Amazing Race: Qantas Wins Race To Fill Airplane Seats On Route To Manila (Cebu Pacific 50.4%, PAL 70.4%)


When it comes to filling seats on international airline routes, not all carriers are equal.

Budget carrier Cebu Pacific managed to sell just 50.4 per cent of its seats on its new route between Sydney and Manila in the Philippines last year, making it the third-worst performing route by load factor. But on the same route, full-service Qantas filled 88.7 per cent of the seats on its planes, which was the best performance of any carrier on an international route.

Data compiled by aviation consultancy Aspire Aviation based on government filings and analysis of global distribution systems shows routes to Pacific Islands and Papua New Guinea are consistently the lowest performers in terms of load factors. There are, however, reasons why airlines keep those going. They are often used heavily by government and corporate clients and are also used to ferry large amounts of freight between Australia and remote areas.

Thai Airways, which faced political instability in its home market last year, managed to fill only 66.3 per cent of its flights to and from Australia, making it one of the worst performers. Garuda Indonesia was close behind, filling just 67 per cent of its seats from Australia to Bali and Jakarta.

Those poor performances contrasted with US carrier Delta Air Lines filling 86.9 per cent of the seats on its daily flights between Sydney and Los Angeles, which was ahead of the 81.2 per cent filled by its partner Virgin Australia on flights between Australia and Los Angeles.

Cathay Pacific, which has been pushing unsuccessfully to date for more air access to Australia, filled 86.9 per cent of the capacity to its Hong Kong hub last year. Just this week, the airline announced it would upgrade a second of its four daily flights between Sydney and Hong Kong to a larger Boeing 777 from a smaller Airbus A330 from October. It is prevented from adding more flights to the main Australian gateways of Sydney, Melbourne, Brisbane and Perth under the terms of its bilateral air services agreement, but it can add capacity by using bigger planes.

Etihad Airways, which is expanding capacity by placing an Airbus A380 on its Sydney route from June, was also a top performer.  The Virgin partner filled 86.7 per cent of its seats between Australia and Abu Dhabi last year. That was much better than the 73.8 per cent of seats Virgin filled on its own flights between Sydney and Abu Dhabi.

Overall, Virgin filled 74.7 per cent of its seats across its entire international operations, which compared with the 79.7 per cent filled by Qantas.

In the period between July and December, Virgin reported a loss from its international operations, while Qantas reported a profit. Virgin has faced particular pressure on flights between Australia and Bali, where it filled 68.3 per cent of its seats, while Qantas’ budget arm Jetstar filled 75 per cent.

That route will become even more competitive from next month, when Indonesia AirAsia X launches direct flights from Melbourne to Bali. Those flights had been delayed from an initial planned start date of December pending approvals from the Civil Aviation Safety Authority which were granted last week.

Virgin plans to deploy its budget arm Tigerair Australia on international flights in the future, with speculation the low-cost-carrier could take over some Bali flights from Virgin.

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


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

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

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

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

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

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

Rank Carrier Country  LCC Group  Fleet at

1-Jan-2015

Fleet at

1-Jan-2014  

Fleet at

1-Jan-2013

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

Slower 2014 fleet growth driven by adjustments at AirAsia and Tigerair

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

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

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

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

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

Lion Air of Indonesia

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

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

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

Projected fleet growth for Southeast Asian LCCs in 2015

Rank Carrier Country  LCC Group   Projected fleet

 for 31-Dec-2015

Fleet as of

1-Jan-2015

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

Z2

Philippines AirAsia/

Zest AirAsia*

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

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

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

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

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

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

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

Lion and VietJet continue to pursue rapid expansion

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

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

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

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

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

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

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

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

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

Rank Airline Group number of

carriers

 number of

aircraft

aircraft

on order*

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

World’s Safest Low Cost Carriers for 2015


AirlineRatings identified the top 10 safest low-cost carriers in the world (in alphabetical order):

