CAPA: Cebu Pacific’s Long-Haul Operation. Part 1 The Middle East


Cebu Pacific Air is planning further expansion of its long-haul network in 2015 but, at least for now, has shelved plans for growing its widebody fleet beyond six aircraft. The Philippine LCC is wisely waiting to see how its long-haul operation, which had a load factor of only 53% in 4Q2014, matures before committing to more A330s or new-generation widebody aircraft.

Cebu Pacific took delivery of its sixth A330-300 in Mar-2015. The airline is currently using its widebody fleet to operate only four long-haul routesDubai, Kuwait, Riyadh and Sydney – but the type is also currently being used on three short-haul routes.

Manila-Doha is being launched as Cebu’s fifth long-haul route – and fourth to the Middle East – in Jun-2015. Cebu Pacific is also seeking additional traffic rights to the UAE which would be used to launch services to Sharjah. While the Middle East remains the main focus of Cebu’s long-haul unit, the LCC also aims to begin serving Honolulu by the end of 2015 and is keen to secure more Australia rights to enable the launch of services to Melbourne.

Cebu Pacific’s long-haul operation struggled in 4Q2014 as new routes were launched

Cebu Pacific launched its long-haul unit in 2013, when it took delivery of its first two 436-seat A330-300s and began services services to Dubai. Cebu Pacific did not launch its second long-haul route until Sep-2014, at which point it had a fleet of five A330-300s.

The airline initially focused primarily on using the A330 to increase capacity on domestic and regional international routes. This was a sensible approach given the initial performance on the Manila-Dubai route and the opportunities Cebu Pacific had to up-gauge short-haul flights from A320s to A330s.

Cebu Pacific’s long-haul division began a new chapter in early Sep-2014 as it launched four routes within a span of only five weeks – Dammam, Kuwait, Riyadh and Sydney. Not surprisingly the rapid network expansion proved to be challenging as new long-haul routes typically have a longer spool-up period than short-haul routes. Cebu Pacific also quickly realised Manila-Dammam was a particularly challenging route and decided to suspend Dammam from 30-Mar-2015.

Cebu Pacific reported in its 4Q2014 results presentation an average load factor across its five long-haul routes (including Dubai and the four new routes) of only 53% for 4Q2014. Cebu Pacific had a similar initial experience with the Dubai route after its Oct-2013 launch. Cebu Pacific recorded an initial load factor of only 36% in its first month of operating Manila-Dubai.

Performance on the Dubai route has gradually improved over time. For the full year in 2014 Cebu Pacific’s average load factor on long-haul routes was 61%. This mostly reflects its performance in the Dubai market as the UAE (Dubai or Sharjah, which was served temporarily during runway works at Dubai) accounted for more than 60% of total Cebu Pacific long-haul ASKs for the year.

Cebu Pacific’s long-haul operation incurred over USD20 million in losses in 2014

Cebu Pacific executives said during the carrier’s 4Q2014 results briefing that its long-haul operation incurred a loss of about PHP1 billion (USD23 million) in 2014. This includes continued losses on Manila-Dubai as well as start-up costs for Dammam, Kuwait, Riyadh and Sydney. The profits the A330s generated on short-haul routes, which Cebu Pacific stated were substantial, are not included in the PHP1 billion figure.

Cebu Pacific should continue to see improvements in Dubai and is confident it will also see gradual improvements in 2015 across the three new long-haul routes it has maintained. In the Manila-Dubai market Cebu Pacific should benefit from Emirates‘ reduction at the end of Jan-2015 from three to two daily flights.

Cebu Pacific currently operates one daily flight to Dubai, a schedule it plans to maintain although for some of 2014 it cut back to a less than daily schedule. Sydney, which was launched on 9-Sep-2015 with four weekly frequencies, is currently served with five weekly flights. Kuwait, which was launched on 2-Sep-2015 with three weekly flights, is currently served with four frequencies. Riyadh, which was launched on 1-Oct-2015, is served with three weekly flights. Dammam was also served with three weekly flights during the six months it operated (5-Oct-2014 to 30-Mar-2015).

According to Cebu Pacific’s online booking engine Sydney is being reduced back to four weekly frequencies in Jun-2015 as Cebu Pacific launches Doha, which will be served with two weekly flights from 4-Jun-2015.

Cebu Pacific’s A330 schedule on short-haul routes – which currently includes 17 weekly flights to Davao, four weekly flights to Cebu and one daily flight to Singapore – will remain unchanged in Jun-2015 (based on schedules in OAG).

But Cebu Pacific is planning to start using the A330 on more short-haul routes in 2H2015, which should enable the carrier to boost average aircraft utilization levels. CAPA will examine these plans and the overall use of the A330 fleet in the next installment in this series of reports.

Cebu Pacific sees opportunity in Qatar market

Competing in the Manila-Doha market could be challenging as Qatar has a much smaller community of Filipinos than Saudi Arabia or the UAE and a slightly smaller community than Kuwait. But Cebu Pacific is taking a low risk approach as it is launching Doha with only two weekly flights (all its other long-haul routes have launched with at least three weekly flights).

Cebu Pacific believes Doha is a relatively predictable market that could prove to be more easy to manage in the spool-up phase than its other Middle Eastern routes. Cebu Pacific is offering initial one-way fares including taxes on the Manila-Doha route from PHP3,558 (USD82), which should help stimulate demand among the Filipino expatriate population living in Qatar. Fares on its other three Middle East routes currently start at PHP5,558 (USD126) including taxes. (Checked bags, food and drinks are sold separately as Cebu Pacific follows a pure LCC model.)

PAL’s withdrawal from the Manila-Doha route, which it operated for about six months in late 2013 and early 2014, leaves a potential opening for Cebu Pacific. Qatar Airways also reduced capacity in late 2013 on the Manila-Doha route from two to one daily frequency. Qatar has since operated one daily flight to alternative airport Clark but Manila is generally considered a much more convenient airport for most Filipinos.

The shift of second frequency to Clark was necessary after Qatar ended an unusual codeshare arrangement with PAL, which enabled Qatar to use PAL’s traffic rights for its second Manila frequency although the flight was Qatar-operated. Emirates more recently was similarly forced to cut its third frequency to Manila after the same type of codeshare partnership with PAL ended. Cebu Pacific was a staunch opponent of these arrangements as Gulf rivals were able to use traffic rights intended for Philippine carriers.

Cebu Pacific is targeting a different sector of the Philippines-Middle East market from those of its Gulf competitors although there is obviously some overlap. Cebu Pacific is focusing almost entirely on migrant worker and visiting friends and relatives (VFR) traffic. In deciding in 2012 to establish a long-haul unit Cebu Pacific determined most of this traffic was flying between Manila and the Middle East on one-stop carriers. While Emirates, Etihad and Qatar carry a relatively large volume of Filipino workers based in the Gulf, they focus more on markets beyond their hubs, particularly the Philippines-Europe market.

Kuwait Airways, Oman Air and Saudia also serve Manila. Cebu Pacific competes against Kuwait Airways on the Manila-Kuwait route but Cebu Pacific is the only non-stop operator as Kuwait’s six times per week Manila service operates via Bangkok.

Oman Air launched services to Manila in late 2014, resulting in a new one-stop competitor in the Manila-Middle East markets served by Cebu Pacific. The new route from Oman has been successful but Oman Air is mainly focusing on the local Manila-Oman market and connections to Europe.

Cebu Pacific’s share of capacity in the Philippines-Saudi Arabia market drops to 13%

Saudia serves Manila from Jeddah, Riyadh and Dammam with a total of 12 weekly frequencies, according to current schedules in OAG. Saudia is a tough competitor as it focuses mainly on the local Philippines-Saudi Arabia market. PAL also competes in the Manila-Riyadh market, which it entered in late 2013 and currently serves five times per week.

Cebu Pacific currently accounts for only about 13% of non-stop seat capacity in the Philippines-Saudi Arabia market compared to about 38% for PAL and 49% for Saudia, according to CAPA and OAG data. Cebu Pacific briefly captured over 20% of capacity in this market while it operated to Dammam. Even with Cebu pulling out of Dammam total seat capacity in the Philippines-Saudi Arabia market has more than doubled since late 2013.

Cebu Pacific could bolster its position in the Philippines-Saudi Arabia market if it is able to implement a potential partnership with flynas. The Saudi Arabia-based LCC would give Cebu Pacific an opportunity to sell domestic connections beyond Riyadh, including Dammam.

Short-haul international connections are also possible beyond Riyadh. By using Riyadh to serve offline markets in the Middle East as well as parts of Eastern Europe Cebu Pacific could potentially increase capacity on Riyadh beyond the current three weekly flights.

Cebu Pacific seeks additional traffic rights for the UAE

A potential partnership with flynas as well as UAE-based LCC Air Arabia would enable Cebu Pacific to not rely entirely on the point to point market. While the business case for the Cebu Pacific long-haul unit was always based purely on local traffic the opportunity to provide connections beyond its Middle Eastern gateways should boost load factors and the overall performance of its long-haul operation, particularly during off-peak periods.

Cebu Pacific had a marketing tie-up with Air Arabia during its time serving Sharjah in mid-2014 while there was runway works in Dubai. As CAPA previously outlined, Cebu Pacific has since been keen to launch regular services to Sharjah, which would enable it to forge a more comprehensive and permanent partnership with Air Arabia.

The Sharjah flight would complement and not replace Dubai as Cebu Pacific sees Sharjah as a separate market with strong local demand from Filipinos working in that part of the UAE plus connections on Air Arabia.

Cebu Pacific is now in the process of applying for additional Philippines-UAE traffic rights, which it would use to launch services to Sharjah. The rights should be available as Filipino carriers are currently only using 18 of their 28 available weekly entitlements. This includes 11 weekly flights from the PAL Group and seven for Cebu Pacific. The PAL Group currently operates five weekly flights to Abu Dhabi and six weekly flights to Dubai, according to OAG. The Dubai flight was recently handed from PAL Express to PAL mainline, which already operated the Abu Dhabi route.

But there is no guarantee Cebu Pacific will receive additional traffic rights for the UAE. The PAL Group also is interested in increasing its capacity to the UAE. More flights to Abu Dhabi are likely for PAL given the flag carrier’s recently expanded codeshare partnership with Etihad. Currently Etihad operates two daily flights to Manila and is unable to expand on the route on its own as the UAE carriers are now fully utilising their 28 weekly entitlements (the restrictions are imposed from the Philippine side).

The PAL Group, which launched both Abu Dhabi and Dubai in 2H2013, currently has about a 24% share of non-stop seat capacity between the Philippines and the UAE. Cebu Pacific has a 17% share while Emirates has seen its share of the market drop to about 30%. Etihad also has nearly a 30% share of capacity in the Philippines-UAE market.

Total seat capacity in the Philippines-UAE market is currently up by about 33% compared to Apr-2013 but is down about 23% compared to Apr-2014. The reduction, which was driven mainly by the cut at Emirates, should leave an opening for further expansion by Cebu Pacific and/or PAL.

The Philippines-UAE market could potentially support more capacity, particularly during peak periods. Naturally it took time for the sudden surge in capacity by Filipino carriers from 2H2013 to be absorbed.

Cebu Pacific quickly gains a foothold in the Philippines-Middle East market; but challenges remain

In the broader Philippines-Middle East market, total non-stop seat capacity has increased by about 60% over the past two years. Cebu Pacific will account for about a 19% share of non-stop capacity in this market in Jun-2015, at which point it will be operating four routes to four countries in the region, compared to zero Jun-2013.

