Cebu Pacific, PAL, AirAsia plan Boracay expansion. Will new runway at Caticlan lead to overcapacity?
Cebu Pacific, Philippine Airlines and Philippines AirAsia are planning to pursue rapid expansion at Caticlan Airport in 2016 following the completion of a highly anticipated runway extension project. Caticlan is the closest airport to the popular Philippine resort island of Boracay but has seen limited growth over the years as it could only handle regional aircraft.
Caticlan is expected to see the launch of international flights from all three of the main airline groups in the Philippines as well as from some foreign carriers. Several of these flights will be transferred from Kalibo, an airport about 70km from Boracay that has seen rapid growth due to the constraints at Caticlan, which is only a 10min ferry trip from Boracay.
Traffic on Caticlan-Manila is also expected to grow as Cebu Pacific and PAL upgrade flights from turboprops to A320s and as AirAsia enters the market. Caticlan-Manila is already the 10th largest domestic route in the Philippines while Kalibo-Manila, which will almost certainly see a decline in traffic, is now the fourth largest.
Caticlan Airport runway extension to be completed by Mar-2016
Philippine consortium San Miguel began a major construction project at Caticlan in mid-2014 after winning a 25-year contract to rehabilitate, expand and operate the airport. A hill was flattened as part of the first phase, enabling the airport’s only runway to be expanded from 950m to 1800m.
San Miguel is also renovating the current terminal, expanding the apron and building a new international terminal. New navigational equipment is being installed to enable operations in bad weather. Flights now have to divert to Kalibo or be cancelled during bad weather or heavy winds as the Caticlan Airport has limited infrastructure and a very short runway which prior to the flattening of the hill could only be used in one direction due to the hilly terrain.
Philippine carriers expect the airport to be able to accommodate jets from the beginning of the next northern summer season in late Mar-2016. But the new international flights will likely be phased in over several months as not all parts of the project may be completed at once.
Cebu Pacific and PAL currently control the Caticlan market
Cebu Pacific and PAL Express are the main operators at Caticlan, with 150 weekly flights and 140 weekly flights respectively, according to OAG schedule data. Cebu Pacific currently operates 55 weekly return flights on Caticlan-Manila and 20 weekly return flights on Caticlan-Cebu while PAL Express operates 70 weekly return flights on Caticlan-Manila.
Cebu Pacific operates all its Caticlan flights with 72-seat ATR 72s, a type it added in 2008 primarily to access the Caticlan market. PAL Express currently serves Caticlan with 56-seat Dash 8 Q300s and 76-seat Q400s. Caticlan historically has only accommodated the smaller Q300 but PAL Express recently was able to up-gauge some flights to Q400s as part of the runway extension has already been completed.
The PAL Group is offering about 8,800 weekly seats in the Caticlan market in Jul-2015, up from about 7,000 a few months ago when the operation was limited to Q300s. Cebu Pacific currently has about 10,800 weekly seats to and from Caticlan but often has more than 12,000 weekly seats during peak periods.
Caticlan Airport seat capacity by carrier: 6-Jul-2015 to 12-Jul-2015
Of the nearly 20,000 weekly seats provided by Cebu Pacific and PAL Express at Caticlan, almost 17,000 are on the Caticlan-Manila route. This makes Caticlan-Manila the 10th largest domestic route in the Philippines based on seat capacity for early Jul-2015.
Top 10 domestic routes in the Philippines ranked by seat capacity: 6-Jul-2015 to 12-Jul-2015
PAL and Cebu Pacific plan A320 operations at Caticlan
PAL’s strategy for the Caticlan airport includes further up-gauging its Manila flights to A320s from Mar-2016 and transferring to Caticlan its Kalibo-Taipei flights. PAL currently serves Busan, Seoul and Taipei from Kalibo but expects Busan and Seoul flights will need to remain at Kalibo because the new 1800m runway at Caticlan will still be too short to accommodate fully loaded A320s.
Cebu Pacific expects it will be able to operate fully loaded A320s from Caticlan on routes of up to three hours. This will enable Cebu Pacific to transfer its recently re-launched Kalibo-Hong Kong route to Caticlan as well up-gauge its domestic flights from Manila.
Cebu Pacific may also launch new international routes from Caticlan such as Taipei but will not be able to move over its Kalibo-Seoul service. Cebu Pacific subsidiary Cebgo also currently operates charters between Kalibo and China, which are unlikely to be moved to Caticlan.
PAL has the ability to operate its A320s on slightly longer routes from the newly extended Caticlan runway than Cebu Pacific as its A320s are in a less dense configuration. Still, flights to South Korea or Japan are probably out of the question.
Caticlan upgrade frees up turboprops for other markets
PAL Express sees opportunities to redeploy its Dash 8s to new secondary domestic destinations that have been eager to secure service. PAL Express currently operates four Dash 8 Q300s and five Dash 8 Q400s, according to the CAPA Fleet Database. Historically most of the capacity provided by the Q300 fleet was allocated to the Caticlan market.