AER LINGUS

ALASKA AIRLINES

ICELANDAIR

JETBLUE

JETSTAR

KULULA.COM

https://i1.wp.com/capetownrocks.nl/nieuws/wp-content/uploads/Kulula-1.jpg

MONARCH AIRLINES

https://i0.wp.com/upload.wikimedia.org/wikipedia/commons/9/90/Airbus_A330-200_Monarch_Airlines_GLA.jpg

THOMAS COOK

TUI FLY

https://i1.wp.com/upload.wikimedia.org/wikipedia/commons/0/0c/TUIfly_Nordic_Boeing_767-300ER_Prasertwit.jpg

WESTJET

Cebu Pacific Long-Haul LCC Hybridises By Pursuing Transit Traffic, Starting With Sydney-North Asia


5J1Cebu Pacific Air’s long-haul unit is entering a new phase of growth which will also see it evolve to pursue more transit traffic. Cebu Pacific initially envisioned a pure LCC model for its long-haul low-cost unit, relying almost entirely on point to point traffic, but is now looking to build up connections, particularly to feed its new ManilaSydney route.

In Sept-2014 Sydney and Kuwait will become Cebu Pacific’s second and third long-haul destinations afterDubai, where its performance has improved in recent months following a dismal start in 4Q2013. The carrier’s A330 fleet, which now consists of four aircraft with a fifth to be added by the end of Aug-2014, has until now been primarily used to upgauge short-haul routes.

The upcoming launch of services to Australia and Kuwait will be followed by Saudi Arabia in 4Q2014 and Hawaii in early 2015. Sharjah may also be launched in 2015 as Cebu Pacific considers leasing additional A330s.

This is the first in a two part series of analysis reports on Cebu’s now 14-month-old widebody operation. This part focuses on the new Manila-Sydney route and connection opportunities beyond Manila. The second part, to be published later this week, will look at Cebu’s plans for Saudi Arabia and the prospects of a Sharjah service. It will also examine the overall PhilippinesUAE market including Cebu’s performance in Dubai.  

Cebu Pacific currently has just one long-haul route

Cebu Pacific began operating A330s in Jun-2013, becoming the fourth LCC in the Asia-Pacific region with widebodies after Jetstar, AirAsia X and Scoot. Daily services to Dubai were launched in early Oct-2013 after an initial period of operating the first two A330s on regional routes.

Cebu Pacific currently uses its A330-300 fleet for Dubai and several short-haul routes. Some frequencies from Manila to Singapore, Seoul, Cebu and Davao are operated regularly with A330s. The A330 is also being used to Tokyo Narita during select days for the peak northern summer season and has previously been used to serve Hong Kong during peak periods. (Cebu Pacific is unable to use the A330 regularly on the Manila-Hong Kong route due to bilateral capacity constraints unless it reduces frequencies, which is not a sensible alternative as slots at Hong Kong are at a premium and Cebu Pacific would like to maintain its current Manila-Hong Kong schedule of four daily flights.)

Cebu Pacific currently operates four A330-300s in single-class configuration with 436 seats. Cebu Pacific is the only long-haul LCC with an all-economy configuration. Jetstar, AirAsia X and Scoot all offer a premium product, with Jetstar and Scoot providing a recliner style seat and premium economy-like product while AirAsia X offers an angled lie-flat business seat.

Cebu Pacific still does not see a need to introduce a premium product as its target market is overseas workers. The Philippine market is extremely price sensitive with limited premium demand.

Cebu Pacific long-haul low-cost model evolves to focus more on transit traffic

Cebu Pacific however is starting to recognise the value of feed. Its initial long-haul model envisioned relying on point to point traffic with a focus on the Manila-Middle East market. This market consists predominately of Filipino workers and to a lesser extent visiting friends and relatives (VFR) as Cebu Pacific’s low fares stimulate more frequent visits by families living back in the Philippines as well as more frequent trips home by the expatriates.

