PH budget airline market eases with AirPhil’s rebranding

MANILA, Philippines – Budget carriers like Gokongwei-led Cebu Pacific stands to benefit from the rebranding of Philippine Airlines’s (PAL) budget arm into a full service carrier as the Philippines’ domestic market continues to grow, an aviation expert said.

After following the budget airline model since 2010, AirPhil, the Philippines’ second largest domestic carrier after Cebu Pacific, is currently undergoing a rebranding and forming a AirPhil/PAL hybrid to become more like a full service carrier, noted Brendan Sobie, chief analyst at Sydney-based Centre for Aviation (CAPA).

Under the new PAL Express brand, which was implemented on March 15, the PAL unit has removed itself from the competitive budget airline category, noted Sobie. PAL Express has started offering frills such as drinks and snacks, becoming more like a regional full-service subsidiary than a budget subsidiary. 

“The re-branding and transitioning of AirPhil back to full-service (or almost full-service) leaves a void in the PAL group portfolio in that they will no longer have a real budget airline subsidiary. As a result they could lose out in a big and fast-growing sector of the market,” Sobie told Rappler.

“The previous strategy had AirPhil positioned to play in that space. The new strategy leaves that space for others,” he added.

“While having a regional full-service subsidiary or hybrid could ultimately be successful, PAL may need to re-look at its decision to leave the bottom end of the market to competitors,” he added.
 
According to CAPA’s analysis, Cebu Pacific believes this consolidation is a positive development for an oversaturated industry.

Over 2012, the domestic budget airlines suffered from irrational competition and over capacity. The market reached saturation point at the end of the year when new SEAir became the 4th budget airline on domestic trunk routes, joining Cebu Pacific, AirPhil Express, Zest Airways and start-up AirAsia Philippines.  

Total passenger traffic in the Philippine domestic market was up 10% to 20.6 million passengers, according to Philippine CAB data. But seat capacity was up 16% to 28.3 million seats. As a result, the average load factor in the Philippine domestic market slipped by over 4ppt to less than 73%.

As a result of the heated budget airline competition, the only full-service carrier serving the Philippine domestic market in 2012, Philippine Airlines (PAL) recorded a 5% drop in domestic traffic to 4.1 million. Budget airlines accounted for 80% of passenger traffic in the Philippine domestic market in 2012, up from 76% in 2011. 

The market penetration of budget airlines in the Philippines is one of the highest in the world.

Cebu Pacific led the market with a 46% share, up from 45% in 2011 despite the entrance of two new budget carriers in the domestic market.

Cebu Pacific to take more market share

Cebu Pacific, which recorded 11% growth in passenger traffic in 2012, is planning more double-digit capacity expansion in 2013.

It plans to expand its seat capacity by 11% in 2013 and grow its fleet by 17% to 48 aircraft. The expansion, which includes the launch of its new long-haul operation, should allow the carrier to extend its already leading share of the Philippine market.

Cebu Pacific flew 13.3 million passengers in 2012, reflecting an 11% increase in domestic traffic to 10.3 million and a 10% increase in international traffic to 3 million.

The Philippines has relatively recently emerged as a popular tourist destination, a status the government is working to further exploit. This should lead to increasing inbound demand in the international market as well as additional domestic demand as tourists fly around the Philippines to visit the country’s various islands.

With these brighter prospects Cebu Pacific is well positioned to cash in on the anticipated growth in the Philippine market and as AirPhil launches itself into the full service market, it is yet to be seen which is more profitable, noted CAPA’s Sobie. – Rappler.com