17-Dec-2015 12:00 PM

Mactan-Cebu International Airport grows rapidly as hub prospects improve with Manila congestion

Analysis

Cebu in the Philippines has emerged as one of the fastest-growing airports in Southeast Asia, with passenger growth of 13% through the first 10 months of 2015. Mactan-Cebu International Airport has been boosted by the relaunch of several domestic routes by the Philippine Airlines (PAL) Group, as well as international expansion from PAL, Cebu Pacific and foreign carriers.

The second largest airport in the Philippines is poised for more rapid growth in 2016 as PAL continues to pursue expansion at its second hub, with more new domestic routes and the launch of services to Los Angeles, Cebu's first long haul route. The Cebu Pacific Group also plans to expand its Cebu base in 2016, with at least two more turboprops.

Mactan-Cebu is well positioned for long-term growth as the airport's new private owners have begun construction of a new terminal, which will increase annual capacity to 12.5 million annual passengers. The new terminal will enable Cebu to build as a hub for transit traffic, and to benefit further from infrastructure constraints at Manila, which are prompting Philippine carriers to base additional aircraft at secondary cities.

Summary

Mactan-Cebu International Airport in the Philippines is experiencing rapid growth, with passenger numbers up 13% in the first 10 months of 2015.
The airport is set for further expansion in 2016, with new domestic routes and the launch of its first long-haul route to Los Angeles.
The construction of a new terminal will increase the airport's capacity to 12.5 million passengers per year, positioning it as a hub for transit traffic.
The growth in passenger numbers is driven by the relaunch of domestic routes by the Philippine Airlines (PAL) Group and international expansion from PAL, Cebu Pacific, and foreign carriers.
Cebu Pacific and PAL are both planning further expansion on secondary routes, with PAL Express opening a turboprop base in Cebu in 2016.
Cebu is also emerging as an international hub, with PAL launching flights to Los Angeles and plans for further long-haul routes to the Middle East.

Mactan-Cebu passenger growth exceeded 13% in first 10 months of 2015

Mactan-Cebu International is the second largest airport in the Philippines after Manila Ninoy Aquino International, and was the fourteenth largest in Southeast Asia based on passenger traffic for 2014. Rapid growth should further push Cebu into the eleventh or twelfth spot in Southeast Asia for 2015.

Cebu handled 6.4 million passengers through the first 10 months of 2015, representing 13.4% growth compared with the same period of 2014. Cebu is on pace to end 2015 with nearly 8 million passengers.

Cebu's prior historical high was 7 million annual passengers, which was achieved in 2013. Cebu saw its traffic drop by 2.2% in 2014, driven by a contraction at PAL as the flag carrier restructured its domestic operations. Growth peaked at 14.8% in 2011, before dropping to 8.9% in 2012, and 3.3% in 2013.

Mactan-Cebu passenger traffic and year over year growth: 2010 to 2014 and 10M2015

Full year growth for 2015 could surpass the 14.8% achieved in 2011, given the surge in recent months. The Oct-2015 result was 17.9% passenger growth, and for the three months of 3Q2015: growth exceeding 20%.

Cebu Airport's traffic fluctuates significantly depending on the time of year - as it does throughout the Philippines - with December, January, April and May being the strongest months.

Mactan-Cebu monthly passenger numbers: Jan-2010 to Oct-2015

PAL resumption of secondary domestic routes drives domestic growth at Cebu

The surge in recent months was driven partially by the launch of six domestic routes by PAL Express: from Cebu to Bacolod, Butuan, Cagayan de Oro (Laguindingan Airport), Davao, Iloilo and Tacloban. PAL initially dropped all six of these routes in early 2014, as well as Cebu to Ozamiz and Puerto Princesa as part of a restructuring, which included the suspension of all non-Manila domestic routes.

PAL's new management team, which took over in Sep-2014 when Lucio Tan regained control of the airline group, decided in early 2015 to re-enter most of the point to point routes dropped under the leadership of San Miguel. As CAPA highlighted in the last instalment in this series of reports on the Philippine market, the resumption of point to point routes by the PAL Group, along with expansion on domestic trunk routes by PAL and AirAsia, have led to intensified competition in the Philippine domestic market. Total domestic seat capacity in 3Q2015 was up 17% in 3Q2015, leading to an erosion in yields, and impacting profitability.

