04-Apr-2018 11:32 AM

Boracay Island to close: major airline and tourism impacts

Analysis

The Philippine government is planning to prohibit visitors from visiting Boracay Island, its most popular tourist destination, for six months starting 26-Apr-2018. The government will use the closure period to clean up the island, which has been suffering from environmental degradation, illegal construction and insufficient waste management.

The unusual move could have a long term positive impact on tourism at Boracay and the Philippines as a whole. However, the short term impact on tourism in the Philippines and the country's three main airlines could be significant. Boracay accounts for approximately 6% of seat capacity at the Cebu Pacific Group and the Philippine Airlines Group while smaller Philippines AirAsia has over 20% of its capacity allocated to the Boracay market.

Boracay attracts approximately 2 million annual visitors, close to half of which are foreigners. Total visitor numbers to the Philippines reached 6.6 million in 2017, following three years of double digit growth, but with the closure of Boracay the Philippines will struggle to meet its 7.4 million visitor target for 2018.

Philippines tourism authorities will need to invest heavily in marketing alternative tourist destinations, and work closely with the impacted airlines, to avoid a decline in overall visitor numbers.

Summary

Boracay is the third largest aviation market in the Philippines, after Manila and Cebu.
Approximately 15% of visitors to the Philippines spend time on Boracay, which is also the most popular holiday destination in the Philippines for domestic tourists.
Nearly all of the traffic at Kalibo and Caticlan, the sixth and seventh largest airports in the Philippines, consists of visitors heading to Boracay.
The upcoming closure of Boracay Island for six months under a government-planned environmental cleanup effort could lead to a reduction in visitor numbers to the Philippines for 2018, ending three years of double digit gains.
The closure of Boracay will also impact the three main airlines in the Philippines; Boracay accounts for approximately 6% of traffic at the Cebu Pacific Group Philippine Airlines Group and 22% at smaller Philippines AirAsia

Philippines government plans to close Boracay for six months from 26-Apr-2018

The Philippines government is planning to close Boracay Island for six months from 26-Apr-2018. More details on the closure are expected to be announced by the government soon, but the general plan is to block foreign tourists from embarking at ferry terminals on the mainland.

Local residents will still be allowed to access the island but will obviously be impacted, as Boracay's economy is almost entirely dependent on tourism.

Tourists planning to visit Boracay over the next six months have already been cancelling their trips. Some foreigners planning to visit Boracay in the first half of Apr-2018 also decided to cancel their trips after mid-Mar-2018, when the Philippines interior, tourism and environment ministers proposed a six month closure. Philippines president Rodrigo Duterte initially came up with the suggestion of closing Boracay in Feb-2018, calling the island a "cesspool" and claiming a closure was necessary in order to clean it up.

Boracay attracts 1 million foreign visitors per year

Visitor numbers to Boracay still increased by 7% in Mar-2018, to 172,000. However, a six month closure means the island will likely only attract 1 million total visitors this year, compared to approximately 2 million in 2017 (includes domestic tourists).

Approximately 1 million (15%) of the 6.6 million overseas visitors to the Philippines in 2017 stopped in Boracay. The island's growing popularity has contributed to three consecutive years of double digit visitor growth to the Philippines.

Boracay is particularly popular with Chinese and South Korean visitors, which are the largest source markets for the Philippines tourism industry. Chinese visitor numbers to the Philippines increased by 43% in 2017, to nearly 1 million, and South Korean visitor numbers were up 9%, to 1.6 million.

A large proportion of Chinese and South Korean visitors spend their entire holiday in Boracay. There are several direct flights from these two key markets to nearby Kalibo Airport, as well as one-stop connections via Cebu and Manila. It will be challenging to convince North Asian tourists to select alternative beach destinations in the Philippines, rather than more popular beach destinations in other Asian countries such as Bali in Indonesia and Phuket in Thailand.

Two top 10 Philippine airports rely almost entirely on Boracay visitors

Philippine carriers are planning a significant reduction in the number of flights to Caticlan and Kalibo, the two airports which serve the Boracay market, and foreign airlines are expected to suspend services entirely. The suspensions and reduced schedules will be announced once the government finalises the closure plan, which is expected within the next few days.

