Philippines market good for AirAsia

December 18, 2010, Saturday

NEW ENTRANT: RHB Research notes that AirAsia will be entering the LCC sector in the Philippines as a new entrant, trying to garner a slice of action of the market that was currently dominated by market leader Cebu Pacific.

KUCHING - Airline industry player AirAsia Bhd’s (AirAsia) penetration into Philippines market through joint venture (JV) forming with three Filipino businessmen was seen as a smart move by several research firms.According to OSK Research Sdn Bhd (OSK Research), the JV named AirAsia Incorporation (AAI) was expected to commence operations sometime in September 2011, with 40 per cent stake in the JV, would commence with the deployment of at least two aircraft leased from its parent company, AirAsia.

The research house stated that the Philippines would be an attractive market for low cost carriers (LCCs) such as AAI, given the archipelagic nature of its geography, which would provide conducive conditions for air travel.

Coupled with its high number of Filipinos working abroad to boost demand for international travel, the Philippines would also be offering a significant growth potential on expectations of the high propensity for air travel on the back of rising per capita income, said the research firm.

Despite the intensity of competition in the Philippines’ aviation space,OSK Research noted a lot of room for market share gain, notably in the international segment as AAI would be able to leverage on AirAsia’s superior branding and comprehensive network.

OSK Research viewed that AAI’s earnings could start trickling in after two years of operations.

Another research house, RHB Research Institute Sdn Bhd (RHB Research) noted that AirAsia would be entering the LCC sector in the Philippines as a new entrant, trying to garner a slice of action of the market that was currently dominated by market leader Cebu Pacific.

However, AirAsia would see significant competition from Malaysia Airline System Bhd’s (MAS) recent expansion of its 100 per cent-owned Firefly into a full-fledged LCC, backed by a fleet of 30 fuel-efficient 189-seater Next Generation 737-800 aircraft by 2015 that would lead Firefly to compete head-on with AirAsia’s A320 fleet.

It highlighted that Firefly, a new entrant to the jet segment would go all out to capture market share at the expense of profitability by heavy price discounting while AirAsia might also want nip the competition in the bud by dropping fares. Borneopost

Local airlines face 2011 turbulence

DEMAND AND SUPPLY
By Boo Chanco
The Philippine Star

December 17, 2010

Don’t greet airline executives a Happy New Year. They are even now wishing they could put the next year on fast forward and get it over with. Fuel prices are again on an upswing and there are some analysts who are talking $100 a barrel oil. And even as mergers and alliances are starting to have some positive impact on the bottom line, the threat of a double dip recession could nip rising passenger numbers all too soon.

Domestically, two more things are major concerns. It is certain that 2011 will bring about open skies and increased competition. Despite the usual noise against it from the usual suspects, I don’t think open skies or the “pocket” open skies version can be stopped. I understand the Aquino administration strongly believes in it and is committed to implement it as soon as it can next year.

I am not going into the pros and cons of open skies because this is one topic that had been discussed widely and for some years now. From a business perspective, the local airlines should spend more effort now planning to live with it rather than trying to stop it. The rules of the game are changing and it is take it or leave it.

Stiff competition is the other major headache in the local airline industry. The smaller airlines are beefing up their fleet and teaming up with larger foreign airlines to give the predominant players, PAL and Cebu Pacific a run for market share.

As earlier reported in this column, SEAir is leasing Airbus 320s from Singapore’s Tiger Airways and will thus be in a better position of mounting flights to key domestic destinations too. Tonyboy Cojuangco is teaming up with Air Asia’s Tony Fernandes on a new airline with a 60/40 ownership structure that will also enable it to compete in the domestic market. Zest Air is also beefing up its fleet.

We are now seeing a stiff competition among the airlines not just for passengers but for the services of trained and certified pilots. The flight operations of some of the airlines, including the established ones, may be disrupted next year as pilots are continually being poached by local and foreign competitors.