Cebu Pacific also sees opportunities to redeploy some of the ATR 72s now used for Caticlan-Manila as it sees huge growth potential for point to point routes which are too thin for A320s but ideal for ATR 72s. Cebu Pacific could potentially launch new point to point domestic routes from Caticlan in addition to maintaining its existing turboprop service on Caticlan-Cebu.
Cebu Pacific at the Paris Air Show in Jun-2015 placed orders for 16 ATR 72-600s plus 10 options despite expecting to reduce its turboprop operation at slot constrained Manila. The new ATR 72-600s, to be delivered in a new high density 78-seat configuration, will replace the existing fleet of eight ATR 72-500s and drive at least a doubling of the LCC’s turboprop operation even as most flights on its largest turboprop route (Caticlan-Manila) are transitioned to A320s.
Cebu Pacific still expects to operate some Manila-Caticlan flights with ATR 72s, particularly in the initial phases of the new Caticlan airport operation as there may not be sufficient ramp space to up-gauge all flights.
Caticlan has a colourful history of service from various Philippine airlines
Two small Philippine regional carriers, Skyjet and SEAir International, also have served the Caticlan-Manila route over the last year. But neither carrier is currently selling scheduled flights to Caticlan, according to their online booking engines.
SEAir International operates Dornier 328 turboprops while Skyjet operates BAE 146 jets. The BAE 146 was a staple for Caticlan for several years as the four-engine jet has short take-off and landing capability, enabling it to access Caticlan’s 950m runway.
Asian Spirit in particular was a large BAE 146 operator and at one point operated several daily flights to Caticlan. But Asian Spirit was impacted by Cebu Pacific’s entry into the Caticlan market in Feb-2008. Asian Spirit rebranded as Zest Airways in Oct-2008 and began operating newly acquired Xian MA60 turboprops to Caticlan.
Zest continued to operate MA60 turboprops until it merged with Philippines AirAsia (PAA) in 2013. The AirAsia Group was not interested in a regional aircraft operation, leading Zest to transition to an all-A320 fleet as it adopted the AirAsia brand. AirAsia Zest and PAA are currently still separate carriers but aim to become a single entity by the end of 2015.
The AirAsia Group is now looking at launching services to Caticlan in Mar-2016 as part of a new business plan for its Philippine operation that focuses on leisure destinations. Caticlan is expected to be among two or three new international hubs that AirAsia opens in the Philippines as PAA/Zest restructures its network in a bid to improve profitability.
As CAPA previously highlighted, AirAsia’s Philippine operation has been highly unprofitable since PAA launched in 2012. PAA has narrowed its losses significantly in recent quarters but is still under-performing compared to its peers as PAL has returned to the black while Cebu Pacific has recorded significant improvement in profitability.
As recently as May-2015 the AirAsia Group stated that PAA was on track to be profitable in 2Q2015 and was preparing for a 2016 initial public offering. But over the last few weeks the group has revised these targets, stating PAA is now expected to be profitable for the first time in 4Q2015 while the IPO target date has been pushed back to 2018. The AirAsia Group is now trying to raise capital at PAA through a new issuance of convertible bonds.
A new operation at Caticlan could improve PAA’s outlook. But as CAPA highlighted in a May-2015 report, any expansion at Caticlan will likely impact AirAsia’s position at Kalibo, where it has a leading 38% share of total seat capacity.
AirAsia currently operates four scheduled international routes from Kalibo, more than any other carrier. AirAsia is also the market leader on the Manila-Kalibo route, with about a 42% share of capacity compared to about 38% for the Cebu Pacific Group and 20% for the PAL Group.
Manila-Kalibo is the only Philippine domestic route AirAsia is the market leader. Most likely this is because AirAsia is currently unable to serve Manila-Caticlan while its two competitors split the Boracay market with operations at both airports.
PAA will face stiffer competition at Caticlan from both Cebu Pacific and PAL. AirAsia is generally keen to avoid overlap with Cebu Pacific in the Philippines as PAA aims to carve out a niche under the radar screen of the market leader by focusing on leisure markets that are not served by Cebu Pacific.
PAA strategically needs to serve Caticlan but the market could suffer from overcapacity after the airport is expanded. Profits are therefore unlikely in the initial phase, particularly as AirAsia will be the newest and smallest carrier in Caticlan. If the market becomes oversupplied PAA may also not be able to hold its ground as long as its competitors, given its focus on becoming a profitable entity and improving its financial footing.
A fare war is particularly a possibility on the Manila-Caticlan route as Cebu Pacific and PAL both up-gauge their existing flights to A320s. Both carriers could cut some frequencies, which will free up valuable slots at Manila for other routes. But a 50% reduction in frequencies, which would be required to maintain flat capacity as A320s replace turboprops, is highly unlikely.