Cebu Pacific for several years has offered a transit product which, for an additional fee, offers a through check-in including transfer of checked bags. But the carrier’s overall portion of transit traffic is very low – less than 5% – including from widebody flights. Cebu Pacific has no intention of migrating to an origin and destination pricing model or starting to work with global distribution system providers, initiatives AirAsia X has adopted in pushing up its transit traffic component to nearly 50%.

Cebu Pacific plans to stick with a traditional sum of sectors LCC approach in pricing connections. The airline, however, is hybridising to some extent by promoting more connections between Cebu Pacific flights and onto flights operated by other airlines.

Cebu Pacific recently began interlining with Tigerair, its first interline partnership with another LCC. It also recently worked with Middle Eastern LCCAir Arabia to promote connections beyond Sharjah, which it served for 12 weeks during the recent runway closure at Dubai, but not through a formal interline or IT link. (The potential of a deeper relationship with Air Arabia will be examined in the second part of this series of analysis reports.) 

Cebu Pacific sees its Manila-Dubai route, which resumed in late Jul-2014 after the Dubai airport fully reopened, as continuing to consist nearly entirely of point to point traffic. But Cebu Pacific is aiming to generate a larger portion of transit passengers on its new Sydney-Manila route, which it plans to launch on 9-Sep-2014 with four weekly flights. The general manager of Cebu Pacific’s long-haul division, Alex Reyes, told CAPA prior to CAPA’s recent Australia Pacific Aviation Summit in Sydney that the carrier is particularly pushing connections to Hong Kong.

Cebu Pacific has opportunity to stimulate demand in Sydney-Hong Kong market

Sydney-Hong Kong is a large local market served with five daily non-stop flights, including four from Cathay Pacific and one from Qantas. But the market has not grown over the past several years due to bilateral constraints.

The Sydney-Hong Kong market generally suffers from higher average fares than other large Sydney-Asia city pairs such as Singapore, Kuala Lumpur and Bali because it lacks a non-stop LCC option. (Singapore, Kuala Lumpur, Hong Kong and Bali are all top 10 international destinations from Sydney based on current seat capacity.)

Singapore Airlines long-haul LCC subsidiary Scoot serves Singapore-Sydney while AirAsia X serves Kuala Lumpur-Sydney and Jetstar serves Bali-Sydney. AirAsia X’s new Indonesian affiliate is also expected to launch Bali-Sydney service by the end of 2014.

Scoot and AirAsia now offer a one-stop product in the Sydney-Hong Kong market but routing passengers via Singapore or Kuala Lumpur is more circuitous than Manila. Currently the fastest connections on AirAsia/AirAsia X from Sydney to Hong Kong is about 16 hours (with a layover in Kuala Lumpur of about three hours) while the fastest connection from Hong Kong to Sydney is about 14 hours (with a layover of only slightly more than one hour). Scoot connections are generally longer, ranging from 15 to 19 hours (includes Singapore-Hong Kong flights operated by Scoot and Scoot partner Tigerair).

In comparison, Cebu Pacific will offer a total journey time of about 12 hours in both directions (slightly less than 12 hours on Sydney-Hong Kong and slightly more than 12 hours on Hong Kong-Sydney). Cebu’s Sydney-Manila flight lands at Manila at 17:30, or 100 minutes before the last of Cebu Pacific’s flights from Manila to Hong Kong. The third of Cebu Pacific’s four daily flights from Hong Kong lands in Manila at 21:30, or just under three hours before the new 00:15 departure for Sydney.

Cebu Pacific is also offering an array of domestic connections at Manila, which will particularly be targeted at Australians going on holiday because the main leisure destinations in the Philippines (such as the islands of Boracay and Palawan) can be only accessed by domestic flights. Cebu Pacific is hoping to stimulate demand in the outbound Australian market – which grew by 25% over the last two years – although the Filipino worker and VFR segment is its main focus. Cebu Pacific says there are about 170,000 Filipinos living in Australia, including about 70,000 in New South Wales, while in 2013 only 56,000 Australians visited the Philippines.

