Home' Asian Aviation : AAV July-Aug 2014 Contents 20 AsianAviation | JULY-AUG 2014
"Cost is critical in the decision-making process," for
these travellers, Gokongwei emphasises.
But going head-to-head with the Gulf carriers is
an ambitious strategy given their economies of scale.
Manila's main gateway, Ninoy Aquino International
Airport (NAIA), is served by Emirates, Etihad, Qatar
Airways, Saudia, Kuwait Airways and Gulf Air.
Secondary hub Clark International Airport, located
100km from the city centre, is also served by Qatar
Airways, while Emirates briefly flew to the airport
before withdrawing in May.
Cebu Pacific is therefore treading carefully with
the new long-haul business, downgrading its original
plans for seven routes by the end of 2014 to five.
Under-served point-to-point markets offer the
greatest potential, Gokongwei says, noting that about
75% of traffic to Saudi Arabia does not currently fly
direct. "If you combine the huge number of non-direct
traffic with the stimulation we can provide by offering
lower fares, I do think there's enough room for the
Saudi carriers, for Philippine Airlines and ourselves,"
Further Middle Eastern destinations such as
Riyadh and Dammam will likely join the network
soon, especially if demand for Kuwait proves strong.
But the airline is not putting all its eggs in one long-
With the launch of Sydney flights, Cebu Pacific
is diversifying beyond labour traffic and going
after foreign tourists. Gokongwei had at first been
reluctant to enter Australia without securing daily
access -- something the airline's current designation
does not permit -- but he has settled on four times
weekly. That may represent a climb-down, or it
may indicate that the bilaterals are close to being
renegotiated (Qantas's subsidiary Jetstar also wants
greater onward connectivity through Manila).
Either way, while the talks with overseas authorities
continue, Cebu Pacific is deploying its A330s closer
to home too -- most recently extending trials of
domestic flights from Manila to Cebu and Davao.
It also has the option of further regional up-
gauging, thanks to a network of 23 international
Asian destinations in 11 countries.
This flexibility has enabled the airline to remain in the
black despite the start-up costs associated with taking
new widebodies. Although the Manila-Dubai route
was lossmaking throughout Q4 2013 and Q1 2014,
load factors on the connection are now approaching
the mid-80% break-even point. If this can be sustained
without yields suffering, then Gokongwei will likely
give the green-light for further expansion.
"Long-haul is indeed challenging -- competing
with Middle East carriers as well -- but we're happy
to say that from our start in October, we've been
able to achieve profitability in the most recent April
period," he affirms. "Our low fares are filling a gap
in the market."
In the domestic sector, much-needed consolidation
has prompted investment analysts at Maybank to
declare that "the fare war of H2 2013 has abated"
and the outlook for profitability is rising.
The rationalisation of the low-cost market came
in three stages. In March 2013, AirAsia Philippines
and Zest Airways agreed a share swap that later
lead to a merged AirAsia Zest. That same month,
Philippine Airlines withdrew from the low-cost
sector by re-branding no-frills subsidiary AirPhil
Express as full-service PAL Express. Then in
February 2014, Cebu Pacific secured the right to
fully acquire Tigerair Philippines.
Gokongwei is still evaluating whether to retain the
Tigerair brand domestically. "It's more likely that in
the future it will be some variant of the Cebu Pacific
brand," he says, although no changes are expected
in the next 12 months. Collectively, the two carriers
now account for 59% of domestic capacity.
Issuing an advisory on the Filipino sector in May,
Maybank stated: "As little as three years ago the
market was highly fragmented, with six major players
in the country. It has proven unsustainable ... Going
forward, Cebu Pacific will continue to gain market
share based on its firm fleet growth plans."
The bank also notes the country's strong GDP
growth, which is forecast to hit 6.8% this year. Set
against a net reduction in the country's fleet of six
aircraft -- fuelled by the flag carrier's withdrawal of
16 units -- the Philippines appears to be bucking the
over-capacity crisis gripping Southeast Asia.
Cebu Pacific's fleet strategy leaves no doubt that
Gokongwei intends to strike while his competitors
are on the backfoot. The airline currently deploys
52 aircraft, comprising four A330s, 30 A320s, 10
A319s and eight ATR 72s. It has another 43 units
on order, plus 10 options.
Eleven additional A320s will arrive between
now and 2017, comfortably outpacing the six
withdrawals earmarked for the same timeframe.
Two more A330s will enter the fleet, including one
this year. And from 2017 onwards, deliveries of 30
A321s will get under way.
Gokongwei says the transition to larger
narrowbodies was motivated by slot limitations at
NAIA plus the ever-present need to curtail unit costs.
"The only way to carry more passengers and use
slots efficiently is to use larger aircraft," he explains.
"We're basically targeting ASK [capacity] growth in
the low teens [annually] on our short-haul business."
With larger aircraft coming into favour, there are no
plans to expand the turboprop fleet. But the ATRs will
not be phased out. Gokongwei describes the type
as a "good workhorse" for 30-minute hops across
the archipelago, especially given the small runways
at islands like Boracay and Busuanga. "They will
continue to serve our fleet planning very well," he says.
Europe and North America will eventually join the
network, but not until Cebu Pacific acquires longer-
range widebodies. Gokongwei is therefore keeping
a close eye on the performance of the Boeing 777,
787 and A350.
"We're looking for an aircraft that could cover the
major European cities such as London and Paris,
while enabling us to cover key cities in the United
States, including San Francisco and Los Angeles,"
the CEO confirms. He stresses, however, that "it's
very early days" for the plans.
In the meantime, the acquisition of Tigerair
Philippines may open up a new avenue for growth.
The subsidiary's previous owner, Tigerair, operates
an extensive network out of Singapore. Cebu
Pacific and Tigerair have already signed interline
agreements for onward connections at their main
bases, and Gokongwei believes the partnership
could develop further.
"Within the domestic [Filipino] space we fly to
32 cities, but likewise into North Asia, into China,
Korea, Japan," he notes. "Whereas Tiger has
real strength going into a lot of Southeast Asian
countries, Indonesia, Thailand, Malaysia, and
particularly into India.
"We are already selling each other's tickets on
each other's sites. Tiger has the most popular airline
site in Singapore, and we have the most popular site
in the Philippines ... Now for the routes between
the Philippines and Singapore, we are going through
the various competition regulators to seek a revenue
If granted, the deal would enshrine metal-neutral
cooperation between the two airlines, allowing them
to pool revenue and share profits on common routes.
Although non-organic expansion can push Cebu
Pacific's revenue still higher -- double-digit growth
has already been recorded in all but one of the
past ten years -- Gokongwei is not interested in
establishing overseas joint ventures. "With such
a large population, the Philippines is still relatively
underserved. And with very strong economic growth
we think the opportunity here remains attractive," he
insists. "In other countries, I don't want to be the
fourth or fifth entrant into the market."
Instead, Cebu Pacific will continue to lobby
governments across the region to relax bilateral
restrictions. The airline led the charge for Open
Skies between the Philippines and Japan last year,
paving the way for its subsequent launch of two
new routes -- Tokyo and Nagoya -- plus higher
frequencies to Osaka.
"As little as three years ago the market
was highly fragmented, with six major
players in the country. It has proven
unsustainable ... Going forward, Cebu
Pacific will continue to gain market share
based on its firm fleet growth plans."
MAYBANK IB RESEARCH
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