Cebu Pacific has a much larger share of the actual market as a majority of passengers carried by the three main Gulf carriers, which still account for about 40% of total capacity, are connecting to flights beyond the Middle East.

Cebu Pacific has been successful at securing a significant share of the Philippines-Middle East market in a relatively short period and has stimulated demand with its low fares. But Cebu Pacific’s operation in the Middle East, which was always the main target for its long-haul unit, has faced challenges and has so far been highly unprofitable.

Cebu Pacific is confident its long-haul operation will broadly break even in 2015. The airline expects an average load factor across its long-haul network in 2015 of more than 70%. Higher yields and lower fuel prices will also help drive the hoped for turnaround.

Cebu Pacific has already noticed a significant improvement on Dubai, Kuwait and Riyadh in 1Q2015. “My sense is we are over the hump with the long-haul operation,” says Cebu Pacific CEO Advisor Garry Kingshott.

The anticipated improved performance of the long-haul operation hinges on a significantly better performance in the Middle East market, which will account for approximately 75% of its long-haul capacity in 2015.

Cebu Pacific could potentially increase capacity to Australia (its only current long-haul destination outside the Middle East) and is planning to launch services to Hawaii, but not until late 2015.

Cebu Pacific is banking on the Middle East as it tries to prove it made the right decision in 2012 in taking the long-haul low-cost plunge. Given the reduction in fuel prices and the fact Cebu Pacific has now had plenty of time to iron out the initial kinks and get accustomed to the intricacies of the Middle East market, 2015 is likely to be a make or break year for the long-haul operation.

Source: CAPA, http://centreforaviation.com

CAPA: Southeast Asia Airlines Endure Rough & Unprofitable 2014; Outlook For 2015 Is Brighter


Of the 18 publicly traded airlines or subsidiaries/affiliates in Southeast Asia which report financial results, five saw a reduction in operating profits in 2014 – Bangkok Airways, Malaysia AirAsia, Singapore Airlines (SIA), SIA regional subsidiary SilkAir and Thai AirAsia. Another four saw their operating losses widen – Indonesia AirAsia, Malaysia Airlines (MAS), Tigerair Singapore and Thai Airways – and three swung from a profit to a loss – Garuda Indonesia, Nok Air and Malaysia AirAsia X.

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The six which improved profitability were Cebu Pacific, Philippine Airlines (PAL), Philippines AirAsia, Tigerair Philippines, Garuda Indonesia budget subsidiary Citilink and SIA Cargo. The latter four remained in the red while Cebu Pacific managed an improvement in profits and PAL was the only airline to swing from a loss to a profit.

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The Philippines was an exception, led by a huge improvement at Philippine Airlines

Four of the six airlines which saw profits improve are based in the Philippines, which bucked the general trend in the region as market conditions improved. The Philippine market benefitted from consolidation and capacity reductions while overcapacity plagued all the other major markets in Southeast Asia.

The consolidation included the early 2014 acquisition by Cebu Pacific of Tigerair Philippines, which Cebu Pacific was able to quickly turn around. Tigerair Philippines incurred a net loss of only USD4 million between 20-Mar-2014, the date the acquisition closed, and 31-Dec-2014. The LCC incurred a loss of about USD54 million in 2013 and a loss of about USD15 million in the first 80 days of 2014, based on figures from the Singapore-based Tigerair Group.

Philippines AirAsia acquired Zest in 2013 and the two carriers are now in the process of merging. The AirAsia Group is confident its Philippine operation can turn the corner in 2015 after narrowing losses in 2014. (Note: Philippines AirAsia financial figures include Zest.)

But by far the biggest improvement in the Philippine market and Southeast Asia overall has come at flag carrier Philippine Airlines. PAL, the last of Southeast Asia’s publicly listed airlines to report results for 2014, recently posted an operating profit of USD7 million for 2014 compared to an operating loss of USD283 in 2013. CAPA will take a detailed look at the Philippine market in an upcoming series of analysis reports, produced for CAPA Members.

Of the five main Southeast Asian markets, only the Philippines managed an improvement in market conditions and profitability in 2014. The airline sectors in Indonesia, Malaysia and Thailand were all unprofitable in 2014 after posting profits in 2013. The Singapore airline sector was profitable in 2014 but only modestly and saw a drop compared to 2013.

Thailand was set back by a prolonged period of political instability, which significantly impacted inbound demand, while Indonesia was impacted by the depreciation of the Indonesian rupiah, weaker economic growth and a presidential election. In Malaysia, the MH370 and MH17 incidents contributed to a weaker demand environment. Singapore saw a slowdown as it relies heavily on all three of these markets as well as China, which saw a large drop in outbound visitor numbers across Southeast Asia.

Asia Airline Sector Operating Profit/Loss Or EBIT (in USD) By Carrier: 2014 vs 2013 (Source: CAPA, http://centreforaviation.com)

Rank Airline  Country             2014

operating result 

         2013

operating result 

1. Malaysia AirAsia Malaysia  $261m profit $293m profit
2. Singapore Airlines Singapore  $166m profit $197m profit
3. Cebu Pacific Philippines  $97m profit $57m profit
4. Bangkok Airways^ Thailand  $49m profit $82m profit
5. SilkAir Singapore  $24m profit $43m profit
6. Thai AirAsia Thailand  $9m profit $74m profit
7. Philippine Airlines Philippines  $7m profit $283m loss
8. Nok Air Thailand  $13m loss $36m profit
9. Citilink Indonesia  $14m loss $60m loss
10. Tigerair Philippines Philippines  $19m loss $54m loss
11. Philippines AirAsia Philippines  $22m loss $29m loss
12. SIA Cargo Singapore  $37m loss $87m loss
13. Indonesia AirAsia Indonesia  $48m loss $12m loss
14. Tigerair Singapore Singapore  $64m loss $6m loss
15. AirAsia X Malaysia  $67m loss $10m profit
16. Malaysia Airlines^ Malaysia  $303m loss* $107m loss*
17. Garuda Indonesia Indonesia  $419m loss $86m profit
18. Thai Airways^ Thailand  $523m loss $95m loss
TOTAL   $916m loss $145m profit

CAPA: What’s In An eponym? Airport Names


According to a list in the online encyclopaedia Wikipedia, there are 317 scheduled commercial airports around the world (out of a total of 4037 according to OAG/ACI [2013]) which are named after a person.

Most often that individual is (by far) a politician, or a religious leader. There is a small but growing number that are named, or more likely have been renamed, after a ‘celebrity,’ such as a musician, actor, artist or sportsperson for example and occasionally an industrialist.

One might assume that there is a commercial motive behind such a decision, at least partially. But there is little in the way of research so far into the quantifiable economic benefit of an airport adopting a celebrity eponym.

The vast majority of these airports are named after political or religious figures, or notable individuals from the fields of science and other disciplines. There are some dangers in taking the political route and even the religious one. While it is extremely unlikely that anyone would seek to name an airport after a tyrant, applying any political eponym to an airport runs the risk of alienating as many people as it encourages to use the facility. This is particularly true in the US, where political support amongst those who care at all is divided almost 50:50 between Republicans and Democrats with hardly any other parties or individuals getting a look in.

Passengers having distaste for a party may not be able to avoid using the named airport but they can minimize their patronage and circumvent the facilities in it.

President Obama will inevitably have an airport named after him – but where?

On the other hand such extreme reactions are rarely to be found where US airports are named after Presidents, who retain a special place in the heart of most American citizens, irrespective of their political doctrine. So there will almost certainly be a Barack H Obama airport one day when his two terms are complete, possibly in Chicago where his political power base is.

That would mean renaming O’Hare airport, which is currently named after a World War 2 flying ace, as Midway simply wouldn’t be ‘important enough,’ and the proposed South Chicago Suburban airport has been earmarked for cargo, which might not be appropriate. Or it could be in Hawaii, where he was born, or Kenya, where his father came from, or even Ireland, as the Irish have long celebrated the rise to power of ‘Barry O’Bama.’ (This was written on St Patrick’s Day and Dublin Airport does not carry anyone’s name right now).

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Obama would be the latest edition to a long list of political airport eponyms that already includes the 41st President George H W Bush (Houston) – not his son George W ‘Dubya’ Bush who has no lasting airport memorial for now at least -; Gerald R Ford (the not so grand Grand Rapids Airport, Michigan); Ronald Reagan (Reagan National Airport, Washington DC); and probably the best known of them all, John F Kennedy (New York). ‘JFK’ actually has two. The J F Kennedy Memorial Airport in Ashland, Wisconsin is also named for the assassinated 35th President.

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The Abraham Lincoln Capital Airport, named after probably the most famous of the US’ historical Presidents and arguably the greatest, can be found at one of the many Springfields (the most popular name for a town or city in the US and where ‘The Simpsons’ live), this one at Springfield, Illinois, where ‘Abe’ lived. In the US at least it is not only large city or hub airports that are named in honour of senior politicians.

There are many politicians immortalised in runway tarmac in the US but Presidential name selections are relatively few and that broadly is the case in most other countries. Canada’s main claim to fame is Montreal’s Pierre Elliot Trudeau International Airport, one that is perhaps not as influential as was the former French-Canadian Prime Minister, who began his political life as a Parliamentary Secretary to Lester B Pearson (who, of course, is immortalized at Toronto’s main airport).

In 2014 MPETIA carried only 14.8 million passengers, a small figure for Canada’s second city and a mere 38% of the total at Toronto Pearson, despite 5.3% annual growth. There is increasing concern amongst the city’s politicians over this poor performance, which is heavily influenced by lower taxes at airports in nearby New York State in the US. Meanwhile no passengers at all now use Montreal’s Mirabel Airport, the 1975 white elephant that was once the world’s largest by size, and which was named after the suburb of that name.

The UK is a country that has usually avoided political name attachments. Most of the main airports in London (Heathrow, Gatwick, Stansted etc) and the regions (Manchester, Birmingham, Glasgow, Edinburgh etc) carry no political appendage. In fact, with little imagination being employed, airports in Britain are or were typically named after the suburb or locality in which they are found (Manchester Ringway, Liverpool Speke, Birmingham Elmdon, Glasgow Abbotsinch, Edinburgh Turnhouse and so on). The main bone of contention is whether or not to describe them as ‘International’ Airport, whether they actually are or not.

This state of affairs is representative of a wider trend in the UK which can best be demonstrated in the example of the legendary 1970s new town of Milton Keynes, about 50 miles (80 km) north of London and now Britain’s fastest growing city and with more finance houses than Zurich. It was named after the villages of Milton and Keynes over which it was built, not the economists Milton Friedman and John Maynard Keynes as is often assumed.

Several airports could have a claim on Sir Winston Churchill

There are the beginnings of an interesting debate in the UK though, over the future naming of Heathrow Airport. In the year of the 50th anniversary of the death of celebrated wartime leader Sir Winston Churchill (who is generally regarded as Britain’s greatest ever citizen), a councillor in Maidenhead, close to Heathrow Airport, has begun a campaign to rename London Heathrow Airport after Churchill. Heathrow Airport has not responded to the suggestion though it is not likely to until the final results of the Airports Commissions on UK runway capacity are delivered early in Jun-2015.

