08-Jan-2016 10:39 AM

Emirates expands in the Philippines by 79%, pressuring Philippine Airlines and Cebu Pacific

Analysis

The Philippines-UAE market could again see capacity strains in 2016 as Emirates resumes Clark and launches Cebu. Emirates is also adding four weekly flights to Manila, resulting in 79% capacity expansion for the Dubai-based carrier in the Philippine market.

Meanwhile rival Etihad is adding three times weekly Manila flights. There will be 54 weekly flights in the Philippines-UAE market from May-2016 compared to 40 currently and 28 at the end of 2013. The surge in capacity is made possible by a new air services agreement which Philippine airlines unsuccessfully tried to block, fearing it could make their UAE services unviable.

Philippine Airlines is responding to the challenging conditions in the Philippines-UAE market by adding tags to all its Abu Dhabi and Dubai services, hoping new fifth freedom sectors improve the profitability of its UAE operation. Cebu Pacific is opting against using newly awarded rights for additional flights to the UAE until market conditions improve.

Emirates to launch services to Cebu and Clark

Emirates on 4-Jan-2016 announced it will launch a daily service to Cebu and Clark on 30-Mar-2016. The new flight will operate on a Dubai-Cebu-Clark-Dubai circular routing using 428-seat two class (economy and business) 777-300ERs. Cebu is the second largest city in the Philippines while Clark is located 100km outside of Manila.

Emirates' decision to begin serving secondary airports in the Philippines is unsurprising as the new Philippines-UAE air services agreement requires separate flights to Cebu or Clark as a condition of additional entitlements for Manila. But Emirates was not required to serve both airports and only needs to operate four weekly flights to meet the requirement.

The new air services agreement, agreed to in late Aug-2015, increased the number of Manila-UAE weekly flights for each side from 28 to 35. The UAE has since allocated four of the additional frequencies to Emirates and three to Etihad. Other airports in the Philippines have always enjoyed open skies status with the UAE.

Emirates and Etihad to add Manila flights

Emirates plans to start using its additional Manila frequencies at the end of Mar-2016, lifting its Dubai-Manila operation from 14 to 18 weekly flights and from 5,992 to 7,704 weekly one-way seats. Etihad plans to start using its additional Manila frequencies at the beginning of May-2016, lifting its Abu Dhabi operation from 14 to 17 weekly flights and from 5,768 to 7,004 weekly one-way seats. Etihad uses 412-seat two class (economy and business) 777-300ERs on all its Manila flights.

Including the new daily service to Cebu and Clark, Emirates will have 10,700 weekly one-way seats from Apr-2016 in the Philippines-UAE market. Etihad will have 7,004 weekly one-way seats in the Philippines-UAE market from May-2016 and may need to add about another 1,200 weekly seats by Aug-2016 to meet its end of the Cebu/Clark requirement. (After signing the new agreement with the UAE Philippine authorities stated any UAE carrier operating additional flights to Manila made possible by the agreement is required to also operate separately to Clark or Cebu within one year from the date the agreement was signed.)

The Philippines-UAE market is also currently served by Philippine Airlines (PAL) and Cebu Pacific. PAL has one daily flight to Dubai and five weekly flights to Abu Dubai using A330-300s in 414-seat two class configuration (economy and premium economy), giving it 4,968 weekly one-way seats in the Philippines-UAE market. Cebu Pacific operates one daily flight to Dubai using 436-seat single class A330-300s, giving it 3,052 seats.

Emirates' share of capacity in Philippines-UAE market will exceed 40%

Total one-way capacity between the Philippines and the UAE will increase by 30% from 19,780 seats currently to 25,724 in May-2016. Emirates' share will increase by 11.3ppt to almost 42% while the shares of all three competitors will decrease.

Currently there is fairly equal balance between Philippine and UAE airlines. But from May-2016 UAE airlines will account for almost 70% of non-stop seat capacity between the Philippines and UAE.

Philippines-UAE non-stop capacity share (% of seats) by carrier: Jan-2016 vs May-2016

Jan-2016

May-2016

Capacity in the Philippines-UAE market already increased significantly in the last four months of 2013, when Cebu Pacific and PAL Express launched Dubai while PAL launched Abu Dhabi. (PAL took over the Manila-Dubai route from PAL Express in early 2015 along with the single class A330-300s which had been under the PAL Express fleet.)

As CAPA previously highlighted, the new flights from Cebu Pacific, PAL and PAL Express drove a 70% increase in Philippines-UAE seat capacity in late 2013. Overcapacity resulted, pressuring yields and load factors.

Not surprisingly all three new services to the UAE from the Philippine carriers initially struggled. The impact on Emirates and Etihad was more subdued as they rely primarily on Philippines-Europe traffic to fill up their Manila flights.

Emirates previously cut capacity to the Philippines in 2014 and 2015

Conditions in the Philippines-UAE market have gradually improved over the last two years. The new routes from the Philippine carriers became more mature and most of the capacity added in 4Q2013 was gradually absorbed.

Market conditions also improved in early 2015 after Emirates was forced to cut one of three daily Manila flights. Emirates was able to add a third daily frequency to Manila at the beginning of 2013 despite only having traffic rights to operate 14 weekly frequencies by codesharing with PAL. At the time the Philippines allowed foreign airlines to use Philippine carrier traffic rights by being the operating carrier under a codeshare arrangement with a Philippine airline.

The unusual policy of allowing foreign carriers to use local carrier rights became controversial after Cebu Pacific launched a long haul unit in 2013 , which led to the LCC seeking Philippine carrier rights to the UAE and other long haul markets. PAL's resumption of flights to the UAE after a several year hiatus also changed the situation. The Emirates-PAL codeshare was terminated in 2014, forcing Emirates a few months later to cut the flight it had been operating using PAL traffic rights.

