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Cebu Pacific Air: upgauging drives 40% growth at congested Manila

Following a commitment for 31 additional Airbus aircraft, Cebu Pacific is poised to grow capacity in Manila by more than 40% over the next five years as it accelerates an upgauging strategy. The Philippines' largest airline group is not expecting to be able to add any flights at Manila due to slot constraints, but the average seat capacity per departure should grow from 195 seats currently towards an average of nearly 280 seats.

Increasing densification is a sensible strategy for Cebu Pacific as the resulting reductions in unit costs enable it to maintain very low fares in a price sensitive market while maximising precious slots at its main hub. Over the next few years Cebu Pacific will stop operating turboprops at Manila, double the size of its widebody fleet and transition most of its Manila-based narrowbody flights from A320s to A321s. 

Cebu Pacific is the launch customer of a new 460 seat high density configuration for the A330-900 and will receive 16 of the new type from 2021 to 2024. It is also the launch customer of A320neos in a new 194 seat configuration and plans to start receiving in 2020 A321neos in the 240 seat maximum configuration. 

The airline group’s overall seat capacity has grown marginally in the last three and half years as it has waited for the delivery of new generation aircraft, which have been delayed due to Pratt & Whitney engine issues. Cebu Pacific is resuming double digit capacity growth in 2H2019 and expects annual seat capacity growth of 10% to 11% from 2020 to 2024.

Summary

  • Cebu Pacific has increased its commitments to Airbus neo aircraft by 31 aircraft, for a total of 68 aircraft, only four of which have so far been delivered.
  • All but eight of these aircraft are slated to be delivered by the end of 2024, at which point Cebu Pacific will have phased out its 33 existing A320ceos and eight A330-300ceos.
  • Cebu Pacific has ordered 16 A330-900s, which will have a new maximum of 460 seats and mainly be used on regional routes within East Asia.
  • Cebu Pacific is configuring its future A321neos and A321XLRs with 240 seats.
  • Cebu Pacific's future Manila operation will focus almost entirely on high density A321s and A330s, as most of its A320s and all its ATR 72 turboprops will be used on secondary point-to-point routes.

Cebu Pacific chief executive advisor Mike Szucs discusses the airline group’s recent Airbus order, anticipated capacity growth, upgauging at Manila and potential growth from secondary bases

Cebu Pacific expands Airbus neo commitment to 68 aircraft 

At the 18-Jun-2019 Paris Air Show Cebu Pacific signed an MOU with Airbus for 31 neo aircraft, consisting of 16 A330-900s, 10 A321XLRs and 5 A320neos. The A330-900 and A321XLR are new aircraft types for Cebu Pacific

In 2018 the group initially committed to five A320neos in a lease deal with Avolon, two of which were recently delivered. It also ordered 30 A321neos in 2011 and another two in 2016; two of these 32 aircraft were delivered in 1H2019.

Therefore, Cebu Pacific has increased its total neo commitment from 37 to 68 aircraft, including four aircraft that have already been delivered. 

The new 31 aircraft commitment reinforces a fleet renewal and upgauging strategy that Cebu Pacific has been pursuing since the initial neo order 2011.

The group is now planning to complete an ambitious fleet renewal and upgauging project by the end of 2024. The group expects to end 2024 with 83 passenger aircraft, all of which will be eight years old or less. Cebu Pacific currently has an in-service fleet consisting of 66 aircraft and plans to end 2019 with 69 aircraft (excludes two ATR 72 freighters, which are being put into service over the next few months). 

“It’s not a massive amount of fleet growth”, Cebu Pacific chief executive advisor Mike Szucs told CAPA TV on the sidelines of the 24-Jun-2019 CAPA North Asia LCCs summit in Cebu, Philippines. “This is really about acceleration of new technology, new engines coming in.”

Cebu Pacific Group fleet summary: as of 1 Aug-2019

Aircraft In service In storage

On order

(confirmed)

On order

(unconfirmed)

Airbus A320-200 33 0 0 0
Airbus A320-200neo 2 0 3 5
Airbus A321-200 7 0 0 0
Airbus A321neo ACF 2 0 30 0
Airbus A321neoXLR 0 0 0 10
Airbus A330-300E 8 0 0 0
Airbus A330-900neo 0 0 0 16
ATR 72-500 1 7 0 0
ATR 72-600 13 0 3 0
Total: 66 7 36 31

Cebu Pacific to phase out all ceo aircraft except seven new A321s 

Over the next five years Cebu Pacific is phasing out all of its A330ceos and A320ceos. As of 1-Aug-2019, the airline still operated 33 A320ceos and eight A330-300ceos.

