1Q Passenger Traffic Increases by 5% for Int’l and 12% for Domestic


Civil Aeronautics Board of the Philippines announced  that international passenger traffic for the 1st quarter of 2016 reached 5.61 million in January to March, up from 5.34 million passengers in the same period last year. International carriers account for 2.65 million passengers while Philippine carriers flew 2.95 million international passengers.

Despite this modest growth, passenger traffic is still hampered by slot limitation at Ninoy Aquino International Airport, the country’s main gateway.

International Traffic (1st quarter of 2016)

Philippine_Airlines_Airbus_A320_MRD-1

  1. Philippine Airlines – 1.55 million passengers (up from 1.46 million)
  2. Cebu Pacific Air – 1.12 million passengers (from 837,942)
  3. Philippines AirAsia – 222,330
  4. PAL Express – 60,992

Domestic Traffic (1st quarter of 2016)

IMG_20160122_173053

  1. Cebu Pacific Air – 3.03 million passengers
  2. PAL Express – 1.15 million passengers
  3. Philippines AirAsia – 657,102 passengers
  4. Philippine Airlines – 563,070 passengers
  5. CebGo – 377,096 passengers
  6. AirSwift – 33,515 passengers
  7. Magnum Air – 30,191 passengers

CAB earlier reported a 12-percent increase in domestic passengers to 5.84 million in the first quarter from 5.23 million a year ago.

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Philippine Airlines Arrives in Saipan


It was delayed for an hour and a half.

The inaugural flight of Philippine Airlines to Saipan was delayed due to some 40 Chinese tourists whose connecting flight from China to MNL arrived late. The flight was originally scheduled to arrive at 0335H (local time) but the plane landed 0505H.

CNMI Officials Celebrate

Despite this, CNMI officials happily welcomed PAL’s flight. Gov. Ralph Torres remarked “Thank you Philippine Airlines for having this new hub here. It is truly a new opportunity not just for our tourism market, but also for our medical referral program. This is an excellent opportunity for us and we are going to work closely with the airlines and all entities involved.” The Governor is hopeful for a successful and continuous service to Saipan from MNL.

“We are going to make sure that we help PAL succeed, because when you succeed, we also succeed. This is going to be a good partnership. I also want to acknowledge our Commonwealth Ports Authority — they will be working closely with PAL.”

Torres acknowledged that PAL is taking a risk, “but we also see an opportunity for growth here, and I believe the market will grow.”

PAL Express president Bonifacio Sam thanked the CNMI government and people for their support.

“This is our maiden flight — at last we are here, thank you so much for the support,” Sam said.

Proud moment

“Landing here on Saipan … after a little over four hours … is a proud moment for PAL, and the touchdown of our plane marks the culmination of the collective effort of PAL and the industry’s stakeholders.”

He thanked the entities that made the flight service available: the Civil Aviation Authority of the Philippines, the Federal Aviation Administration, the CNMI government, the Philippine Department of Tourism, and the Marianas Visitors Authority.

“Now fellow Filipinos, Saipan residents, and leisure travelers can travel in and out of the island with ease and enjoy the flight on board our modern Airbus A320 with business class and economy class while experiencing heartfelt service.”

Sam also mentioned that he loves nature and golf. “For a tourist like me, Saipan is indeed the place to be … I look forward to experiencing an exciting round of golf here.”

Saipan is PAL’s 43rd destination in its international network which includes countries in Asia, Oceania, the Middle East, the United States and Europe.

PAL Express flies twice-weekly from Saipan to Manila every Thursday and Monday at 4:35 a.m. local time with an arrival in Manila at 6:45 a.m.

PAL leaves Manila every Wednesday and Sunday at 9:20 p.m. and arrives on Saipan at 3:35 a.m. local time the following day.

The PAL route includes connections to points within the Asia-Pacific region such as Thailand, Singapore and China.

Happy

Chris Tenorio, acting CPA executive director, presented a plaque to PAL officials to commemorate the inaugural flight while MVA Managing Director Chris Concepcion said he is happy about the successful inaugural flight.

“This is a new flight service that people in the CNMI can take advantage of — direct flights to Manila twice a week. It not only will help our local passengers on medical referral, it will also provide a new destination for leisure customers who can travel directly and not have to transit anywhere.”

Staffers of MVA’s Manila office, which opened early this year, are also on island for PAL’s inaugural flight.

