As Philippines reaches 80% penetration on Aviation Travel
October 28, 2011
 |
| Airphil Express and Cebu Pacific flights to Tawi-Tawi |
The low-cost carrier penetration rate in the fast-growing domestic Philippine
market is about to reach 80%, a remarkable achievement and a figure
unprecedented in the global aviation industry. An LCC penetration rate
of 85% is even plausible in the foreseeable future as Philippine LCCs,
led by
Cebu Pacific and
AirPhil Express, are rapidly expanding domestically while flag carrier
Philippine Airlines (PAL) continues to reduce domestic capacity.
LCC competition in the Philippine international market is expected to increase significantly, driven primarily by the launch of
AirAsia Philippines,
which was originally planned for this month but has encountered last
second delays. Domestic competition, however, is not likely to increase
as
AirAsia Philippines and the proposed
Tiger Airways-
SEAir
joint venture face uphill battles in their attempt to secure
authorisations for domestic operations. While international routes
linking the Philippines with other Asian countries could see intense
competition from five or more LCCs, the domestic market will likely be
served by two or at most three LCCs in future.
Cebu Pacific and AirPhil
are confident they will emerge as the big domestic winners, with
AirPhil targeting a 30% to 35% share of the domestic market. Cebu
Pacific is positioned to remain the market leader with roughly a 50%
share while full-service carrier PAL is likely to see its share erode to
about 15%.
LCC domestic penetration rates reached 68% in 2010 and 75% in 2Q2011
LCC penetration rates in the Philippines have been rising steadily
over the last several years driven by rapid expansion at Cebu Pacific.
LCC penetration rates particularly surged last year, reaching 68%
compared to only 59% in 2009, primarily because of growth at two new
LCCs: AirPhil and
Zest Air. AirPhil, formerly known as
Air Philippines, has pursued rapid domestic expansion since rebranding and adopting the LCC model in Mar-2010. Zest, previously known as Asian
Spirit, initially adopted the LCC model in 2008 and started to pursue more aggressive expansion in 2010.
Philippine CAB data shows the three LCCs combined account for 75% of
total passenger traffic in 2Q2011, compared to only 66% in 2Q2010.
Scheduled capacity data for the current week shows LCCs have a 77% share
of the domestic market in the Philippines, with Cebu capturing 44.4%,
AirPhil 20.3% and Zest 12.4%.
Cebu Pacific and AirPhil executives expect LCCs to soon start capturing nearly 80% of the Philippine domestic market.
Cebu Pacific and AirPhil executives expect LCCs to soon start capturing nearly 80% of the Philippine domestic market.
Cebu Pacific and AirPhil are both adding significant domestic capacity
in 4Q2011, as they take delivery of several additional A320s. PAL,
meanwhile, has further reduced its domestic capacity. Over the last two
years PAL has been steadily reducing its A320 fleet, returning aircraft
as leases expire and leasing two A320s to AirPhil.
PAL and AirPhil have common owners and a close partnership which
includes codesharing on domestic routes. CAPA has been informed that PAL
is now only operating 90 daily domestic flights, down from 145 daily
flights previously. The latest capacity reductions were initially
implemented during a ground crew strike at PAL late last month but are
now believed to be permanent. AirPhil handled PAL passengers that were
inconvenienced during the strike and continues to work closely with the
flag carrier as PAL focuses more on the international market, where
there is higher demand for a premium service.
AirPhil to expand A320 fleet to 15 aircraft by end of 2012
AirPhil currently operates eight A320s and eight Dash 8 turboprops.
The carrier is planning to nearly double its A320 fleet over the next
year, with almost all the additional capacity to be deployed
domestically. AirPhil SVP marketing and sales Alfredo Herrera tells CAPA
that the carrier’s ninth A320 will enter service next month followed by
the 10th in December and two more in Jan-2012. Three more deliveries
are planned for later next year, resulting in a fleet of 15 A320s by the
end of 2012.
...“We are still a domestic player first and foremost. International is gravy,”...
Of
the four A320s to be delivered to AirPhil over the next three months,
Mr Herrera says three will be deployed domestically while one aircraft
will be used for international charters. AirPhil is now primarily a
domestic operator with only two daily scheduled international flights: Manila-Singapore and Cebu-Hong Kong. It also has regular charters to several destinations in mainland China.
“We are still a domestic player first and foremost. International is gravy,” Mr Herrera tells CAPA.
By focussing on the domestic market with its first 15 A320s, Mr
Herrera expects AirPhil can be a “strong number two” behind Cebu
Pacific, capturing 30% to 35% of the domestic market. The carrier’s
A320s are being used to build up market share on trunk routes while its
eight Dash 8s are used for some of the several domestic destinations in
the Philippines that have runways that are too short for jets. AirPhil
has five 70-seat Dash 8-400s and three 50-seat Dash 8-300s with the
-300s used exclusively to operate a high frequency service from Manila
to Caticlan, the gateway to popular tourist destination Boracay Island
that is also served by Cebu with ATR 72s.