Manila well positioned as hub for Australia-North Asia market flows

There are huge opportunities for the Philippines’ emerging tourism sector to attract more Australians, particularly as lower fares make holidays in the Philippines as inexpensive as Bali. But there are likely more growth opportunities for Cebu Pacific in carrying passengers beyond Manila – both Australians and North Asian residents.

Manila is geographically well positioned for connections between Sydney and North Asia in addition to the obvious example of Hong Kong. In his presentation at the CAPA Australia Pacific Aviation Summit on 6-Aug-2014 Mr Reyes said there is a big opportunity to carry Sydney passengers beyond Manila and added: “We want to get people to hop to North Asia.”

Mr Reyes singled out Beijing, Seoul, Shanghai, Taipei and Tokyo as well as Hong Kong. He pointed out that flight times from Manila to all these destinations are two or three hours less compared to Kuala Lumpur.   

But quick connections will only be available in both directions for Hong Kong. Beijing, Seoul, Shanghai, Taipei and Tokyo are only served by Cebu Pacific from Manila with one daily flight or less, making it more difficult to offer a competitive product from a schedule perspective. AirAsia X generally provides faster transit times as it serves most of these destinations as well as Sydney with two daily flights. Among these five destinations Scoot currently only provides a one-stop product in the Sydney-Taipei market.

AirAsia X has become a major player in the Australia-North Asia market over the past year as it has added a second daily flight to Sydney,Melbourne and Perth, providing a huge increase in capacity that could be not supported entirely by the Malaysian market and connections withinSoutheast Asia. The entrance of Cebu Pacific adds even more LCC capacity in the Australia-Southeast Asia market, providing another increase which once again will require a significant share of connecting traffic to North Asia to be sustainable.

With the launch of services from Cebu Pacific, Australia will have all four long-haul LCCs from the Asia-Pacific region with over 100,000 weekly seats. This includes about 50,000 seats from Australia-based Jetstar Airways, which has roughly two thirds of its international capacity at its long-haul unit. There are also about 45,000 weekly short-haul LCC seats in the Australian international market operated by Jetstar Airways, Jetstar Asia,Indonesia AirAsia, and Tigerair.

Cebu Pacific could attract Taiwan, South Korea, Japan and China traffic at Sydney but needs to improve schedules

Cebu Pacific could still attract some price sensitive customers in the Sydney-North Asia excluding Hong Kong market who do not mind long layovers or stopovers in Manila in one direction. But the real volumes would come if and when the carrier adds frequencies in its North Asian markets.

Cebu Pacific has the setup in Manila to offer fast connections but without the schedules this will not be fully utilised. Mr Reyes says Cebu’s integrated operation at Manila Terminal 3 enables connections in as little as one hour with through baggage.

Taipei, which is already a large connection market for the Australian long-haul low-cost operations of Scoot and AirAsia X, could particularly be attractive if Cebu Pacific expands on the Manila-Taipei route. Currently Cebu Pacific’s only flight from Taipei arrives in Manila at 03:05, or three hours after the Sydney flight departs (requiring a 21 hour connection time), while from Sydney to Taipei a transit time of just under five hours is available. There are currently only four non-stop weekly flights from Sydney to Taipei, all on full-service flag carrier China Airlines.

In the Sydney to Beijing, Shanghai and Seoul markets a long connection (15 to 20 hours) is similarly required on the return. Tokyo has about a 12 hour connection from Sydney and about an eight hour connection on the return. Connections to Japan could improve as Cebu Pacific has been expanding rapidly in the Japanese market since a new bilateral agreement last year opened up opportunities for Filipino carriers. Cebu Pacific over the past year has launched services to Tokyo Narita and Nagoya, while upgrading Osaka, which had been its only Japanese destination, to daily and is now seeking to take over one of the two daily flights to Haneda recently dropped by PAL.