PAL had the capacity to launch the six Cebu domestic routes as it took delivery of five additional A321s in 1H2015. While the new A321s have been based at Manila, they replaced Manila-based A320s, freeing up A320s to be moved to Cebu. Expanding at Cebu while up-gauging Manila was a logical option for PAL as expanding the base at Manila was not a feasible option, due to slot constraints.

The PAL Group also has added capacity on Cebu-Manila, which is currently served with 10 to 11 daily frequencies using a combination of PAL mainline and PAL Express aircraft. PAL has approximately 30,000 weekly seats on Cebu-Manila, which is the group's largest route.

The six resumed domestic routes are all much smaller, but combined they account for over 18,000 weekly seats. This has had a significant impact on Mactan-Cebu traffic over the last several months, since it accounts for about 11% of Cebu's total domestic seat capacity, and about 8% of Cebu's system-wide seat capacity.

Cebu Pacific was first to establish a base at Cebu

PAL Express currently operates one to two daily frequencies with single class A320s on all six of the resumed routes except Butuan, which is served with four weekly A320 flights. Cebu Pacific offers more frequencies on all six routes, but uses a mix of A320 family aircraft and ATR 72s. Cebu Pacific serves four of the routes with a combination of jets and turboprops, while Tacloban is served only with ATR 72s, and Davao only with A320s.

Cebu Pacific opened a base in Cebu about five years ago and has since steadily expanded its Cebu operation. The Cebu Pacific Group currently has about 110,000 weekly seats at Cebu, making its operation slightly less than one third the size of its Manila base. The PAL Group is almost as large as Cebu Pacific in Manila, but even with the growth in 2015 its Cebu base is now less than one fifth the size of its Manila base.

While PAL now has seven domestic routes, the Cebu Pacific Group has 22 domestic routes from Cebu, according to OAG data. Cebu Pacific serves seven of these routes with a mix of turboprops and jets, six with only jets, and nine with only turboprops (the group's turboprops are operated by regional subsidiary Cebgo).

Over the last year Cebu Pacific has continued to expand on point to point secondary domestic routes from Cebu. While the group's capacity on Cebu-Manila has remained flat at about 44,000 weekly seats, its capacity on other domestic routes from Cebu has increased over the last year by about 14% to approximately 57,000 weekly seats. While the additional 7,000 domestic seats represent capacity much smaller than the seats that PAL Express has added in Cebu, it is still significant, and has helped drive an overall increase in domestic traffic at Cebu.

Domestic traffic overall was down 3.9% in 2014. Through the first 10 months of 2015, domestic traffic at Mactan-Cebu was up 11.4% to 4.8 million.

Mactan-Cebu domestic passenger traffic and year over year growth: 2010 to 2014 and 10M2015

In the most recent month with available data, Oct-2015, domestic traffic was up 14% year over year. In 3Q2015 domestic traffic was up 22%. Monthly domestic traffic is also significantly higher than it was in Oct-2013, which was before PAL cut its Cebu domestic operation.

Mactan-Cebu domestic monthly passenger traffic: Jan-2010 to Oct-2015

Cebu Pacific accounts for about 60% of domestic capacity at Cebu

PAL's current capacity on the Cebu routes that it suspended for about a year is higher than the capacity levels prior to their suspension. Cebu Pacific also has added domestic capacity, helping drive the overall surge in domestic traffic.

The third domestic competitor in the Philippines, AirAsia, has cut domestic capacity at Cebu, but AirAsia is a relatively minor player in the Philippine domestic network and the reductions at Cebu have been modest.

Philippines AirAsia (PAA) currently operates eight daily flights from Cebu to Manila. Over the last year AirAsia has increased Cebu-Manila from seven to eight daily frequencies but has cut its only secondary domestic routes from its Cebu base. Cebu-Davao and Cebu-Cagayan de Oro, which AirAsia each served with two daily flights each, have been suspended. As a result its total domestic capacity has decreased at Cebu by 27% or from 11 to eight daily flights.