This actually raises an interesting question as to which airport might claim to ‘own’ a politician’s name where several are in the frame. There are two or three others that might well lodge a claim in Churchill’s case, including Manchester, where Churchill entered politics – quite by chance – and subsequently won his first Parliamentary seat (Oldham 1900-1906) and then went on later to represent Manchester North West. Later still he represented two separate constituencies in Essex (closest airports London Stansted and London Southend) and Dundee in Scotland.

Yet, there seems to be no interest shown by Manchester Airports Group, which owns both Manchester and Stansted airports, even in merely examining the case for renaming either airport after a statesman who is almost universally revered (even if such reverence is open to question).

There are several exceptions to this general rule in the UK, where airports have been overtly renamed after ‘celebrities,’ the best known being Liverpool and Belfast City airports, and where attachment to a highly regarded historical figure is – again – under consideration, this time at Birmingham. These exceptions will be examined later.

Briefly, other notable ‘politicians’ (the word is sometimes used loosely here) who have found themselves attached to airports, whether they like it or not (and most are well beyond caring) include:

Napoleon Bonaparte (Ajaccio, Corsica, France);

Alexander the Great (who is immortalised at two airports, in Greece and Macedonia);

David Ben Gurion (Tel Aviv, Israel);

Yasser Arafat (Rafah, Gaza Strip);

Rafic Hariri (Assassinated former Prime Minister of Lebanon: Beirut):

Charles de Gaulle (Paris, France);

Gengis Kahn (Ulan Bator, Mongolia);

Lech Walesa (Gdansk, Poland);

Indira Gandhi (Delhi, India. There are no airports named after Mahatama Gandhi but plenty of other transport facilities in India are);

Benazir Bhutto (Assassinated former Prime Minister of Pakistan: Rawalpindi);

Jomo Kenyatta (Nairobi, Kenya);

Konrad Adenaur (first post-war German Chancellor, Cologne, Germany);

Oliver Tambo (ANC leader: Johannesburg, South Africa);

Adolpho Suarez (Spain’s first democratically elected prime minister after Franco, Madrid – but only from 2014);

Simon Bolivar (Leader of five countries to independence from Spain: twice, at Columbian and Venezuelan airports);

Imam Khomeini (Tehran, Iran);

Vaclav Havel (Prague, Czech Republic).

Additionally, Lee Kuan Yew (Singapore) – a proposal in Apr-2015 to rename Singapore‘s Changi Airport that arose from a public petition and will now be presented to the Government for consideration.

One potential issue that can arise when an airport is named for political reasons is that the politician falls out of favour. That can prompt awkward deliberations as to whether the airport should be renamed.

Baghdad International Airport was previously Saddam International Airport, ironically now a name that suggests, if nothing else, greater national unity than exists at present. Addis Ababa’s Bole International Airport once carried the name of Emperor Haile Selassie, revered by Rastafarians as the returning messiah, but is now recognized by the bland name of a suburb.

South African airports eradicate all apartheid era traces, but no place yet for Mandela

The principal three South African airports dropped their apartheid era names. Johannesburg’s Jan Smuts became O (Oliver) R Tambo; Cape Town’s D F Malan simply reverted to Cape Town and gained ‘International;’ while Durban’s Louis Botha also became Durban International before closing down altogether in 2010 to be turned into a container storage yard and replaced by the green field King Shaka International Airport, named for a 19th century Zulu leader.

Away from the ‘golden triangle’ of the Republic’s three main commercial cities, the name of another apartheid era leader, B J Vorster, who was in power at the time of Nelson Mandela’s imprisonment, was quietly removed from what is now plain Kimberley Airport, at the centre of South Africa’s diamond mining region.

Strangely, perhaps, there is no Nelson Mandela airport yet in South Africa, though there surely will be one day. But there is a Nelson Mandela Airport – at Praia on the island of Santiago, the capital of Cape Verde; a country that prospered from South African Airways flights that landed there to refuel en route Europe and the Americas during the period when they were not permitted to overfly a raft of African states. The naming was not without controversy.

There are few other countries where the march of history is better demonstrated than in South Africa’s renaming of its airports but Bolivia (named after the hitherto-mentioned Simon Bolivar) has a shot at it. No friend to the US during the Eva Morales presidency since 2005, Bolivia renamed El Alto, the world’s highest international airport, from its previous moniker, J F Kennedy (again) but in its defence that was before Morales took office and the name was rarely used in public anyway. Had the Morales government chosen to do it the already tense stand-off between the two countries might have been further heightened.

Simon Bolivar crops up again in Ecuador where another airport named after him at Guayaquil was renamed Jose Joaquin de Olmedo International in honour of a former President, Mayor of Guayaquil and a renowned poet. At least on this occasion there was no obvious political motive. It was merely felt that there were too many Simon Bolivar airports.

Politics most definitely played a part in the Philippines though, where former First Lady Imelda Marcos’ (of the shoes) name was removed from what is now plain Mati Airport and in Taiwan, where Generalissimo Chiang Kai-shek (he of the ‘White Terror’) suffered a similar fate, being erased from the nameplate of what is now Taiwan Taoyuan International Airport.

Royalty ranks higher than religion in airport naming

Aside from politics, the names of religious leaders and of royalty can be found at airports, the latter with much greater frequency. Religious ones include the same Pope (John Paul II) at both of the Krakow, Poland and Ponta Delgada (in the Portuguese Azores) airports. St Paul the Apostle Airport can be found at Ohrid in Macedonia.

There are no other Popes or Apostles that we know of but the beatified Mother Teresa of Calcutta is recognised at Tirana Airport in Albania. While she was of Macedonia origin, her parents were Albanian.

The names of Kings and Queens are attached to five airports, three of them in Saudi Arabia (Abdulaziz/Jeddah, Fahd/Dammam and Khalid/Riyadh), together with the aforementioned King Shaka at Durban, South Africa and (King) Tribhuvan airport in Nepal. There are two Queens (Alia at Amman, Jordan and Beatrix at Oranjestad, Aruba and one Princess (Juliana, at Sint Maarten in the Netherlands Antilles).

Sultans are far more numerous, 11 in total, and all in Malaysia (six) or Indonesia (five). (A number of Indonesian airports are also named after ‘national heroes’).

Renowned aviators do make the list but not as often as might be expected. Lyon’s (France) main airport is named after Antoine de Saint-Exupéry who was an all round polymath: an aristocrat, writer and poet as well as a pioneer of flight. Istanbul’s fast growing second airport carries the name of Sabiha Gökçen, an adopted daughter of Mustafa Kemal Atatürk, founder of the Turkish state, and the first Turkish female combat pilot. The Wright Brothers are recognised at Dayton–Wright Brothers Airport in Dayton, Ohio, USA but it is only a reliever/general aviation facility.

The final ‘category’ so to speak is the most intriguing one and might be referred to as the weird and wacky. They are, though, few and far between. Airports are a serious business. They include another flying ace, Billy Bishop, a Canadian First World War pilot, if only because he turns up twice; once at the Toronto City Airport that has recently changed hands in a sale-and-leaseback deal (an unusual arrangement in the airports business) and secondly at Owen Sound/Billy Bishop Airport, also in the province of Ontario. There are limited commercial flights at the latter but the potential for confusion is evident.

Greece is strong on names of characters from ancient history. The Greek physician Hippocrates is immortalised at the Kos International Airport, the island on which he was born, while the ancient Greek boxer Diagoras of Rhodes is celebrated at the airport of that name on the island of Rhodes. In the UK it still perplexes some people as to why the owners of Doncaster-Sheffield Airport, which opened in 2005, gave it the title ‘Robin Hood’ after the heroic outlaw of popular English folklore.

He is more typically associated with Sherwood Forest, some distance from the airport and the naming occasioned a petition against it. One airport is even named after a piece of music – Linz Blue Danube Airport in Austria is named after Johann Strauss’ Blue Danube Waltz of 1866. Bizarrely, Sétif International Airport 08 May 1945 was named after a massacre.

There have been few academic studies to date

The naming of an airport is evidently taken seriously even if the result is sometimes a little difficult to understand. Surprisingly, there has been little in the way of academic research into the subject but a doctoral thesis was prepared in 2011 by a student, Uttam Kumar Regmi, who is also an aviation lecturer in Nepal specialising in the marketing and economics of airports. The following sections are based on interpretations of the content and data of that thesis. Comments in brackets (parentheses)/italics indicate an observation by the CAPA author on the student’s remarks.

The study investigated the use of brand names and slogans at 1,562 airports worldwide using content analysis of airport websites. The broad conclusions are:

  • Over 75% of airports worldwide are named after a single place;
  • 20% of world airports are not named after a place, and this is particularly common for airports in Latin America and the Caribbean where almost half of airports in that region are not named after a place. Instead, they tend to be named after a famous person, especially a political leader and/or revolutionary;
  • Almost half of airports worldwide name their airport after the scope of services available, and this is always in addition to, as opposed to in place of, an existing name.

Significant differences exist between world regions. Naming an airport after natural or man-made

attractions is most common in Europe; after a political leader and/or revolutionary is most common in Latin America/the Caribbean; and after royalty is most common in the Middle East (as above).

Only 10% (also reported in the study to be 13%) of all airports use a slogan and this is mainly a North American phenomenon. A more detailed analysis of airports in Europe finds that one-quarter of airports have two or more place names; one is typically the name of the place in which the airport is located, while the other tends to be the name of the nearest main city or town. (Often such an outcome will be driven by the demands of a low cost airline that wishes to emphasize the proximity of an airport to a major city or conurbation, even if it is not proximate at all, as in the case for example of Frankfurt Hahn, Stockholm Skavsta and Paris Beauvais airports. This trend may begin to reduce as the main European LCCs focus their growth more on primary airports).

Including a reference to the scope of services available at the airport is significantly more common at larger versus smaller airports in Europe. The use of a slogan is significantly more common at airports in Europe that are owned or operated by private interests compared to those that are publicly owned and operated.

So the naming of airports worldwide is widespread while the employment of slogans is limited. In Europe in particular the use of airport names and slogans varies according to the size of the airport and style of corporate governance.

Airports are typically not strong at marketing a brand

Historically, the study says, airports have been behind their airline counterparts in terms of marketing, failing to demonstrate professionalism and lacking a proactive or dynamic approach. However, airport marketing has developed rapidly in this sense during the last few decades, many of them establishing marketing departments during the 1990s, led by the UK.

Citing brand theory, the study says the most fundamental element of brand awareness is the brand name. It must be distinctive, memorable, easy to pronounce and meaningful (whether in real or emotional terms). An extension of the brand name is to have a slogan which is a memorable phrase that says something about who the company is and what it does.

Using location as the defining reason for naming an airport has its dangers. The study mentions an example of one area that co-operated to find an acceptable umbrella name – Tri-Cities, which covers parts of Tennessee, Southwest Virginia and North Carolina. It also refers to what was East Midlands Airport in the UK, to which Nottingham was added as the neighboring ‘main city’ in 2003.

But the other two principal cities of the area – Leicester and Derby – are closer to the airport and were added following protests in 2006, resulting in the ridiculously cumbersome “East Midlands Airport – Nottingham Leicester Derby,” which is hardly ever used. Rather, it is still just plain ‘East Midlands’ to most people.

Some reference is made to ‘famous persons,’ some of which are mentioned in the prior text. But little is reported about ‘celebrity’ naming, the main focus of this short report, despite the fact that naming in recognition of the famous in general made up a high proportion of airport names in all regions at the time the academic study was undertaken, varying from a low of 10.4% of all names in Europe to 42.2% in Latin America and the Caribbean (an average of 19.3% across all regions). Indeed the word ‘celebrity’ does not appear in the report even though it could be argued that celebrity is a significant sub-category of ‘famous’.