This early, the President of Philippine Airlines is warning that the domestic market may not be that big and ruinous competition may result. That is probably true. It also complicates an already difficult market for the country’s premier flag carrier.

As I had explained here in some past columns, the big problem of PAL is that it is overstaffed and cannot be as nimble as the budget carriers like Cebu Pacific. PAL has some 7000 employees compared with Cebu Pacific’s 2,500 and at least in the domestic and comparable international regional routes, Cebu Pacific had been flying more passengers already.

This is why even the Department of Labor saw the importance of allowing PAL management to do what it should to improve the competitiveness of the airline. There is no choice for PAL but to try to approximate the efficiency of Cebu Pacific and the host of new and existing budget airlines in order to survive.

The order from Malacañang for both management and labor union to hold their horses will only delay the inevitable. There is no way they can escape addressing the need to make PAL’s structure and business model more in tune with competitive requirements in today’s airline market.
The officers of the employee labor union are doing their members a great disservice by refusing to see the futility of the status quo. The employees union should learn from the example of the American automotive unions. When it became clear that GM, Ford and Chrysler would go belly up unless the unions worked with management and government to save the car companies, the United Auto Workers or UAW decided that cooperation was the better deal.

It was a painful decision for the tough American automotive union who had to give up years of hard won benefits. But the union leaders realized that if they want to truly protect the economic interest of the workers, they will have to save their respective car companies first. It is the same thing with PAL. It is crunch time and every stakeholder must decide if they want to save the airline or bury it for good.

For the Lucio Tan haters, what Lucio Tan is or is not is irrelevant. The key problem now is how to make the airline competitive. The alternative is to let the airline die and allow the new airlines to take its market share. There is something Darwinian in the capitalist system. Weak corporations should be allowed to die.

If PAL dies because it was not allowed by its staff to reorganize to meet competition, the surviving airlines will take over PAL’s market share, routes and even its planes and other assets at no cost to the taxpayers. PAL should not be considered too big to fail.

Even if it wants to, it would be extremely difficult for the government to bail out PAL now. Government has a serious fiscal deficit problem. It is also not good policy to use the money of 90 million taxpayers to save 2,500 jobs, jobs which aren’t going to be there in the long term anyway.

What happens next in PAL is also going to be an important test for the Aquino administration. Will it just do the politically expedient alternative and capitulate? Will it exercise leadership and allow the airline to reconfigure its business model to help it survive today’s new business environment?

PAL employees should learn an important lesson from the pilots who went on strike some years ago. It turned out that the pilots’ union was ill-advised and the pilots lost everything after their strike had been held illegal by the courts.

But pilots have one great thing in their favor that the ordinary airline employees don’t have. Pilots have world class skills that are in high demand in the world market. In fact, retaining and hiring enough pilots will be a major headache for the local airlines next year. What money the airlines have will be used to keep and hire the pilots first.
A PAL strike during the holidays will be a disaster for the airline… but a life changing calamity for the affected employees and their families. It would be better for them to take the million pesos or so offered and then take their chances on a new career. The union leaders are taking on the responsibility for the lives of their members and their families. For their own sakes, I hope everyone will be reasonable.

AirAsia launches RP unit

Eyes Clark hub

December 17, 2010

SOUTHEAST Asia’s budget carrier king Tony Fernandes yesterday launched a joint venture airline with Philippine businessmen, giving a jolt of competition to what he described as an underserved aviation market.

AirAsia Group Chief Executive Officer Tony Fernandes (left) shakes hands with Antonio “Tonyboy” Cojuangco, Jr., a cousin of President Benigno S. C. Aquino III, during a news conference in Makati. Southeast Asian budget carrier king Mr. Fernandes yesterday launched a joint venture airline in the Philippines, giving what he described as an underserved market a big jolt of competition. -- AFP

AirAsia Philippines, Inc. in which AirAsia will hold a 40% stake, should begin flight operations in August next year using either Clark or Subic -- two former United States military bases near Manila -- as its base, the Malaysian said.