PAA currently has about a 12% share of domestic seat capacity at Cebu compared to 59% for the Cebu Pacific Group, and 29% for the PAL Group. On the Cebu-Manila route, AirAsia has a 21% share, compared to 47% for the Cebu Pacific Group, and 32% for the PAL Group.

The Cebu-Manila route accounts for about 56% of all domestic capacity at Cebu. Of the top eight domestic routes, Cebu Pacific and PAL now compete on seven.

Mactan-Cebu top 10 domestic routes ranked by seat capacity: 14-Dec-2015 to 20-Dec-2015

PAL Express to open turboprop base in Cebu

Domestic traffic at Cebu should continue to experience double digit growth in 2016, and likely in 2017, as Cebu Pacific and PAL are both planning further expansion on secondary routes.

PAL Express is planning to open a turboprop base in Cebu in 2016. Currently PAL Express operates all nine of its Dash 8 turboprops from Manila, but plans to move some of these aircraft to Cebu after an extended runway opens at Caticlan, enabling it to up-gauge Manila-Caticlan flights from Dash 8s to A320s.

While the PAL Group plans to keep some turboprops at Manila to serve destinations which can still not accommodate A320s, it is keen to reduce its turboprop operation in Manila as much as possible, since Manila slots are at a premium.

PAL Express currently serves Manila-Caticlan with 10 daily turboprop flights. The PAL Group will likely reduce its Caticlan schedule as it transitions Manila-Caticlan flights to A320s, enabling it to free up Manila slots for other routes while still increasing capacity in the Manila-Caticlan market. Meanwhile the turboprops can be redeployed to pursue further growth on secondary routes from Cebu.

PAL Express is expected to use the new Cebu turboprop base to add frequencies on some of the recently resumed domestic routes and also to launch new routes. With 15 domestic routes from Cebu currently only served by Cebu Pacific, there are clearly plenty of opportunities for PAL. Several of these routes are too small for A320s, or cannot accommodate A320s due to runway limitations at the destination.

Other potential longer domestic routes from Cebu are only suitable for A320s but could be launched by PAL as A320s are replaced by Dash 8s on existing routes, and as PAL continues to expand its A320 base at Cebu. PAL's A320 family fleet is expanding by three aircraft in 2016. Given the constraints at Manila, the additional aircraft will likely once again end up in Cebu.

Cebgo to expand its Cebu base in 2016

Cebu Pacific is also planning to continue expanding its domestic operation from Cebu with a focus on smaller secondary routes. Cebgo's Cebu base will expand from four aircraft to at least six aircraft in 2016.

Cebgo currently operates eight ATR 72-500s, with four aircraft based in Manila and four in Cebu. Cebgo plans to expand its fleet to 10 aircraft in 4Q2016 as it takes the first two of 16 ATR 72-600s that were ordered by its parent in Jun-2015. The two additional aircraft will be used to grow the Cebu base, although the ATR 72-600s will most likely be positioned in Manila, freeing up additional ATR 72-500s for Cebu.

Cebu Pacific also plans to reduce its turboprop base at Manila after the extended runway opens at Caticlan. The airport's new owners, San Miguel, have been aiming to open the extended runway along with an expanded apron, in Mar-2016. While a delay for a few months is possible, both Cebu Pacific and PAL will be ready to up-gauge Manila-Caticlan turboprop flights as soon as the project is completed.

Up-gauging the Manila-Caticlan route will enable Cebu Pacific to redeploy some of its Manila-based tuboprops to Cebu or potential other new bases. As a result the Cebu base could grow by more than two aircraft in 2016. Further growth of Cebgo's turboprop base at Cebu is also likely in 2017 to 2019 as the turboprop fleet is expanded to 16 aircraft. While Cebgo is planning to open new turboprop bases, Cebu will remain its largest base and continue to grow.

With the additional turboprops based at Cebu, the Cebu Pacific Group expects to add capacity on existing domestic routes and launch new routes. One or two new domestic destinations from Cebu are planned for 2016. These new destinations will be entirely new destinations for the group, which sees opportunities to expand its overall network as it grows its turboprop operation at secondary bases.

