By ALEXANDRA WEXLER
Soaring competition in Asia's low-cost airline industry is a sign that the model works, says Lance Gokongwei, chief executive of Philippines-based carrier Cebu Pacific.
Thai Airways, All Nippon Airways and Singapore Airlines have all announced plans for new low-cost carriers in recent months, while last week Australia's Qantas Airways and Japan Airlines said they are planning a low–cost joint venture too. These new entrants will have to fight it out with the likes of Indonesia's Lion Air, Singapore's Tiger Air, and market leader AirAsia of Malaysia, as well as Cebu Pacific.
"Basically, the market has seen the value of low-cost carriers in Asia," says Mr. Gokongwei. "I think it's really a validation of the model."
Asia's travel sector is expanding rapidly on the back of the region's growing wealth. But competition will make business tougher and could drive down fares. The industry is also coping with rising fuel costs, while a slowdown in the global economy would also put a dent in traffic.
Cebu Pacific launched in 1996 and began flying to international destinations in 2001. The no-frills airline had the second largest ever initial public offering on the Philippine Stock Exchange in October. It said last week that first-half net profit fell about 23% mainly due to a 50% jump in the price of fuel.
Passenger revenue continue to rise, however, and the airline has placed orders for new aircraft that will more than double its existing fleet.
Mr. Gokongwei spoke to The Wall Street Journal's Alexandra Wexler about the challenges of keeping true to the low-cost model amid soaring fuel costs, planning for an expanding market, and distinguishing Cebu Pacific from the competition. The following interview has been edited.
WSJ: Are you concerned about rising competition including from Qantas, Singapore Airlines and others?
Mr. Gokongwei: There are very few examples of full-cost carriers executing on the low-cost carrier model. I think that the DNA of a low-cost carrier and a full-cost carrier is really very different.
WSJ: How will AirAsia's plans to enter the Philippines affect your business?
Mr. Gokongwei: One, the market will continue to grow. It will also further boost tourism into the Philippines, and that will help our domestic network. Very few tourists stay in Manila, and Cebu Pacific has 45% of the domestic market in the Philippines.
WSJ: What are your biggest challenges?
Mr. Gokongwei: There's always a temptation to stray from the low-cost carrier mindset, and we have to be very focused on keeping our operations very simple and scalable. We see a lot of low-cost carriers stray from their roots, which made them successful. They start offering premium seats or lounges in that effort to get that extra 1% of business.
WSJ: What are some of the rising costs you're dealing with?
Mr. Gokongwei: As we grow, the biggest issue we're facing is the cost of fuel. Over 50% of our cost today is fuel. We have to improve efficiency and reduce our non-fuel unit cost. We have tried to recover this through fuel surcharges and increased ancillary revenues.
WSJ: How are consumers on budget airlines different than customers on traditional carriers?
Mr. Gokongwei: I don't think there's a major distinction. Everyone is focused on value today. I learned the hard way about trying to introduce business class and lounges- the Philippines itself is not a hub conducive for that. I have to focus on not getting caught in the middle market, because the middle is disappearing.
WSJ: Hong Kong issued a travel alert on Manila last August after a hostage crisis that resulted in the deaths of several travelers from the city. How has that affected Cebu Pacific?
Mr. Gokongwei: We at Cebu Pacific first want to convey our deepest sympathies with those who had loved ones who were lost last year. We are very hopeful that there will be a resolution between the Philippines government and those who were affected as soon as possible. I think on a traffic basis, initially of course there was an effect, especially on the Hong Kong-to-Cebu route. It seems to have recovered for the first six months of this year--traffic is up 9% year over year.
WSJ: Where do you expect to see the most growth?
Mr. Gokongwei: We prefer to offer more frequent flights on routes we already have, versus introducing new routes. In the last six months, we've added frequency to Singapore, Kuala Lumpur, and Bangkok. In terms of new routes, there are lots of opportunities in northern Asia. There are lots of cities in Thailand and Japan that we'd like to add flights to.
WSJ: How do you expect the airline industry to grow in the next five to 10 years?
Mr. Gokongwei: In 2005, we were carrying 2 million passengers a year, and I think we had about a third of the domestic market. The domestic market will be 20 million this year, and we expect to carry 12 million passengers. We believe that air traffic [in the Philippines] will grow two to three times the GDP growth. In addition, low-cost carriers will continue to gain market share from traditional carriers. We have made the necessary plane orders to support this type of growth, including taking in a total of 53 new aircraft between September of this year and 2021.