Narita is currently the only Japanese airport served non-stop from Sydney, according to OAG data. The route is served only by full-service carriers, with Qantas and oneworld partner Japan Airlines each operating one daily flight on the route. Jetstar serves Tokyo from Cairns, Gold Coast and Melbourne with domestic connections at both ends, using Jetstar Airways from the three Australian gateways (including to Sydney) and Jetstar Japan from Narita.  

Opportunities for Cebu Pacific in the Sydney-mainland China market, which has emerged as a large target market for AirAsia, are more limited as Cebu Pacific doesn’t have as large a network in China. It currently serves the three major Chinese cities – Beijing, Guangzhou and Shanghai – with less than daily flights and has only one secondary destination – Xiamen, which is served with only two weekly flights. Growth in China is not likely at least for the short to medium term given the current state of relations between China and the Philippines.

But Hong Kong – and potentially other North Asia connections as Cebu’s schedule thickens – will clearly play a big role in Cebu Pacific’s performance in the Sydney market and be a factor in potential expansion into other Australian markets. Mr Reyes says that since ticket sales for the new Sydney-Manila route began in mid-Jun-2014 booking have been “quite good”.

Further Australia expansion possible if bilateral is extended

Cebu Pacific plans to increase Sydney from four to five weekly flights from Dec-2014. A further expansion to Australia is possible in 2015 but requires an expansion of the Australia-Philippines air services agreement.

See related report: Cebu Pacific’s Australia launch falls victim to old fashioned protectionism and mercantilism

The current bilateral is capped at 6,000 weekly seats, with 2,200 now allocated to Cebu Pacific and 3,800 to Philippine Airlines. This cap applies only to Melbourne, Sydney, Perth and Brisbane; Philippine carriers are free to serve other Australian airports with unlimited capacity.

PAL is expected to fully utilise its capacity allocation from Dec-2014, when it plans to upgrade Sydney from four weekly to daily flights. Philippine authorities are keen to expand the bilateral which would enable both Cebu Pacific and PAL to expand. Mr Reyes says Cebu Pacific is interested in serving multiple destinations in Australia.

With additional traffic rights Cebu Pacific could launch Melbourne as early as 2015 and upgrade Sydney to daily. PAL has said it is interested in launching non-stop service to Perth and Brisbane. (Brisbane is now served three times per week via Darwin while Perth was also briefly served via Darwin in 2013.)

Cebu Pacific could also eventually serve Perth and Brisbane but Melbourne is more likely in the near to medium term. Cebu Pacific sees Perth as a potential destination for its future fleet of A321neos as the market is likely too thin to support an A330. It does not believe the A321neo will have the range to serve Brisbane although this could be re-examined after the new type enters service.

Cebu Pacific faces huge challenges as Sydney service commences

Cebu Pacific however first needs to build a sustainable business case in Sydney, which could prove to be challenging. Cebu Pacific will have to overcome stiff competition and potential overcapacity on the Manila-Sydney route.

Qantas serves Sydney-Manila with four weekly flights while PAL’s recent decision to increase Sydney to daily in response to Cebu’s entrance puts pressure on a market which has traditionally been relatively small with large seasonal fluctuations. While PAL has been in Australia for decades Cebu Pacific is a relatively unknown brand in the Australian market.

Sydney has a relatively large Filipino population but the community is not large enough to support 16 weekly flights except during peak travel periods such as Christmas and Easter. The 16 flights will provide about 2,200 one-way seats, nearly double current capacity levels.

Transit traffic to North Asia should help but Cebu Pacific will face stiff competition in the Sydney-North Asia market from more established long-haul LCCs, particularly AirAsia X, which is now the fourth largest foreign carrier in the Australian market. Cebu Pacific will need to increase frequencies in several key North Asia markets in order to offer attractive connections from Sydney to cities other than Hong Kong.

