This is the fifth and final instalment in a series of analysis articles on the Philippines market. The first part analysed the strong position of Philippine market leader Cebu Pacific. The second part looked at the tie-up between LCCs Zest Air and AirAsia Philippines, which along with Tiger affiliate SEAir compete with Cebu Pacific in the fast-growing budget end of the market. The third part looked at the outlook for Philippine Airlines (PAL) in the domestic market, including the recent decision by the group to abandon the low-cost model at sister carrier AirPhil/PAL Express. The fourth part looked at PAL’s position in the international market. This part examines the opportunities in the dynamic Philippine regional market as a result of consolidation and rationalisation in the domestic market.
Regional carriers have traditionally played an important role in the Philippines as several domestic airports, including some of the country’s most popular tourism destinations such as Boracay, cannot be accessed with Airbus or Boeing aircraft. Even some of the country’s low-cost carriers operate turboprops, abandoning the normal single aircraft type mantra of the LCC model, recognising the unique needs of the Philippine market.
As Asian LCC groups, which view mixed fleets as adding cost and complexity, have entered the Philippine market, there has been a reduction in the number of players that operate both regional and narrowbody aircraft. This has benefitted the country’s two largest airline groups – Cebu Pacific and Philippine Airlines (PAL) as they remain committed to retaining their turboprop fleets – and has left a potential niche role for new carriers.
Start-up full-service regional carrier SkyJet is the latest carrier to attempt to fill this niche. SkyJet launched services in late 2012 and plans to operate six underserved domestic routes by the end of 2013 with a fleet of three BAe 146 regional jets.
The PAL Group and Cebu Pacific both have domestic networks covering 32 destinations, according to Innovata data. There are still several island communities left unserved by the country’s two main airline groups, which in 2012 accounted for 88% of the Philippine domestic market as well as 41% of the country’s international market (91% when only including international passengers transported by Philippine carriers). But there is also always a risk for smaller carriers of the stronger more established carriers entering the markets they open. For example PAL Express recently decided to enter SkyJet’s initial market, Basco on the isolated northern Philippine island chain of Batanes.
Turboprops are an important component of the PAL strategy as they provide access to about a dozen destinations which are not served by the group’s narrowbody fleet because of runway restrictions and/or market size. The PAL Group also uses turboprops on several point-to-point routes connecting cities which are served from Manila with A320 family aircraft.
PAL several years ago transferred its fleet of nine Dash 8 turboprops and regional routes to Air Philippines, which rebranded as AirPhil and adopted the LCC model in early 2010. In Mar-2013, AirPhil rebranded as PAL Express and readopted the regional full-service carrier model.
Under AirPhil the Dash 8s were used to feed PAL, with all the Dash 8 routes covered under a PAL codeshare while the A320 routes were operated independently from PAL. Under PAL Express, the carrier now has an entirely feeder role under PAL, with all the carrier’s A320 and Dash 8 flights falling under the PAL code and frequent flyer programme.
Cebu Pacific currently operates a fleet of eight ATR 72s, having added the type in early 2008. Cebu’s ATR 72 operation has been highly successful, allowing the LCC to enter markets such as Caticlan (serving Boracay island) which it could not otherwise access.
Cebu Pacific initially primarily used its ATR 72 fleet as a feeder from airports such as Caticlan that cannot handle A320s. But in recent years it has also used turboprops to open point-to-point routes connecting second tier cities which can handle jets but demand is not sufficient for 180-seat aircraft.
Cebu Pacific currently uses ATR 72s at 18 of its 32 domestic destinations, according to Innovata data. But only six of these airports are served exclusively with ATR 72s with the other 12 airports having a mix of ATR 72 and A319/A320 service. Among these 12 there are a few in which Cebu Pacific uses a mix of turboprops and jets on routes from Manila. But in most cases the turboprops are used to serve point-to-point markets, primarily from the carrier’s second largest hub at Cebu, while jets are used to serve the same destination from Manila.
Cebu Pacific shifted some of its ATR 72s from Manila to secondary hubs in mid 2012 after Philippine carriers agreed to cut peak hour frequencies at Manila as part of an airport initiative to reduce congestion and delays. Cebu Pacific is keen to keep turboprops in its fleet although its current five-year fleet plan does not include any additional turboprops and focuses expansion on its Airbus fleet. Cebu Pacific, however, plans to phase out its A319s over the next several years, which could leave more opportunities for turboprops as the A320 becomes its smallest jet aircraft.
Philippines fleet breakdown by aircraft type: as of 1-Apr-2013
Zest expected to follow SEAir in existing regional markets
Regional markets have also traditionally been served by Zest Air and SEAir. Zest and SEAir are the third and fourth largest domestic players in the Philippines, accounting for 10% and 1.5% of domestic passenger traffic in 2012.
Zest’s roots are as a regional carrier, previously known as Asian Spirit, operating turboprops and BAe 146 jets (which have short runway capabilities). Zest continued to operate turboprops after becoming an LCC in 2008 and adding A320s. Zest currently uses its fleet of four Xian MA60 turboprops to serve four of its 13 domestic destinations.