Manila-Boracay could easily see at least a doubling in capacity as AirAsia enters the market and the two incumbents up-gauge. Manila-Caticlan has the potential of becoming the third largest domestic route in the Philippines after Manila-Cebu and Manila-Davao.
Most of the additional capacity could be absorbed, particularly if Manila-Kalibo sees a large decrease. But Kalibo is unlikely to see a decrease that matches the increase at Caticlan. This will inevitably pressure yields at both Caticlan and Kalibo.
Yields at Caticlan are now among the highest in the Philippine domestic market. The airlines serving Caticlan can afford some reduction in yields as large gauge aircraft come with lower unit costs. But there is a risk that stiff competition will lead to a much larger reduction in yields compared to the expected reduction in costs, particularly when taking into account the cost of operating at the newly privatised airport. While San Miguel has not yet set fees for Caticlan the charges at Caticlan will almost certainly continue to be significantly higher than Kalibo.
Kalibo Airport relies mainly on Boracay-bound tourists
A majority of Manila-Kalibo passengers now travel the approximately two hours by road/ferry to Boracay. This is an inconvenience compared to the quick 10min ferry from Caticlan to Boracay but fares on Manila-Caticlan are typically significantly higher, particularly during peak holiday periods.
Boracay is a major inbound market as it has emerged as the leading tourist destination in the Philippines. Aklan province, which includes Kalibo and Boracay, recorded about 1.5 million international visitor arrivals in 2014. Boracay also attracts a large volume of domestic tourists.
Kalibo itself is a small local market. It is the capital of Aklan but has a population of less than 100,000.
Almost all of Kalibo’s international passengers head to Boracay. Kalibo currently has scheduled international services to seven destinations and also accommodates a large charter operation, particularly from China and South Korea. China and South Korea are by far the two largest source markets for the Boracay tourism sector.
AirAsia competes on four of the seven international routes from Kalibo and accounts for a leading 45% share of international seat capacity at the Kalibo Airport. This includes three routes operated by AirAsia Zest (Busan, Seoul and Shanghai) and one (Kuala Lumpur) by the group's Malaysian subsidiary.
AirAsia will not likely be able to move over any of its existing Kalibo international routes to Caticlan as they are all about four hours long. But AirAsia could launch new short-haul international routes from Caticlan such as Hong Kong and Taipei.
Kalibo international seat capacity by carrier: 6-Jul-2015 to 12-Jul-2015
Kalibo is also currently served by two Singapore-based carriers, SilkAir and Tigerair, both subsidiaries of the Singapore Airlines Group. Full service SilkAir launched services on the Singapore-Kalibo route in May-2014 while LCC group Tigerair launched Singapore-Kalibo in Jul-2013. (Tigerair Philippines initially operated the route but Singapore-based Tigerair took over the route in early 2014 after the Tigerair Group sold Tigerair Philippines to Cebu Pacific.)
SilkAir plans to look at moving its Kalibo service to Caticlan. Tigerair is less likely to serve Caticlan as the Singapore flight is about three and a half hours and therefore would likely require payload restrictions on its 180-seat A320s. Tigerair and SilkAir both also operate A319s but plan to phase out the type over the next few years.
SilkAir operates less dense A320s and 737-800s and would be more willing to accept slight payload restrictions as it is a full service regional carrier, carrying higher yielding connecting traffic. SilkAir also could avoid any potential payload restriction by operating all its flights on a Singapore-Caticlan-Cebu triangle routing. SilkAir already combines its Kalibo flights with Cebu as part of triangle routings which go in both directions depending on the day of week.
Kalibo has seen rapid growth but may now see a dip in traffic. Caticlan becomes a litmus test
Kalibo Airport has seen rapid growth in recent years as Caticlan Airport has been unable to accommodate the surge in visitor numbers at Boracay. Total seat capacity at Kalibo has nearly doubled over the last three years, according to CAPA and OAG data. Kalibo is now the fourth largest airport in the Philippines based on current seat capacity while Caticlan is just outside the top 10.
The rapid growth left Kalibo Airport operating overcapacity, particularly during peak holiday periods. But in Mar-2015 the airport opened a terminal extension. Kalibo also has expanded its parking area to accommodate more aircraft. The airport will remain government owned while nearby Caticlan transfers into private hands.
While the expansion at Kalibo was overdue the airport could be operating under capacity after Caticlan Airport completes a major expansion in 2016 and starts to capture a much larger share of the Boracay traffic. San Miguel is also planning to invest in developing the Caticlan area, which could unlock further growth as Boracay Island starts to become overdeveloped.
Over the last year the Philippine airline sector has been in a refreshing phase of capacity discipline, driving a significant improvement in profitability. Caticlan could emerge in 2016 as an intriguing test case to see if the three main airline groups in the Philippines can continue to avoid the temptation of strategic expansion and prevent a new overcapacity scenario from emerging.