Everyone’s a celebrity, sporting and singing

In 2015 the rule of thumb is that the most famous – apart from some members of Royalty and very serious politicians – are ‘celebrities,’ and most frequently those in the sports, acting and musical performance fields. As long ago as 1966 John Lennon, then of The Beatles, declared that he was ‘bigger than’ (interpreted by the media as ‘more popular than’) Jesus. The attachment of the name of such persons to an airport is more likely to generate newspaper column inches and public intrigue than any other category.

CAPA undertook its own short study of the phenomenon of naming an airport after a celebrity (see later). The results seem to indicate that not a great deal of thought is attached to the power of a celebrity name to attract passenger business or investment. This is also rather surprising. Airport naming rights (to third parties) has increased in value as a non-aeronautical revenue generating tool during the past decade, especially so in the case of ‘low cost’ airports and terminals, which typically attract more leisure passengers that might be influenced by a particular name. This is the case in the US as well as Europe and Asia, where private airports developed outside the FAA’s remit can offer certain facilities to airlines that those within that framework cannot, and can develop unconventional revenue streams, such as offering naming rights and other sponsorship opportunities.

The best example (in fact the only one to date – setting up such a private airport in the US is no easy task) is Branson Airport, Missouri, which apart from being the only privately owned, privately operated commercial service airport in the US (it opened in May-2009) is a nationally known centre for live music performances, on a par with Nashville and Austin.

And yet there has been no formal brand naming of Branson Airport so far, nor does it even carry a slogan.

Conclusions

  • Most airports are named after a single place. Where they are named after a person it is most frequently politicians, royalty or religious figures. There can be hidden dangers in doing so;
  • The use of celebrity names is not widespread. Some of the best examples can be found in the UK;
  • There is little evidence of formal, structured evaluation of the financial benefits of airport naming, including celebrity naming;
  • Some airports do not use the names of entities or individuals when there would be an obvious benefit. But they may ‘play’ on the name in other ways;
  • Some trade associations are not convinced of the value of these naming activities as it can generate confusion;
  • The adoption of a slogan may potentially be hazardous and needs to be thought through. Often they appear humorous but one person’s humor can be another’s insult.

Source: http://centreforaviation.com

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

Etihad named CAPA Airline of the Year


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MANILA, Philippines – Etihad Airways, the national airline of the United Arab Emirates, has been named CAPA Airline of the Year at the CAPA Aviation Awards for Excellence 2014 in Antwerp, Belgium.

Etihad operates two flights daily between Abu Dhabi and Manila.

The CAPA Aviation Awards for Excellence, the world’s pre-eminent aviation strategy awards, are for strategic leadership in the aviation industry.

The Airline of the Year award is given to the carrier which has had the greatest impact on the development of the global airline industry, as a strategic leader and by setting a benchmark for others to follow.

Peter Harbison, CAPA executive chairman, presented the award to Etihad Airways, citing the airline for its “remarkable strategic partnership model.”

“Recognising that organic growth was not likely to generate the rapid global expansion it needed, Etihad Airways has relied on an extensive network of codeshares and most notably, established its own ‘equity alliance’, cemented by minority holdings in airlines around the world… In a new world of aviation partnerships, Etihad Airways is at the strategic vanguard of equity relationships, as a growing number of airlines – notably in Asia – line up to emulate the success of this truly original model,” Harbison said.

James Hogan, Etihad Airways President and Chief Executive Officer, said receiving Airline of the Year is not just a great honor but also “a powerful endorsement of the Etihad Airways business model.”

“The four-pillars of our strategy – organic expansion, codeshare partnerships, minority investments in other airlines and deep commercial agreements – are more than a new rule book for global aviation they are the keys to a long and sustainable future for the airline and its partners,” he said.

Source: ABS-CBNnews.com

Philippine Airlines Slows Expansion By Subleasing A330s & Reducing A321s Orders


Philippine Airlines’ new executive and ownership team is preparing a new business plan which should see the flag carrier slow down international expansion and become a more rational competitor. The Lucio Tan Group and former president Jaime Bautista are back in charge, ending a two and a half year stint with San Miguel and its president, Ramon Ang, in control.

PAL’s biggest short-term challenge is excess aircraft, the result of an overambitious order placed withAirbus in 2012 after San Miguel took control. PAL has several surplus newly delivered A330s which are now being under-utilised and could soon face a surplus of narrowbody aircraft as it is committed to taking 10 additional A321s in 2015.

If PAL does not succeed at finding new homes for excess A330s and is not able to defer or sublease future A320s it could be forced to pursue aggressive capacity expansion in both the domestic and international markets. Such expansion would make it difficult for PAL to be profitable and would also impact its competitors, particularly Cebu Pacific Air.

Lucio Tan retakes control of Philippine Airlines and PAL Express

Philippine conglomerate LT Group took back control of the flag carrier in late Oct-2014, completing a deal to buy back the 49% stakes in PAL and PAL Express which LT initially sold to Philippine conglomerate San Miguel in Apr-2012. LT had all along retained a majority stake but agreed to cede management control to San Miguel, resulting in the appointment of San Miguel president Ramon Ang as PAL president.

The original intent was for LT to later sell its remaining stakes in PAL and PAL Express to San Miguel and/or a new strategic investor which San Miguel was aiming to secure. But LT and San Miguel could never agree on a deal for the remaining stake while attempts to find a new strategic investor failed to bear fruit after talks with several foreign airline groups including All Nippon Airways. (There is still a possibility of a strategic stake sale materialising later.)

In Sep-2014 LT offered to buy back San Miguel’s share of PAL and PAL Express, which was previously known as AirPhil Express. The deal was completed in late Oct-2014 and Jaimie Bautista was appointed PAL’s new president, replacing Mr Ang.

LT now again owns 100% of PAL Express and about 89% of PAL Holdings. Individual shareholders account for the remaining 11% in PAL Holdings, which is listed on the Philippine Stock Exchange and is the parent of Philippine Airlines but not PAL Express.

Mr Bautista had been the president of PAL for several years prior to exiting in 2012 when LT ceded management control to San Miguel. He advised LT on the deal to regain control and initially returned to PAL in Sep-2014 as general manager.

PAL also appointed on 23-Oct-2014 several new board directors to take the seats that had been controlled by San Miguel. Several new executives including a new CFO were also appointed, replacing executives that had been seconded by San Miguel to PAL.

Other executives that were brought in under San Miguel’s tenure but were contracted directly by PAL (rather than on secondments from San Miguel) have stayed. This includes formerSpiceJet CEO Neil Mills, who joined PAL in 2013 as CEO advisor.

PAL to slow the pace of international expansion

The new executive team and board are now closely reviewing the previous business plan, which envisioned rapid growth of the fleet and international network. This review effectively began in Sep-2014 under Mr Bautista after San Miguel first agreed to sell back the stake to LT. Now that the deal is done and a new board is in place a new business plan can be prepared and implemented.

Under Mr Ang’s tenure, PAL added several medium/long-haul destinations and was planning to further expand the network in Europeand North America. PAL Holdings reported a 51% increase in passenger revenues in 2Q2014, driven mainly by the expansion of the international network. Monthly international passenger numbers were up between 15% and 39% the first seven months of 2014.

Most of the new medium/long-haul destinations that have already been launched are expected to be maintained including London, Toronto, Abu Dhabi, Dubai, Dammam and Riyadh. But PAL is expected to suspend plans for launching more new international destinations with the exception of New York and potentially Jeddah. PAL has already begun selling New York, which will be launched in Mar-2015 with four weekly flights via Vancouver.

San Miguel’s business plan envisioned multiple new destinations in both the US and continental Europe. None of the new destinations in the US after New York are expected to be pursued at least for the short to medium term.

In Europe the focus will be on improving the performance on the ManilaLondon Heathrow route, which is still unprofitable although load factor and yields have been on the rise after a dismal start. (The performance of London should also improve as PAL finally secured Russia overfly routes in late Oct-2014, enabling the carrier to significantly reduce the flight time to London. PAL however is still trying to secure betters slots from Heathrow which it needs to offer a full range of connections on the Manila end of the outbound leg.)

Philippine Airlines drops plan for 757s and Brisbane and Perth non-stops

Mr Bautista said in a recent meeting with CAPA that he expects PAL will also no longer pursue plans for further expansion in Australia. San Miguel had been planning to upgrade Brisbane to non-stop and re-launch Perth as a non-stop using a planned new fleet of 757s. San Miguel was also looking to upgrade Melbourne to daily. Sydney has already been upgraded to daily.

Melbourne is now served with three weekly widebody flights while Brisbane is currently served with three weekly A320 flights via Darwin. Manila-Darwin-Brisbane was launched in Jun-2013 along with Manila-Darwin-Perth, which was operated four times per week with A320s. Perth was quickly cut and Darwin and Brisbane could also now be suspended as the route has been unprofitable.

San Miguel planned to acquire 757s, which are able to operate non-stop from Manila to Perth – routes which were seen as too thin for A330s. Mr Bautista said San Miguel had put a down payment with Boeing for five ex-Shanghai Airlines 757s using its leasing subsidiary. (San Miguel set up a leasing company which now owns several of the Airbus aircraft that were added over the past two years. The leasing company had been 60% owned by San Miguel and 40% owned by PAL but the 60% stake has now been transferred to LT.)

Mr Bautista has been able to cancel the 757 deal with Boeing and get back the deposit. This was a sensible move as acquiring a new aircraft type for two likely marginal routes was extremely ambitious and risky.

Competition in the Philippines-Australia market has already intensified significantly as a result of Cebu Pacific’s Sep-2014 launch of flights to Sydney. Cebu Pacific is currently serving the route with four weekly flights, is adding a fifth frequency in Dec-2014 and is interested in securing more traffic rights to potentially increase Sydney to daily and launch Melbourne.

San Miguel long-haul expansion was more strategic than rational

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San Miguel’s plan for rapid expansion in Australia was seen as an aggressive response to Cebu Pacific entering the market. Under San Miguel, PAL also quickly launched services to several cities in the Middle East which were being targeted by Cebu’s new long-haul operation.

Dubai, which was launched by PAL in Nov-2013 using A330s in single-class 414-seat configuration operated by PAL Express, has been highly unprofitable. Yields and load factors have been under pressure from the beginning as Cebu Pacific also launched Dubai in Oct-2013.

Cebu Pacific’s long-haul unit in Oct-2014 added services to Dammam and Riyadh, routes that PAL launched in late 2013 using A330s in all-economy configuration. For these routes, PAL mainline operates the aircraft.

The intensifying competition between the Philippines and the Middle East and PAL’s options for this market, including an enhanced partnership with Etihad (both PAL and Etihad now operate the Abu Dhabi-Manila route) will be examined in a later installment in this series of reports.

PAL ordered too many A330s

PAL’s fleet currently consist of 11 A330-300s while PAL Express has two A330-300s. All 13 aircraft have been delivered since Sep-2013 – a remarkably quick spool up period for a widebody fleet – and are part of the 64 aircraft deal that was forged with Airbus in 2012.

Philippine Airlines fleet summary: as of 5-Nov-2014

PAL Express fleet summary: as of 5-Nov-2014

Both PAL Express aircraft and six of the PAL A330-300s are in 414-seat configuration. The other five PAL aircraft are in two-class 368-seat configuration. PAL is slated to take two more 368-seat A330-300s by the end of Nov-2014, marking an end to the A330 portion of the 2012 order.