To be competitive and build a sustainable operation in Australia Cebu Pacific may also have to consider adopting an origin and destination pricing model and pursuing stronger relationships with travel agents, including online travel agents. Cebu Pacific is entering the Australia-Asia market at a time competition is extremely intense, pressuring yields and load factors at all airlines. It will take a lot more than low fares and a low cost structure to carve out a profitable niche.

Source: CAPA, Centre for Aviation

Analysis: Is Small The Next Big Thing?


Cebu Pacific Air
Cebu Pacific Air

 

Asia’s airline industry is booming as local competition heats up with fleet expansions, new routes and an array of financing options. “In terms of aircraft numbers, Asia-Pacific has become a bigger market than Europe, second only to North America, and the projections are that it will grow at a really fast rate,” says Saugata Mukherjee, an aviation finance specialist and asset and structured finance partner at Stephenson Harwood in Singapore. Southeast Asian low-cost carriers like AirAsia, Lion Air, and Cebu Pacific have driven much of the growth, placing orders for hundreds of Airbus A320s and Boeing 737s. VietJet Aviation Joint Stock Co, Vietnam’s first private airline, agreed last September to a provisional order for up to 92 Airbus jets worth $9 billion, while Singapore’s Tiger Aiways placed an order in March for 37 Airbus A320neo aircraft valued at $3.8 billion at list prices. “The established legacy carriers are under increasing pressure from low-cost carriers,” says Leo Fattorini, a partner in Bird & Bird’s international aviation group in Singapore.

Vietnam in particular is tipped to spark competition among airlines and manufacturers. Even as the nation’s local economy grows at about 5 percent – its slowest pace in 13 years – demand for domestic air travel is experiencing double-digit growth. The International Air Transport Association expects Vietnam to become the world’s third-fastest growing market for international passengers and freight next year, and second-fastest for domestic passengers.  While this is likely to translate into a robust new source of business for aircraft makers like Boeing and Airbus, regional manufacturers like Canada’s Bombardier, Brazil’s Embraer, European joint venture ATR, Russia’s Sukhoi and Japan’s Mitsubishi Aircraft also stand to benefit.

 

cropped-tigerair.jpg
Tiger Airways

Carving Out a Niche

After flying under the radar for many years, manufacturers of smaller jet and propeller-driven passenger aircraft are gaining traction in Asia. Embraer forecast that the region will take delivery of 1,500 new jets of 70 to 130 seats over the next 20 years. That translates, it says, to a staggering $70 billion worth of business. The Singapore Airshow in February underscored this trend, with smaller aircraft makers picking up a slew of new orders. Thai low-cost carrier Nok Air said that it would order up to eight of Bombardier’s Q400 turboprop aircraft. ATR meanwhile, inked a deal to sell up to eight of its 72-600 aircraft to Thai carrier Bangkok Airways. It also agreed to sell 20 aircraft to leasing firm Dubai Aerospace Enterprise, with options for 20 more, in a deal valued at $1 billion. Substantial numbers of ATR aircraft are being acquired by airlines in Indonesia, Malaysia, the Philippines and Myanmar, where a lot of routes aren’t yet developed enough to warrant an Airbus A320 or a Boeing 737, says Fattorini. “These ATR aircraft are ideal for these countries. They are relatively fuel efficient, robust and versatile, and can fly into airports where perhaps some of the larger jets can’t,” adds Fattorini.

Growing demand for services to and between smaller second- and third-tier cities has created a unique market suited to smaller aircraft. In a country like India, where Airbus and Boeing aircraft have saturated the market with airlines like IndiGo, SpiceJet and GoAir, start-up carrier Air Costa, which began operations last October, is trying to carve out a niche for itself by connecting the smaller cities with Embraer jets. “You don’t need larger aircraft. Regional air services have enormous potential in India,” Ramesh Lingamaneni, chairman of Air Costa, told Reuters. In February, the airline ordered 50 jets valued at $2.94 billion from Embraer, in what was the aircraft maker’s first major Indian deal. “The Air Costa model of looking at secondary cities is a very interesting one. It is a trend that we have and will continue to see across the entire region,” says Mukherjee.