“They will head back to Manila spreading the word about Saipan and the CNMI that we are open for business for tourism and leisure travel,” Concepcion said.

PAL provided direct Manila-Saipan flight service in the 1990s but it was eventually discontinued.

Source: Bryan Manabat, http://www.postguam.com

Airline Ratings Out


Airlineratings.com has released its safety ratings and reviews of airlines for 2015.

Safety Rating
Philippine Airlines (full service airline) – 6 out of 7
PAL Express (regional airline) – 6 out of 7
Cebu Pacific (LCC) – 4 out of 7
AirAsia Zest (LCC) – 3 out of 7
Product Rating
Philippine Airlines (full service airline) – 5 out of 7
PAL Express (regional airline) – 4 out of 5
Cebu Pacific (LCC) – 3 out of 5
AirAsia Zest (LCC) – 2 out of 5

 

All Philippine based carriers were reviewed and ranked based on Safety Rating and Product Rating. These airlines include Philippine Airlines, PAL Express, Cebu Pacific and AirAsia Zest.

Safety Rating is based on the following criteria: IOSA/ISSA certification, EU Banned List, Fatality Free, FAA Endorsed and ICAO Country Audit.

Product Rating is dependent on the airline’s product offering segmenting a full service airline from LCC and regional airlines.
A full service airline typically offers passengers in flight entertainment, checked baggage, meals, beverages and comforts such as blankets and pillows in the ticket price.
The seats generally have more recline than a low cost carrier as well as more leg room. Full service airlines offer passengers the choice of economy or business class travel and on some flights premium economy and first class.
Airlines in this category will transfer baggage between flights and to alliance partners of which most full service carriers are a part (SkyTeam, oneworld, Star Alliance). Full service airlines often have a long history and are flag carriers for their countries of origin.
Low cost and regional airlines cannot be compared with full service airlines as they offer an entirely different product on typically far shorter routes where the frills do not matter as much.
Whilst the full service airlines are graded using a 7 star rating system, regional and low cost airlines can not have a seven-star budget product because seven stars denotes excellence.
Airlineratings.com adopted a separate easy to follow five-star rating systems for regional and low cost carriers.

 

 

And the Philippines’ Largest Domestic Carrier Is…


From January to September 2015 period:

Passenger

  1. Cebu Pacific, 8.37 million passengers (50.94%)
  2. PAL Express, 3.60 million passengers
  3. AirAsia Zest, 1.61 million passengers
  4. Cebgo, 1.38 million passengers
  5. Philippine Airlines, 1.18 million passengers
  6. Air Asia, 272,755 passengers
Image Source: Rappler.com

Cargo

  1. Cebu Pacific, 82.51 million kilograms
  2. PAL Express, 51.63 million kilograms
  3. Philippine Airlines, 34.51 million kilograms
  4. Cebgo, 15.78 million kgs
  5. AirAsia Zest, 10.72 million kgs
  6. AirAsia, 1.24 million kgs

 

PAL Express: Goodbye Dubai! وداعا دبي!


MANILA, Philippines – Philippine Airlines will take over the Manila-Dubai route, which is currently being serviced by low cost carrier unit PAL Express.

“We (PAL) are planning to take over the Dubai route from PAL Express. We are looking at April,” Jaime Bautista, president and chief operating officer of PAL, said.

This is part of the airline’s rationalization plan, which would allow PAL to focus on international routes and PAL Express on domestic routes. The only exception is Cebu and Davao, which will still be serviced by PAL.

“We want PAL Express to concentrate on the domestic routes,” Bautista said.

PAL Express operates 24 aircraft of the PAL Group’s fleet of 74 Airbus and Boeing aircraft.

Source: ABS-CBNnews.com

Philippine Airlines Slows Expansion By Subleasing A330s & Reducing A321s Orders


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

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

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

Lucio Tan retakes control of Philippine Airlines and PAL Express

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

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

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

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

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

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

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

PAL to slow the pace of international expansion

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

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

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

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

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

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

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

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

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

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

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

San Miguel long-haul expansion was more strategic than rational

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

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

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

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

PAL ordered too many A330s

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PAL struggles with newly acquired A340-300 fleet

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

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

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

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

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

PAL needs more 777-300ERs

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

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

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

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

PAL faces excess narrowbody issue as well

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

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

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

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

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

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

PAL Express may pursue domestic expansion in 2015

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

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

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

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

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

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

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

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

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

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

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

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


A380

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