AirPhil aims to eventually pursue some international expansion, which
would allow it to increase the utilisation of its A320s. But for now
AirPhil plans to only expand its international operations via charters,
partially because traffic rights on prime routes such as Manila-Seoul are not currently available.
...the international routes are key in helping Cebu keep its costs lower than its competitors...
Cebu
Pacific has a much larger international operation, accounting for 21%
of its total capacity. While some of Cebu’s international flying is
currently not as profitable as its domestic operation,
the international routes are key in helping Cebu keep its costs lower than its competitors, including AirPhil, as several of the international flights are operated during overnight hours.
Cebu Pacific to add three A320s in 4Q2011
Cebu Pacific is also adding three A320s in 4Q2011, with most of the
additional capacity being used to increase frequency on domestic routes.
The first of these aircraft was placed into service last week and used
to operate additional flights to three domestic destinations. One more
A320 is slated for delivery by the end of this month, with the last one
expected in December, giving Cebu Pacific a year-end fleet of 29 A320
family aircraft and eight ATR 72s.
Cebu Pacific’s current fleet plan includes four additional A320s in
2012, followed by seven more in 2013. As a result, it expects a fleet of
40 A320 family aircraft and eight ATR-72s by the end of 2013.
Cebu Pacific has seen its domestic traffic increase by 10% through
the first three quarters of 2010 to 6.7 million passengers. The carrier
also transported 2 million international passengers through the first
nine months of 2011, a 25% increase compared with last year. Last year
Cebu Pacific transported over 8 million domestic passengers, accounting
for 52% of the 16.6 million total passengers in the Philippine domestic
market.
...the main priority is to defend its market leading position domestically...
Cebu
Pacific is primarily focussed on defending its fortress position
domestically, aiming to exploit its first mover advantage in the local
Philippine LCC market and grow at least as fast as its competitors.
Unlike pan-Asian LCC groups such as AirAsia and
Jetstar,
Cebu Pacific does not have an ambition to become a major international
player. The carrier plans to continue growing its international network,
as it helps diversify its revenue stream and keep its A320 utilisation
levels at about 14 hours per day, but
the main priority is to defend its market leading position domestically.
Cebu Pacific sticks with pure LCC model while hybrid model appeals to AirPhil
...“Everyone who gets mixed up will lose money.”...
Cebu
Pacific also plans to stick with a pure LCC model and will not be
tempted by elements of hybrid models, such as codeshares, GDSs and
corporate bookings. Cebu Pacific chief executive advisor Garry Kingshott
told an IATA conference in Singapore
earlier this month that airlines pursuing “blurry models” typically
have lower profit margins than pure LCCs or FSCs.
“In this industry you
are either a low-cost producer or a high differentiator,” Mr Kingshott
said.
“Everyone who gets mixed up will lose money.”
Cebu Pacific uses travel agents locally in the Philippines as credit
card usage remains relatively low in the country but connects with them
via the web. Mr Kingshott is adamant Cebu Pacific will not turn to the
GDSs. “We have far more success today in using Twitter and Facebook as
booking channels,” he said. “We’re in a very complex business.
Everything you touch seems to complex up for whatever reason.”
Cebu Pacific’s insistence on remaining pure to the LCC model could
provide an opening for AirPhil to follow a more hybrid model. AirPhil
already codeshares with PAL and could pursue partnerships with foreign
carriers seeking improved access to domestic destinations in the
Philippines as full-service carrier PAL continues to increase its focus
on the international market. AirPhil already offers some frills, such as
free checked luggage, in an attempt to differentiate its product from
larger Cebu Pacific. In Singapore it also decided to use Terminal 2
instead of following Cebu Pacific into Changi’s budget terminal.
...following a hybrid model comes at a cost...
However, as Mr Kingshott pointed out,
following a hybrid model comes at a cost.
AirPhil’s costs on domestic trunk routes are already higher as its A320
fleet is smaller and utilised less (Cebu Pacific enjoys more economies
of scale with its much larger A320 fleet and utilises its A320s on
average about two more hours than AirPhil, primarily because Cebu
Pacific now does a lot more international flying).
Cebu Pacific also now
has a cost advantage over AirPhil on the turboprop routes because the
ATR-72 has lower per seat costs than the faster but generally less
economical Dash 8. AirPhil also uses a legacy reservation system from
Sabre.
Its codeshare with PAL also adds cost, although this cost is offset as
the AirPhil seats sold by PAL are typically higher-yielding than seats
sold by AirPhil directly.
