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


philippine-airlines

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

 

Southeast Asian Budget Airlines Slowing Pace of Expansion


Some Discount Carriers Are Deferring or Canceling Aircraft Orders
Some Discount Carriers Are Deferring or Canceling Aircraft Orders

Budget airlines in Southeast Asia are scaling back their breakneck pace of expansion, as passenger demand hasn’t caught up with the capacity boost that has contributed to significant fare pressures.

Some of the region’s biggest discount carriers, such as Malaysia’s AirAsia5099.KU 0.00% Bhd. and Singapore-based Tiger Airways Holdings Ltd. J7X.SG -2.33% , are deferring or canceling aircraft orders while considering reducing investments elsewhere because mounting competition is hurting profitability.

The Southeast Asian region has been the continent’s main hotbed of low-cost carrier growth, with burgeoning markets helping send many middle-class travelers to the skies for the first time.

Budget airlines now carry more than half of Southeast Asia’s airline passengers. These carriers have staged an aggressive cross-border expansion ahead of more-flexible air services arrangements among the region’s 10 nations to be set as early as 2015.

The region’s two dominant discount carriers—AirAsia and Indonesia’s Lion Air—have ordered a combined total of more than 1,000 planes for delivery over the next decade, prompting concerns of overcapacity at a time of slowing economic growth.

Airlines across the Asian-Pacific region have recently recorded some of the weakest traffic growth because of continued weakness in the Chinese economy and the recent contraction in regional trade volumes.

In March, total international passenger traffic in Asia rose just 1.1% from a year earlier, far below the 5.3% rise in new aircraft capacity, according to data released this week by the International Air Transport Association, an industry lobby group.

“It’s a very, very competitive market on the fare side. We’ve seen already a number of carriers take steps to address some of that overordering,” said Robert Martin, chief executive at Singapore-based aircraft leasing firm BOC Aviation Ltd.

“The key thing is the volume of planes coming each year into the region. If they can limit that … it would work,” he said.

AirAsia said earlier it would defer 19 Airbus A320 aircraft that would have arrived this year and the next, noting it would consider replacing the orders with the more fuel efficient A320neo, or new engine option, planes. The airline didn’t respond to requests seeking comment.

Meanwhile, Tigerair recently canceled nine current generation A320 planes that were to arrive in 2014 and 2015, as part of a deal with the aircraft manufacturer to buy 37 A320neos for delivery between 2018 and 2025.

Tigerair, which last week reported a widening group net loss of 95.5 million Singapore dollars ($76.6 million) in the financial year ended March 31, sold its unprofitable Philippines business and said this month it was reviewing its investment in its Indonesian joint venture, Tigerair Mandala.

Tigerair will ground five of Mandala’s nine A320s and three of the five aircraft that are being returned from Tigerair Philippines. Tigerair didn’t respond to calls seeking comment.

AirAsia is also months late in starting commercial flights at its Indian operation, and last year had to pull the plug of its joint venture in Japan due to disagreements with partner All Nippon Airways9202.TO +0.44%

Southeast Asian airlines “are making some adjustments. In some markets there is too much capacity,” notes Brendan Sobie, a regional analyst at CAPA—Centre for Aviation, an industry consultancy.

Aircraft maker Boeing Co. BA +0.17% also said it was on the lookout for possible capacity issues in various global regions.

“One of the areas where we are watching for overcapacity is Southwest and Southeast Asia,” said Randy Tinseth, vice president of marketing at Boeing, which sells its single-aisle 737 jets to Lion Air and other Southeast Asian carriers.

Mr. Tinseth notes that there substantial orders on the books from the region, especially from new business models such as low cost carriers.

While many analysts expect consolidation in the region’s airline industry, they said demand would continue to expand as more people travel.

Lion Air spokesman Leithen Francis said the company would take delivery of up to 38 new jets this year and has no plans to slow down.

“There’s still growth in the Indonesia domestic market, where we are aiming to increase our market share,” Mr. Francis said.

The recent exit of smaller carriers from the Indonesian market is helping Lion Air add capacity as it seeks to increase its market share to 60% from about 50% now, he added.