Mactan-Cebu's international stature to grow with launch of Los Angeles

The domestic growth in Cebu by both the Cebu Pacific and PAL groups helps position Cebu as a hub not only for domestic connections, but also in the international market. Cebu Pacific and PAL have both been expanding their international operations at Cebu. For PAL the domestic connections are particularly important as PAL prepares to launch long haul operations at Cebu, with a new route to Los Angeles.

As CAPA highlighted in the first instalment in this series of reports on the Philippine market, PAL is planning to launch three weekly A340-300 flights from Cebu to Los Angeles in Mar-2016.

While PAL expects to carry a large volume of local Cebu-Los Angeles passengers, it will also offer connections with its growing domestic network from Cebu. The new flight from Los Angeles will arrive in the early morning and depart for Los Angeles in the evening, enabling connections to most of its domestic destinations from Cebu. PAL now offers connections for Los Angeles passengers to these domestic destinations via Manila, but offering an alternative via Cebu is attractive to both passengers and PAL.

Connecting in Cebu is less of a hassle for passengers than Manila. In the Manila market PAL will be able to sell the Manila-Los Angeles and Manila domestic seats now used by connecting passengers. Essentially, moving transit passengers from Manila to Cebu enables PAL to grow in the local Manila market, despite the slot constraints at Manila.

Connecting passengers are also crucial in order for PAL's new domestic routes from Cebu to become viable. PAL lacks the cost base to compete effectively against Cebu Pacific on local point to point routes from Cebu, particularly as this sector of the market is extremely price sensitive. If PAL succeeds at building a hub at Cebu, several routes that would struggle on their own could become viable.

Cebu Pacific and PAL drive growth in international traffic at Cebu

PAL has also been growing regional international flights from Cebu, providing further feed for the expanded domestic operation.

PAL currently links Cebu with Nagoya, Osaka Kansai, Tokyo Narita and Seoul Incheon. Tokyo is served with two daily A321 flights, Osaka and Seoul with one daily A321 flight, and Nagoya with three weekly flights. Nagoya and Osaka were launched at the end of 2014, providing a boost for Cebu's international traffic in 2015.

Cebu Pacific has added two international routes from Cebu in 2015, including four weekly flights to Tokyo Narita in Mar-2015, and three weekly flights to Taipei on 17-Dec-2015. Cebu Pacific also operates daily flights from Cebu to Hong Kong and Seoul, and nine weekly flights from Cebu to Singapore.

Cebu Pacific is not currently planning to add any international destinations from Cebu in 2016, but Cebu could emerge as an international hub for the group over the long term, given the constraints at Manila. Cebu Pacific offers a connection product for passengers travelling between international flights, and encourages self-connections for passengers between domestic and international flights.

Cebu Pacific currently has about 9,600 weekly international seats at Cebu, compared to about 12,300 seats for PAL, according to CAPA and OAG data. After Los Angeles is launched in Mar-2016, PAL's international capacity at Cebu will expand to almost 14,000 weekly seats. Philippines AirAsia (PAA) has only 2,500 weekly international seats at Cebu.

Foreign carriers account for about 50% of Cebu's international market

Foreign carriers account for slightly over 50% of the international market, with about 26,000 weekly seats. Cebu is currently served by five foreign LCCs and four foreign full service carriers.

Cathay Pacific, Korean Air, Asiana and SilkAir are the FSCs, with Cathay Pacific and Korean the largest, having nine weekly frequencies each. Asiana currently has seven weekly flights to Cebu, and SilkAir has six weekly flights.

Cathay has the largest capacity share, accounting for 10% of total international seat capacity at Cebu. Cathay and Korean (9% share of international seat capacity) carry a large number of Cebu passengers beyond their hubs, particularly to North America. PAL has said that there is an opportunity with its new Los Angeles flight to entice passengers who are now flying Cathay and Korean between Cebu and Los Angeles.

Mactan-Cebu international seat capacity share (% of seats) by carrier: 14-Dec-2015 to 20-Dec-2015

Air Busan, Jeju Air, Jin Air, Malaysia AirAsia and Tigerair are the five foreign LCCs serving Cebu. Jin is the largest with 10 weekly flights, including seven from Seoul and three from Busan. The Busan service was launched in Sep-2015. Air Busan and Jeju Air each have one daily flight to Cebu, while Malaysia AirAsia and Tigeair each have only three weekly frequencies.