Cebu Pacific also operates seven A321ceos, but these are late model ceos that were all delivered in 2018. These seven aircraft are expected to remain in the fleet for several years and will be the only ceo aircraft still in service at the end of 2024. 

Cebu Pacific’s A320ceo fleet peaked at 36 aircraft in 2H2016, 2017 and 2018 (its newest A320ceo was delivered in 1H2016). Three A320ceos were phased out in 1H2019 and another three A320ceos are slated to be returned in 2H2019 as more A320neos/A321neos are delivered. 

The group expects to receive four more A321neos (for a total of six) and three more A320neos (for a total of five) by the end of 2019, although based on its most recent fleet guidance it is possible that one of these aircraft will be delayed until 2020. 

Cebu Pacific also plans to phase out its last remaining ATR 72-500 passenger aircraft by the end of 2019, resulting in net growth of three passenger aircraft (66 to 69) over the last five months of the year. 

Cebu Pacific to take all 68 neo aircraft by end of 2026

Cebu Pacific began taking delivery of A320neo family aircraft in Jan-2019, when it received its first A321neo. It took its second A321neo at the end of May-2019. The first two A320neos were delivered in Jun-2019 and July-2019. 

By the end of 2024 Cebu Pacific is slated to receive all eight A320neos and 30 A321neos that it has on outstanding order. The airline is also slated to receive an initial batch of two A321XLRs in 2024. The remaining eight A321XLRs are slated to be delivered in 2025 and 2026.

The group’s widebody fleet will double by the end of 2024, from eight to 16 aircraft. The 16 recently ordered A330-900s are slated to be delivered in 2021, 2022, 2023 and 2024. Eight of these are growth aircraft, while eight will replace the eight existing A330-300s.

Delivery schedule for Cebu Pacific's outstanding aircraft orders: as of end 1H2019

Cebu Pacific to complete renewal of passenger turboprop fleet this year 

Renewal of Cebu Pacific’s turboprop fleet, which is operated by its regional subsidiary Cebgo, began in 2H2016 with the delivery of the first two ATR 72-600s. The group took delivery of another six ATR 72-600s in 2017, four more in 2018 and one aircraft in 1H2019. It has three more ATR 72-600s on order, which are scheduled to be delivered in 2020 to 2022.

In 2015 Cebu Pacific placed an order with ATR for 16 ATR 72-600s with half allocated as growth aircraft and half as replacements for its eight ATR 72-500s. Cebu Pacific has since been trying to sell its ATR 72-500 fleet, but has struggled to find buyers due to the decline in values and demand for ATR 72-500s.

In 2018 Cebu Pacific decided to convert two of its ATR 72-500s into freighters while continuing to look for buyers for the other six aircraft. The group originally expected the first converted ATR 72-500 freighter to be put into service by the end of 2018, but the conversion and approval process has taken several months longer than initially anticipated.

See related report: Turboprop freighter aircraft: Cebu Pacific becomes first cargo LCC

Conversion of the first ATR 72-500 has now been completed and Cebgo plans to put the aircraft into service on 4-Sep-2019.

The second aircraft is now in the process of being converted and is expected to be put into service by the end of 2019. The first freighter was manufactured in 2008 and will therefore be 16 years old at the end of 2024 (making it much older than any of Cebu Pacific’s passenger aircraft). 

Cebu Pacific is setting aside a third ATR 72-500 for potential cargo conversion; it expects to make a decision on whether to convert this aircraft within the next few months. The group has decided to part out one of its ATR 72-500s to support the new freighter operation. It continues to look for potential buyers for the remaining four ATR 72-500s.

Average density of Cebu Pacific’s fleet to increase significantly 

Turboprop expansion will account for three of the 14 passenger aircraft to be added to the fleet over the next five years. Widebodies will account for eight, or 57%, of the additional aircraft. 

Narrowbody aircraft will account for the remaining three aircraft as the narrowbody fleet grows from 48 aircraft at the end of 2019 (30 A320ceos, seven A321ceos, six A321neos and five A321neos) to 51 aircraft (32 A321neos, 10 A320neos, seven A321ceos and two A321XLRs).

Although the number of additional narrowbody aircraft is very modest, the average narrowbody density is increasingly significantly. The narrowbody fleet will grow by only 6% from the end of 2019 to the end of 2024, but the total number of seats on the narrowbody fleet will grow by 24%.

The total fleet is growing by a relatively modest 20% from the end of 2019 to the end of 2024, whereas the total number of seats in the fleet will grow by 46%. Cebu Pacific will have an average fleet density of 244 seats at the end of 2024 compared to 201 seats at the end of 2019. Its current average seat density is 196.5 seats (as of 1-Aug-2019).