Meanwhile, Tigerair continues to struggle. On Wednesday, the company said Chief Executive Koay Peng Yen was resigning after less than two years at the helm. He will be succeeded by Lee Lik Hsin, an executive at Singapore Airlines Ltd. C6L.SG +0.29% , which owns a 40% stake in Tigerair.

Source: Gaurav Raghuvanshi, online.wsj.com

 

Philippine Airlines & Cebu Pacific: Poised to Expand in US Following Category 1 Upgrade


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Photo Credit: Kaoru Kojima, Planespotters.Net

The US FAA upgrade of the Philippines to a Category 1 safety rating opens up short-term expansion opportunities for Cebu Pacific Air and Philippine Airlines (PAL), brightening the outlook for both carriers. The upgrade removes the previous freeze on new entrants or adding capacity.

The Category 1 rating enables PAL to immediately replace ageing A340s and 747-400s with more efficient 777-300ERs on existing services to Los Angeles and San Francisco. PAL also plans to add within the next year new destinations in the continental US, giving it a potential alternative to the more risky planned expansion of its European network.

Cebu Pacific is likely to launch services by the end of 2014 to Guam and Hawaii with A320s and A330s, matching PAL on each route. Hawaii and potentially Europe, which is also now an option for Cebu Pacific as the carrier has joined PAL in being removed from the EU blacklist, gives the LCC an opportunity to slow down Middle East expansion and diversify its new long-haul operation.

Philippine Authorities Secure Category 1 Rating 

The US FAA announced on 10-Apr-2014 the upgrade of the Philippines from a Category 2 to Category 1 safety rating. The Philippines has been stuck in Category 2 since early 2008, prohibiting PAL from adding flights or changing gauge on any existing frequencies in one of the carrier’s most important markets.

Transitioning trans-Pacific flights to more efficient widebody aircraft and expansion in the US has been a key component of the PAL business plan for over six years. PAL initially committed in 2007 to acquiring six 777-300ERs with the expectation of operating the type to the continental US, including existing and potential new routes. But just a few months later the US FAA downgraded the Philippines to Category 2.

Frustratingly for PAL, the Philippines remained in Category 2 when the 777-300ERs were delivered, starting with two aircraft in 2010 and followed by another two in 2012 and the final two in 2013. As a result PAL was forced to find other markets for its 777-300ERs, some of which like Australia proved to be less than ideal.

In 2011 PAL, under its prior management and ownership, even took the unusual step of hiring and paying for a consultant to help Philippine authorities meet Category 1 standards. While Philippine authorities over the last few years have repeatedly expressed confidence in an upgrade, a Category 1 rating particularly appeared imminent since Mar-2013, when ICAO concluded that Philippine oversight authorities were again in compliance with international safety standards.

The ICAO conclusion led to the EU removing PAL from its blacklist of carriers in Jul-2013. Japanese authorities also quickly lifted restrictions that had blocked PAL and all Philippine carriers since 2008 from expanding to Japan. The Philippines had to wait longer for the US to follow as the FAA first needed to schedule and conduct a new audit of Philippine authorities, which was completed in Mar-2014.

 PAL Will Finally Operate 777-300ERs on US Routes

PAL stated on 10-Apr-2014 that 777-300ERs will take over within the next month its existing flights to Los Angeles and San Francisco. PAL now operates ageing 747-400s on its daily flight to San Francisco and a combination of 747-400s and A340-300s on its 11 weekly frequencies to Los Angeles. PAL also operates five weekly flights to Guam and three to Honolulu, which the carrier says will continue to be operated with A320s and A330-300s respectively.

PAL currently uses its six 777-300ERs to operate three of its 14 weekly flights to Tokyo Haneda, its five weekly flights to London and its seven frequencies to Vancouver with three continuing to Toronto, according to OAG data. Sydney had also been flown with 777-300ERs until early Feb-2014, when A340-300s were placed back on the ManilaSydney route.

The 777-300ER will significantly improve the efficiency of PAL’s operation to Los Angeles and San Francisco and also enable the carrier to eliminate a fuel stop on the westbound leg. The 747-400 and A340 are able to operate non-stop from Manila to California but often have to make a stop on the longer return leg.