Unlike Cebu Pacific and PAL Express, Zest currently only operates turboprops from Manila and does not use its MA60s at secondary hubs. The carrier’s regional network was larger prior to mid-2012, when it briefly suspended turboprop operations.
Zest will likely drop its turboprop operation in 2013 – this time permanently – following a tie-up with AirAsia Philippines. The AirAsia Group prefers to maintain an all-A320 fleet, believing turboprops add too much cost and complexity.
SEAir was also following a regional full-service model domestically prior to an ownership change in early 2012 which brought in Singapore-based Tiger Airways along with new Philippine shareholders. The deal with Tiger excluded SEAir’s turboprop fleet, which included Fairchild 328s and Let 410s. Like AirAsia, Tiger is only interested in pursuing a pure LCC model at all its affiliates with an all-A320 fleet.
The transition of SEAir in mid-2012 to an all-jet fleet and the likely upcoming transition at Zest to an all-jet fleet will leave PAL Express and Cebu Pacific as the only major turboprop operators in a country which has dozens of airports that cannot accommodate jets (some of which are not currently served at all). PAL Express and Cebu Pacific already has a cosy duopoly in most regional markets, including Manila-Caticlan, the 10th largest domestic route in the Philippines.
Cebu Pacific currently operates 12 daily flights between Manila and Caticlan with 72-seat ATR 72s while PAL Express operates 10 daily flights with 50-seat Dash 8-300s, according to Innovata data. Cebu Pacific has a 64% share of current seat capacity on the route compared to 36% for PAL Express.
Caticlan to Manila capacity by carrier (one-way seats per week): 19-Sep-2011 to 22-Sep-2013
Cebu Pacific and PAL Express also serve Caticlan from Cebu. Cebu Pacific currently operates 23 weekly frequencies between Caticlan and Cebu while PAL Express offers two daily flights.
Given the high frequency nature of their Caticlan operations, the Boracay market takes up a large share of Cebu’s eight ATR 72s and a majority of the block hours flown by PAL Express’ four Dash 8-300s. (PAL Express’ five 70-seat Dash 8-400s cannot be used to serve Caticlan due to runway restrictions.)
Caticlan was also previously served by Zest and SEAir. Prior to Cebu Pacific adding ATR 72s in early 2008, Zest (then known as Asian Spirit) and SEAir both operated several daily frequencies in the market. But competing with Cebu Pacific, which offered a better product with more modern turboprops at a competitive fare, proved challenging.
Cebu Pacific and PAL Express also have strong positions in the Philippine regional market as they are able to offer connections to a wide range of domestic and international destinations. This is especially critical at destinations such as Caticlan and Busuanga on the island of Palawan given the large number of tourists, particularly from North Asia, heading to holidays at island resorts. But there should still be room in markets such as Caticlan and Busuanga for independent carriers as there is also a lot of local demand.
Busuanga along with Batanes were the initial destinations of SkyJet. The carrier’s CEO, Joel Mendoza, tells CAPA that SkyJet is preparing to enter the Manila-Caticlan market as part of a plan to serve six domestic routes by the end of the year.
While competing against the high frequency schedules of Cebu Pacific and PAL Express seems daunting, Mr Mendoza believes the Caticlan market is under-served and can support more capacity. SkyJet also has a different proposition as a full-service leisure carrier, working closely with agents and hotels to fill up its flights as part of package deals.
SkyJet believes it has another key differentiator in that it will be the only jet operator in the popular Manila-Caticlan market, which will be appealing to Filipinos living in Manila and looking to take a quick break in Boracay. SkyJet is the only Philippine carrier currently operating a regional jet, according to the CAPA Fleet Database.
SkyJet will use its 76-seat BAe 146-100 for the Caticlan market as the 94-seat BAe 146-200 cannot access Caticlan due to runway restrictions. The carrier currently operates one 146-100 and one 146-200 with the -200 used on its two existing routes, connecting Manila with Basco on the Batanes Islands and Busuanga on Palawan.
For now the -100 is used on charters, including occasional flights between Taipei and Busuanga. SkyJet also plans to operate charters between Taipei and Caticlan but has no intention of expanding into the scheduled international market.
SkyJet plans to launch its third scheduled route, Manila-Virac, with three weekly flights commencing 16-Apr-2013. Basco and Busuanga are also now served with three weekly flights.
Caticlan along with Catarman and Surigao will be the carrier’s next three routes, to be launched in phases over the next several months. Mr Mendoza told the CAPA Aviation Finance Asia Summit in Singapore on 21-Mar-2013 that he prefers to launch one route at a time to minimise risk. SkyJet also has minimised risk by relying primarily on block space sales to travel agents. The carrier also has contracts to carry cargo, primarily fresh fish, in its markets, leveraging the fact that the 146 unlike turboprops has sufficient belly space to carry cargo in addition to passenger bags.
