Airphil Express

Philippine Airlines and AirPhil outlook improves as new ownership cements two-brand strategy

Philippine Airlines (PAL) and low-cost sister carrier AirPhil Express are embarking on a new but still challenging era following the sale of large minority stakes in the two companies to Filipino conglomerate San Miguel. While Lucio Tan will continue to control majority stakes in both airlines, the deal is significant as it provides USD500 million required for fleet renewal and reinvigoration at PAL and for expansion at AirPhil, which will be used to fight off increasing LCC competition. It is also significant as San Miguel will gain management control of both carriers, which could lead to some adjustments in the group’s strategy.

The deal, which was completed last week, hardly comes as a surprise. On numerous occasions Mr Tan has looked to sell part of his stake in PAL, of which he took control 20 years ago after the flag carrier was privatised. The latest round of negotiations with San Miguel and one other potential buyer have been dragging on since late last year. Industry sources say Mr Tan was initially reluctant to include AirPhil, which has a brighter outlook than PAL given its focus on the faster growing budget end of the market, and cede management control in either carrier.

Philippine Airlines plans to resume domestic expansion and looks for green light from US regulators

Philippine Airlines (PAL) is not ready to abandon the domestic market – at least not yet. The floundering flag carrier, which has seen its share of the Philippine domestic steadily slip in recent years, plans to add back some domestic capacity in 2012 as its previously-reduced A320 fleet expands again by four aircraft.

International capacity will also be up in 2012 as PAL takes its next batch of B777-300ERs. PAL is banking on the Philippines regaining next year a Category 1 safety rating from the US FAA, which is necessary for the carrier to deploy B777-300ERs on US routes as planned. Continued restrictions on US routes is one of several challenges PAL faces as the carrier also tries to overcome increasing competition from LCCs and continuing worker protests.

Cebu Pacific & AirPhil are main beneficiaries as Philippines domestic LCC penetration rate nears 80%

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.

AirAsia Philippines impact on Cebu Pacific & PAL should be minimal – at least initially

Cebu Pacific, which has remained in the black in 1H2011 despite soaring fuel costs, does not expect the Oct-2011 launch of AirAsia Group’s new Philippine affiliate to curtail its growth or impact its profitability. Philippine Airlines (PAL), which was back in the red for the three months ending 30-Jun-2011, should also not be significantly impacted by AirAsia’s entry into the dynamic Philippine aviation market although the flag carrier continues to struggle against some of its existing low-cost competitors including Cebu Pacific.