PAL Needs To Acquire More Widebody Aircraft

The 777-300ER is the ideal aircraft for PAL’s trans-Pacific operations, as the carrier envisioned in first selecting the type in 2007. But PAL will not have enough 777-300ERs to cover all its North American flights. Based on current schedules all 25 weekly frequencies to Los Angeles, San Francisco and Vancouver would require a fleet of at least seven aircraft.

PAL will also need more 777-300ERs to add new destinations in mainland US, which it plans to launch within the next year. The carrier served Las Vegas until 2012 and previously looked at serving San Diego, which has one of the largest Filipino populations in the US. But at this point PAL’s management team seems more keen to go further east with Chicago and New York both likely destinations by early 2015.

PAL has been looking at acquiring more widebody long-haul aircraft, including additional 777-300ERs. With the green light now to change gauge and expand in the US, the acquisition of additional 777-300ERs through leases or new orders becomes more likely as it remains the preferred type for US routes. (787s or A350s could also be acquired but PAL would likely need to wait longer for delivery slots, making these types potential replacements for A340s on European routes.)

Category 2 prevented PAL from completing renewal of its widebody fleet as the carrier had no choice but to continue operating 747-400s and A340s on its US routes. PAL currently operates five 747-400s, which are 19 to 20 years old and are only used for Los Angeles and San Francisco. PAL also has been operating some of its US flights since 2008 with four long-standing A340-300s, which are 16 to 17 years old.

In addition to taking its last two 777-300ERs, over the last year PAL added five ex-Iberia A340-300s under a lease agreement with Airbus. The newly acquired A340-300s, which are 12 to 15 years old, will likely be used to operate to London (and at least some of the Vancouver frequencies) as PAL looks to free up 777-300ERs for the US market.

PAL also has taken delivery over the last year of eight A330-300s (including one at PAL Express) which were part of a large order placed in 2012 with Airbus. PAL has another 12 A330-300s on outstanding order, all of which are slated to be delivered by the end of 2015, according to the CAPA Fleet Database.

PAL has been using the A330s to expand regionally within Asia-Pacific and to the Middle East. PAL recently reduced its A330-300 order book by five aircraft in a swap for eight more A320neos, raising it A320neo commitment to 18 aircraft.

Philippine Airlines fleet summary: as of 12-Apr-2014

The PAL group has been ambitiously pursuing expansion in the Middle East, where it added five destinations in 4Q2013 using new A330-300s. PAL also launched the Manila-London Heathrow route in Nov-2013, quickly taking advantage of its removal from the EU blacklist.

See related reports:

 US Expansion More Attractive Than Continental Europe

PAL has also been preparing over the last several months to add services in continental Europe, with Amsterdam, Frankfurt, Paris and Rome all cited as potential routes. PAL had been looking at launching multiple European destinations in 2014 and still has a sufficient number of A340-300s to potentially launch one or two. But new US destinations could become the priority over continental Europe.

It would be logical for PAL to focus on the US and catch up on the six years it has not been able to grow in the US market. (In fact PAL slightly reduced capacity to the US as in 2012 it dropped Las Vegas, which it served as a tag with Vancouver on three of the seven weekly flights to Vancouver. Dropping the tag allowed PAL to switch its Vancouver service to an all-777-300ER operation and add Toronto. Service to Las Vegas is not likely to be restored as the focus is instead now on the eastern US.)

The US represents a better opportunity than Europe as the US has by far the world’s largest population of overseas Filipinos. There are over 3 million Filipinos living in the US while there are about 700,000 Filipinos living in Europe. The European population is also spread out, making it easier for Gulf carriers to penetrate the Philippines-Europe market as they are able to offer a wider array of destinations in Europe, particularly as PAL does not currently have a European partner.

The Philippines-US market is also competitive but PAL does not have to contend with the Gulf carriers and has an advantage as it is the only carrier with non-stop service. Delta and United serve the Philippines but neither operates non-stops. Delta currently serves Manila via Nagoya and Tokyo in Japan while United operates from Guam, where it has a small base.

Several North Asian carriers also serve the Philippines-US market on a one-stop basis including All Nippon Airways, Asiana, Cathay Pacific, China Airlines, EVA, Korean Air and Japan Airlines. But PAL has a strong position with its exclusive non-stop product along with brand loyalty as overseas Filipinos generally prefer flying with PAL.

