Filipino LCCs locked out of Japan

July 5, 2012

JCAB Rules

The Philippines Low Cost Carrier (LCCs) cannot expand in Japan due to a Japan Civil Aviation Bureau (JCAB) recent restriction which essentially follows US determinations relating to a country’s safety category. The Philippines for a number of years now has been denied US FAA Category 1 status, the normal level. 

As a result of not being Category 1, Filipino carriers serving the US cannot open any new routes or change frequency or aircraft. As Japan has chosen to follow this determination, the same restrictions apply on Filipino carriers serving Japan.

Philippine Airlines holds the largest amount of capacity in the Philippines-Japan market, in place prior to losing Category 1 status, with the second largest amount of capacity from Delta, which uses its ex-Japan traffic rights to serve the Philippines. Delta offers more capacity to the Philippines than ANA and JAL combined.

There is also limited frequency between the Philippines and Japan via service from from Jetstar Airways (originating in Australia) and Jetstar Asia (originating in Singapore). Jetstar Japan will enable the group to enhance links between the Philippines and Japan on an origin and destination basis without having a first leg from Australia or Singapore to the Philippines. 

The pairing of routes can be polar, with very price-sensitive VFR traffic visiting the Philippines’ main cities while leisure travellers head to tourist hubs.

Rank of airlines serving Japan-Philippines based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	PR	Philippine Airlines	9108
2	DL	Delta Air Lines	5474
3	JL	Japan Airlines	3318
4	NH	All Nippon Airways	1540
5	JQ	Jetstar Airways	732
6	3K	Jetstar Asia	540
7	5J	Cebu Pacific Air	537

Source: CAPA – Centre for Aviation

Cebu Pacific, the largest and only profitable LCC in the Philippines, has only about 500 weekly seats to Japan. The potential of the Japan-Philippines market to expand with low-priced LCC service (ANA and JAL have some of the highest costs and prices) is exemplified by the South Korea-Philippines market.

South Korea does not follow the US over Category 1 ratings and so Filipino carriers have been able to expand in line with bilateral agreements. In Apr-2012 Cebu Pacific requested approximately 4,000 additional weekly seats to South Korea.

Rank of airlines serving South Korea-Philippines based on capacity (seats): 02-Jul-2012 to 08-Jul-2012

Rank	Airline		Total seats
1	OZ	Asiana Airlines	8813
2	PR	Philippine Airlines	7756
3	KE	Korean Air	6250
4	5J	Cebu Pacific Air	5191
5	Z2	Zest Air	3360
6	7C	Jeju Air	1323
7	LJ	Jin Air	1098
8	BX	Air Busan	780

Source: CAPA – Centre for Aviation

The lack of Category 1 status in the Philippines is a sore point and Japan’s somewhat arbitrary adoption of it is already the subject of discussions between the two countries. This issue will likely come to head and be resolved if and when Japanese LCCs request capacity into the Philippines.

Category 1 reflects not on individual airlines (it relates to regulatory oversight capability) but consequences work against them. Philippines Airlines acquired Boeing 777-300ER aircraft under the assumption the Philippines would regain Category 1 status but has since had to use the aircraft on alternative routes, decreasing cost synergies and revenue improvements, as it cannot change equipment on US routes so long as the Philippines is not Category 1 rated. 

A likely scenario is that the Philippines could pressure Japan to relax its following of US Category 1 ratings (which globally is followed by very few countries) in exchange for giving Japanese LCCs access.

When the market is finally opened, the Japanese LCCs will feel pressure from Filipino carriers that not only have a lower cost base but greater brand recognition, as is especially the case with Cebu Pacific. Jetstar could want to secure its position early and before the Philippines-Japan market is opened to expansion by Filipino LCCs. None of the Japanese airlines will be anxious to see any change in the status quo relating to Category 1.

The AirAsia group is advantaged as it launched a local subsidiary, AirAsia Philippines, in Mar-2012 that could potentially serve more of the market than higher-cost AirAsia Japan. Jetstar has no Filipino subsidiary and the market is saturated enough that a joint venture there is unlikely. CAPA