Cebu Pacific Group passenger fleet: end 2019 versus end 2024

Aircraft

Seat

configuration

Number of aircraft
end 2019

Total seats

end 2019

Number of aircraft

end 2024

Total seats

end 2024

Airbus A320-200 180 30 5400 0 0
Airbus A320-200neo 188 and 194* 5 940 10  1910
Airbus A321-200 230 7 1610 7 1610
Airbus A321neo ACF 236 and 240* 6 1416 32 7632
Airbus A321neoXLR 240 0 0 2 480
Airbus A330-300E 436 8 3488 0 0
Airbus A330-900neo 460 0 0 16 7360
ATR 72-600 78 13 1014 16 1248
Total:   69 13,868 83 20,240

Cebu Pacific is a pioneer in introducing new high density configurations 

Cebu Pacific currently configures its A320ceos with 180 seats, its A320neos with 188 seats, its A321ceos with 230 seats and its A321neos with 236 seats.

The group plans to switch to a 240 seat configuration for future A321neos by the end of 2020; the newly ordered A321XLRs will also have 240 seats. The plan is to switch to a 194 seat configuration for the five newly ordered A320neos, which will be delivered in 2023 and 2024. 

Cebu Pacific’s A330-300s have 436 seats; the A330-900s it has ordered will have 460 seats. The group’s ATR 72-600s have 76 seats and the ATR 72-500 (only one remaining) has 72 seats.

Cebu Pacific was the launch operator of the 76 seat configuration for the ATR 72-600. With the new Airbus deal announced in Jun-2019, the group emerged as the launch customer for the 188 seat A320neo and the 460 seat A330-900. 

Airbus is already offering a 240 seat configuration for the A321neo but Cebu Pacific initially decided on 236 seats as it wanted an extra toilet. Cebu Pacific’s A321neos have four toilets, whereas the 240 seat A321neos now being delivered to other LCCs have only three toilets.

Cebu Pacific benefits from improved seat technology 

Airbus and Recaro are now offering a new configuration from 2020 that allows 240 seats while maintaining four toilets. Mr Szucs said this is made possible by reconfiguring the forward galley, which will be turned around by 90 degrees.

Mr Szucs acknowledged that a smaller galley limits the available space for food and other ancillaries, but said that this is not a major issue. He pointed out that Cebu Pacific can always opt to load more food and drink at the destination airport before operating the return sector. (LCCs typically stock all food and drink at their base, selling the same items for both sectors.)

The reconfiguration of the forward galley is also the driver behind the newly available 196 seat configuration for A320neo as it has freed up space for an extra row compared to the existing 188 seat configuration. “There’s some clever stuff they have done that gets us to 194”, Mr Szucs said. “We don’t think it compromises comfort in any way given the advances that have been made in seat technology in recent years.”

New slim line seats and cabin reconfigurations, particularly with the toilets, have also enabled Airbus to offer Cebu Pacific a new maximum of 460 seats on the A330. Mr Szucs said Cebu Pacific initially pushed Airbus to increase the maximum to 436 seats on the A330-300 (subsequently increased to 440 seats) and again “pushed” Airbus to increase the seat count further for the A330-900, which has the same fuselage dimensions as the A330-300.

There has been some consumer criticism of the decision to squeeze 460 seats into the A330 but Cebu Pacific, which mainly uses its widebody fleet on regional routes, does not believe it is sacrificing comfort. “Particularly in a short haul product we think it’s super consistent with what other LCCs are doing”, Mr Szucs said. “In the long haul it will be fine as well.”

Cebu Pacific expects 10% to 11% growth per annum over next five years 

The Philippines is an extremely price sensitive market with limited premium demand. Cebu Pacific therefore has no interest in introducing a premium economy or business class product. It is instead focused on achieving the lowest unit possible, enabling it to offer very low fares while consistently turning profits.

Increasing density also helps drive growth that would not otherwise be possible, given the slot constraints at Manila. Cebu Pacific is now projecting seat growth of 10% to 11% per annum in 2020 through 2024 – with broadly equal growth at Manila and secondary bases.

The new order and some changes in the delivery stream for the original order will enable Cebu Pacific to grow at a very consistent rate over the next five years. The group has not been able to achieve this kind of growth in recent years, partially because of A321neo delivery delays. 

Cebu Pacific capacity growth has suffered in recent years due to A321neo delays 

Cebu Pacific was initially slated to receive its first two A321neos in 2H2017, followed by another 13 aircraft in 2018. Deliveries were pushed back multiple times due to problems with the Pratt & Whitney GTF engines. 

