Philippine carriers see huge opportunities in China

Once restrictions are lifted

September 11, 2012

Philippine carriers expect to significantly expand their China operations over the next several years and remain confident in the opportunities in the Chinese market despite a current government warning on holidaying in the Philippines. Philippine low-cost carriers – including AirAsia Philippines, Cebu Pacific, PAL Express/AirPhil Express and Zest Air – are poised to be the largest beneficiaries from increasing demand in the Philippines-China market.

In recent years an influx in charters has catered to a large portion of the growth in the Philippines-China market. But charters between the two countries have stopped operating in recent months due to a Chinese government warning against travel to the Philippines, an unfortunate politically-motivated byproduct of the dispute over the Scarborough Shoal in the South China Sea. The return of charter operations and a significant increase in scheduled flights are expected once the warning is lifted.

There are currently about 11,000 one-way scheduled seats per week in the Philippines-China market, down about 15% from May-2012 when China first issued its warning against travelling to the Philippines following a naval standoff with the Philippines around the Scarborough Shoal. Philippine carriers account for nearly three-quarters of capacity in the market. Philippine Airlines (PAL) is the largest carrier, accounting for 37% of current capacity between the Philippines and China.

Cebu Pacific is the second largest carrier in the Philippines-China market, accounting for 27% of total capacity. A second Philippine LCC, Zest Air, also serves mainland China but only accounts for about 9% of total capacity in the market. China Southern currently accounts for about 21% of capacity in the Philippines-China market while Air China accounts for the remaining 6%, according to Innovata data.

PAL currently serves Beijing, Shanghai and Xiamen from Manila while Cebu Pacific serves Guangzhou, Beijing, Shanghai and Xiamen (launched in Mar-2012). Zest serves Shanghai and Quanzhou (launched in May-2012, giving Qanzhou Jinjiang Airport its first scheduled international service). From the Chinese side, China Southern serves Manila from Guangzhou and Xiamen while Air China only links Manila from Beijing.

Philippines to China capacity (one-way seats per week) by carrier: 10-Sep-2012 to 16-Sep-2012

Carrier	Routes and weekly seats	Total weekly seats and capacity share
Philippine Airlines	Manila-Beijing (750) Manila-Shanghai (2114) Manila-Xiamen (1201)	4065 (37%)
Cebu Pacific	Manila-Beijing (716) Manila-Guangzhou (537) Manila-Shanghai (1253) Manila-Xiamen (450)	2956 (27%)
China Southern	Manila-Guangzhou (1022) Manila-Xiamen (1253)	2275 (21%)
Zest Air	Manila-Quanzhou (504) Manila-Shanghai (504)	1008 (9%)
Air China	Manila-Beijing (656)	656 (6%)

Source: CAPA – Centre for Aviation & Innovata

Philippines-China was a large charter market before Scarborough Shoal conflict

PAL, Zest and Cebu Pacific also operated frequent charters into China prior to May-2012, when Chinese tour companies cancelled their charter programmes as a result of the travel warning. Most of the charters operated to airports near beach resorts (such as Kalibo) rather than Manila. The warning has also significantly impacted demand and profitability on scheduled routes, according to executives at Philippine carriers.

The PAL Group's LCC subsidiary, AirPhil Express (which later this year will readopt the previous brand PAL Express), also operated flights to China prior to the onset of the current crisis in May-2012. PAL Express will likely resume flights to the country once tensions ease and would be the logical brand for adding destinations in China that are not served by PAL mainline given AirPhil/PAL Express’ leisure focus and all-economy configuration.

While Philippine carriers would be interested in increasing capacity to major Chinese cities, slot and traffic right restrictions will likely limit any growth in Beijing, Shanghai and Guangzhou to up-gauging existing flights. Cebu Pacific, for example will be able to more than double capacity on its Beijing and Shanghai services by switching from Airbus A320s to Airbus A330s, which it will start taking delivery of in mid-2013. But the real opportunities are in secondary Chinese cities.

Cebu Pacific CEO advisor Garry Kingshott told CAPA's LCCs & New Age Airlines in North Asia conference on 06-Sep-2012 that “the opportunities in China and Chinese secondary cities are enormous. They will sustain many more operations for years to come as disposable income comes up and they are allowed to travel.”

Also speaking at the conference, Zest CEO advisor Brian Hogan cited Xian and Chengdu among the many secondary Chinese destinations which can potentially support LCC service from the Philippines. “When China opens up oh my goodness you could put a 1,000 airplanes in and out of there ... there’s people everywhere. They want to travel,” Mr Hogan said.

AirAsia Philippines seeks China traffic rights

New LCC AirAsia Philippines is also keen on the mainland China market and has already applied for traffic rights to China. AirAsia Philippines launched services in Mar-2012 and now operates domestic as well as international flights to Kuala Lumpur, Hong Kong and Macau.