Despite offering an outdated product on ageing aircraft, PAL’s load factor to Los Angeles and San Francisco in recent years has been consistently above 75% except during the off peak months of September to December.

PAL’s position in the US should strengthen further as its transitions its California flights to its flagship product, the 777-300ER. About half of the Filipinos living in the US reside in California.

Expansion of the network to the east should allow PAL to be able to further grow its overall share of the Philippines-US market. There are currently about 200,000 Filipinos living in the New York City area and about 100,000 in the Chicago area. This segment of the community is generally flying with North Asian carriers as there is no convenient PAL option.

Cebu Pacific Poised to Enter Guam and Hawaii 

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Cebu Pacific also is keen to serve the US market but currently does not have the aircraft with the range to reach the mainland US. The LCC is expected to initially focus on Guam and Honolulu with both routes likely to be launched by the end of 2014.

Cebu Pacific has long been interested in serving Guam with its A320 fleet but has been precluded by Category 2 restrictions. The carrier even previously looked at wet-leasing aircraft from a US carrier to serve Guam but ruled out that option as it was cost prohibitive.

Manila-Guam is currently served by United with 10 weekly 737-800 flights along with the five weekly A320 flights from PAL. With LCC stimulation the Manila-Guam should be able to support a significant increase in capacity.

Guam has been keen for some time to attract LCC service from the Philippines. The Guam airport has seen the Korea-Guam market grow following the entrance of Jeju Air, which is the only LCC currently serving Guam.

The Honolulu-Manila market has only been served by PAL since Hawaiian Airlines dropped Manila in mid-2013 after five years on the route. Cebu Pacific should be able to be more successful than Hawaiian at stimulating demand as the Honolulu-Manila market is price sensitive – as are most Filipino expatriate markets.

Hawaii has the second largest Filipino community after California among US states, with about 300,000 residents.

The opening up of the US market comes at an ideal time for Cebu Pacific as the carrier has not yet decided on routes for the three A330-300s it is adding in 2014. The carrier’s new long-haul unit took delivery of its first two A330s in 2013, one of which was used to launch service to Dubai in Oct-2013 with the other aircraft used for regional services to Seoul and Singapore. Cebu Pacific has been using its third A330 in the domestic market since taking the aircraft in Feb-2014.

Hawaii Gives Cebu Pacific The Option Of  Slowing Down Middle East Expansion

With another A330 delivery expected in May-2014 followed by one more in 3Q2014, Cebu Pacific needs to quickly move forward with selecting additional long-haul routes. Australia is under consideration and Sydney will likely be launched by the end of 2014. As CAPA previously reported, Cebu Pacific also has been considering two destinations in Saudi Arabia as well as Kuwait, Qatar and Oman.

Hawaii represents a potentially more appealing option. The Middle East market has become extremely competitive as PAL also has launched services to Saudi Arabia, Qatar and the UAE. In addition several Middle Eastern carriers have large operations at Manila.

As Cebu Pacific’s initial performance in Dubai has been somewhat disappointing, the carrier’s long-haul unit could be better off focusing on a more balanced network featuring a mix of Australia, Hawaii and two or three Middle Eastern destinations. Previously the long-haul plan was for five to six destinations in the Middle East and one in Australia by the end of 2014. Cebu Pacific will still likely launch one or two additional Middle Eastern routes in 2014 but now has the option of deferring some of its Middle Eastern expansion until at least 2015 in order to free up capacity for Honolulu.

See related reports:

Cebu Pacific also now has the option of serving the EU as it was removed from the EU black list on 10-Apr-2014, ironically the same day it received good news with the US FAA announcement. But Hawaii is a more likely option for 2014 with services to Europe and potentially the continental US to be added later as new generation widebody aircraft are considered. Most European destinations are not within range of Cebu’s A330s without payload limitations although Moscow is an option and has been considered.

PAL and Cebu Pacific Improve as Japan Opens Up

US Category 1 along with the removal from the EU blacklist significantly improves the outlook for both main Filipino carriers. PAL and Cebu Pacific are also now pursuing rapid expansion in Japan, taking advantage of the lifting of restrictions by Japanese authorities.