(Both A330 configurations have the same economy class product including extra legroom seats at the front three rows, which are sold as premium economy. The dual-cabin aircraft include 18 lie flat business class seats. Wireless IFE is provided, requiring economy passengers to bring their own tablets, instead of seatback monitors.)

The new A330-300s have been used partially to replace six older generation A330s, which were phased out earlier this year. But most of the aircraft were ordered for growth, with San Miguel opting to take eight aircraft in single class configuration in response to Cebu’s decision to launch a long-haul operation. The San Miguel aircraft order was clearly overambitious.

PAL initially ordered a more realistic 10 A330s but only a month later ordered another 10 A330s, lifting the total commitment to 20 aircraft. The San Miguel management team recognised in early 2014 that 20 A330s were too many and converted the last five of the A330-300 orders, slated to be delivered in 2015, to eight additional A321neo orders. (This lifted PAL’s A321neo commitment from 10 to 18 aircraft.)

But it was too late to potentially get out of any of the other 15 A330-300 commitments. Mr Bautista told CAPA that the best he could do upon rejoining PAL was to defer the Sep-2014 delivery to Oct-2014 and the two Oct-2014 deliveries to Nov-2014.

PAL has seven to eight excess A330s as utilisation rates are extremely low

PAL at this point has no use for the last two A330s but has to take the aircraft to meet its contractual commitment with Airbus. As it is the 13 current aircraft are being under-utilised, particularly the eight aircraft in single-class 414-seat configuration. Mr Bautista said these aircraft are only being used on the Dubai (daily), Dammam (three times per week) and Riyadh (four times per week) routes as well as on some Bangkok flights.

As a result the eight single class A330-300s are only being used about 330 hours per week, resulting in an average individual utilisation rate of less than six hours per day. This is a dismal figure for a fleet which has an average age of less than one year, particularly given that these aircraft are designed to compete against LCCs.

The utilisation rate of the five 368-seat A330s is slightly higher as these aircraft are currently being used to Abu Dhabi, Osaka and some flights to Hong Kong, Seoul and Tokyo Narita. But the rate will dip as the final two aircraft are added to the fleet.

The average utilisation rate for the 414-seat A330s will also likely dip further as PAL is planning to switch to the 368-seat two-class A330s on Manila-Bangkok as there is demand for a premium product on this route. PAL currently serves Manila-Bangkok with one daily A321 flight and one daily A330 flight.

Mr Bautista acknowledges the current PAL schedule only requires seven or eight A330s. PAL has been looking to sell or sublease the surplus aircraft. It prefers to offload the single-class aircraft as it sees a potential need for using most or all of the dual-class A330s. But the pool of potential buyers for the single-class aircraft is very limited as few airlines operate A330s in single-class configuration.

These aircraft are also now used, making it more difficult to place. Ironically one of the few operators of single-class A330s is Cebu Pacific, which is seeking to lease two additional A330-300s. But Cebu Pacific has rejected offers from PAL as it does not like the product that PAL uses and prefers to take new aircraft which it can configure with its own product.

A partial reconfiguration by adding business seats while keeping the economy cabin is one of several options being considered. Mr Bautista said that PAL could potentially use more than seven two-class A330s if the airline starts to use the type to Melbourne, Sydney and Honolulu. These routes are currently operated with A340-300s and require two to three aircraft, potentially reducing PAL’s requirement for offloading A330-300s to about five aircraft.

PAL struggles with newly acquired A340-300 fleet

PAL currently operates six A340-300s. These are ex-Iberia aircraft that were acquired under San Miguel’s tenure, with four being added in 2013 and two earlier this year.

San Miguel purchased the A340s to support accelerated expansion of the long-haul network as the A330 does not have the range to operate to Europe or North America non-stop. In addition to the three medium-haul routes (Melbourne, Sydney and Honolulu) the A340s are now used on PAL’s five weekly flights to London and two of its nine weekly flights to Los Angeles. The A340 is also scheduled to be used on the new route to New York via Vancouver when it is launched in Mar-2015. (In addition, the A340 will be used for three weekly additional seasonal frequencies to San Francisco from mid-Dec-2014 to mid-Jan-2015.)

Using the new A330-300 fleet on Sydney, Melbourne and Honolulu is sensible as they are significantly more efficient than the A340. But it would require PAL to under-utilise or cut its newly acquired A340-300 fleet.

The new management team would be keen to phase out the A340-300s as soon as possible and acquire additional 777-300ERs to support the long-haul network while using the A330s to take over medium-haul missions. But PAL would have to take a big hit to phase out A340-300s. PAL only acquired the aircraft over the last 18 months and is now investing further in the A340 fleet by installing the OnAir system. (There is no seatback IFE in the economy cabin.)

Another complication is a lack of availability for near-term 777-300ER delivery slots. Mr Bautista said so far PAL has been told the earliest slot is 2016.

PAL needs more 777-300ERs

PAL’s six 777-300ERs are now being used to operate daily flights to Los Angeles, San Francisco and Vancouver (with three of the Vancouver flights continuing on to Toronto). The 777-300ER fleet is not big enough to support the entire long-haul operation.

One intriguing option on the table is to swap with a leasing company its excess A330s for 777-300ERs. But this would be a difficult deal to complete as 777-300ERs are in high demand and leasing companies may not be interested in PAL’s A330s as they are no longer new and perhaps in a difficult configuration to remarket.

A widebody fleet consisting of just two types, A330s and 777-300ERs, is the ideal scenario for the LT Group and would allow PAL to complete the renewal of its fleet. PAL already phased out earlier this year its 747-400s fleet as well as older model A340s. These aircraft had been used on the US routes until the US FAA upgraded the Philippines to Category 1.

Under Category 2, PAL was unable to change aircraft gauge or expand in the US market, forcing it to retain ageing aircraft types. The decision to acquire 777-300ERs was initially made by Mr Bautista back in 2006, with the aircraft envisioned for US routes. The Philippineswas subsequently downgraded to Category 2 in 2008, forcing PAL to find alternative routes for the 777-300ERs as they were delivered. Category 1 was finally restored in Apr-2014.

PAL faces excess narrowbody issue as well

Unfortunately the fleet challenges PAL currently is grappling with are not limited to widebody aircraft. Mr Bautista said PAL is committed to taking in 2015 10 A321ceos from its narrowbody order. These are all growth aircraft as PAL does not have any A320 leases expiring until 2016.

PAL has so far taken delivery of 12 of the 34 A321ceos it ordered in 2012. The final 10 aircraft from this order are slated to be delivered in 2016.

The 2016 aircraft do not pose as much of a problem as 2015 aircraft because about half of the 2016 aircraft are earmarked as replacements. In 2017 PAL will start taking delivery of the 18 A321neos it now has on order but this also does not pose a challenge as these are intended mainly as replacement for current generation A320 family aircraft.

PAL is now looking at alternatives for deferring, cancelling or subleasing several of the A320s slated for delivery in 2015. The commitment for 10 growth aircraft in a single year is another example of overambitious expansion under the business plan that was prepared by San Miguel. PAL at this point only has a need for two or three of these aircraft.

The group currently has 34 A320 family aircraft in its active fleet. The 12 A321s, which have all been delivered since mid-2013, are all operated by PAL mainline. PAL earlier this year phased out its remaining A319s.

Of the 22 A320s, 12 are currently flown by PAL Express and 10 at PAL mainline. All the PAL Express aircraft are in the domestic market while virtually all PAL narrowbody flights are in the regional international market. All of the PAL A320s are in two-class configuration while some of the A320s at PAL Express are in single class configuration. These are the aircraft originally operated by AirPhil, which followed the budget carrier model before rebranding as PAL Express in early 2012 and transitioning to the full-service regional model.

PAL Express may pursue domestic expansion in 2015

LT at least at this point does not see the need to return to its old multi-brand strategy with AirPhil operating alongside PAL and focusing on the bottom end of the market. But Mr Bautista says the preferred configuration for the domestic market is all-economy aircraft with extra legroom seats at the front. PAL Express – which offers frills including snacks, drinks and checked bags – now sells a premium economy product, which provides extra legroom seats on the all-economy A320s while on the dual-class A320s an actual business class seat is provided for the same price.

If PAL is unable to find new homes for the A321s it is committed to taking in 2015, the fallback plan is to add capacity, primarily in the domestic market. PAL Express, which has taken over almost all of the group’s domestic flights, would likely be the operator of the additional aircraft.

The prospect of the PAL group adding capacity in the domestic market is a concern as the domestic market has returned to profitability in 2014. The domestic market previously suffered from overcapacity and irrational competition. Consolidation and capacity reductions have ushered in much more favourable market conditions.

Cebu Pacific reported record profits in 2Q2014 driven primarily by the improvement in the domestic market. Mr Bautista said PAL Express also has been profitable in the domestic market. (PAL Express’ overall profitability was dragged down by its only international route, Dubai.)

Aircraft challenges will make it difficult for PAL to be profitable in short to medium term

PAL Holdings, which includes PAL mainline but not PAL Express, also returned to the black in 1H2014. But PAL Holdings is again expected to end 2014 in the red. More losses are likely in 2015, particularly if PAL is not able to resolve the huge aircraft issues it now faces.

San Miguel deserves credit for several improvements under its watch and investing significantly in PAL’s product. But San Miguel made some big mistakes with the fleet.

The overambitious order with Airbus has put PAL in a dificult position. The decision to acquire used four engined A340s, an aircraft type avoided by virtually every other airline group, was also rash. Thankfully at least the even more shortsighted decision to acquire 757s has been undone.

The aircraft challenges that have been inherited by PAL’s new management team will likely impact the carrier’s profitability for at least the short term. The group is already saddled with the cost of carrying excess aircraft, which is impacting utilisation rates. It may have to take substantial one-time hits if it subleases excess A330s and A320s and if it reduces or phases out its newly acquired A340-300 fleet.

PAL’s outlook is not all gloom as the Philippine market is now relatively strong, boosted by a reduction in the number of domestic competitors, the restoration of Category 1 and a relatively strong economy. But PAL first needs to adjust its fleet plan to a more rational level and get the right mix. This will not be an easy task.

Source: http://centreforaviation.com/analysis/philippine-airlines-looks-to-slow-fleet-expansion-by-subleasing-a330s-and-reducing-a321-commitments-194822

Cebu Pacific Seeks FAA Permit For US flights


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MANILA – While Philippine Airlines (PAL) is struggling over ownership issues, rival Cebu Pacific is expanding its footprint with a bid to fly to the US.

“We applied to FAA for our operating permit to fly to US,” Alex Reyes, head of Cebu Pacific’s long haul division, told Interaksyon.com.

Cebu Pacifiic’s move to fly ito the US came after the Federal Aviation Authority upgraded the Philippines’ aviation rating to Category 1 last April.

Cebu Pacific already has clearance to fly to Guam, Saipan, Honolulu, San Francisco, and Los Angeles after the Philippine carrier bagged the approval of the US Department of Transportation.

According to Centre for Asia-Pacific Aviation (CAPA), Cebu Pacific’s first US route will be Honolulu-Guam.

“Cebu Pacific plans to launch Guam by the end of 2014 using its A320 fleet. Honolulu will take slightly longer to launch as Cebu Pacific first needs to secure extended range twin-engine operations (ETOPS) approval for its A330 fleet,” CAPA said.