AirAsia Philippines could launch flights to mainland China as early as 2013, at which point it is hoped that the current travel warning will no longer be in place. AirAsia Philippines will seek to serve points in mainland China which are already served by other AirAsia affiliates. The AirAsia Group now has seven destinations in mainland China – Beijing, Chengdu, Chongqing, Guilin, Guangzhou, Hangzhou and Shenzhen. Guangzhou and Shenzhen are served from both Kuala Lumpur and Bangkok while Beijing, Chengdu, Guilin and Hangzhou are served from Kuala Lumpur and Chongqing is served from Bangkok. Four more mainland China destinations are to be added in the coming months – Nanning, Kunming, Xian and Wuhan.

AirAsia’s large presence in China through its affiliates in Malaysia and Thailand could give AirAsia Philippines an advantage as Philippines-China becomes a hot market. AirAsia Philippines will not have to spend as much to launch and support new services to secondary cities in China as its competitors because it can leverage the existing services of AirAsia X, AirAsia Malaysia and Thai AirAsia. Being affiliated with a well known pan-Asian brand will also help AirAsia Philippines market any new service to Chinese residents, which would account for the overwhelming majority of passengers on any new Philippines-China route.

Limited domestic opportunities prompt Philippine LCCs to look towards North Asia

Most Philippine LCCs now see more opportunities in the international market than domestically given the intense competition and overcapacity that is plaguing the domestic market. There are currently five LCCs operating domestically in the Philippines – market leader Cebu Pacific, AirPhil Express (soon to be rebranded PAL Express), Zest, SEAir and AirAsia Philippines. SEAir launched a new LCC operation covering domestic trunk routes in late Jul-2012 with support from new part-owner Tiger Airways.

AirPhil, AirAsia Philippines, Cebu Pacific, SEAir and Zest will all likely focus medium-term expansion on the international market, particularly China and other north Asian destinations. “North Asia to me is mecca,” Zest’s Mr Hogan tells CAPA. “I’m not excited by the domestic market.”

Of all the international markets from the Philippines, China offers the biggest potential opportunities as most other short-haul international markets such as South Korea, Hong Kong, Singapore and Malaysia are already well served by LCCs. (There are opportunities in Japan – which is only served by one Philippine LCC, Cebu Pacific, with only one destination – but all Philippine carriers have been barred by Japanese authorities from adding capacity until the Philippines can pass an ICAO audit.)

Top five international markets from the Philippines based on capacity (seats per week): 10-Sep-2012 to 16-Sep-2012

Market	One-way seats per week
Hong Kong	36,284
South Korea	30,710
Singapore	29,061
Japan	21,364
China	10,960

Source: CAPA – Centre for Aviation & Innovata

South Korea is already now the largest source of visitors to the Philippines. There are currently just over 30,000 weekly one-way scheduled seats between South Korea and the Philippines and during peak periods there are up to 40,000 weekly seats. (Hong Kong is the largest international market from the Philippines based on capacity but South Korea is a larger source of visitors.)

There is also a huge charter market between the Philippines and Korea. Most of the charter flights operate to and from Kalibo, which is the closest international airport to the popular resort island of Boracay (about 90 minutes by bus). Mr Hogan says Zest currently operates 32 charter flights per week to Korea and Korea accounts for 25% to 30% of the carrier’s total business (Zest also currently operates 18 weekly scheduled flights between Korea and the Philippines).

Charters to Korea help Philippine LCCs as well as PAL improve their aircraft utilisation as the flights are almost always operated in the middle of the night using A320s which are used primarily in the domestic market. (LCCs also operate some international scheduled flights late at night and early in the morning but these only utilise a small portion of their fleets.)

PAL and the LCCs are keen to offer more scheduled flights to Korea and China as scheduled flights are potentially more lucrative than charters. While charters are low risk because the tour companies cover the cost of the flights, the margins are typically low and the tour companies are charging a lot more than LCCs would charge for the same seat. For example while Zest will continue to look to grow its Korea charter business, adjusting its model to accommodate the request of Korean tour companies such as in-flight meals, it is also keen to expand its scheduled operation into Korea and will launch a daily flight from Clark Airport outside Manila to Seoul Incheon in Oct-2012. The addition of Clark-Seoul will give Zest five scheduled routes to Korea along with Cebu, Manila and Kalibo to Seoul and Kalibo-Busan.

China could become the Philippines largest market

Philippine carriers believe the China market could eventually overtake South Korea although it is now only one third the size. While there are only two cities in Korea with scheduled service to the Philippines, Busan and Seoul, there are dozens of Chinese airports that can potentially support service to the Philippines. Chinese regional airports are also seen as more aggressive in recruiting foreign LCCs than airports in Korea or Japan.

Nearly all of China is within the range of narrowbody aircraft from the Philippines, opening up opportunities in every region of the fast-growing country. Mr Kingshott points out that the Philippines is uniquely positioned to benefit from the expected boom in China outbound tourism as the Philippines is the closest tropical destination to China.

For now however Philippine carriers have to be patient and wait for the Philippine-China relations to improve before exploiting the huge opportunities in the Chinese market. So far there have not been many encouraging signs since the Scarborough Shoal conflict began in Apr-2012. But Philippine carriers remain optimistic that the China travel warning will be lifted sooner rather than later. Once it does, rapid growth will almost certainly ensue and China could eventually become the largest source of tourists for the Philippines.