In 2017 Cebu Pacific partially mitigated the impact of the GTF delays by ordering seven late model A321ceos, all of which were delivered in 2018. However, the group still had to dial down growth significantly in 2018, compared to its initial plans. Cebu Pacific’s seat capacity grew by only 2% in 2018. 

The group’s seat capacity growth was also much slower than typical in 2016 and 2017 as Cebu Pacific decided to wait for new engine technology before resuming rapid expansion. Seat capacity grew by at least 9% per annum from 2011 to 2015, but was flat in 2016 and was up by a relatively modest 6% in 2017.

As a result, Cebu Pacific Group seat capacity (includes Cebgo) only grew by 7% in the three years from 2015 to 2018, after nearly doubling from 2010 to 2015. Cebu Pacific ceded market share these three years as its two main local competitors, the Philippine Airlines (PAL) Group and Philippines AirAsia (PAA), grew faster.

Cebu Pacific Group annual seat capacity and year-over-year growth: 2010 to 2018

Cebu Pacific has been losing market share 

Cebu Pacific Group’s domestic market share peaked at 60% in 2014 and 2015 before dropping to 57% in 2016, 55% in 2017 and 51% in 2018, according to Philippine CAB data. Cebu Pacific’s domestic market share was only 50% in 1Q2019. (The Philippines CAB has not yet reported traffic figures for 2Q2019 or 1H2019.)

The group was first able to achieve 50% domestic market share in 2013 and has been the domestic market leader since 2009, when Cebu Pacific overtook the PAL Group.

In 2018 Cebu Pacific’s international market share slipped to slightly less than 19%, after being maintained at 20% in 2015, 2016 and 2017. While the international decline has not been as significant as in the domestic market, it comes on a much smaller base, and without the delivery delays there would have been continued gains. 

Cebu Pacific’s international market share increased from 16% in 2013 to 20% in 2015. Its international market share was only 4% in 2006.

PAL continues to be the leader in the international market and has maintained a 28% share the past four years (2015, 2016, 2017 and 2018). In 1Q2019 Cebu Pacific’s international market share was again slightly less than 19%, while PAL’s share slipped to 26%. 

New fleet enables Cebu Pacific to resume market share gains, starting in 2H2019 

Cebu Pacific was originally planning to grow capacity by 18% in 2019. The idea was to make up for the three years of unusually slow growth (2016, 2017 and 2018) with an unusually high capacity gain in 2019, before resuming a growth trajectory closer to its historic norm (pre-2016) in 2020.

See related report: Cebu Pacific Air SWOT: Asia’s first LCC, Philippines market leader

Over the past several months the group has reduced its seat capacity growth projection for 2019 to 11%. Although the group’s seat capacity grew by only 7% in 1H2019, given the timing of its neo deliveries it is expecting 14% seat growth in 2H2019. 

Cebu Pacific should therefore be able to start regaining market share in 2H2019. The 10% to 11% growth per annum for 2020 to 2024 could also result in market share gains – although modest gains, given the overall expected growth rate for the Philippines

Total passenger traffic in the Philippines grew at an average 10% rate from 2014 to 2018. It is expected to grow at a broadly similar rate over the next several years. 

Cebu Pacific's upgauging strategy is focused on Manila 

Cebu Pacific has never focused much on market share and the airline has always been relatively conservative with its expansion compared to other Southeast Asian LCCs. As it reaccelerates expansion its projected growth rate of 10% to 11% is again relatively conservative for the Asian LCC sector – and rational.

Cebu Pacific’s expansion plan is particularly sensible given that its focus on upgauging will enable it to reduce its already very low unit costs and expand in Manila despite infrastructure constraints. Manila is Cebu Pacific’s main base, accounting for 77% of its seat capacity (based on CAPA and OAG data for the week commencing 12-Aug-2019) and is generally a much more profitable market than Philippine secondary markets. 

Cebu Pacific should be able to maintain approximately 77% of its seat capacity at Manila, although it does not expect that it will be able to add services at Manila due to the slot constraints. “We don’t anticipate putting any additional aircraft into Manila on a net basis”, Mr Szucs said.

Cebu Pacific will therefore allocate all 14 aircraft to be added from the end of 2019 to the end of 2024 to its secondary bases. The proportion of movements at Manila – which is currently 71% - will therefore decline, although the seat capacity share at Manila should be maintained. 

Cebu Pacific to grow at Cebu and Clark 

Over the next five years Cebu Pacific is planning to grow its two other current bases – Mactan-Cebu and Clark – as the overall fleet expands by 14 aircraft.

The group will also consider opening new bases and may launch point-to-point international routes from new gateways, such as Bohol and Puerto Princesa. It also has the flexibility of adding point-to-point routes using aircraft and crew from its three existing bases.

