Cebu Pacific Air

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.

New Cebu Pacific long-haul operation could push out Philippine Airlines but may require hybrid model

The new plan from leading low-cost Filipino carrier Cebu Pacific to offer long-haul services from 3Q2013 represents not just the fourth low-cost long-haul operation in Asia, but the first time such a carrier has potential to force a full-service rival – Philippine Airlines (PAL) – out of business.

Cebu Pacific will benefit from the Philippines’ extremely price sensitive market that has seen LCCs achieve a staggering 80% share of the domestic market and a fast-growing share of the regional international market. Demand for low-cost long-haul services will come primarily from the large visiting friends and relative (VFR) and migrant worker market. But Cebu’s new low-cost long-haul operation will also benefit from growing tourism and potentially the ability to transfer passengers over a geographically convenient hub if Cebu decides to stray from its original point-to-point model.

While PAL is the nation’s sole long-haul carrier, its lack of global alliance membership, relatively small domestic operation and higher cost base create low barriers for entry. National sentiment for Asia’s oldest airline may run high, but as seen in the Philippines’ domestic market, passengers vote with wallets.

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.

Jetstar's new North Asia focus leaves room for Qantas Singapore expansion to Europe and India

Jetstar is planning to expand its Singapore-based fleet by 50% over the next six months as the low-cost carrier group looks to North Asia for the next phase of its dramatic expansion. As the largest low-cost airline group in the Asia-Pacific region continues to expand at a rate of about 20% per annum, additional capacity will not be directed west towards South Asia, the Middle East or Europe but primarily to North Asia, where Jetstar sees the most opportunities given North Asia’s very low LCC penetration rate. This strategy could signal growth for the Qantas brand in South Asia and Europe as the group looks at potentially announcing next month the launch of a new Singapore-based full-service carrier.