See related report: Cebu Pacific, AirAsia Zest, Tigerair and Philippine Airlines race to add flights to Japan

For Cebu Pacific the opportunities in Japan and the US are particularly key as the carrier was previously limited to operating only three weekly flights to Japan while it was completely shut out of the US. PAL benefited in Japan and to a lesser extent the US as it was already in both markets with relatively significant operations.

Japan is currently PAL’s largest market, accounting for about 25% of its total international seat capacity while the US is its fourth largest market accounting for about 10%. On 30-Mar-2014 PAL significantly expanded its Japanese operation as it launched two daily flights to Tokyo Haneda, introduced a second daily frequency to Osaka and added two weekly frequencies to Fukuoka for a total of seven.

PAL Can Now Look for US Airline Partners

While it benefited from limits on Cebu’s expansion, PAL needed to grow in both Japan and the US as the carrier enters a new expansion phase under San Miguel, which acquired a majority stake in PAL in 2012 and has invested significantly in new aircraft. The Category 1 rating also allows PAL to pursue code shares with US carriers, which would give it domestic connections beyond its gateways.

While attracting a partnership with a US major may be challenging, Hawaiian Airlines, Alaska Airlines and Virgin America are all potential suitors which would provide sufficient offline access beyond the main PAL gateways of Los Angeles, San Francisco and Honolulu. JetBlue could also be a potential partner if PAL opts to launch services to New York.

PAL also has been discussing a potential partnership with ANA, which could provide access to some US points beyond Tokyo as well domestic connections in Japan.

Category 1 will offer a huge boost for PAL as it opens up online and offline opportunities in the US. While an ambitious PAL is still keen to grow further in the Middle East and Europe, where it did not have a single destination just six months ago, the US should now get priority.

CAPA employs a leading team of writers and analysts positioned around the world. Find out more about CAPA’s regional and global analysts.

Source: http://centreforaviation.com/analysis/cebu-pacific-and-philippine-airlines-poised-to-expand-in-us-following-category-1-upgrade-162935

Philippines-UAE Market Suffers From Overcapacity, Impacting Cebu Pacific, Philippine Airlines, Emirates and Cathay Pacific


 

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Central Business District of Makati, Philippines

Capacity reductions in the PhilippinesUnited Arab Emirates (UAE) market are inevitable after 24 weekly non-stop flights between the two countries were added in 4Q2013. While there is considerable traffic between the Philippines and UAE, yields are generally low and there are large seasonal fluctuations.

Three Philippine carriers entered the market at essentially the same time – Cebu Pacific, Philippine Airlines (PAL) and PAL Express – while Emirates launched services to Manila alternative airport Clark. Emirates already served Manila with three daily flights, having added the third frequency at the beginning of 2013. Etihad also serves Manila with two daily flights.

Fares between Manila and Dubai or Abu Dhabi have dropped as the three Philippine carriers have struggled to fill new A330s. Load factors have been sustainable only during peak periods. Losses for all the carriers are likely if current capacity levels are maintained year-round.

This is the first of a two-part series of analysis reports on Cebu Pacific’s new long-haul operation. This report analyses Cebu Pacific’s first long-haul route, Manila-Dubai, which launched on 7-Oct-2013, and the broader Philippines-UAE market. The second report, to be published later this week, will look at Cebu Pacific’s plans for additional long-haul routes in 2014 as it expands its A330-300 fleet from two to five aircraft.

Cebu Pacific’s Initial Dubai Performance Was Lacklustre

 

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Image Source: T. Laurent

Cebu Pacific decided in early 2012 to expand into the long-haul low-cost sector, committing to an initial batch of leased 436-seat A330-300s. In Jan-2013 the carrier selected Dubai as its first long-haul route and began selling the new daily service nearly nine months ahead of launch with one-way promotional fares starting at PHP6,748 (USD166 based on the exchange rate at the time) including taxes and fees.

See related reports:

Despite ample lead time, Cebu Pacific’s performance on the route for the first month was disappointing. In its results presentation for 3Q2013, Cebu Pacific disclosed that its average load factor on Manila-Dubai was about 36% during the first month of operation. It carried about 10,000 passengers to and from Dubai during this period. Cebu Pacific also disclosed in mid-Nov-2013 that forward bookings for the next three months were relatively weak, with only 20% of available seats sold.