Mactan-Cebu is now Cebu Pacific’s second largest base, accounting for 21% of the group's total seat capacity (17% of its Mactan-Cebu capacity is generated by flights to Manila). Clark currently only accounts for only 5% of the group’s seat capacity but has been growing rapidly – Cebu Pacific added a third aircraft to the Clark base in early Aug-2019.

Of Cebu Pacific’s 41 international routes, 27 are from Manila, six are from Mactan-Cebu and four are from Clark. It also has two international routes from Iloilo, one from Davao and one from Kalibo.

The group also has relatively large domestic operations at Davao and Iloilo – it has more total capacity in these cities than Clark – but all the services from these cities use aircraft that are rotated from Cebu, Clark and Manila

While Clark is only approximately 100km from Manila and has been marketed over the years as an alternative airport for Manila, airlines have struggled to attract Manila area passengers to Clark. Cebu Pacific believes Clark will grow, given that it has its own catchment area of 20 million people, but believes that growing Manila is the only option for responding to the growing demand to/from Manila

“We never thought it was really an alternative to Manila. We always think it is a catchment in its own right and well worth the investment”, Mr Szucs said. “But it will take time. Manila is the one really booming away. That is the one that is genuinely spilling demand at the moment.”

Cebu Pacific to grow Manila capacity by at least 40% 

While there will be some upgauging on point-to-point routes bypassing Manila, almost all the growth outside Manila will be driven by growing the number of aircraft and frequencies. Cebu Pacific plans to base all its A320s and ATR 72s outside Manila by 2024, while all of the group’s A330s and most of the A321s will be based in Manila

The upgauging strategy should enable the group to grow Manila seat capacity by at least 40% over the next five years. This would be a significant accomplishment, given that Manila growth will almost certainly be profitable and provide a competitive advantage, since PAL and PAA are not likely to be able to achieve similar growth rates. 

PAL and PAA have been focusing expansion in recent years on other markets, particularly Cebu and Clark, which has impacted their profitability. The Manila market is now generally considered to be undersupplied, whereas some of the other markets in the Philippines are suffering from overcapacity. 

Cebu Pacific is still market leader in Manila and Cebu, but the focus has been Manila

The Cebu Pacific Group currently has a 35% share of total seat capacity at Manila and a 33% share at Cebu. However, it has been able to increase its share slightly at Manila, whereas over the past four years its share at Cebu has declined by nearly 20ppts (from over 50% in 2014).

Over the past four years the AirAsia and PAL Groups have both increased their capacity shares at Cebu by approximately 5ppts. Foreign airlines have also significantly increased their share. 

The PAL Group currently has a 27% share of seat capacity at Cebu and the AirAsia Group has a 17% share.

Mactan-Cebu capacity share by airline: week commencing 12-Aug-2019

At Manila the PAL Group has a 31% share, which is more than 3ppts less than the Cebu Pacific Group (includes Cebgo).

The AirAsia Group has a 13% share of seat capacity in Manila (includes services operated by Malaysia AirAsia). 

Manila seat capacity share by airline: week commencing 12-Aug-2019

At Clark, Cebu Pacific has just overtaken the PAL Group to become the market leader again.

A few weeks ago, in late Jul-2019, PAL had a leading 28% share at Clark compared to 24% for Cebu Pacific and 21% for AirAsia. Cebu Pacific increased its Clark capacity by nearly 20% in early Aug-2019 when it started basing a third A320, which was used to launch three new routes (two domestic and one international).

Cebu Pacific now has a leading 28% share of seat capacity at Clark, compared to 25% for PAL and 21% for AirAsia. Although it has regained the lead at Clark, the Cebu Pacific group’s share of capacity at Clark is still lower by approximately 15ppts compared to Aug-2016.

PAL resumed services to Clark in late 2016 and AirAsia resumed Clark in early 2017. 

Clark capacity share by airline: week commencing 12-Aug-2019

Cebu Pacific is planning to increase its Clark seat capacity by another 10% in Sep-2019. Over the next few years it expects to base more aircraft at Clark, as well as at Mactan-Cebu.

Cebu Pacific’s Manila upgauge strategy is not new, but is accelerating 

While Cebu Pacific expects to regain some market share at Cebu and Clark, expansion in Manila through upgauging remains its priority. 

Cebu Pacific has already used upgauging to drive significant growth in Manila this decade. Some growth was also achieved through the 2014 acquisition of Tigerair Philippines, which had a relatively small portfolio of Manila slots.

Additional slots have not been available at Manila for several years. In fact, in 2012 all Philippine carriers had to reduce their Manila movements slightly in order to ease congestion. These slots were never returned to the airlines and it is unlikely that Philippine carriers will be able secure additional slots in the foreseeable future. 

