic and international services continues to grow rapidly and the market has only three local airlines. One or two Vietnamese airlines were likely profitable on an operating level in 1H2014 – or at least close to break-even.

But CAPA estimates that of the approximately 30 airlines in Southeast Asia that do not report results (excluding small regional operators and charter carriers) only between four and six were profitable in 1H2014. This is an alarmingly small number – although it is only slightly worse than the 4/17 ratio among the publicly traded airlines and subsidiaries which report results.

Overall CAPA estimates about 20% of the 47 airlines based in Southeast Asia, excluding small regional operators and charter carriers, were unprofitable in 1H2014. This is clearly not sustainable.

Can other Southeast Asian markets follow the Philippines lead?

There is a potential silver lining. The Philippines example shows how consolidation and more rational behaviour can improve profitability. Some of the other markets in Southeast Asia also are now starting to see consolidation and more rational behaviour in the form of capacity cuts and slower expansion rates.

The AirAsia and Tigerair groups have both deferred new aircraft deliveries and have been trying in recent months to sell or sublease excess aircraft. SilkAir, Gaurda and Citilink have also slowed fleet expansion. The Lion Air Group has also slightly slowed down expansion by using its leasing subsidiary to start placing aircraft with airlines outside the group that are based in other regions. (However, the Lion Air Group is still adding an alarming two to three aircraft per month in the Southeast Asia market.)

The adjustments made in recent months are now giving the Southeast Asian market an opportunity to start catching up with the overzealous capacity influx from the last year.

The demand environment is also starting to show some signs of improvement, particularly in Thailand. The impending restructurings at two ailing flag carriers, MAS and Thai Airways, should also benefit several of the region’s carriers.

The Southeast Asia market should start seeing some improvement in 2H2014 – but outlook remains challenging

CAPA estimates that the bottom of the current profit/loss cycle in Southeast Asia came in 2Q2014. But the current quarter (3Q2014) will likely see only a very modest improvement. There could be more significant improvements in 4Q2014 and 2015 but a return to profitability is by no means a certainty.

More adjustments will likely be necessary for a full recovery in profitability to prior levels. Deferrals and aircraft sales have so far only been pursued by a few of the region’s airline groups. Consolidation has so far only taken place in the Philippines (with the AirAsia-Zest and Cebu Pacific-Tigerair Philippines deals) and in Indonesia, where there have been three smallish airline casualties so far this year (Tigerair Mandala, Merpati and Sky Aviation).

More consolidation is likely as airlines struggle to cope with the losses incurred so far this year. But the launch of new start-ups and the possible strategic response by some airlines to re-accelerate expansion could jeopardise the hoped for return to more rational capacity levels.

Southeast Asia remains fundamentally a favourable market for airlines, with healthy economic growth and a fast expanding middle class. But competition remains intense. While the steep losses of 1H2014 may not be repeated the overall profitability of the Southeast Asian airline sector will likely remain behind most other regions – including North Asia, Europe and North America – for the foreseeable future.

Source: CAPA