Privately owned Caticlan Airport is closest to Boracay and linked via a short ferry, which takes 15mins to the island. The larger government-operated Kalibo International Airport is nearly 80km from Boracay and can be accessed via a bus-ferry combination that takes approximately two hours.

Kalibo and Caticlan are the sixth and seventh largest airports in the Philippines respectively based on current seat capacity. Combined, the two airports account for over 5% of total seat capacity in the Philippines.

Boracay is essentially the third largest airline market in the Philippines after Manila and Cebu. Caticlan and Kalibo combined have more weekly seats than Davao, the third largest city in the Philippines and fourth largest airline market.

Almost all traffic at both Caticlan and Kalibo consists of visitors heading to Boracay. The local market is very small, and consists mainly of workers in Boracay's tourism industry.

The population of Kalibo, the capital and largest city in Aklan province, is less than 100,000. The population of Aklan province is approximately 600,000; there are over 50 provinces in the Philippines with bigger populations.

Boracay market is served with nearly 40 daily flights

Caticlan currently only has domestic flights, although the Philippine conglomerate San Miguel, which took over the airport in 2013, is now constructing a new terminal designed to handle international flights also.

Kalibo Airport already has several international flights, chiefly to the main source markets of China and Korea, and generally provides a cheaper option for domestic flights because taxes and fees are much higher at Caticlan Airport.

Caticlan currently has an average of 15 daily return flights, generating nearly 50,000 weekly seats. The airport is linked with four domestic destinations but Manila dominates, accounting for 73% of seat capacity and 65% of movements (based on OAG schedules for the week commencing 2-Apr-2018).

Kalibo currently has an average of 24 daily return flights, generating approximately 60,000 weekly seats. Kalibo has three domestic destinations and 13 international destinations. Kalibo's domestic/international capacity mix is broadly 50/50, but the ratio varies slightly depending on the time of year.

During the recently concluded norther winter season, Kalibo's capacity peaked at approximately 70,000 weekly seats. Caticlan's capacity has never exceeded 50,000 weekly seats because the airport has limited gate and tarmac space.

Caticlan and Kalibo combined handled approximately 4 million passengers in 2017. A six month closure of Boracay Island would likely reduce their combined throughput to approximately 2 million passengers in 2018.

Caticlan Airport has grown rapidly since opening of extended runway

Seat capacity at Caticlan nearly doubled in 2017, driven by the opening of an extended runway in late 2016 and the start of night operations in mid-2017.

Prior to Nov-2016, Caticlan could only accommodate turboprops - or the niche four-engine BAe 146, which has STOL capability - and its weekly seat capacity never exceeded 21,000 weekly seats. Up to Jul-2017, the airport was only open during daylight hours.

Caticlan Airport annual seat capacity: 2012 to 2017

A320s now account for 76% of seat capacity at Caticlan and 55% of movements, according to CAPA and OAG data. The increase in capacity since late 2016 was driven partially by upgauging from turboprops to jets on the core Manila route by Cebu Pacific and Philippine Airlines (PAL).

The extended runway also enabled Philippines AirAsia (PAA) to start competing on the main Caticlan-Manila route. PAA also now operates A320s from Caticlan to Cebu and Clark - routes that are still mainly served by Cebu Pacific and PAL using turboprops.

Cebu Pacific is the market leader at Caticlan, accounting for 42% of total seat capacity. This includes a 14% share for its turboprop subsidiary Cebgo and 28% for its main jet operation.

PAA currently has a 33% share of seat capacity at Caticlan, while PAL has only a 23% share. All of PAL's flights at Caticlan are operated by the domestic subsidiary PAL Express, which operates A320 family aircraft and Dash 8 turboprops. The remaining 3% of seat capacity at Caticlan is generated by the small independent regional airlines AirSWIFT and SkyJet.

Caticlan Airport capacity share (% of seats) by airline: 2-Apr-2018 to 8-Apr-2018

Kalibo has strong international growth

Kalibo's domestic capacity dropped by slightly more than 10% in 2017, driven by reductions from AirAsia, Cebu Pacific and PAL as they added services to Caticlan.