Future of Zest Air appears more uncertain
There is clearly room in the Philippine domestic market for at least
two LCCs and it would make sense for AirPhil to differentiate itself
from Cebu Pacific by following a slightly different model. Zest Air,
which currently operates seven A320 family aircraft, is probably the
most vulnerable as it is the smallest of the carriers and does not yet
have the economy of scale enjoyed by Cebu Pacific or the partnership
AirPhil has with PAL.
Zest’s most valuable assets are its slots at Manila...
Zest also does not have as much cash at its disposal.
Zest’s most valuable assets are its slots at Manila,
which Cebu Pacific and AirPhil would quickly swoop up if given the
opportunity. The current slot situation at Manila is currently one of
the biggest challenges limiting growth for Cebu Pacific, AirPhil and the
domestic LCC market generally. The carriers are now having to base some
of their additional aircraft at Cebu instead of Manila but believe more
slots could potentially be made available at Manila by improving the
efficiency of operations at the congested airport.
Tiger-SEAir
and AirAsia Philippines are also eyeing the domestic market. But the
incumbents are confident the status quo will be maintained and neither
carrier will secure permission to operate domestic trunk routes.
Tiger and SEAir joint venture remains in limbo
Tiger and SEAir initially filed for domestic trunk routes in 2Q2011
and have since been fighting a show cause order which forced them to
suspend ticket sales and postpone the launch of flights from Manila to
Cebu and Davao. Tiger has said its planned 33% investment in the joint
venture with SEAir is contingent on securing domestic rights. It is
looking increasingly likely that the application will be denied and the
proposed joint venture will fizzle altogether – similar to what recently
happened with Tiger’s planned joint venture in Thailand.
Without the equity tie-up and domestic joint venture, the marketing
tie-up which has been in place between Tiger and SEAir since late last
year on international routes could also be in jeopardy. The marketing
tie-up now includes SEAir operating two Tiger-branded A319s from
Manila's alternative airport, Clark.
Expansion of this operation has been put on hold multiple times. The
marketing tie-up and proposed joint venture excludes SEAir's existing
small turboprop domestic operation, which includes routes from Manila to
regional destinations such as Caticlan and currently accounts for 1% of
total capacity in the Philippines domestic market.
AirAsia Philippines misses launch target
The SEAir Tiger-branded international operation now faces the
prospect of competition on all of its routes from AirAsia Philippines.
The new AirAsia affiliate took delivery of its first A320 in Aug-2011,
unveiling plans to launch services in Oct-2011. AirAsia Philippines was
aiming to start by year-end linking Clark with five international
destinations – Bangkok, Hong Kong, Macau,
Singapore and Seoul – and two domestic destinations – Kalibo and Puerto
Princesa. But ticket sales have not yet begun on any of the planned
initial routes and the AirAsia Group said this week that its new
Philippine affiliate is now aiming to launch services in early 2012 as
it continues to work on securing required regulatory approvals.
...the new carrier has only received a temporary permit for international routes...
AirAsia
Philippines, which plans to operate seven A320s by the end of 2012,
should still be able to launch services on some international routes –
including Bangkok, Singapore and Macau – in 1Q2012.
But sources tell
CAPA some of the planned international routes, particularly South Korea,
are in jeopardy because of a lack of room in existing bilaterals for
another Philippine carrier. AirAsia Philippines may also not receive the
domestic licence it needs to operate the planned Clark-Kalibo and
Clark-Puerto Princesa routes. For now
the new carrier has only received a temporary permit for international routes.
Its first aircraft has been sitting at Clark now for 10 weeks without a
single revenue service and a second aircraft is about to be delivered.
While AirAsia Philippines may have some initial headaches, its
ability to leverage the AirAsia brand and the group’s infrastructure
across Asia should allow it to become established as a major player in
the Philippine international market. Tiger and small local LCC
Spirit of Manila
are the most vulnerable as AirAsia Philippines quickly expands at
Clark. The impact on Cebu Pacific and AirPhil should be limited because
they have the advantage of operating international flights at more
convenient Manila. They are also primarily domestic carriers and are
focussed on profiting from their enviable position in the fast-growing
Philippine domestic market.
Given the slot restrictions at Manila and the challenges Tiger/SEAir
has faced, the Philippine domestic market remains relatively closed. But
with two to three LCCs competing fiercely and an unprecedentedly high
LCC penetration rate, fares will almost certainly remain low. As a
result demand will continue to be stimulated and, as more Filipinos
start to fly more often, the domestic market should continue to chalk up
double-digit annual growth.
As Mr Kingshott
pointed out earlier this month, the domestic LCC penetration rate now
being achieved in the Philippines is without precedent in the global
industry. “It proves if you can take fares to a level where people can afford them, LCCs will succeed,” he said.
While domestic LCC penetration rates of 50% to 60% are common in some other emerging markets - such as Brazil, India, Malaysia and Mexico
- there has never been a domestic market of a significant size with an
LCC penetration rate approaching 80%. In mature markets, such as the US and several European countries, domestic LCC penetration rates are currently about 30%.