Importantly, for the likes of Embraer and ATR, the world’s two largest aircraft manufacturers do not make aircraft that compete in the below-130 seat segment. “Right now, there are two different markets for aircraft. If you look at Lion Air for example, they use their Boeing 737s for the bigger primary city connections, but they also have an ATR fleet which captures a different market segment,” says Mukherjee. There is, however, some overlap between markets. Bombardier’s C Series offers a competitive alternative to the Airbus A320 and Boeing 737, but it is still yet to make an impression in the Asian market, says Mukherjee.

 

AirAsiaA320
AirAsia

Financing Options

As more carriers enter Asia’s lucrative aviation market, a range of financing options are readily available to fund fleet expansions. The choice of funding depends quite heavily on the carrier, says Fattorini. “Some of the top-tier established carriers still have very strong cash positions, despite increased pressure on their balance sheets. They often buy aircraft outright, or have the credit rating to be able to access loan finance at attractive rates,” says Fattorini.

For less-established carriers that do not boast the strongest balance sheets or the highest credit ratings, export credit agency (ECA) financing is often a preferred alternative. “Carriers typically start off with ECA financing because they either don’t have access to commercial funding, or they find commercial funding too expensive. But as they mature, commercial financiers come in and start helping them out, and their terms are usually more flexible than those offered by the ECA lenders,” says Mukherjee. For his part, Fattorini says that ECA finance has become more expensive and fallen slightly out of favour among airlines and lessors with stronger balance sheets as a result. But he adds that  a lot of historic orders still exist that are being backed by ECAs, as well as hybrid ECA deals which, depending on the ECA involved, could either be pre-funded or refinanced in the capital markets.

As the market matures, lawyers say the range of financing will extend increasingly into the capital markets space. “Right now, money is cheap. But, if the pricing environment changes – and it will – you will see enhanced equipment trust certificate (EETC) issuance increasingly by non-U.S. issuers. Non-ECA-backed airline bond financing will possibly start to play a role in Asia as well in the medium term,” says Mukherjee.

Another alternative for airlines is leasing, which is gaining popularity in Asia as carriers look to avoid owning a large fleet in favour of leaner balance sheets. In 2011, leased planes accounted for 36.5 percent of the worldwide fleet, according to Boeing data, up from less than 15 percent 20 years earlier. “The generally accepted view is that leasing will increase to about 40 or 50 percent of the market in the not too distant future,” says Fattorini.

A number of new leasing companies too have entered the Asian market, keen to increase and develop their portfolios. “There is definitely more competition between lessors now, and this is good news for airlines. As can be expected, there has also been some amount of consolidation between lessors through M&A activity and it is possible that there will be some further activity as the market evens out,” says Mukherjee.

 

Sharklet-fitted Airbus A320
VietJet

Shakeup For State Carrier

VietJet Aviation Joint Stock Co, Vietnam’s first private airline, agreed last month to a provisional order for up to 92 Airbus jets worth $9 billion at list prices. The low-cost carrier is aiming for a stock market listing in either Hong Kong or Singapore in 2015 to fund the expansion, Managing Director Luu Duc Khanh said. VietJet plans to double its fleet by 2015 to 20 jets, and is speeding up work to get three joint ventures in the air, including one with an undisclosed carrier in Myanmar and another agreed with Thailand’s KanAir, to operate in early 2014.

VietJet’s bold expansion after less than two years in business could raise the stakes not only at home, but also in Southeast Asia’s fast-growing low-cost market, dominated by Malaysia’s AirAsia Bhd and Indonesia’s Lion Air.

