Few aviation markets are going through the kind of change seen in the Philippines, where foreign players are seeking to challenge the incumbents and existing operators are stepping on each other's toes
There can be few aviation markets that have seen such a rapid transformation in their fortunes as the Philippines. "We have seen aviation flip itself on its head in this country over the last six months," says Nick Gitsis, a director and founder of SEAir, which currently only operates Let L-410 and Dornier 328 turboprops. "The big guys are getting into turboprops and the little guys like us are getting into jets. Fortunately there's enough of a market for everyone."
There are now five established passenger airlines in the Philippines: Philippine Airlines (PAL), its lower-cost sister carrier Air Philippines, independent low-cost carrier Cebu Pacific, and smaller Asian Spirit and SEAir.
For the past decade or so the carriers have generally competed only in their own market segments, with Cebu challenging only PAL and Air Philippines, and Asian Spirit only challenging SEAir.
But that all began to change last year, when SEAir announced plans for a tie-up with Singapore-based low-cost carrier Tiger Airways that should see it operating Airbus A320s from Clark airport, outside Manila, through a franchise arrangement. Asian Spirit has already added Boeing MD-80-series aircraft for new international services.
The market has indeed been expanding at a rapid rate as the economy continues growing and airfares come down due to the intense competition. In the second half of last year, the number of passengers carried on domestic routes increased by more than 25%.
PAL has also been producing profits. This is an incredible turnaround from the situation it was in less than a decade ago. PAL fell into serious financial difficulty in 1998 and nearly collapsed. Since June 1999 has been under Securities and Exchange Commission-supervised protection. Since then, however, it has posted an operating profit for eight consecutive years and a net profit for six of those years. In its last financial year PAL had its best year ever, turning a net profit of $140 million for the 12 months to March 2006.
Economic strength
President Jaime Bautista says available seat kilometres were reduced slightly last year as several aircraft went in for scheduled heavy maintenance checks but revenue passenger kilometres increased, which led to an improved load factor of 76.8%, its highest in 15 years. "Economic growth in the Philippines is strengthening the market for air travel," says Bautista, who expects demand to remain strong for several years to come.
Last year, the Philippine domestic market grew by 17.4% to 8.5 million passengers. It is on track to grow at a similar clip this year and exceed 10 million passengers.
Bautista says PAL is now "on track towards long-term profitability", enabling it to feel comfortable about its new growth plans. PAL recently placed lease and purchase orders for six widebody Boeing 777-300ERs and is planning to invest between $50 million and $100 million to reconfigure the cabins of existing widebody aircraft.
It earlier ordered up to 20 A320-family narrowbodies, six of which have already been delivered. Four more are due to arrive this year and five more in 2008, after which another five will be acquired if options are firmed up.
"There is still a lot of growth out there as the economy continues growing," says Bautista, who adds that the expanding travel market will continue to benefit all of the country's operators.
Things have been getting ugly behind the scenes, however, as the incumbents have so far been successful in delaying SEAir's plans to add A320s.
Air Philippines and Cebu, which currently only operate narrowbody jets, are also planning to take on SEAir and Asian Spirit where it will hurt them most, on turboprop routes such as to Caticlan, a gateway to the popular tourist destination of Boracay. Air Philippines recently ordered Bombardier Q300s while Cebu ordered ATR 72-500s.
This growth has also been translating into varying levels of profits for the airlines, despite the cutthroat competition. Cebu has remained profitable in recent years and is expected to launch an initial public offering sometime over the next year (see p88). Cebu may even overtake PAL this year as the largest domestic carrier in the Philippines.
Fighting over Clark
PAL and Cebu are separately planning major expansions out of Clark, a former US airbase outside Manila, which will directly impact SEAir.
Cebu says it is seeking traffic rights for daily services between Clark and Hong Kong, as well as for four-times-weekly services to both Singapore and Macau and thrice-weekly services to Bangkok and Taipei. "If we get the necessary approvals from all the governments concerned, we will make Clark our third base and hub after Manila and Clark," says chief executive Lance Gokongwei.
The move will also put the carrier into direct competition with SEAir's would-be partner Tiger, which already serves Clark from Singapore as well as Macau. Cebu says it expects to carry more than 300,000 passengers to and from Clark per year but is "confident of increasing this volume as Clark continues to spark growth in the region".
PAL separately announced plans recently to invest between $30 million and $50 million at Clark airport for new facilities to enable the launch of many new international services of its own. The carrier says it plans to lease between 30Ha and 50Ha of land over a 25-year period for catering, ground handling and aircraft maintenance facilities. It says its international flights from Clark will initially be to South Korea, Japan and China.
The plans of Cebu and PAL for Clark have been revealed as all the incumbent carriers - with the notable exception of SEAir - have been fighting as a group against government plans to declare Clark and Subic Bay airports full "open-skies" zones, which would give foreign carriers unlimited operating rights and allow them to set up bases there.
Earlier this year Air Philippines, Asian Spirit, Cebu Pacific, PAL and cargo carrier Pacific East Asia Cargo went public with a joint protest in full-page advertisements in Philippine newspapers, saying that granting foreign carriers unlimited rights to serve Clark and Subic Bay would be a "threat to national interest". The issue has become a highly divisive one between business leaders pushing for more foreign airline access - particularly to Clark - and the local carriers seeking to keep foreign competitors out. "All we want is Philippine carriers to have the same - it is just about reciprocity," says PAL's Bautista. "We are not against competition. We just should not allow anybody to fly to the Philippines without regulation."
Whatever happens, few doubt that Clark will become a key aviation centre in the country in the coming years. Manila's existing airport has only one runway for international services and there is almost no room for growth there. Clark, by comparison, has plenty of room for expansion and many in the industry expect it will take over as the main international gateway around a decade from now, after a mammoth expansion secures the final go-ahead.
Airport expansion
Clark currently handles only a small amount of traffic annually, mainly from low-cost carriers such as Malaysia's AirAsia and Singapore's Tiger. These services are from a basic terminal that is in desperate need of improvement. The airport's master plan envisions two terminals capable of handling between 20 million and 30 million passengers annually, according to industry executives who have seen the document.
"No doubt, it is going to be the gateway in the future," says Avelino Zapanta, a former PAL president who now heads up SEAir. "NAIA [Manila's airport] has no hope for expansion and with the market growing so quickly it will all have to happen at Clark."
The country's airlines may be fighting more viciously among themselves, but the need for expansion out of Clark is one of the few things they all seem to agree on. As PAL president Bautista says: "Clark is where a lot will be happening. Watch this space."
Tiger's chief executive Tony Davis was featured in the June issue of Airline Business. To read the interview visit www.flightglobal.com/CEOs
Source: Airline Business