Over the past several years Cebu Pacific has significantly increased the average number of passengers per Manila departure by adding widebody aircraft and phasing out A319s. It has also upgauged turboprop services as it swapped out 72 seat ATR 72-500s for 78 seat ATR 72-600s. 

Widebodies have naturally had the biggest impact. At the beginning of 2013 the 180 seat A320 was the largest aircraft in Cebu Pacific’s fleet. At the time, the group had 23 A320s, 10 A319s and eight ATR 72-500s.

A330s drive capacity growth at Manila for Cebu Pacific  

Cebu Pacific began operating two A330-300ceos in 2013, added three more of the type in 2014 and one additional aircraft in each of 2015, 2016 and 2017.

The airline decided to add widebody aircraft to expand into the long haul market and the A330s were initially used almost entirely on long haul routes. However, Cebu Pacific cut three long haul routes in 2017 and has since used most of its A330s on regional routes.

Cebu Pacific currently uses the A330-300 on nine regional routes: Bangkok, Cebu, Davao, Hong Kong, Osaka, Seoul, Shanghai, Singapore and Tokyo Narita. Bangkok, Osaka, Seoul, Shanghai, Singapore and Tokyo have one daily A330 frequency and Hong Kong has three daily frequencies. 

The Cebu and Davao A330 schedule fluctuates depending on the week and time of the year. Manila to Cebu and Davao, which are Cebu Pacific’s largest domestic routes, have up to two A330 frequencies per day. Manila-Hong Kong is Cebu Pacific’s largest international route, followed by Manila to Singapore, Tokyo Narita and Bangkok

Regional routes account for approximately 85% of Cebu Pacific’s A330 capacity (it fluctuates slightly depending on the time of year).

The airline currently operates only 14 long haul weekly services, consisting of seven to Dubai, four to Sydney and three to Melbourne (based on OAG schedules for the week commencing 12-Aug-2019).

These are its only services with a scheduled flight time of more than five and a half hours.

Cebu Pacific international weekly departures based on scheduled flight time: week commencing 12-Aug-2019

Cebu Pacific plans to upgauge several more regional routes to A330s in 2021 to 2024 as it doubles the size of its widebody fleet. All 16 of the A330-900s it is acquiring will be based in Manila. Eight will replace the current fleet of eight A330-300s and eight will be used to upgauge services now operated with narrowbody aircraft. 

Services currently operated with A330-300 will be boosted by 6%, since Cebu Pacific is configuring its A330-900s with 460 seats compared to 436 seats on the A330-300. Seat capacity on services upgauged from A320 family aircraft to A330-900s will be increased by at least 92% (based on the largest narrowbody aircraft).

Cebu Pacific is not keen to pursue US routes or significant long haul expansion 

Mr Szucs said Cebu Pacific may add frequencies to its three existing long haul destinations – for example, it is keen to upgrade Sydney to daily. A fourth long haul destination is also possible, but the eight additional widebody aircraft will be used almost entirely to upgauge regional services.

“The 330 order is all about short haul”, Mr Szucs said. “A majority of it is going into Asia. It’s going into China, Japan, Korea, Hong Kong, Singapore and Bangkok. All these places that we have been growing with the A330ceo we anticipate doing more and more with the A330neos.”

Cebu Pacific has evaluated potentially launching nonstop flights to the US west coast, but at least for now has decided against acquiring an aircraft capable of this mission. It selected the A330-900 over the 787-9, which would have the range to operate nonstop flights to North America but did not provide the density that Cebu Pacific wanted.

The group has the option of converting its A330-900 order to A330-800s, which would also have the range to operate Manila to the US west coast in all-economy configuration.

But the A330-800 is less efficient than the -900 and is not currently being considered. “I don’t think it’s top of our mind”, Mr Szucs said. “The destinations closer to home are more what we are looking at.”

Cebu Pacific will also be able to pursue some long haul expansion in 2023 to 2025 as it takes delivery of 10 A321XLRs. The group does not plan to evaluate long haul narrowbody routes for a few years, but the idea is potentially to use the A321XLRs to launch new routes to Australia, India and Russia. A321XLR destinations not currently in the Cebu Pacific network would likely be served from Manila, while long haul destinations already served with A330s from Manila (such as Sydney) could be launched from Cebu.

Cebu Pacific upgauging has big impact in Manila capacity 

Given the expected focus on regional routes, the eight additional A330s should be able to generate approximately 25,000 additional one-way weekly seats from Manila as narrowbody flights are upgauged. This alone would drive approximately a 13% increase in Cebu Pacific’s total Manila seat capacity. 