SkyJet will have competition in all six of its initial markets following PAL Express’ decision to enter Basco with three weekly Dash 8 flights commencing 1-May-2013. But SkyJet believes there is enough room in all six markets for an independent niche leisure carrier that works closely with local hotels and resorts. “We complement the bigger airlines. We are not in competition,” Mr Mendoza stated.
Basco had previously been served by SEAir but had no service for some time prior to SkyJet’s launch. The lack of air service in the Batanes Islands prompted Mr Mendoza, whose wife is from Batanes, to establish the carrier. He believes there are similar islands throughout the Philippines that can also support regular air service if the local airline works closely with the community and promotes the destination culturally. There are over 7,000 islands in the Philippines.
While PAL Express or Cebu Pacific could piggyback on SkyJet’s “grassroots” efforts in serving such destinations, SkyJet is not concerned about competing against much larger carriers as overall regional island destinations in the Philippines remain underserved. As it continues to gradually expand SkyJet expects to open a mix of underserved and unserved routes, believing there are many destinations which can sustain service with the right support from the local community.
SkyJet now competes against Cebu Pacific, PAL Express and Zest on its other existing route – Manila-Busuanga. Cebu Pacific currently has 18 weekly frequencies on the route while PAL operates 14 weekly flights and Zest offers 11 weekly frequencies. The Zest service had been suspended for several months in 2012 but was resumed at about the time SkyJet launched.
SkyJet only accounts for about 9% of current seat capacity on the Busuanga-Manila route, compared to 40% for Cebu Pacific, 33% for PAL Express and 19% for Zest.
Busuanga to Manila capacity by carrier (one-way seats per week): 19-Sep-2011 to 22-Sep-2013
SkyJet believes there is enough room in Busuanga market for all the carriers, even if Zest does not drop its turboprop operation as expected. Busuanga is on the popular tourist island of Palawan, which is famous for its pristine beaches. Busuanga is also served from Cebu with three weekly flights from Cebu Pacific.
SkyJet’s soon to be launched third route, Manila-Virac, is currently only served by Cebu Pacific with only four weekly flights from Manila. Zest also served the market until mid-2012, according to Innovata data.
Manila-Surigao, which will likely be launched by SkyJet in 2H2013, is now only served by PAL Express with one daily flight. Cebu Pacific left a void in the Surigao market as it stopped operating Manila-Surigao in Nov-2012. Cebu Pacific now only serves Surigao with one daily flight from Cebu, where connecting flights are available to Manila. PAL Express also offers four weekly flights between Cebu and Surigao.
As Surigao is in the southern Philippines, Manila-Surigao is one of the longest turboprop routes in the PAL Express network. SkyJet’s jet service could give the carrier an edge in the Manila-Surigao market, particularly for local passengers.
Cebu Pacific and Zest also dropped service to Catarman in 2012, leaving PAL Express the only carrier in the market and an opening for SkyJet. PAL Express currently serves the Manila-Catarman route with only one daily flight.
SkyJet is seeking to add a second 146-200 by the end of 2013 to support the planned expansion of its domestic network. Mr Mendoza says the carrier may add two more 146-200s in 2014, depending on market conditions.
SkyJet has the opposite approach from an LCC as it looks to acquire relatively cheap aircraft and have low average aircraft utilisation. The cost of operating into small airfields can be high but SkyJet’s fares are higher than average LCC fares. LCCs attract a different customer segment as SkyJet targets package customers and offers complimentary snacks and check-in luggage as well as commissions to travel agents.
SkyJet is not alone in targeting the regional leisure carrier niche. The former owners of SEAir, led by Nick Gitsis and Iren Dorneir, also established a new full-service regional carrier in 2012 known as SEAir International. SEAir International has retained the fleet of turboprops that Tiger rejected while acquiring the original SEAir.
SEAir International was initially planning to launch services in mid-2013, focusing on point-to-point routes as the original SEAir slots at Manila where transferred to the new SEAir-Tiger A320 operation (and are now being used on domestic trunk routes). The new SEAir received an operators’ certificate in Nov-2012 and was planning to re-enter the Manila-Basco market by the end of 2012. But SEAir International has still not yet launched scheduled operations and its fleet has mainly been grounded over the last year, with the exception of some passenger and cargo charters.
While there is potentially room in the Philippine market for small regional carriers, there are challenges. Raising funds can be a particularly difficult task for turboprop start-ups and there is always a risk that larger more established carriers will dump capacity in markets launched by small carriers.
The regional market has become the forgotten sector of the dynamic and fast-growing Philippine aviation industry. But it is an essential sector to the Philippine economy and tourism industry. And there will be more opportunities as LCC groups such as AirAsia and Tiger focus only on the bigger markets.
To see the first four articles in this series:
- Philippine Airlines banks recovery on international expansion but faces uphill battle
- Philippine Airlines group faces challenging future after exiting budget carrier sector
- AirAsia Philippines and Zest Air outlook improves following tie-up
- Cebu Pacific sees bright outlook for 2013 as rationality returns to domestic market
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