CEBU PACIFIC OUT TO GIVE PAL HEADACHES

THE plan of Cebu Pacific to offer budget long-haul services could force Asia’s oldest airline “out of business,” according to the Centre for Asia Pacific Aviation (CAPA).

The airline unit of JG Summit Holdings Inc. (JGHSI) on Tuesday surprised the industry when it announced that it would offer longhaul operations in the third quarter of next year.

The country’s leading budget airline targets to operate in cities where large Filipino communities reside such as Europe, Middle East, Oceania and the United States.

In its report, CAPA said that Cebu Pacific would benefit from the Philippines’ extremely price sensitive market that has seen low-cost carriers (LCCS) achieve a staggering 80 percent share of the domestic market and a fast-growing share of the regional international market.

With a gross domestic product (GDP) per capita of $2,255, CAPA said that “price is more sensitive” in the Philippines.

“Demand for low-cost long-haul services will come primarily from the large visiting friends and relatives [ VFRS] 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,” CAPA said.

The report further said that Cebu Pacific would have an advantage over the other low-cost long-haul carriers in proving the model on ultra-long-haul flights.

“Filipinos already demand longhaul flights given its large expatriate populations in the Americas and Europe,” CAPA added.

Data from CAPA showed that there are about 11 million Filipinos living overseas, including about 3 million in the US and about 2.5 million in the Middle East.

“Only a little over one million expatriate Filipinos live in Asia, a market Cebu has targeted with its fastgrowing regional international operation, and has stimulated [the market] by offering low fares that allow these workers to return home much more frequently,” the report said.

“The fact an overwhelming majority of the expatriate Filipino population lives outside Asia shows the huge potential of a low- cost long-haul operation in the Philippines,” it added.

The CAPA report also warned that Cebu Pacific’s plan to operate in Europe and Middle East could be challenging because of stiff competition and higher operating expenses.

The Philippines-europe market is now served mainly by the Gulf carriers, which have relatively low-cost structures and the advantage of operating geographically well- positioned hubs that can connect a wide range of city pairs.

Changing competition landscape

Flag carrier Philippine Airlines ( PAL), also Asia’s older airline, pulled out of Europe several years ago. KLM is now the only European carrier still serving Philippines but it plans to drop its non-stop Amsterdam-manila flight in late March in favor of a new Amsterdam-taipei-Manila service.

CAPA, however, said that if Cebu Pacific would be allowed to launch US flights, the situation would be different since competition is not nearly as intense as it is on flights to the Middle East and Europe.

Cebu Pacific earlier said that it expects its passenger volume in international routes to grow by 20 to 25 percent, and those in domestic routes to expand by 10 to 15 percent. Its passenger count is seen to increase from 11.9 million in 2011 to about 14 million by yearend.

If Filipino aviation had to be recreated from scratch, CAPA said that low- cost would be the model of choice, possibly with one carrier adopting a hybrid model.

“The case for Cebu long- haul services is clear- cut, but the medium-term opportunity for PAL less so. Reducing a cost base to be more competitive can be done, but when PAL outsourced certain divisions in 2011, strikes crippled the airline, nearly shutting it down for a number of days. No carrier has successfully stripped costs out to be competitive against LCCS. Half the solution is to cut costs while the other half is to improve positioning.” CAPA said.

PAL has become a weak carrier with a bleak outlook, CAPA said, but Asia’s oldest airline has time to respond to the new threat Cebu Pacific’s long-haul operation will bring and revise its strategy accordingly.

“The new fleet of 777- 300ERS and US expansion, if allowed, could help PAL’S viability. But it should seek out new airline partners, improve its premium product and look to join a global alliance [persuading an alliance to accept PAL however could prove to be a challenge],” it added.

“To fend off the latest threat, PAL will need to work hard, make changes and hope that Cebu really sticks to the pure LCC model. A hybrid model for Cebu would create a far more challenging scenario for PAL,” CAPA added.

Representatives of PAL were unavailable for comments as of press time.