CAPA said Honolulu will also be “challenging from a competitive standpoint” as PAL is increasing its Manila-Honolulu flights from four to seven a week ahead of Cebu Pacific’s expected entry into the Hawaii market.

“PAL’s response thus far to Cebu Pacific’s long-haul expansion has  been extremely aggressive. PAL also launched Dubai and Abu Dhabi at about the same time as Cebu Pacific entered Dubai and also has launched Dammam and Riyadh ahead of Cebu Pacific,” CAPA said.

By September, Cebu Paciifc will be flying to Kuwait and Sydney, Australia.

But despite the stiff competition in the long-haul market, “Cebu Pacific is prepared to weather the storm. If anything PAL is more likely to retreat as questions again surface over PAL’s future ownership structure,” CAPA said.

Recently, San Miguel Corp (SMC) admitted that it was in discussions for either divesting from PAL or buying out the Lucio Tan Group.

SMC, through wholly owned subsidiary San Miguel Equity Investments Inc, earlier entered into investment agreements with Trustmark Holdings Corp and Zuma Holdings and Management Corp, giving the food-and-beverage conglomerate a 49 percent stake in PAL and Air Philippines Express for $500 million. The remaining 51 percent of PAL remains with Tan.

The FAA upgrade also allowed PAL to expand operation to the US, particularly to New York, Chicago and Florida.

PAL operates a total of 26 weekly flights to the US, with frequencies to Los Angeles, San Francisco, Honolulu and Guam.

“Cebu Pacific is still too new to the long-haul low-cost game to determine if it will be a winner,” CAPA said.

Additional Aircraft Acquisition

According to CAPA, Cebu Pacific was already evaluating acquisition of the A350, 787 and the 777X.

“The latter is still several years away but would enable flights from Manila to the west coast of the US, which have traditionally been PAL’s largest and most lucrative long-haul markets,” CAPA said.

“We are always evaluating aircraft acquisition since we are in constant touch with airframe manufacturers,” Cebu Pacific’s Reyes said.

“As an airline we are continually studying opportunities for further growth,” he added.

At present, the airline has 50 aircraft and total remaining order book of 11 A320s, 30 A321 NEO, and2 A330s on operating lease, with 8 A320s for lease returns.

In the first six months, Gokongwei-owned Cebu Air Inc (CEB) reported a profit of P3.18 billion, up 124.7 percent from the P1.414 billion in the same 6 months of last year. In the second quarter alone, Cebu Pacific’s net income shot up to P3.01 billion from the previous year’s P257.34 million.

Revenue grew 23 percent to P26.72 billion in the first half from P21.73 billion last year. In the second quarter alone, top line rose to P14.95 billion from last year’s P11.18 billion.

Source: Darwin G. Amojelar, InterAksyon.com

CAPA: Philippine Airlines Seeks A Strategic Investor As International Expansion Continues


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ANA: Not Planning To Invest In PAL

Attracting an investor from the airline sector has so far proven challenging. All Nippon Airways (ANA) emerged as a potential suitor in 2013 as part of the Japanese carrier’s initiative to invest in foreign airlines with focus on Southeast Asian market.

But ANA has since ruled out an investment in PAL. ANA also has decided not to complete a planned investment in small Myanmar carrier Asian Wings, which when announced in Aug-2013 was seen as a toe in the water with the idea it would be followed by larger investments in Southeast Asian airline sector.

ANA’s rival Japan Airlines also has been ruled out as a potential investor in PAL. Japan was a logical place for PAL to turn as Japan is PAL’s largest market accounting for about 22% of the carrier’s international seat capacity.

PAL currently operates 63 weekly flights to five Japanese destinations (FukuokaNagoya, Osaka, Tokyo-Haneda and Tokyo-Narita), according to OAG data. But synergies with Japanese carriers are relatively limited. ANA and JAL are strong competitors in the Philippines-US market.

PAL is now planning to expand its US operation, which is made possible by Philippine authorities securing a Category 1 rating from the US FAA earlier this year. As PAL expands in North America it will try to woo away passengers that have been flying via North Asian hubs including Tokyo, Hong KongSeoul and Taipei, thus increasing the competitive posture towards airlines from those countries.

Japan is an important and growing source market for the Philippines tourism sector. But Philippines-Japan is primarily a leisure point to point market and seemingly is not of sufficient importance to Japanese carriers to justify an investment. There are also limited opportunities to offer Japanese passengers connections beyond Manila.

Securing Investment from Korean Carriers Would Be Challenging

South Korea is also an important and growing source market for Philippine tourism sector. South Korea is PAL’s second largest market based on current seat capacity and is served with 46 weekly flights across five routes (Seoul to Cebu, Kalibo and Manila and Busan to Kalibo and Manila).

Korean Air and Asiana each have large presences in Philippine market, supported by strong inbound demand from Korea as well as sixth freedom traffic, particularly to North America.

Asiana is the second largest foreign carrier in Philippine market based on seat capacity and currently has 39 weekly flights to the Philippines while KAL is the fourth largest and has 23 weekly flights. It is similarly hard to build a business case for a Korean carrier to invest in PAL.

As is the case with Japanese carriers, potential opportunities for Korean carriers to use Manila as a transit hub for other regions of Asia are limited. San Miguel has talked up building Manila into a transit hub. PAL is generally not well positioned for this type of traffic and will need to compromise yields to attract passengers in markets such as Australia-London and Singapore-North America.

And potential North Asian partners would be impacted if PAL were to pursue this type of traffic aggressively. While an investment seems unlikely PAL could still use partners in Korea and Japan. A Korean and/or Japanese partner would help with local point of sales and connections to secondary cities in Japan.

A Japanese or Korean carrier could also potentially help provide offline coverage to smaller North American markets which PAL does not intend to cover on its own.

Cathay Pacific Codeshare Or Relationship With A Chinese Carrier Is Unlikely

Currently PAL has codeshare with only two North Asians carriers, Air Macau and Cathay Pacific. But both partnerships are limited. The Air Macau codeshare is limited to the MNL-Macau route, which is currently served only by PAL (as well as Cebu Pacific).

The Cathay codeshare is limited to the CEB-HKG route, which is only served by Cathay (as well as Cebu Pacific). The Cathay partnership excludes the much larger and more competitive MNL-HKG route or any destinations beyond Hongkong.

The Cathay-PAL partnership is unlikely to be extended as Cathay competes with PAL in several key PAL markets including Philippines-North America, Philippines-Middle East and Philippines-North Asia. Cathay is now the largest foreign carrier in the Philippines with 43 weekly flights and 12,000 one-way seats.

Cathay regional subsidiary Dragonair also operates nine weekly flights to the Philippines, giving the Cathay group about 25,000 weekly seats and over 5% of capacity in Philippine international market. A partnership with a mainland Chinese carrier would be more appealing as PAL only now serves four destinations in mainland China with a combined 22 weekly return flights.

But a strong partnership or investment from a Chinese carrier may be made less likely in view of the tense state of relations between China and the Philippines. A partnership with a Taiwanese carrier would be more conceivable but again would likely be relatively limited.

Taiwan is a much smaller local market for the Philippines than Hong Kong, Korea or Japan. PAL has only 11 weekly frequencies to Taiwan while China Airlines and EVA Air serve the Philippines with 20 weekly flights and seven weekly flights respectively. The close proximity of Taipei and Manila mean the two hubs compete for traffic and are not synergistic.

Singapore Airlines: Not A Likely Suitor for PAL

PAL’s codeshare partnerships in Southeast Asia are also relatively limited. Currently PAL has codeshares with Garuda IndonesiaMalaysia Airlines (MAS) and Vietnam Airlines.

Garuda and Vietnam Airlines currently do not serve Manila although Garuda is planning to enter the Jakarta-Manila route by the end of 2014.

The MAS codeshare initially provided PAL with offline access to Kuala Lumpur and has been maintained since PAL resumed services to Kuala Lumpur in early 2013. None of these airlines are in position to invest in PAL or any other foreign carrier.

A partnership with Singapore Airlines (SIA) would be more intriguing as Singapore is by far the largest Southeast Asian market from the Philippines. There are currently over 60,000 weekly seats between Singapore and the Philippines, making it the Philippines largest market after South Korea. But there would be limited synergies for SIA.

PAL is not believed to be on SIA’s list of potential acquisition targets.

PAL Forges A New Partnership With Etihad

In recent years most of PAL’s codeshare partners have been from the Mideast. PAL currently codeshares with Emirates and Gulf Air, according to OAG data. But PAL also previously codeshared with Etihad and Qatar Airways.

Most of its codeshares with Gulf carriers were forged during a period when PAL did not operate any services to the Middle East. In some cases Philippine authorities allowed PAL to have its codeshare partners use PAL traffic rights to Middle East countries, which enabled Gulf carriers to continue expanding in Manila after their own traffic rights were exhausted.

PAL and other Philippine carriers have since taken back most of these traffic rights. In 2H2014 PAL launched Abu Dhabi, Dubai, Dammam and Riyadh services (Dubai is served by PAL Express).

Cebu Pacific launched Dubai and is planning to launch Kuwait in Sep-2014. (Cebu Pacific also has been looking to serve Saudi ArabiaOman and Qatar.) PAL forged a partnership agreement with Etihad in late Apr-2014 that builds on the original codeshare between two carriers.

The two carriers announced on 9-Jul-2014 that the new partnership will initially cover the Manila-Abu Dhabi route, which Etihad and PAL both operate. For now the only extension announced beyond the parallel routing is to be on PAL/PAL Express services to 20 Philippine destinations, including holiday destinations such as Cebu, Palawan and Kalibo (a gateway to Boracay Island).

Etihad has said it has no intention of acquiring a stake in PAL. While an investment is always a future possibility for any carrier Etihad partners with, PAL has a better chance of finding a suitor within Asia – although even there it faces an uphill battle to secure an investment.

PAL recognizes the need to work with a Gulf carrier to support its effort to build a more global network. PAL currently does not codeshare with any European carrier. The new Etihad partnership could potentially be extended to destinations beyond Abu Dhabi in continental Europe and Africa as well as secondary destinations in the Mideast.

Much of the foundation for Philippine services to the Mideast is in carrying migrant worker traffic, but Gulf countries in particular have shown increasing interest in holidaying in friendly countries outside the region.

PAL has been looking at launching several potential destinations in continental Europe including AmsterdamFrankfurt, Paris and Rome. One or two European destinations may still be added over the medium term but following the Category 1 upgrade by the US FAA it is more likely to focus on expanding in the US market.

As PAL’s only current European destination is London, which is not generally considered a convenient hub for Asia to Europe connections, using Etihad and the Abu Dhabi hub to cover the rest of Europe would be a sensible move.

PAL Expands In US But Lacks A US Partner

In US, PAL currently serves Los AngelesSan FranciscoHonolulu and Guam. Restoration of Category 1 status has allowed PAL to shift all its LAX and some  its SFO flights to the 777-300ER.

PAL plans to shift its remaining San Francisco 747-400 flights to the 777-300ER at the beginning of Sep-2014. This will allow PAL to finally retire its 747-400s after an initial plan to retire the fleet in May-2014 had to be postponed.

Moving the 777-300ERs to the US market improves PAL’s product and efficiency but comes with a catch as PAL has to transition its Vancouver and Toronto services from 777-300ERs to A340s to free up 777s for the US market. PAL currently serves LAX with 11 weekly frequencies, SFO with seven weekly frequencies, GUM with five weekly frequencies and HNL with three weekly frequencies. Vancouver is served with seven weekly frequencies, three of which continue onto Toronto.