Thai Airways, All Nippon Airways and Singapore Airlines have all announced plans for new low-cost carriers in recent months, while last week Australia's Qantas Airways and Japan Airlines said they are planning a low–cost joint venture too. These new entrants will have to fight it out with the likes of Indonesia's Lion Air, Singapore's Tiger Air, and market leader AirAsia of Malaysia, as well as Cebu Pacific.
"Basically, the market has seen the value of low-cost carriers in Asia," says Mr. Gokongwei. "I think it's really a validation of the model."
Asia's travel sector is expanding rapidly on the back of the region's growing wealth. But competition will make business tougher and could drive down fares. The industry is also coping with rising fuel costs, while a slowdown in the global economy would also put a dent in traffic.
Cebu Pacific launched in 1996 and began flying to international destinations in 2001. The no-frills airline had the second largest ever initial public offering on the Philippine Stock Exchange in October. It said last week that first-half net profit fell about 23% mainly due to a 50% jump in the price of fuel.
Passenger revenue continue to rise, however, and the airline has placed orders for new aircraft that will more than double its existing fleet.
Mr. Gokongwei spoke to The Wall Street Journal's Alexandra Wexler about the challenges of keeping true to the low-cost model amid soaring fuel costs, planning for an expanding market, and distinguishing Cebu Pacific from the competition. The following interview has been edited.
WSJ: Are you concerned about rising competition including from Qantas, Singapore Airlines and others?
Mr. Gokongwei: There are very few examples of full-cost carriers executing on the low-cost carrier model. I think that the DNA of a low-cost carrier and a full-cost carrier is really very different.
WSJ: How will AirAsia's plans to enter the Philippines affect your business?
Mr. Gokongwei: One, the market will continue to grow. It will also further boost tourism into the Philippines, and that will help our domestic network. Very few tourists stay in Manila, and Cebu Pacific has 45% of the domestic market in the Philippines.
WSJ: What are your biggest challenges?
Mr. Gokongwei: There's always a temptation to stray from the low-cost carrier mindset, and we have to be very focused on keeping our operations very simple and scalable. We see a lot of low-cost carriers stray from their roots, which made them successful. They start offering premium seats or lounges in that effort to get that extra 1% of business.
WSJ: What are some of the rising costs you're dealing with?
Mr. Gokongwei: As we grow, the biggest issue we're facing is the cost of fuel. Over 50% of our cost today is fuel. We have to improve efficiency and reduce our non-fuel unit cost. We have tried to recover this through fuel surcharges and increased ancillary revenues.
WSJ: How are consumers on budget airlines different than customers on traditional carriers?
Mr. Gokongwei: I don't think there's a major distinction. Everyone is focused on value today. I learned the hard way about trying to introduce business class and lounges- the Philippines itself is not a hub conducive for that. I have to focus on not getting caught in the middle market, because the middle is disappearing.
WSJ: Hong Kong issued a travel alert on Manila last August after a hostage crisis that resulted in the deaths of several travelers from the city. How has that affected Cebu Pacific?
Mr. Gokongwei: We at Cebu Pacific first want to convey our deepest sympathies with those who had loved ones who were lost last year. We are very hopeful that there will be a resolution between the Philippines government and those who were affected as soon as possible. I think on a traffic basis, initially of course there was an effect, especially on the Hong Kong-to-Cebu route. It seems to have recovered for the first six months of this year--traffic is up 9% year over year.
WSJ: Where do you expect to see the most growth?
Mr. Gokongwei: We prefer to offer more frequent flights on routes we already have, versus introducing new routes. In the last six months, we've added frequency to Singapore, Kuala Lumpur, and Bangkok. In terms of new routes, there are lots of opportunities in northern Asia. There are lots of cities in Thailand and Japan that we'd like to add flights to.
WSJ: How do you expect the airline industry to grow in the next five to 10 years?
Mr. Gokongwei: In 2005, we were carrying 2 million passengers a year, and I think we had about a third of the domestic market. The domestic market will be 20 million this year, and we expect to carry 12 million passengers. We believe that air traffic [in the Philippines] will grow two to three times the GDP growth. In addition, low-cost carriers will continue to gain market share from traditional carriers. We have made the necessary plane orders to support this type of growth, including taking in a total of 53 new aircraft between September of this year and 2021.
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