“We do expect to be profitable straight away,” Mr. Fernandes told a press conference.

The partners have approved an authorized capital expenditure of $25 million for the joint venture.

“The amount does not include the cost of putting the terminal. We still have to compute that. Our aircraft will be leased from AirAsia Malaysia. We will have three to five 150-seater Airbus 320s to be used in the next few months,” he said.

Mr. Fernandes said internal funds would capitalize the joint venture, in which investors led by Antonio “Tonyboy” O. Cojuangco, a cousin of President Benigno S. C. Aquino III, hold a combined 60%, the minimum local equity stake set by the Constitution.

“Many of the routes that AirAsia Philippines will be going to are already being exploited by other AirAsia companies, so the setup cost for AirAsia Philippines is very low,” enabling low fares, Mr. Fernandes said.

Local competition includes successful budget carrier Cebu Pacific, which recently went public, and the loss-making flag carrier Philippine Airlines (PAL).

“Cebu Pacific has done a fantastic job,” Mr. Fernandes said, praising its equally low-cost, no-frills model but saying there was more than enough room for the AirAsia group to grow.

“I think PAL could have, I’m sure, done a better job,” he added.

Kuala Lumpur-based AirAsia has set up similar joint ventures in Thailand and Indonesia and previously announced plans to set up a unit in Vietnam.

However, Mr. Fernandes said AirAsia was now giving priority to the Philippine joint venture before proceeding with the Vietnam project.
The flashy 46-year-old tycoon, who also heads the Lotus Formula One team, said that just a tiny segment of the Philippine population of 95 million people were currently making use of air travel, giving the project huge potential.

Marianne Hontiveros, a music industry executive, will be the AirAsia Philippines chief executive, with Mr. Cojuangco as chairman.

“We need tourism badly in our country, and we have so much to offer,” Ms. Hontiveros told the press conference yesterday.

Transportation ministry Undersecretary Glicerio Sicat welcomed the airline investment as a boost to a tourism sector that is seriously falling behind its Southeast Asian neighbors due to bad infrastructure and security problems.

“As Tony Fernandes himself said, more people would be able to fly,” Mr. Sicat told reporters.

He said the government expects AirAsia to serve certain areas not adequately served by local carriers.

“He (Mr. Fernandes) said some of their routes would be pioneering.

We will improve the airport facilities, that will be our contribution,” Mr. Sicat told reporters.

The Aquino government has singled out tourism as a potential key growth driver, and had warned PAL, which is facing labor problems, to shape up or face tougher competition under an “open skies” regime that will let more foreign airlines in.

The Philippines tourism ministry hopes to double annual tourist arrivals to six million, raising annual tourism revenues to at least $4.6 billion and creating three million new jobs.

Michael L. Romero of the local port operator Harbour Centre will be the vice-chairman of AirAsia Philippines.

“AirAsia Group has been interested in putting up a hub in the Philippines for the past three years. It was only last year that we finally decided to have this joint venture,” Mr. Romero said.

“We believe in the reputation of the budget carrier as it was able to have 25 million passengers today from 100,000 passengers when it started. Carriers around the world are going to the low-cost model as it is more attractive to the passengers,” he added.

Victor Jose I. Luciano, president and chief executive officer of Clark International Airport Corp., told reporters in the same briefing the airport in Clark, Pampanga is “always ready to accommodate AirAsia Philippines.”

“We are just waiting for them to decide whether they will have their hub in Clark. But we will respect their decision if they opt to have it in Subic,” he said.

Mr. Fernandes said the company was “still weighing options” whether to choose Clark or Subic as the hub for operations.

“We will have the decision within the month. Hopefully, we can have our maiden flight by March or April next year,” he said.

Last month, AirAsia said net profit for the September quarter rose to 327.29 million ringgit ($62.89 million) from 130.07 million ringgit in the same period last year. -- AFP and Aura Marie P. Dagcutan. Businessworld.