The route has been performing much better since late Nov-2013, with significantly higher load factors and some flights completely full. More details will be disclosed in Feb-2014, when Cebu Pacific reports its 4Q2013 results.

But December and January are peak months for the Philippines-UAE market as Filipinos working overseas typically make their trips back home during the holiday season. February and March will be more challenging months while April will see another peak for Easter. On a year-round basis the Philippines-UAE is not an easy market to turn a profit on, particularly without any ability to sell flights beyond the UAE.

The market is dominated by migrant worker traffic as the UAE has a population of about 700,000 expatriate Filipinos, making it the fourth largest overseas Filipino community (only the US, Saudi Arabia and Canada have larger Filipino expatriate communities). But Filipino migrant worker traffic to and from the UAE fluctuates significantly and during some months is extremely unbalanced with most passengers heading in one direction only.

Emirates, Etihad and airlines serving the Philippines-UAE market with a one-stop product have an advantage over the Philippine carriers as they can respond to these fluctuations by focusing more on other markets to fill their Manila capacity during periods of weak Philippines-UAE demand. Cebu Pacific and the PAL Group are only able to offer connections beyond Manila, primarily only in the Philippine domestic market, providing limited options to fill their Manila-UAE flights during periods of low demand.

Cebu Pacific, PAL and PAL Express Launches Drive Over 70% Increase in Total Capacity

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Cebu Pacific also has been impacted by the 6-Nov-2013 launch of services to Dubai by PAL Express and by the 1-Oct-2013 launch of services to Abu Dhabi by PAL mainline. The PAL service contributed to Cebu Pacific’s lacklustre October performance as both carriers were new to the Philippines-UAE market and offered very low promotional fares in an attempt to stimulate demand. But this attempt was unsuccessful as October is an off-peak month.

The subsequent PAL Express launch has provided more direct competition for Cebu Pacific. PAL Express operates its A330-300s in similar all-economy configuration to Cebu Pacific while PAL has a three-class configuration including premium economy and business. Cebu Pacific and PAL Express are also both serving Dubai while PAL is serving Abu Dhabi – although both airports have similar catchment areas and with the right pricing Dubai services can attract Filipinos working in Abu Dhabi while Abu Dhabi services can attract Filipinos working in Dubai (both emirates have sizeable Filipino communities and are only about 150km apart.)

PAL, PAL Express and Cebu Pacific added a combined 6,900 weekly one-way seats in the Philippines-UAE market. Meanwhile Emirates’ capacity increased from about 7,800 to 10,400 weekly one-way seats after it launched service to Clark. Factor in Etihad’s approximately 5,300 weekly seats, which has remained stable, and total capacity shot up by over 70% practically overnight from about 13,100 to about 22,500 weekly one-way seats.

The increase in capacity allocated to the local market was even more pronounced as most of the additional capacity is being provided by Philippine carriers that do not offer any connections beyond Dubai.

Previously the market was under-served with Cebu Pacific claiming that 70% of passengers travelling between Manila and Dubai were opting for one-stop flights (as Emirates was mainly carrying passengers beyond Dubai and being undercut in the local market by carriers such as Cathay Pacific). But with Cebu Pacific, PAL and PAL Express all entering at once, the market has quickly swung from under-served to over-served, putting pressure on all players (including the one-stop carriers) to reduce prices.

Impact of Overcapacity Could Hit Harder in February

As PAL Express did not launch its Dubai service until just before the start of the peak season, the full impact of all the additional capacity will not be felt until the next off-peak period, which typically starts in late January. Cebu Pacific’s online booking engine reveals it has cut back services to Dubai to five weekly flights for the remainder of Jan-2014 and all of Feb-2014. This would be an indication of soft demand and a potential return of the unfavourable conditions that were experienced in Oct-2013 – although this time potentially even worse as PAL Express is also now competing in the Manila-Dubai market.

For now Cebu Pacific is selling six weekly flights for most of Mar-2014 and a full daily service for the rest of the year. But the carrier will likely need to look at implementing further cuts at the conclusion of the Easter season.

Even with the slight reduction in capacity from Cebu Pacific, fares for Feb-2014 remain extremely low. Cebu Pacific is currently offering a one-way fare of PHP7,549 (USD167 based on the current exchange rate) including taxes and fees for travel in the second half of Feb-2014.

