Philippines

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.

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.

Tiger looks to catch-up after rights issue and departure of founding CEO Tony Davis

Tiger Airways is trying to move forward after surviving the most challenging chapter in its six-year history, capped off recently by a further shake-up in Tiger’s executive team, with founding CEO Tony Davis leaving the group, and a rights issue. Tiger's position going forward is significantly improved, but it still has several challenges to overcome if it has any chances of catching up with rival LCC groups AirAsia and Jetstar, which have successfully established pan-Asian footprints while similar efforts at Tiger have so far failed.

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.