For Cebu Pacific,The time is right!

As it seeks new frontier far from its shores

Singapore - The global aviation meltdown has caused catastrophic financial returns to world leading Airlines around the globe, particularly the Asia Pacific region.

Qantas Airways Ltd., Australia’s largest airline, has eliminated 1,500 positions globally. Air France-KLM Group, Europe’s biggest airline, plans to cut 2,000 jobs.

Hong Kong’s Cathay Pacific Airline registered a loss of US$1 billion in the second half of last year, while Singapore Airlines’ passenger numbers slumped 20 percent to 1.18 million, the biggest decline since June 2003, according to Bloomberg.

But with every crisis comes opportunity and Cebu Pacific’s CEA Gary Kingshott is anxious to cash on it by following Tony Fernandes footstep at AirAsia. Fly the Airbus 330.

The Center for Asia Pacific Aviation (CAPA) reported that as the global downturn bites, low-cost carriers would outpace traditional airlines “in terms of traffic growth and earnings in 2009. So it did.

Cebu Pacific has outpaced Philippine Airlines as the industry leader in the Philippines by flying 5.4 million passengers in 2008 and it seeks a modest goal of carrying 7 millions more passengers in 2009 despite the global recession when its legacy counterpart which was forced to adopt a convergence strategy contends to carry only 6.5 million this year.

Recruitment for AirAsia and Cebu Pacific was also on the upswing in sharp contrast to the legacy airlines retrenchment program. Both Airlines with pending delivery orders from Airbus continue to roll its new planes to fly new routes despite short on cash due to hedging problems.

Tony Fernandes said that “The crisis is actually an opportunity for low-cost carriers or any low-fare model of business. If you look at America which is in a very bad situation, Best-Buy is doing very well, Wal-Mart is also doing very well. We are obviously seizing this opportunity when some of the other premium airlines are cutting back on their growth and people are transferring their business from legacy airlines to low-cost carriers.”

Both Gary and Tony sang the same tune after they saw each other in Singapore two months ago during the Low Cost Airlines World Asia Pacific Summit, and got a little word on the long haul choice as Cebu Pacific intends to introduce wide-bodies on its fleet. Narrow body is not the most economical way of flying to Australia especially the Airport charges which bills 30% of the fare.

Jetstar Airways, a low cost Qantas subsidiary was the first airline to introduced wide-body aircraft on its fleet as it launched Tokyo and Hawaii to its map. Qantas Group has done a commendable job of launching and nurturing JetStar as a successful internal low-cost, without contaminating it with big airline issues plaguing Qantas itself.

Philippine Airlines strategy of doing the same synergy hopes to duplicate the same success story after its plan with Air Philippines suffered a snag. Meanwhile, Malaysia Airlines did it with Firefly and Singapore Airlines with Tiger Airways.

History has shown that the "airline within an airline" model rarely works well, particularly for low-cost carriers. Low-cost development is equally problematic and the airline graveyard is virtually littered with failed "internal low-costs": Tango and Zip at Air Canada, CALite at Continental, Delta Express and Song at Delta, Shuttle by United and TED at United, to name a few. It remains to be seen whether PalExpress, its turboprop service, would be an exception to the rule as Philippine Airlines adopts to a convergent type of operations amidst impressive growth of low cost carriers. All its ordered B777 aircraft as well as its reconfiguration program has adopted a bi-class system.

Former EasyJet and Go executive Michael Coltman, from consultancy firm Mango Aviation, records history and flags up airlines which have capitalized on adversity. He said that over the past 40 years, the vast majority of successful low-cost airlines started and grew during downturns. The early 1970’s marked by recession, a fuel crisis, and stifling regulation, has spawned Southwest Airlines which now plans to go Long haul.

For Ryanair and EasyJet, the September 11, 2001 crisis allowed massive aircraft orders at greatly discounted rates, ensuring competitive cost advantage for years to come. The market turmoil at this time also allowed it to place an aircraft order that helped it secure a lower cost base than would otherwise have been possible.

During downturns, aircraft financing becomes much more affordable. Buying or leasing an aircraft in today's market can be done at near-historic lows.

Gary Kingshott thinks that now is the time to invest. This would allow the creation of a long-term cost advantage while targeting a market that will deliver meaningful revenue. This time Airbus makes sure that it lends a helping hand as it did before. After all, it was CEO Lance Gokongwei who said that he preferred Boeings yet ended getting Airbus for its fleet in 2003.

Airbus already established a Watchtower Committee to monitor its customers and financing needs, which Nigel Taylor, senior vice-president, customer, project and structured finance for Airbus says an operation similar to the War Room established by Boeing Capital in August 2007.

The purpose of the Committee is to analyze the "real" needs of airlines over the next two years, seeking to determine if any carrier may not need the equipment this year and moving the aircraft around if necessary. It also analyses pre-delivery payments and surveys the banks in line to finance customers. Cebu Pacific’s dream perfectly fits the bill.

The Toulouse based manufacturer is currently planning on about $1.3 billion in customer financing this year as compared with $1 billion for Boeing.

Investing now will require significant cash outlay. A sufficient war chest, which is still doubtful considering the losses posted by JG Summit in 2008, would allow the airline to secure aircraft at a long-term cost advantage, while having enough cash to cope with weaker near-term demand, fend off any competitive challenge and hedge fuel at current prices. This, combined with the right route network, would make for a strong carrier during the next economic upturn. But at the end of the day, it would still be JG Summit’s call.

Already, the legacy airline, particularly Cathay Pacific, now boast massive no-frills discounts or restricted fares across their networks as a means of fending off their budget rivals, at the same time keep their customers to continue flying with them and generate much needed revenue to sustain its big fleet as passengers are shifting their preference to fly low cost. [ATI]

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