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


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

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

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

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

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

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

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

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

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

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

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

 

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

The surge in capacity was not necessarily irrational

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

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

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

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

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

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

PAL becomes largest player in UAE-Middle East market

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

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

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

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

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

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

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

Cebu Pacific quickly grows Middle East network

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

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

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

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

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

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

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

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

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

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

End of Emirates-PAL codeshare leaves Emirates seeking more rights

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

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

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

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

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

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

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

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

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

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

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

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

PAL could use Etihad and Etihad Alliance carriers to serve Europe

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

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

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

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

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

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

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

PAL Express may drop Manila-Dubai

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

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

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

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

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

Philippines-UAE market has become a high stakes chess game

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

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

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

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

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

 

 

 

 

 

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