Myths Behind Blue Skies

Open skies will not guarantee foreign airline flights to the country

December 10, 2010


The turmoil in Philippine Airlines aside, it really is time to ramp up the implementation of the so-called “open skies” policy for air transportation. It has been over 15 years since the landmark Executive Order 219, issued by President Fidel Ramos in January 1995, called for the liberalization of the air travel industry in the Philippines.

As far as domestic travel is concerned, liberalization was an unqualified success. The most obvious proof is the rise of Cebu Pacific, which now has fair claim to being the country’s leading airline. When it comes to the international sector, however, the record has not been very encouraging.

President Benigno Aquino III, following through on a long-held commitment, has said he wants to implement EO 219 fully. At the private-public partnerships “summit” last month, he vowed to take the necessary next steps to implement the EO’s provisions on international aviation. “Our national development requires promoting an open and competitive international aviation sector that enables Philippine and foreign air carriers to expand their operations, maintain a strong Philippine-based aviation industry, and ensure international connectivity in order to allow Philippine and foreign air carriers to plan and make long-term investments in the Philippine market.”

Open skies will have its biggest impact on Philippine tourism; it is seen as one crucial stage in the development of a world-beating tourism industry. Even the Aquino administration, however, despite its high approval ratings, will face great resistance in implementing the policy. It will be up against three persistent, pernicious myths.

It is obvious that the open skies policy, even in the “pocket” version that the Aquino administration wants to try first, cannot work by itself. No advocate has ever said that it is the silver bullet that will slay the vampire of lower-than-deserved tourist arrivals. However, quite a number of critics of open skies argue as though the policy were a stand-alone initiative. This, then, is the first myth: open skies will be characterized as putting the cart before the horse. But in fact efforts are under way to decongest airport terminals, build new roads, create more support systems, train more tourist workers and (as we have seen in the botched Pilipinas Kay Ganda campaign) create a new, more attractive marketing drive.

The second myth is present market demand. It is an argument offered by Philippine Airlines management, and has been echoed by an official of the Civil Aeronautics Board. Foreign airlines have seat entitlements they do not use, said Porvenir Porciuncula, CAB deputy executive director. “It is really a function of the market. Open skies will not guarantee foreign airline flights to the country,” he said. This is the kind of thinking that, under its old management, allowed PLDT to monopolize the telephone industry for many years. It is a bureaucrat’s view, not an entrepreneur’s perspective—and would have been incapable of imagining the growth in the number of phones in the country after deregulation.

Opponents of open skies are insisting on reciprocity, wrapping this particular argument with the mantle of nationalism. Of course reciprocity is fundamental to any open-skies agreements but, we hasten to add, reciprocity must be understood in a broader sense, the better to serve the public interest. This, then, is the third myth: The idea that open skies must mean strict equality, seat for seat, route for route, airport for airport. But, just to give one example, wouldn’t we want more tourists from Singapore? How many points of entry can that tiny but rich island-state offer us? EO 219 defined the criteria for the exchange of travel rights and routes right: It should be a combination of reciprocity, defined as “the exchange of rights, freedoms, and opportunities of equal or equivalent value,” and the national interest, including “value for the Philippines in promoting international trade, foreign investments and tourism.”

We should not leave the definition of national interest to airlines or bureaucrats alone.

Cojuangco forms budget airline with Air Asia

By Julito Rada

December 7, 2010

MALAYSIAN low-cost airline Air Asia is forming a local subsidiary with telecom heir Antonio Cojuangco to fly to select domestic routes, Board of Investments managing head Cristino Panlilio told reporters Monday.

Panlilio said he was told of the plan by Air Asia chief executive Tony Fernandes at the sidelines of the Association of Southeast Asian Nations’ finance ministers’ meeting in Kuala Lumpur last week.

The planned Philippine subsidiary should start commercial operations next year, Panlilio said without adding details.

Cojuangco was chairman and chief executive of Philippine Airlines during the early Cory Aquino years after his group won the bidding for the privatization of the flag carrier.