The upgauging from A330-300s to A330-900s on the existing widebody flights will generate approximately 2,500 additional one-way weekly seats. This would drive a more modest increase in Manila seat capacity of slightly more than 1%. 

The upgauging of narrowbody flights will have a much bigger impact, given that most narrowbody flights from Manila are now operated with A320s but will be operated by A321s by 2024.

Approximately 75% of Cebu Pacific Group’s Manila services are now operated with A320 family aircraft. Nearly 80% of these A320 family flights are still operated with A320s, while slightly more than 20% have already been upgauged to A321s.

CAPA estimates that 90% of the remaining A320 flights will be upgauged to A321s, generating approximately 30,000 additional one-way seats for a 15% overall increase. (Although Cebu Pacific plans to base all its A320 at secondary cities and the type will be used mainly on point-to-point routes bypassing Manila, a small number of A320 flights will still be operated to Manila using aircraft based outside Manila because some domestic destinations can handle A320s but not A321s.) 

Of the Manila services already operated by A321s, CAPA estimates that approximately 60% will be upgraded to A330s and the other 40% will continue to be operated with A321s. The impact from the A321 to A330 upgauging is part of the estimated 13% increase that was explained earlier in this section. In the event that A320 flights are upgauged to A330s, more additional seats will be generated from the narrowbody to widebody upgauging, but fewer seats will be generated from the narrowbody to narrowbody upgauging, resulting in the same total impact. 

Cebu Pacific to stop operating turboprops at Manila 

Cebu Pacific also plans to stop operating turboprops from Manila, driving further capacity growth there, as its Manila-based ATR 72-600s are transferred to other airports.

Currently 52% of Cebu Pacific’s turboprop services are operated from Manila Ninoy Aquino (based on OAG schedules data for the week commencing 12-Aug-2019).

For some time the group had been planning to move its Manila-based turboprops to the Cebu and Clark bases. The government’s recent decision to open Sangley Air Base to turboprop services has opened up the opportunity for Cebu Pacific to move its Manila turboprop services instead to Sangley, which is approximately 30km by road from central Manila

Sangley is expected to start handling business jets and regional freighters, including Cebu Pacific’s ATR 72-500 freighters, by the end of 2019. A second phase will open up the airport to regional passenger aircraft. This is contingent on improvements to the airport and access from Manila that is expected to only take a few months to complete. (A ferry service from Pasay City, on the Manila waterfront, to Sangley is planned.)

“We would be happy to relocate our turboprops there when the facilities can take it”, Mr Szucs said. “We would be very keen to do that and use the slots that we have in Manila for the jet operations instead.”

Sangley is a more attractive option than Clark for the ATR 72-600s now based in Manila because Sangley serves the same catchment area of Manila, whereas Cebu Pacific views Clark as a separate catchment area, as explained earlier in this report.

Most of Cebu Pacific’s Manila turboprop services are to domestic airports that can only accommodate turboprops. These services would have been lost entirely without the Sangley option (although some of these airports are expected to be upgraded over the next few years, opening up the option of jet services from Manila by 2024). 

Upgauging from turboprops brings total capacity increase at Manila to more than 40%

Cebu Pacific currently has 160 weekly turboprop departures from Manila. As these slots are reallocated to jets, one-way seat capacity generated by these slots will increase by an estimated 25,000 weekly one-way seats.

This is the equivalent of another 13% increase in total Manila seat capacity and brings the total increase to an estimated 42%. (Some of this increase will be generated in 4Q2019 as Cebu Pacific starts to reallocate some turboprop slots to jets and introduces more A321neos.)

Cebu Pacific currently has 1,000 weekly departures from Manila with an average of 195 seats per departure. The group should be able to achieve an average of nearly 280 seats per departure by the end of 2024. 

While this is a rough estimate the impact is clear. Cebu Pacific will be squeezing a significant amount of additional capacity from its existing Manila slots, giving it a huge competitive advantage as it gains market share at its most profitable airport.

Philippine Airlines unable to respond with its own upgauging 

Philippines AirAsia (PAA) and Philippine Airlines (PAL) need to respond by accelerating their own Manila upgauging strategies. However, both airline groups have constraints that will prevent them from matching the estimated 40% capacity increase that will be achieved by their larger rival.

PAL moved all its turboprop services from Manila in early 2018. PAL could move the Dash 8 turboprops it is now basing at Clark to Sangley, which will enable it compete more effectively against Cebu Pacific on a few domestic routes as Cebu Pacific moves its ATR 72s to Sangley. However, it cannot follow Cebu Pacific in reallocating Manila turboprop slots to jets as it has already pulled this lever earlier.