New Competition Between Manila and Dubai/Abu Dhabi Drive Down Fares

PAL’s website is currently offering one-way all-inclusive fares for Feb-2014 starting at USD311 to Abu Dhabi and USD341 to Dubai. PAL and PAL Express both offer complimentary meals, drinks and checked baggage while Cebu Pacific charges for these items.

PAL also offers in-flight entertainment (IFE) across all classes, a business class cabin, premium economy and roomier economy seats. PAL Express does not have any IFE and squeezes 414 seats in its A330-300s, making it only slightly less dense than Cebu’s 436 seat configuration. Cebu Pacific has the world’s densest A330-300 configuration, packing in only four fewer seats than the aircraft’s certified limit. PAL Express and Cebu Pacific both have nine-seat abreast 3-3-3 layouts while PAL uses the more typical eight-seat abreast 2-4-2 layout in economy.

Emirates is now selling on its website return all-inclusive fares starting at USD960 for Manila-Dubai and starting at USD911 for Clark-Dubai. Etihad’s online fares for Manila-Abu Dhabi are higher, starting at USD1296 for a return ticket. (One-way fares online on Emirates and Etihad are significantly more expensive).

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Cathay Pacific is also extremely competitive, offering on its website Manila-Hong Kong-Dubai return fares that start at only USD605 including taxes. Cathay is the largest one-stop carrier in the Philippines-UAE market and has traditionally moved a large volume of migrant workers between Manila and Dubai as well as Abu Dhabi. Manila-Hong Kong-Abu Dhabi is currently priced at USD920. The launch of non-stop services to the UAE by Philippine carriers has impacted Cathay, pushing down the carrier’s already low economy yields on the route.

Singapore Airlines also offers a one-stop product between Manila and Dubai but has not generally been a high volume mover in this market. Singapore’s online return fares for Manila-Singapore-Dubai currently start at USD992 including taxes. Singapore Airlines no longer serves Abu Dhabi.

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While it appears Cebu Pacific is now undercutting PAL/PAL Express and Cathay Pacific by about 50% (and Emirates and Etihad by even bigger margins) this is not an accurate indication of the cheapest fares available in these markets. The full-service carriers serving the Philippines do not rely much on online distribution channels and often provide big discounts to agents, particularly for high volume migrant worker contracts. In fact some one-stop carriers in the market, such as Royal Brunei Airlines, only sells tickets between Manila and Dubai through agents.

Stimulating new demand in Philippines-UAE market will not be easy

Cebu Pacific’s initial weak performance to Dubai could be an indication it is still learning about the rather complex world of migrant worker contractor/agent purchasing patterns. While Cebu Pacific has been serving several short-haul international destinations that have large Filipino worker populations, such as Hong Kong and Singapore, these markets are different in that many of these workers purchase their tickets independently. For long-haul destinations that see significant Filipino migrant worker traffic almost all the purchasing is done through their contractors.

Cebu Pacific got a jump on its competitors by starting to sell Dubai tickets nine months ahead of launch compared to six months for PAL and only about two months for PAL Express. But it turned out that the earlier start of ticket sales was not an advantage as almost all tickets in the Philippines-UAE market are purchased with short notice by labour contractors. The number of Filipinos who buy their own tickets is very small, even with Cebu Pacific trying to stimulate demand by offering very low advance purchase fares.

Cebu Pacific’s inability to initially stimulate new demand in the market is not an encouraging sign. The carrier should be able to improve its load factor on Manila-Dubai as it becomes more experienced at selling to the contractors and agents that control most of the Philippines-UAE market. But this market is generally a zero sum game, meaning any additional passenger Cebu Pacific gets is likely coming at the expense of another carrier (and at a very low yield).

Capacity rationalization is likely. The PAL Group initially planned to serve Abu Dhabi and Dubai daily but likely adjusted capacity plans, removing two weekly frequencies, in response to weak forward loads. Cebu Pacific may also have to settle for a less than daily service on a permanent basis and drop consideration of also serving Abu Dhabi.

The PAL Group should consider rationalizing by using one rather than two brands for the Philippines-UAE market. Having the PAL and PAL Express products operate almost side by side is confusing. (The Dubai and Abu Dhabi airports are only 130km apart.)