Air Asia began offering regional flights to and from the Philippines out of Clark in April 2005.

Fernandes told Bloomberg last week that Air Asia, Asia’s largest budget airline with 100 planes in its fleet, planned to acquire as many as 12 planes a year and was seeking opportunities in the Philippines, Vietnam, China and India.

Airlines stop customs arrival cards issuance starting Jan. 1

As Customs-airlines row worsens

By Eric B. Apolonio

December 6, 2010

AN ongoing row between the airlines and Customs staff at the airport took a turn for the worse over the weekend after international airline operators said they will stop providing Customs declaration forms to arriving passengers next year.

The Airline Operating Council told the Bureau of Customs on Dec. 2 that it will stop printing and distributing the Customs arrival cards starting Jan. 1 and turn that responsibility over to the bureau.

For the last 10 years, the council has shouldered the expense of printing and distributing the cards with help from Smart Communications as a sponsor. But Smart had terminated its sponsorship, and as a result the council would follow suit, group chairman Maria Lourdes San Juan Reyes.

The arrival forms are the latest wrinkle in the deteriorating relations between the airlines and Customs staff, who have been threatening to stop working after regular hours because of their unpaid overtime.

For decades, the airlines had been paying airport staff overtime and allowances, but they recently stopped because it was the government’s job to pay its employees.

A Court of Appeals decision found for the airlines, but in response some Customs employees started refusing to process arriving passengers after midnight, forcing them to wait for almost an hour inside the plane.

Some Customs booths are often undermanned, forcing arriving passengers to form a long line waiting to be cleared. Airline operators say the intent is to make travelers hate the airlines.

Earlier, Tourism Secretary Alberto Lim called on the Finance Department and the Bureau of Customs to resolve the problem to prevent another international embarrassment for the country.

The country uses about 22 million Customs declaration forms a year, with Philippine Airlines being the biggest user of about 5 million followed by Cebu Pacific with 3 million.

The balance is taken up by the 30-member Airline Operating Council. The group says each arrival card costs about a peso, and that Smart used to defray most of it.

Philippines enjoys Open Skies

But no Foreign carriers in Sight!

December 3, 2010

The Aquino government faced its first rebuke in its proposal to open more of its Philippine airspace after the Civil Aviation Board (CAB) informed the House of Representatives’ transportation committee that foreign carriers already enjoy adequate access to Philippine skies but no foreign carriers are operating on them.

Liberalized Skies

CAB deputy Executive Director Porvenir Porciuncula told the House that civil aeronautics in the country is already under a liberalized status because global leaders in commercial aviation have free access to the country.

“Our air agreements already allow flights to most of the points outside Manila. The big markets, Japan, US, China, South Korea, they can operate in Cebu, Davao but what they are looking for is profitability,” said Porciuncula.

The CAB official stressed that the open skies policy should not be taken as a “cure all” to the government’s need to lure more travelers, particularly tourists, to the country.

Philippine Airlines (PAL) also debunk claims that there is lack of airline seats to accommodate tourists as the open skies advocates insists that the lack of airline seats is the principal reason for low tourist arrivals in the country prompting the government.


47 Million seats

In a statement, PAL said that “It’s not the number of airline seats that is the behind the lack of tourist interest in the Philippines but the country’s negative image abroad, specially in the area of peace and order and security,” this according to Ma. Socorro Gonzaga, PAL senior assistant vice-president for external affairs.

“It’s not the number of airline seats that is behind the lack of tourist. Its about the image of the Philippines” Ms. Gonzaga said, saying that there are 47.4 million seats available to foreign and local carriers at present.

“However, of these 47.4 million available seats, only 10.97 million seats -- or 23% of total entitlements -- were used by foreign and local carriers last year. ”

Of the 10.97 million passengers that came to the country by air in 2009, only 2.9 million were foreign tourists,” she said.