PAL has been looking at launching new destinations in the US in late 2014 or 2015. Chicago and New York are the most likely candidates. PAL is also planning to increase GUM and HNL to daily services from late Oct-2014. PAL uses A320s to GUM and A340s to HNL.

The increases in these markets come ahead of Cebu Pacific’s planned launch of services to the US, which is also made possible by the Philippines regaining a Category 1 ranking. Cebu Pacific aims to launch Guam by the end of 2014 using its A320 fleet and begin serving Hawaii in 2015 using its A330-300s. Category 1 also enables Philippine carriers to codeshare with US carriers.

A codeshare partnership with a US carrier would improve PAL’s position in the US market as PAL would gain offline access to domestic destinations. But PAL could find it challenging to attract a US major and may have to settle for a codeshare or interline with a smaller carriers such as Alaska AirlinesJetBlue and Virgin America. Partnering with a top European carrier may also be challenging although this may not be as critical if its able to expand its new partnership with Etihad.

In addition to potentially providing offline access to Europe via Abu Dhabi, the Etihad partnership could lead to partnerships with European carriers that are part of the Etihad equity alliance such as Alitalia and airberlin.

Australia: Philippine Airlines vs. Cebu Pacific

PAL would also find partnership with an Australian carrier valuable, although options are few.

PAL is pursuing significant expansion in Australia. PAL currently operates four weekly A340 flights to Sydney, three weekly A340 flights to Melbourne and three A320 flights to Darwin, with continuing service to Brisbane.

PAL plans to upgrade Sydney to daily in late Oct-2014. At about the same time PAL reportedly is intending to upgrade Melbourne to daily and begin non-stop flights to Brisbane and Perth. PAL briefly served Perth in 2013 with four weekly flights via Darwin but quickly dropped the route while maintaining Manila-Darwin-Brisbane.

The Australia expansion comes just as Cebu Pacific enters the Philippines-Australia market. Cebu Pacific plans to initially operate four weekly flights to Sydney from Sep-2014 and is looking at adding Melbourne in 2015. While Cebu Pacific should stimulate new demand, overcapacity is likely if PAL implements its plan to double capacity to Australia.

Overcapacity is also likely in the Hawaii and Guam markets as both PAL and Cebu Pacific expand. Overcapacity has already resulted in the Philippines-UAE market after both PAL and Cebu Pacific entered the market in 2H2014. Both carriers have also been pursuing significant expansion to Japan.

The prospect of overcapacity and irrational competition results in a relatively gloomy short to medium term outlook for the Philippine international market. The inevitable discounting has the potential to stimulate new business but there is no indication just how the market would respond to lower prices.

 

Source: http://centreforaviation.com/, Centre for Aviation

CAPA ANALYSIS: Cebu Pacific Profits Drop; Philippine Airlines, AirAsia Philippines Remain In Red. Outlook Is Improving.


The Philippines market has gone through unprecedented consolidation since the beginning of 2013 with three LCCs exiting, leaving one full-service and two low-cost players. But reduced competition and more rational domestic capacity levels has not yet led to an improvement in profitability. Cebu Pacific Air recorded a sharp drop in profits for 1Q2014 while Philippine Airlines (PAL) and Philippines AirAsia (PAA) again incurred large losses.

Cebu Pacific, which acquired much smaller low-cost competitor Tigerair Philippines in Mar-2014, has been impacted by losses at its new long-haul operation. PAL has been impacted by ambitious international expansion, including the resumption of services to Europe and the Middle East. PAA, which has been highly unprofitable since its 2012 launch, continues to struggle despite its merger with another Philippine LCC, Zest Air.

But the outlook for the Philippine market, particularly the LCC sector, is relatively bright compared to most other Southeast Asian markets as only the Philippines has seen significant consolidation.

The Philippines Leads Southeast Asia With Consolidation

Inevitably consolidation will spread throughout Southeast Asia given the current overcapacity, which drove drops in yield and profitability in 1Q2014 at virtually every publicly traded airline in the region. But the Philippines has a clear head start as the necessary consolidation has already taken place and therefore it stands to see an improvement in market conditions before other Southeast Asian countries.

Cebu Pacific is best positioned to benefit from the consolidation. Its already leading domestic share of the Philippine market has increased as a result of its acquisition of Tigerair Philippines and capacity cuts by the two remaining competitors, the AirAsia and the PAL groups.

Cebu’s domestic yields are starting to show signs of improvement as capacity has finally returned to rational levels. Its new long-haul operation, which has incurred steep losses and contributed to most of Cebu’s fall in profitability since the launch of Dubai services in Oct-2013, is also showing signs of improvement.

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Image Source: Nikki Pili

Cebu Pacific Ekes Out U$ 4million Profit For 1Q, 2014

Cebu Pacific saw its net profit narrow by 86% from PHP1.157 billion (USD28 million) in 1Q2013 to only PHP164 million (USD4 million) in 1Q2014. Revenues were up 12% but RPKs were up at a faster clip, 14%, against a 20% increase in ASKs as the carrier’s load factor dropped 4.2ppts to 86.8%. Passenger figures were up by 7% to 3.8 million.

For the second consecutive quarter, profitability was dragged down by Cebu’s new long-haul operation. Cebu Pacific reported a 63% load factor on ManilaDubai for 1Q2014 against a break even load factor on the route of 83% to 84%. (In 4Q2013, Cebu Pacific swung to a loss as the Dubai route got off to a dismal start, including a 36% load factor in Oct-2013.)

But the Dubai route, which showed significant improvement in Apr/May-2014 with a load factor around the break even point, is not entirely to blame for the sharp drop in profits for 1Q2014. Cebu’s executive team told analysts during its 1Q2014 results briefing on 20-May-2014 that short-haul international yields were down as a result of intensifying competition while domestic yields were relatively flat.

Overall yield and average fares were up year over year by 4% and 1% respectively, bucking the trend in the broader Southeast Asian airline sector. But this is misleading as Cebu Pacific was entirely a short-haul operator until Oct-2013, when its new long-haul unit launched a daily service to Dubai.

Cebu’s average fare on Dubai-Singapore has been about PHP11,000 (USD245), significantly higher than its system-wide average of about PHP3,000 (USD67).

Domestic Philippine Yields Expected To Increase In 2Q, 2014

But unlike other domestic markets in Southeast Asia, the short-term outlook in the Philippines is relatively bright. Cebu Pacific expects “significant progress” in domestic yields in 2Q2014 and 2H2014, with year over year increases of approximately 13% and 19%.

Some improvement in short-haul international yields is also expected in 2Q2014, driven by new flights to Japan which come with a higher yield relative to other routes. But the regional international market from the Philippines generally remains challenging given the intense competition and the capacity being added by competitors. This is in line with the rest of Asia and particularly Southeast Asia, where overcapacity has become a common problem.

The Philippine domestic market, however, has seen unprecedented consolidation, putting it in a league of its own in what is otherwise an extremely challenging Southeast Asian marketplace. Total domestic traffic in the Philippines was down by 1% in 2013 to 20.3 million, driven by cuts at PAL which recorded a 37% drop in domestic traffic to 2.6 million. As CAPA previously analysed, Cebu Pacific’s share of the domestic market grew from 46% in 2012 to 50% in 2013 (based on Philippine CAB data).

PAL Makes Further Domestic Adjustments To The Benefit Of Cebu Pacific

The PAL Group further cut domestic capacity in Mar-2014, dropping all of its point to point routes bypassing Manila. Cebu Pacific says included in the PAL cuts were 11 routes from Cebu, the second largest city in the Philippines, which are now left as monopoly routes for Cebu Pacific. Cebu Pacific says total capacity in the Philippines domestic market was down by 1% in 1Q2014.

Cebu Pacific estimates its share of the domestic market reached 52% in 1Q2014. When also including Tigerair Philippines, Cebu’s share reached 56% while the PAL Group share declined to about 33%. AirAsia’s share was roughly flat at just under 11% (based on Cebu Pacific estimates as official Philippine CAB data is not yet available for 1Q, 2014.)

For Mar-2014 the Cebu Pacific Group share of the Philippine domestic market reached an estimated 59% as the PAL Group share dropped to an estimated 30%, including only 1% for PAL mainline and 29% for PAL Express.

This reflects the first month under PAL Group’s revised domestic strategy which relies almost entirely on PAL Express to serve the domestic market.

The PAL Group initially adjusted its domestic strategy in early 2013 as PAL Express, formerly known as AirPhil Express, transitioned from a pure LCC to more a full-service regional model. This followed PAL Express taking over most secondary domestic routes from PAL mainline while withdrawing from most trunk routes.

Under the previous PAL Group strategy, which had been implemented by the former ownership and management group, PAL and AirPhiloverlapped on domestic trunk routes with AirPhil focusing on the bottom end of the market and PAL focusing on high end and connecting traffic. (PAL Express has a lower cost structure than PAL and still has some components of the LCC model, including operating aircraft in single-class configuration, but offers several frills including checked bags, drinks, snacks and newspapers.)

The latest iteration of the PAL Group’s evolving two-brand strategy saw PAL Express taking over from PAL on most trunk routes while dropping the point to point routes. PAL Express has also pulled out of the international market with the exception of the Manila-Abu Dhabi route, which was launched in Nov-2013 with A330-300s in all-economy configuration. (Keeping just one international route and operating only one widebody aircraft is not a logical move but could be driven by a desire to compete more effectively against Cebu Pacific at the budget end of the Philippines-UAE market.)

Philippines AirAsia Restructuring Also Benefits Cebu Pacific

AirAsia is also now in the process of cutting domestic capacity as part of a network restructuring aimed at turning around its unprofitable Philippine operation. PAA incurred an operating loss of MYR25 million (USD8 million) in 1Q2014 compared to a loss of MYR20 million (USD6 million) in 1Q2013.

PAA reported passenger traffic of 900,000 in 1Q2014 but a seat load factor of only 66%.

PAA operating figures now include both PAA and sister carrier Zest AirAsia but the financial figures still only include PAA. The two carriers continue to operate under separate codes but have been working on integrating their operations.

PAA and Zest first agreed to an equity swap and quasi-merger in Mar-2013 but Zest did not adopt the AirAsia brand until late 2013. The AirAsia Group stated in its 1Q2014 results presentation on 20-May-2014 that it expects to secure within the next few weeks approval to fully consolidate PAA and Zest under the PAA brand.

The Malaysia-based group also stated that it is hopeful its Philippine operation, which has been highly unprofitably since PAA’s 2012 launch, can finally be in the black from 2H2014. PAA and Zest have been working on rationalising their combined network and reducing costs. Yields are expected to improve after the network is restructured and new services to Korea and Japan are launched.

PAA will still have challenges as it does not have the scale or position of Cebu Pacific. But having to compete with only one local LCC rather than the five when it launched (Cebu Pacific, AirPhil, Zest,SEAir/Tigerair Philippines and Spirit of the Philippines) clearly improves its long-term prospects. PAA should be able to join Cebu Pacific in benefitting from an improvement in domestic yields while in the more competitive regional international market it should be able to leverage the strong pan-Asian position of the AirAsia brand.