However, the reductions at Kalibo were significantly less than the capacity added at Caticlan, and as a result total domestic capacity at the two airports combined was up by approximately 20%.

Kalibo's international seat capacity also increased by 40% as Boracay's popularity as a tourist destination surged. The international increase more than offset the domestic declines, resulting in a 6% increase in total system-wide capacity for Kalibo Airport.

Kalibo Airport annual seat capacity: 2012 to 2017

Kalibo had over 1.3 million scheduled international seats in 2017, but its international traffic may have been higher as the airport often handles charters, particularly from China.

However, even factoring in charters, less than one third of foreign visitors to Boracay likely arrived on international flights at Kalibo. A majority of overseas visitors heading to Boracay arrive on domestic flights, using both Caticlan and Kalibo.

AirAsia is Kalibo's largest airline

AirAsia is the market leader at Kalibo, with the group's local affiliate PAA currently accounting for 34% of total seat capacity. PAL has a 26% share (includes PAL Express) and Cebu Pacific has a 15% share (includes Cebgo). Eight foreign airlines account for the remaining 25%.

Kalibo weekly seat capacity by airline: 2-Apr-2018 to 8-Apr-2018

AirAsia currently links Kalibo with two domestic destinations (Clark and Manila) and three international destinations (Busan, Seoul and Shanghai). PAL similarly has two domestic destinations (Cebu and Manila) and three international destinations (Beijing, Busan and Seoul), but fewer frequencies than AirAsia.

Cebu Pacific has three domestic destinations (Cebu, Clark and Manila) but only one international destinations (Seoul). Cebgo operates some of Cebu Pacific Group's domestic flights at Kalibo, and PAL Express operates some of the PAL Group's domestic flights.

The eight foreign airlines currently serving Kalibo are Air Seoul, Jin Air, Juneyao, Okay Airways, Scoot, Sichuan, SilkAir and Xiamen Airlines. SilkAir was already planning to suspend services to Kalibo in Jun-2018, but its sister LCC Scoot was intending to increase frequencies to coincide with SilkAir's pull out. Scoot will now likely suspend Kalibo as well, and provide the only link from Singapore when Boracay reopens later this year.

Seoul is the largest international destination from Kalibo by a wide margin. The Kalibo-Seoul route is served by all three Philippine carriers, as well as the Korean LCCs Air Seoul and Jin Air.

Caticlan plans international flights

San Miguel aims eventually to attract some of the foreign airlines now serving Kalibo to Caticlan, as well as potential new foreign airlines. Caticlan will also handle some international flights from Philippine carriers once the airport's new terminal opens, which could coincide with the reopening of Boracay Island in late 2018.

The new terminal will also provide more space for domestic flights - additional gates, check-in desks and parking space. The current small terminal is now operating well above capacity, and there is limited space for aircraft parking.

However, the popular Seoul route will not be an option from Caticlan once the new terminal opens because the runway is still too short to handle fully loaded A320s. Seoul is over four hours from Caticlan or Kalibo. International routes of two and perhaps three hours (depending on aircraft density) from Caticlan are expected.

Philippine tourism authorities need to promote alternative destinations

All the foreign airlines are expected to suspend operations to Kalibo entirely during the Boracay closure period because virtually all their Kalibo passengers are tourists heading to Boracay.

Philippine tourism authorities should provide incentives to the foreign airlines serving Kalibo to serve other tourist destinations in the Philippines instead. Without incentives, these airlines will likely direct their Kalibo capacity to other markets outside the Philippines.

AirAsia, Cebu Pacific, PAL will also likely suspend all their international flights to Kalibo. It should be easier for tourism authorities to persuade local airlines to move these international flights to other international airports in the Philippines.

However, local airlines will need assistance in promoting the alternative destinations in overseas markets. If assistance and incentives are not provided, local airlines may instead decide to reallocate capacity to lower-risk domestic routes.

Cebu Pacific expects up to USD5 million impact from Boracay closure

The three main local airlines are planning to maintain a significantly reduced domestic operation at both Kalibo and Caticlan.