The PAL Express product is a better fit for this particular market. The carrier’s higher density A330s and lower unit costs allows it to compete better with Cebu Pacific. Business class demand is limited and competition with Emirates and Etihad for premium traffic is fierce.

Emirates doubles capacity in Manila market while Etihad smartly does not follow

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Emirates has the advantage of adjusting seat buckets and fares in the local Manila-Dubai market depending on the time of year as it can backfill with passengers heading to other parts of the Middle East, Africa, Europe and the Americas. But with four daily flights now in the Manila market Emirates will at least be somewhat impacted by the new capacity that has been added by the Philippine carriers.

In selecting Dubai, Cebu Pacific stated that 70% of passengers flying between Manila and Dubai were using one-stop carriers rather than Emirates. But this data was based on origin and destination figures from 2012 – before Emirates added its third daily flight to Manila in Jan-2013. While a majority of its Philippine passengers transit in Dubai, as Emirates has added more and capacity in the market inevitably it is able to offer a larger number of seats to agents or migrant worker contractors at competitive fares.

Emirates further expanded capacity in the Manila market at the end of Oct-2013, when it launched a daily service to Clark, giving it twice as much capacity in the Philippines compared to late 2012. Manila and Clark are Emirates’ only destinations in the Philippines while Etihad only serves Manila. Cebu Pacific, PAL and PAL Express have the advantage of offering domestic connections but this is limited as almost all Filipinos heading to the UAE fly from Manila as Manila is where the labour contractors are based and where their visas are processed. Cebu Pacific previously estimated that only 10% of its Dubai passengers would not originate in Manila.

Etihad has not increased capacity to Manila since Nov-2011, when it introduced its second daily flight. The carrier has likely looked at adding a third daily flight – which it could only implement by following Emirates to Clark as there are no available slots and traffic rights at Manila.

The Manila market is an extremely important market for Etihad. The Abu Dhabi-based carrier recently stated that Manila was its second busiest market after Bangkok in 2013, with 547,000 passengers. Even London was smaller.

Assuming Etihad operated all its Manila flights in 2013 with its two-class 412-seat 777-300ERs, which is the densest aircraft in its fleet, the carrier had an average load factor to and from Manila of 91%. With such high load factors Etihad should not be significantly impacted by the additional capacity from the Philippine carriers as there should be sufficient demand in connecting markets to further reduce its already low reliance on local passengers.

While adding more capacity to Manila is tempting, Etihad would be smart to give Clark a miss and continue only with its two daily Manila flights. The UAE is now the fifth largest international market for the Philippines, accounting for 9% of total international seat capacity. More capacity is the last thing the market can use.

With just two daily flights, Etihad will be able to focus more on connecting passengers beyond Abu Dhabi. Competition in the Philippines-Europe market is also increasing with PAL launching non-stop services to London in Nov-2013 and planning multiple new destinations in continental Europe for 2014. But PAL will not be able to come close to matching the network of Etihad (and Etihad alliance partners) or Emirates.

See related report: Philippine Airlines will need to overcome challenges with new London Heathrow service

Making money in the current capacity environment will be challenging

For several years PAL did not serve the UAE, recognising the challenges of competing against Emirates and Etihad and their ability to offer Philippine passengers unmatched networks beyond their hubs. PAL instead chose to codeshare with both carriers.

The resumption of services to the UAE is part of an ambitious expansion plan under new PAL owner San Miguel. Unfortunately for Cebu Pacific, the expansion at the PAL Group comes just as the LCC moves into the long-haul sector with UAE the logical first market for the new widebody low-cost operation.

The Philippines-UAE market does have opportunities for Philippine carriers. But the yields are low and the market has huge seasonal fluctuations.

There is risk of large losses as Philippine carriers start to realise it is not a market where new demand can be easily stimulated. Philippine carriers will need to rely on wooing passengers – or labour contractors – away from very competitively priced one-stop products. But there are not enough of these passengers to go around outside the peak periods. At current capacity levels there will be no winners.

Source: http://centreforaviation.com/analysis/philippines-uae-market-suffers-from-overcapacity-impacting-cebu-pacific-pal-emirates-and-cathay-148902