Those ambitious plans may have shaken state-run flag carrier Vietnam Airlines (VNA) into expediting its long-awaited initial public offering and fleet expansion. VNA dominates the local market and will increase its fleet by 28 percent to 101 aircraft by 2015. It has been preparing for an IPO in the second quarter of 2014.

Its fleet includes both Airbus and Boeing jets, and it has ordered the Boeing 787 Dreamliner and the Airbus A350. According to Boeing, VNA has existing orders for eight 787s and 11 more through leasing companies. The airline also has its hand in the low-cost market through a stake in JetStar Pacific, a joint venture with Australia’s Qantas Airways. JetStar plans to more than triple its fleet of five Airbus A320s to 16 in the next few years, a spokesman says.

VietJet’s joint venture plans were therefore a smart move, says Timothy Ross, an air transport analyst at Credit Suisse in Singapore. “I can’t imagine they have much on their balance sheet … so in terms of building a new business, it’s far better to give away some of the potential upside and invest less,” he says. JetStar has not been profitable and is likely to struggle as competition increases, Ross says, while VNA has not done itself any favours delaying privatisation. “We should have seen the Vietnam Airlines IPO three to five years ago, but it sat on its hands,” he says. “Competition in the airline industry is inevitable.”

Traditionally, lessors call the shots on leasing agreements, especially when dealing with newer carriers, says Fattorini. “But with a number of new lessors in the market, especially those from China who are eager to quickly build up their portfolios, airlines have more options than in recent years. As a result they should be in a relatively stronger negotiating position,” he says. Airlines should consider their pressure points and not be afraid to push hard for positions which make their lives operationally easier. An experienced lessor will never compromise on its ability to quickly recover its asset in a default scenario but on issues such as maintenance and use covenants, there’s likely to be much more flexibility, adds Fattorini.

For his part, Mukherjee thinks that a lessee negotiating contract terms also sends positive signals to the lessor. Lessors and lessees should pay attention to the operational or technical covenants of a lease. “When you maintain your fleet you have one standard and one technical team. If there is a higher standard on your operating lease you suddenly have a mismatch, which raises the standards that your technical team needs to have across the fleet,” says Mukherjee. “The technical team is not going to differentiate between the owned and leased aircraft because they use the same standard across the board. So from a lawyer’s perspective, you need to make sure that those covenants are as evenly set across the financing and leasing documents.”

In addition, Mukherjee highlights the aircraft return conditions of a lease as an important area for lessees to consider. “Lessors and lessees alike must ensure that the lessee’s technical team are well versed in the maintenance and return conditions set out in the lease. Return conditions, in particular, should be negotiated and agreed in relative detail by the lessors’ and lessees’ technical teams. What you don’t want is for a mismatch in contractual expectations and what the lessee’s technical team are capable of delivering. This is neither in the lessee’s interest nor is it good news for the lessor. For example the lessor may have arranged a re-lease of the aircraft with a third party airline. A failure to redeliver on time will lead to losses, and while the lessor can try and claim back its losses from the defaulting airline, it does not present a pretty picture,” he says.

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Lion Air

Boom Times Ahead

As the rivalry among airlines and aircraft manufacturers intensifies in Asia, it is bringing with it an increasing volume of business to the handful of law firms in the region that have aviation finance and aircraft leasing expertise. Some carriers, lessors and financiers in Asia still use lawyers who are based in London or New York, says Fattorini. “This is surprising as there are a number of firms with the right expertise in this region, and it makes the logistics of doing a deal much easier.” But this could change rather quickly as more business flows into Asia. And in an industry as niche as aviation finance and aircraft leasing, on-the-ground experience in the region is vital. For the year ahead at least, especially in Southeast Asia, leasing companies, financial institutions and law firms with dedicated aviation finance specialists are poised to profit from a booming airline industry as low-cost carrier activity surges and regional aircraft makers come to the fore.

Source:  Kanishk Verghese, Reuters