PAL has also already upgauged most of its narrowbody fleet from A320s to A321s. It has 14 more A321neos on order, which will be used for growth and A320ceo replacements. However, it has opted for a 195 seat configuration rather than sticking with the 199 seat configuration it has on its A321ceos (an extra toilet has been added).

PAL took its first 195 seat A321neo in Jul-2019, will take one more by the end of the year and the 13 remaining aircraft by the end of 2024. These, and two Dash 8 Q400s that are slated to be delivered in 4Q2019, are the only aircraft PAL currently has on order.

It also has six low density 168 seat A321neos, which feature lie-flat seats in business class and are used on long haul routes. Strangely, over the past year PAL has opted to downgauge and boost frequencies on some long haul routes from A330s to A321neos, despite the slot constraints at Manila

PAL currently has an average of 219 seats per departure from Manila (based on CAPA and OAG data). Cebu Pacific is poised to overtake PAL in this metric by 2021.

PAL should reassess its fleet strategy as part of a strategic review that will likely be initiated over the next few months by the group’s newly appointed president.

The PAL Group has a larger fleet than the Cebu Pacific Group and generates more revenue, but has less traffic (15 million passengers in 2018 compared to 20 million for Cebu Pacific).

Cebu Pacific has also been much more profitable, reporting profits for 10 consecutive years, whereas PAL has had an accumulated loss over the past decade and has been in the red five out of the past eight years. 

Philippine Airlines Group fleet summary: as of 1-Aug-2019

Aircraft In service In storage

On order

(confirmed)

On order

(unconfirmed)

Airbus A320-200 18 1 0 0
Airbus A321-200 24 0 0 0
Airbus A321-200neo 6 0 0 0
Airbus A321neo ACF 1 0 14 0
Airbus A330-300E 15 0 0 0
Airbus A340-300X 0 1 0 0
Airbus A350-900XWB 6 0 0 0
Boeing 747-400 0 2 0 0
Boeing 777-300ER 10 0 0 0
Bombardier DHC-8Q-314 4 0 0 0
Bombardier DHC-8Q-402 5 0 0 0
Bombardier DHC-8Q-402(NG) 9 1 2 0
Total: 98 5 16 0

AirAsia needs to find a way to bring A321s to Manila 

AirAsia’s average per departure from Manila is slightly more than 180 seats. All of PAA’s services are operated with 180 seat A320ceos, but Malaysia AirAsia has a small number of Kuala Lumpur-Manila services with 186 seat A320neos. 

The AirAsia Group has an overall upgauging strategy, with orders for more than 300 A321neos, which will be configured with 240 seats and delivered starting later in 2019. However, PAA has not yet been allocated any of these aircraft.

PAA currently operates 24 A320ceos, including 14 that are based at Manila. It does not yet have any A320neos and in recent years has been growing primarily by inheriting secondhand A320ceos from other AirAsia airlines. PAA’s fleet has an average age of 11 years and only one of its A320s is less than five years old, according to the CAPA Fleet Database. 

Financial issues have made it difficult for PAA to take new aircraft, including A320neos. However, PAA is hoping to turn a profit in 2019, and capital issues should be resolved following recent ownership changes and a planned initial public offering.

PAA will also need to resolve terminal issues in Manila before it potentially takes A321neos: all of PAA’s domestic services operate from Terminal 4, which cannot handle A321s.

International flights, which are at Terminal 3, can handle A321s but 65% of PAA’s total seat capacity (and nearly 75% of its Manila capacity) is in the domestic market. Having to dedicate A321s to international services would be challenging and inflexible. 

Even if PAA is able to move its domestic services to another terminal and transition its Manila base to an all-A321 fleet, the resulting capacity increase would be 33%, which is less than the increase for Cebu Pacific.

The only other solution for PAL would be to bring in A330s. However, widebodies would be challenging as it would require an AirAsia X franchise in the Philippines and be subscale, given PAA’s relatively small size.

Cebu Pacific's outlook is bright 

Cebu Pacific is poised to remain the largest LCC in Manila by a wide margin – as well as the market leader overall.

As Cebu Pacific uses higher density aircraft to grow in Manila and reduce an already very low cost base, its track record of achieving much higher profits than its two local rivals should also remain intact.

As is often the case with LCCs in emerging markets, first mover advantage is critical. Cebu Pacific is the oldest LCC in the Philippines – and was the first LCC in all of Asia. 

The slots Cebu Pacific was able to build up in Manila in its earlier years have become one of its biggest strengths. Cebu Pacific is now sitting in the enviable position of being able to maximise these slots by pursuing further upgauging as its fleet is renewed.

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