Cebu Pacific executives said during a 27-Mar-2018 analyst call to discuss FY2017 earnings that the airline group would initially maintain a small number of flights at Caticlan and Kalibo to cater to local residents. The group is monitoring the situation closely, and will add flights depending on demand.

Cebu Pacific executives said that Caticlan and Kalibo combined account for 6% to 7% of the group's total traffic and 6% of its total revenue. The group said that under the worst case scenario the six month closure of Boracay will have a USD5 million impact on its bottom line.

However, the USD5 million impact assumes Cebu Pacific is unable to recover some of these losses by increasing operations on other routes. Depending on the success of capacity redeployment efforts, Cebu Pacific believes the financial impact will be closer to USD3 million. Even this figure is relatively conservative, given that Cebu Pacific will be able to reuse the Manila slots used for Caticlan and Kalibo for other domestic routes that are relatively underserved because of the slot constraints at Manila.

Cebu Pacific executives told analysts that tourism authorities had started working with airlines and travel agents to promote alternative tourist destinations.

If these efforts are successful, the short term impact of the Boracay closure will be mitigated. Cebu Pacific executives also stressed that in the long term the decision to close the island for six months is a positive development, since it should result in the long term sustainability of Boracay and highlights a commitment from the Philippines government to manage the environmental impact of growth.

AirAsia will be most impacted

AirAsia will be the most impacted by Boracay's closure as it is the largest airline group in the Boracay/Aklan market. PAA currently accounts for approximately one third of the combined capacity at Caticlan and Kalibo, compared to slightly more than one quarter for Cebu Pacific.

The impact on PAA is also much bigger proportionally as PAA is a much smaller airline. Caticlan and Kalibo currently account for 22% of PAA's total seat capacity, compared to only 6% for both the PAL Group and the Cebu Pacific Group, according to CAPA and OAG data.

PAA focuses more on international traffic than do its larger competitors, and relies more on foreigners to fill its domestic flights. It leverages the AirAsia brand and distribution system, which is strong throughout Asia, while Cebu Pacific and PAL have stronger brands locally in the Philippines.

As Boracay is the most popular destination in the Philippines for foreign tourists, AirAsia has focused heavily on Kalibo since launching PAA - and on Caticlan, since the airport opened to narrowbody jet operations.

AirAsia has been the market leader at Kalibo since it acquired a stake in Zest in 2013, and has had an aircraft/crew base at Kalibo for several years. (PAA and Zest completed a merger in 2015 and have since operated under a single operator's certificate and brand.)

Palawan should work with AirAsia to move from Kalibo to Puerto Princesa

AirAsia's ability to find other markets in the Philippines for its Kalibo based aircraft will be an important test in determining how much the closure of Boracay impacts the Philippines tourism industry. Cebu Pacific and PAL have a relatively easier situation to manage because they do not base aircraft at Kalibo.

There is an opportunity for tourism authorities on Palawan Island, an emerging tourist destination, to attract AirAsia international flights from China and South Korea. Puerto Princesa Airport, the main gateway to Palawan, opened a new international terminal in 2017, but the airport currently only has one regular international flight - a once per week service to Taipei operated by PAL.

Successfully promoting Palawan with travel agents in China and Korea and moving crews from Kalibo to Puerto Princesa would not be easy. However, this is a golden opportunity for Palawan, and is also a worthwhile investment from federal tourism authorities as successfully moving Kalibo's international flights to Puerto Princesa could help avoid a decline in total visitor numbers to the Philippines after the closure of Boracay.

An investment in Palawan - and/or other alternative holiday destinations in the Philippines - would also be worthwhile given the potential long term positive impact. Once Boracay reopens, the new Puerto Princesa flights could continue, since PAA, PAL and Cebu Pacific all have enough aircraft on order to support maintaining any new flights to Puerto Princesa (or other alternative tourist destinations) at the same time as resuming the Kalibo flights.

Demand for Boracay could actually surge if the government succeeds at cleaning up the island. The upcoming closure of Boracay will generate plenty of negative headlines, but there are multiple silver linings for the Philippines aviation sector, tourism and the country overall.