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Image Source: Lester Tangco

Philippine Airlines Incurs U$ 21million Loss in 1Q, 2014

The PAL Group outlook also improves as the overall market conditions in the Philippines become brighter and as it finally has been cleared to pursue expansion in the US, one of its largest markets. But it is not as bright as Cebu Pacific or PAA because PAL no longer has a play in the budget sector, which dominates the Philippine market as it is a highly price-sensitive market.

PAL Holdings reported a PHP931 million (USD21 million) net loss for 1Q2014 compared to a PHP1.256 billion (USD31 million) net loss for 1Q2013. Revenues were up 18% to PHP21.655 billion as the carrier rapidly expanded its international operation. Over the last year PAL has launched services to London, Dubai, DohaDammam and Riyadh while also pursuing capacity expansion on regional routes within Asia as 15 aircraft including nine widebodies were added to the fleet.

PAL should see some improvement in its trans-Pacific performance starting in 2Q2014 as 777-300ERs take over for inefficient 747-400s on Los Angeles and San Francisco. The 747-400s, which were kept several years past their intended expiration date for trans-Pacific routes because US FAA Category 2 restrictions precluded any change of gauge on the US routes, are being retired.

But PAL faces intense competition on its new routes to the Middle East and London. Japan, which is the carrier’s largest market accounting for 24% of its international seat capacity, also has become more competitive as a new bilateral has enabled significant expansion from Cebu Pacific and the entrance of AirAsia. South Korea is its second largest market, accounting for 13% of international seat capacity, will also see new competition from AirAsia and has already seen more capacity from Cebu Pacific.

Domestically market conditions have improved. PAL Express should benefit from the domestic consolidation but PAL Express is not part of PAL Holdings. (Philippine conglomerate San Miguel is the largest shareholder in both PAL and PAL Express but the ownership structures are slightly different and only PAL is publicly traded albeit with a very small float.)

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Cebu Pacific Quickly Turns Around Tigerair Philippines

The outlook for PAL/PAL Express, PAA and Cebu Pacific have also all improved as a result of Tigerair’s recent exit. The Singapore-based Tigerair Group had been an aggressive competitor on domestic Philippine trunk routes since it entered the market in mid-2012, contributing to the irrational fares and capacity levels.

Tigerair Philippines had been highly unprofitable under the Singapore-based Tigerair Group but Cebu Pacific is confident it can quickly turn around its new wholly owned subsidiary. (For now the carrier continues to be branded as Tigerair Philippines although it is entirely owned by Cebu Pacific.)

Cebu Pacific executives said during the 1Q2014 results briefing that Tigerair Philippines had suffered from revenue and cost problems. Revenues improved almost immediately after the acquisition closed on 20-Mar-2014, with average fares increasing by nearly 50%, as Cebu Pacific was able to move Tigerair Philippines under its own distribution network and website. As a result Tigerair Philippines was already in the black in Apr-2014.

Cebu Pacific expects further improvements in Tigerair Philippines’ profitability as it is now focusing on further reducing the carrier’s costs. Cebu Pacific estimates that Tigerair Philippines’ cost structure was 25% higher than Cebu Pacific’s cost structure prior to the sale. Cebu Pacific has already closed about half of this gap by improving aircraft utilisation levels at Tigerair Philippines and pursuing cost synergies.

Cebu Pacific has so far subleased one A320 to Tigerair Philippines, replacing two A319s which have been returned to Tigerair Group. Three more Cebu Pacific-owned A320s will be moved to Tigerair Philippines in 3Q2014, allowing Tigerair Philippines to further reduce asset costs as three A320s are returned to the Tigerair Group.

Cebu Pacific expects it will be able to close the remaining 12% to 13% cost gap with Tigerair Philippines by the end of 2Q2014, which should result in the subsidiary providing positive contributions from 3Q2014. Cebu Pacific particularly expects an improvement when it takes over the ground handling of Tigerair flights on 20-Jun-2014, replacing an external supplier. Cebu Pacific estimates Tigerair Philippine’s ground handling costs will be reduced by 50% to 60% from 3Q2014.

With such high costs it is hardly surprising Tigerair Philippines struggled under the Tigerair Group, leading to the Singapore-based group deciding to dispose of its Philippine affiliate. The purchase of Tigerair Philippines is part of a wider partnership between Cebu Pacific and the Tigerair Group which will also see the two carriers interline.

Cebu Pacific says Tigerair will start selling joint Tigerair/Cebu Pacific itineraries in Jul-2014 while Cebu Pacific expects to be able to start selling joint Cebu Pacific/Tigerair itineraries by Sep-2014. The itineraries will open up a wide array of LCC connections such as Singapore-Tokyo via Manila and Manila-Male via Singapore, boosting revenues and traffic volumes for both groups.

Tigerair Philippines currently operates 91 domestic flights. As a group Cebu Pacific now operates about 1,900 weekly domestic flights across 61 routes and 31 destinations.

Cebu Pacific Accelerates International Expansion

Tigerair Philippines also has a small international operation. Cebu Pacific overall now has about 450 international weekly flights across 35 routes to 25 destinations.

Cebu Pacific accounted for 16.3% of passengers in the Philippine international market in 2013 while Tigerair Philippines accounted for 1.6%, giving the group an 18% share. The PAL Group captured a 24.6% share while PAA/AirAsia Zest accounted for a 4.8% share. Foreign carriers accounted for the remaining 52.7% share, according to Philippine CAB data. (International market data is not yet available for 1Q, 2014.)

The total international market in the Philippines grew by 3% in 2013 to 17.3 passengers. Cebu’s international passenger traffic was also up 3% in 2013 to 2.9 million passengers (excludes Tigerair Philippines). Cebu’s international passenger traffic was up slightly in 1Q2014 to 900,000 passengers. Faster growth is likely in 2Q2014 as expansion of the carrier’s international network accelerated in Mar-2014 with the launch of flights from Manila to Bali, Nagoya and Tokyo Narita.

Further expansion to Japan, where Cebu Pacific previously only served Osaka, and long-haul expansion to the Middle East and Australia will be the focus for the remainder of 2014. Cebu Pacific also aims to launch services to Guam by the end of 2014 with Hawaii to potentially follow in 2015.

Opportunities for further short-haul international expansion are relatively limited because the carrier’s A320 fleet will shrink over the last three quarters of 2014 as four aircraft are returned and three are delivered. Cebu Pacific is also moving another three aircraft to Tigerair Philippines in 3Q2014, leaving it with even fewer A320s for its mainline operation (although the group is keen to reduce unit costs by improving average utilisation levels).

However, its new widebody fleet continues to grow. Cebu Pacific took delivery of its third A330-300 in Feb-2014, its fourth aircraft on 16-May-2014 and is slated to receive its fifth aircraft in Aug-2014. The sixth and final A330-300 from its initial six aircraft commitment is slated to be delivered in 2015.

Cebu Pacific Announces More Long-Haul Routes: Saudi Arabia

Currently only one of Cebu’s A330s is allocated to its long-haul operation. Cebu Pacific has been using two of its A330s to add capacity on regional international routes as well as on some domestic sectors. The A330 is currently used on some flights to Singapore, SeoulTaipei and Davao.  (It was also briefly used to Cebu and has been approved for Tokyo Narita, which was launched at the end of Mar-2014 and for now uses A320s.)

Cebu Pacific will finally start to allocate a second A330 to the long-haul market in Aug-2014, when it intends to launch services to Saudi Arabia with two destinations. Cebu Pacific executives told analysts that within the next few week plans will be finalised and ticket sales will begin for two Saudi Arabia destinations.

As CAPA previously reported, Cebu Pacific has been preparing to serve Riyadh and Dammam with four weekly non-stop flights to one destination and three weekly non-stop flights to the second destination.

Cebu Pacific executives say the airline also now aims to launch services to Kuwait and Australia by the end of 2014. The carrier is already approved for Kuwait, as it is with Saudi Arabia. Cebu Pacific says it is in the final phase of the approval process with Australia’s Civil Aviation Safety Authority, which should give Cebu Pacific the final go ahead within the next few weeks.

By the end of 2014 Cebu Pacific expects to be using four of its initial five A330-300s on five long-haul routes, while the fifth aircraft will continue to be used in the regional international market. Cebu Pacific’s A330 service to Singapore has particularly been successful and will likely continue. Cebu Pacific executives say that the A330 on Manila-Davao has also worked well while Manila-Cebu was less successful as it is a shorter route.

Cebu Pacific’s Honolulu Launch Requires Extended ETOPS Approval

Honolulu has also been added to the network plan for Cebu Pacific’s long-haul operation now that the US FAA has upgraded Philippine regulatory authorities to a Category 1 safety rating. Cebu Pacific is now working through the process of securing US FAA authorisation to operate aircraft to the US. It aims to initially serve the US by operating A320s on Manila-Guam, which Cebu Pacific is now hoping to launch by the end of 2014 contingent on FAA approvals.

Honolulu is likely to be launched in 2015, using the sixth A330. Cebu Pacific executives point out that Hawaii requires an extension of Cebu’s ETOPS authority, which could take several months to secure, making a 2014 launch infeasible.

Cebu Pacific will compete against PAL on both the Manila-Honolulu and Manila-Guam routes as well as to Saudi Arabia and Australia. The prospect of a low-cost competitor on more international routes is not favourable for PAL’s outlook but the flag carrier will continue to have a strong position in the mainland US market, where it is now looking to expand with potential new services to Chicago and New York.

PAL also will continue being the only Philippine carrier serving Europe for the foreseeable future because, while Cebu Pacific has been removed from the EU black list, it does not have aircraft with sufficient range to reach Western Europe or the mainland US. PAL now only serves London Heathrow but has been looking at several potential destinations in continental Europe.

Cebu Pacific Has A Relatively Bright Outlook But Challenges Remain

Cebu’s outlook should improve as it diversifies its long-haul network to include Australia and eventually the US. The larger operation will also give Cebu Pacific more scale, resulting in a lower break even load factor.

The original plan for Cebu’s long-haul unit relied almost entirely on the Philippines-Middle East market. But the market is highly seasonal and primarily consists of bookings made by labor contractors, making it challenging to stimulate sufficient demand on a year round basis.

Cebu Pacific has improved its performance on Dubai considerably since Oct-2013, when its load factor was a dismal 36%, and has overcome an initial weakness with local sales. Initial bookings were impacted as Cebu Pacific resisted entering global distribution systems in a bid to preserve its pure LCC model.

Cebu Pacific executives are now glad they stayed true to their model as it has been able to educate the local market, resulting in much higher volume web booking than initially. However, the 80% plus load factor from April and May is not expected to hold up in June through August due to the slower Ramadan period, even with the carrier temporarily reducing capacity from seven to five weekly flights.

With domestic market conditions now improved, Cebu Pacific needs to increase its focus on improving the long-term profitability of its international operation. As the carrier prepares to announce and begin ticket sales on four more long-haul routes it needs to make sure it has the marketing and distribution plan in place to avoid a repeat of the dismal start it had in Dubai.

The one route alone has been detrimental to Cebu’s 4Q2013 and 1Q2014 performance, providing a hard lesson as Cebu Pacific works out the kinks of long-haul operations.

But Cebu Pacific has a lot to look forward to as it becomes the first LCC to enter several markets including Philippines to Australia, Kuwait, Saudi Arabia and the US. It is also now the only LCC serving the large Manila-Tokyo and Manila-Nagoya routes. Cebu Pacific should be able to stimulate demand across all these markets while enjoying the fruits of its leading position in the much improved Philippine domestic market.

Source: CAPA