(Bloomberg) — The family of Philippine billionaire John Gokongwei, which owns Cebu Air Inc., wants to branch out to airports in tropical destinations to boost regional flights.
JG Summit Holdings Inc. is in talks with Metro Pacific Investments Corp. for a venture that may bid for 30-year contracts to operate and expand six airports across the Philippines, President Lance Gokongwei said in an interview Wednesday in Manila. He said passenger growth at Cebu Air this year will be limited by congestion at Manila’s airport.
“The largest domestic airport we fly into, which is Manila, is constrained, so there’s also a limit on how quickly we can add capacity,” said Gokongwei, 48, who also runs Cebu Air. “Connecting the nation’s secondary cities with international destinations is where we see big opportunities.”
The Philippines, an archipelago of more than 7,000 tropical islands, attracts less than 5 percent of travelers to Southeast Asia. Thailand hosted more than five times the number of visitors in 2013. While cheaper oil and an open-skies policy within the Association of Southeast Asian Nations are positive for the airline business, Philippine carriers are hobbled by old and inadequate domestic airports.
Manila’s Ninoy Aquino International Airport handled about 30 million passengers in 2014, more than its annual capacity of 28 million, according to data on its website. The number of airline passengers in the capital and nearby provinces, which includes Clark International Airport, will climb to 49.8 million in 2020 and 75 million by 2030, from 31.9 million in 2012, the transportation department has said, citing a study by the Japan International Cooperation Agency.
While the government hasn’t decided on a Manila airport expansion, it plans to award a contract to operate and expand provincial airports for an estimated cost of 114 billion pesos ($2.6 billion) by March 2016. The airports are in Bacolod, Iloilo, Panglao, Laguindingan, Davao and Puerto Princesa, according to the Public-Private Partnership Center.
“It’s an excellent combination considering the background of JG Summit in airlines and Metro Pacific in infrastructure,” said Astro del Castillo, managing director at First Grade Finance Inc. “Given the capital required, it’s logical to form a consortium.”
Metro Pacific President Joey Lim confirmed that the company is in talks with JG Summit about airports. The two companies joined forces in 2013 to bid for the right to operate and improve the Mactan-Cebu airport, a project won by a venture that includes GMR Infrastructure Ltd.
Gokongwei said Cebu Air isn’t keen on acquiring regional carriers and will continue to focus on the Filipino market, where about 10 million nationals work overseas.
“There’s 100 million people, it’s an island country. The game is really growing the market and getting people to fly more often or to switch the boats and the buses to the planes,” Gokongwei said. “The market is still very large even by just focusing on the Philippines.”
Cebu Air is set to start flights to Tokyo’s Narita airport from Cebu this month, after introducing trips to Singapore and Hong Kong from the central Philippine areas of Iloilo and Kalibo. The carrier sees promise in North Asian destinations such as Japan and Korea, as the Philippines is the nearest “warm country,” Gokongwei said.
Many Philippine resort islands have the potential to be like Phuket in Thailand and Bali in Indonesia, Gokongwei said.
JG Summit controls 66 percent of Cebu Air, which expects to carry a little more than 18 million passengers this year, up from 16.9 million in 2014, Gokongwei said. Growth will slow from last year’s 17.5 percent expansion even as cheaper oil makes travel more affordable, he said.
“If they get the right partners for the airports, they can make aggressive bids and make money,” said George Ching, an analyst at COL Financial Group. The brokerage has a hold rating on JG Summit, saying the shares are fairly valued.
Cebu Air shares have lost 0.8 percent this year after today’s 1 percent decline. Parent JG Summit rallied for a fourth day to close at a two-month high while Metro Pacific gained 2.3 percent.
Fuel makes up about 50 percent of Cebu Air’s costs. Given the decline of oil to its lowest price in six years Wednesday, the carrier expects to realize savings of about 40 percent on the 70 percent of its fuel bill that isn’t covered by hedges, he said.
The budget carrier has 37 more planes arriving through 2021, a fleet expansion decided when oil was more expensive. Cebu Air, which started in March 1996, flies to 28 cities in 17 countries in Asia, Australia and the Middle East.
“The enemy of airlines is always hubris,” Gokongwei said, explaining that investments for the next five to seven years are made based on current conditions. “You’re making strategic bets on what’s going to happen in the future. So the question is: Will the long-term price of oil remain at $50? I hope so, but I don’t think so.”
Source: Clarissa Batino & Siegfrid Alegado