Seoul is by far the largest international route from Cebu, with 48 weekly return flights and about 20,000 weekly seats. Cebu-Seoul is currently served by seven carriers - all three Philippine carriers, two Korean FSCs and three Korean LCCs - making it an extremely competitive market. But there is strong demand as Cebu is a popular tourist destination for Koreans.

Mactan-Cebu top 10 international routes ranked by seat capacity: 14-Dec-2015 to 20-Dec-2015

AirAsia has reduced its presence in Cebu

The AirAsia Group currently has only 10 weekly international flights at Cebu, including a daily flight from Cebu to Seoul operated by PAA and three weekly flights from Cebu to Kuala Lumpur operated by Malaysia AirAsia. PAA suspended Cebu-Kota Kinabalu service in Aug-2015.

The AirAsia Group was previously looking at launching several international routes from Cebu, including to China, Hong Kong, Japan and Singapore. But under the turnaround plan that PAA has implemented the last few months, the carrier has reduced its focus on Cebu. PAA is not currently planning any expansion of the Cebu base for 2016.

PAA prefers to focus for now on smaller secondary cities such as Kalibo and Puerto Princesa, where there is less competition and growing inbound demand. But AirAsia will eventually need to reconsider expansion at Cebu, given it is the second largest city in the Philippines and is a strategically important market.

Mactan-Cebu poised for more rapid international growth

Even without AirAsia expansion, Cebu is poised to continue growing rapidly in both the domestic and international markets. The international segment is fairly small, but is also growing rapidly.

Cebu's international traffic increased by 19.7%, to 1.7 million, through the first 10 months of 2015. International passenger traffic was up by a much more modest 3.3% in 2014.

Mactan-Cebu international passenger traffic and year over year growth: 2010 to 2014 and 10M2015

International traffic will continue to grow in 2016 as Los Angeles is launched. The airport is confident Los Angeles will be followed by other long haul routes with destinations in the Middle East the main targets. Several years ago Cebu was served by Qatar Airways via Singapore.

Gulf carriers have generally been reluctant to launch Cebu. While there is a large Filipino population from the Cebu region working in the Middle East, typically this traffic needs to stop in Manila for visas, and to meet with their contractors.

Emirates or Etihad, however, could be enticed to serve Cebu following a new air services agreement between the Philippines and UAE which authorised additional flights to Manila for UAE-based carriers, but only if they also commence Clark or Cebu services. A direct flight to Abu Dhabi, Dubai or Doha also becomes more viable as Cebu evolves as a hub, particularly if the foreign carrier is able to partner with PAL. Etihad already has a comprehensive codeshare arrangement with PAL which includes domestic connections beyond Manila.

Mactan-Cebu's biggest strength is Manila's constraints - and its own lack of them

Foreign and Philippine carriers alike face constraints on expanding in Manila. Cebu is a growing market in its own right - with strength in both the inbound and outbound sectors, but ultimately Cebu's growth is enabled by the constraints at Manila and by its own expansion. Cebu is also currently operating above its designed capacity of 4.5 million annual passengers, but unlike Manila it has space, and a commitment to expand.

Mactan-Cebu was taken over in late 2014 by a consortium consisting of India's GMR and Philippine company Megawide Construction. GMR-Megawide has a 25-year concession to manage and expand Mactan-Cebu Airport.

The new joint venture company began a three-year new terminal construction project in Jun-2015. The new terminal is designed to boost the airport's capacity to 12.5 million passengers when it opens in 2018.

Given its current growth spurt, Cebu could pass the 10 million annual passenger milestone by 2018 and be close to processing 12.5 million passengers at the end of this decade. With the new private owners the airport should be able to continue expanding, and keep up with growing demand for an alternative hub in the Philippines.

Given the steady 6% to 7% per annum economic growth in the Philippines, options besides Manila are needed. As the second largest city Cebu offers a sizeable local market. With its position in the middle of the country Cebu also has the geography to emerge as a large hub linking secondary cities throughout the Philippines, as well as international destinations within the region and afar.