25 million seats for Clark

Clark airport already enjoys 25.6 million in seat entitlements yearly but manage to attract only less than 200,000 foreign tourists out of the more than 600,000 that uses the airport for international destinations. Cebu got 20.7 million seats but registers only less than a million foreign tourists; while Davao has 20.3 million and manage to fly only less than 100,000.

Of the more successful international gateways are Kalibo and Laoag at 19.6 million but with greater foreign arrival ratios than major international airports outside Manila.

In Manila, there are 21.2 million seat entitlements available yearly, and almost all of them are taken, which only mean that passengers wanted to get out of the country at the NAIA airport complex.

Tagbilaran and Puerto Princesa also have 19.6 million seats on offer but none has availed a single seat.

According to the PAL reprsentative, “The sum is more than 47.4 million seats because many of the entitlements may be used for different airports, hence the overlap,” she said.

No Foreign Airlines

Meanwhile, CAAP representative Atty. Joseph Ray Gumabon told the House committee on transportation chaired by Leyte Rep. Roger Mercado that foreign airlines are free to include the country in their routes but they do not fly into the Philippines because there are not enough passengers along the open routes particularly to Cebu and Davao.

Last month, the government said it would further liberalize the civil aviation industry to increase tourist arrivals.

Reps. Ben Evardone (Lakas-Kampi, Eastern Samar), Rene Relampagos (LP, Bohol) and Magtanggol Gunigundo (Lakas-Kampi, Valenzuela) admitted in Wednesday’s public hearing they are not totally convinced an open skies policy is what the country needs to invigorate the tourism industry.

Both however agreed to give their principal authors, Reps. Rex Gatchalian (NPC, Valenzuela City) and Aurora Cerilles (NPC, Zamboanga del Sur), the opportunity to defend their proposals in the next hearing.

Cusi now chairman of Icao Aspac branch

By Recto Mercene

December 2, 2010

Starting Thursday, Director General Alfonso Cusi of the Civil Aviation Authority of the Philippines (Caap) will assume chairmanship of a branch of the International Civil Aviation Organization (Icao).

Cusi will assume the top post in Icao’s Cooperative Development of Operational Safety and Continuing Airworthiness Programs (Coscap) branch, one of the international body’s three branches in the Asia-Pacific Region.

Cusi is the first Filipino to head the organization and would be at the helm for one year, Capt. Len J. Cormier, Caap chief technical adviser.

The position is rotated among member states every year.

Cormier said that that according to the Icao Universal Safety Oversight Audit Program (Usoap), many Asia-Pacific countries find it difficult to adequately meet their safety oversight obligations. One example is the lack of check pilots, cabin crews and flight operations inspectors.

Coscap staff are often asked to provide guidance on the interpretation of regulations-standards, best practices, or technical matters. Considerable assistance has been provided to support member administrations preparations and response to Icao-Usoap audits.

Cusi hopes under him, Coscap would become the perfect vehicle for the country and other member states to be able to address their specific problems, thus leading to their attainment of international safety standards.

Specifically, for the Philippines, Cusi said he hopes that this would be the opportunity to speed up the process of meeting the significant safety concerns (SSC) so that the country may get back to Category 1 status very soon.

With Coscap, Icao would be able to support, establish and improve safety among groups of participating states.

Members of the Coscap South East Asia, aside from the Philippines, include; Cambodia, Hong Kong, Macao, Indonesia, Lao Peoples Democratic Republic, Malaysia, Burma, Singapore, Thailand, Vietnam, Brunei Darussalam and Timor Leste.

Coscap members in South Asia include India, Bangladesh, Pakistan, Bhutan, Nepal, Maldives and Sri Lanka, which is the senior member in Aspac, currently operating under its third five-year term.

Ccoscap North Asia includes China, Republic of Korea, the Democratic Republic of Korea and Mongolia.

Cornier said that Coscap under Cusi would get the ownership of the program, and he would be able to set the guidelines for the year.

Currently, Coscap is training 45 check pilots, 25 flight operations inspectors and 50 cabin safety inspectors at the Civil Aviation Training Center.