Emirates also cut capacity in the Philippines in May-2014 when it suspended service to Clark. Emirates initially launched Clark in early Oct-2013 and for several months served Clark with a daily return flight.

During late 2013 and early 2014, Emirates had five daily flights to the Philippines and there were nearly 10 daily flights overall in the Philippines-UAE market compared to only four at the end of 2012.

The Emirates reductions, initially in May-2014 with the suspension of Clark and subsequently in early 2015 with the reduction in the Manila market, resulted in nearly eight daily flights in the Philippines-UAE market. (Total capacity varies depending on the month due to seasonal adjustments by the Philippine carriers.)

Philippines to UAE total one-way weekly seat capacity: Sep-2011 to Jan-2016

Philippine carriers concerned about excess capacity

The capacity additions planned by Emirates and Etihad in 1H2016 will bring the market back to nearly 10 daily flights, or 68 weekly frequencies. With the additional capacity there is obviously a risk the market could again suffer from overcapacity, resulting in similar conditions as late 2013 and 2014.

The Philippine airlines are concerned as their UAE flights rely much more heavily on the local market than the UAE carrier flights. Cebu Pacific and PAL had both urged Philippine authorities in 2015 against increasing the entitlement for UAE carriers.

PAL warned that more capacity for UAE carriers could force it to withdraw from serving the UAE market, pointing it out it withdrew several years ago from the UAE during an initial expansion by Gulf carriers in the Philippine market.

PAL also warned about an impact on its ability to compete in the European market. PAL returned to Europe in late 2013 with non-stop flights to London and has been considering non-stop routes to continental Europe, a proposition which could becomes more difficult to pursue if Gulf carriers continue to expand in the Philippines-Europe market.

Ultimately the Philippine authorities agreed to increase the entitlements for UAE based carriers from 28 to 35 weekly flights, recognising the overall benefit to Philippine consumers.

PAL improves its UAE performance with three new fifth freedom sectors

One outcome of the added competition is innovation from PAL. The flag carrier is now implementing a major revision of its UAE operation in attempt to improve profitability and make the market viable despite the upcoming expansion. The revision will result in all 12 of PAL's weekly flights to the UAE continuing on to other destinations in Middle East by the time Emirates adds its 11 weekly flights to the Philippines.

In Dubai, PAL is launching four weekly flights to Kuwait on 17-Jan-2016 and three weekly flights to Jeddah on 19-Jan-2016. In Abu Dhabi, PAL is launching five weekly flights to Doha on 28-Mar-2016.

PAL has pick up rights on all the new sectors. Fifth freedom rights in the UAE-Saudi Arabia market were gained by Philippine carriers as part of the new air services agreement between Philippines and the UAE.

The new flights will enable PAL to rely less on the end-to-end Manila-Dubai and Manila-Abu Dhabi sectors. A portion of its Manila passengers will carry on to Doha, Kuwait and Jeddah while PAL will also be able to pick up local passengers to fill the seats occupied by Manila-Dubai and Manila-Abu Dhabi passengers.

PAL will compete with Cebu Pacific in the Kuwait and Doha markets along with Kuwait Airways and Qatar Airways, which also serve Manila. In the Jeddah market it will compete mainly against Saudi. While Etihad and Emirates also offer a one-stop product from Manila to all these markets they are relatively minor players as they offer a vast number of destinations beyond their hubs and focus more on Europe than Middle East connecting traffic.

Cebu Pacific unlikely to launch Sharjah under current environment

Cebu Pacific is not planning any adjustments to its Middle East operation in 2016 with the exception of a third weekly flight to Doha. Cebu Pacific now serves Doha with two weekly flights, Riyadh with three weekly flights, Kuwait with four weekly flights and Dubai with one daily flight.

Cebu Pacific was awarded additional traffic rights to the UAE following the extension of the Philippines-UAE air services agreement. But Cebu Pacific is prudently holding off adding capacity to the UAE.

As CAPA highlighted in a Nov-2014 report on the Philippines-UAE market, Cebu Pacific had been looking at potentially launching service to Sharjah. While Cebu's Dubai route has become profitable now is clearly not the time to add capacity in the Philippines-UAE market.

PAL is also not fully utilising its UAE traffic rights. An increase in flights would be risky given the current challenges PAL faces in the Abu Dhabi and Dubai markets. If PAL's performance in these markets does not improve after it adds the new fifth freedom sectors it may need to consider cutting capacity to the UAE.

PAL codeshares with Etihad on the Manila-Abu Dhabi route but this partnership apparently has not provided enough traffic to sustain its current Manila-Abu Dhabi-Manila routing. PAL could be further impacted as Etihad adds three more frequencies on the Manila-Abu Dhabi route, particularly if their current relatively limited partnership is not strengthened. The Etihad-PAL codeshare is now limited to Manila-Abu Dhabi flights and domestic connections beyond Manila.

Emirates is keen to deploy the A380 to Manila

PAL and Cebu Pacific will also be affected if Emirates succeeds at further capacity increases in the Manila market by up-gauging some of its flights to the A380. As CAPA stated in the Nov-2014 report:

The Philippines-UAE bilateral is based on frequencies rather than seats and in theory would allow A380 operations. But Manila Airport has decided it cannot accommodate A380s following a trial with an ad hoc Emirates A380 flight.

Due to the limited separation between the airport's main runway and a parallel taxiway Manila has determined it would need to shut down a parallel taxiway every time an A380 landed. This is seen as an unacceptable compromise as Manila is a very busy airport. Closing a main taxiway once or twice a day would be an inconvenience for other airlines, particularly the two main Philippine carriers.

In announcing the new services to Cebu and Clark on 4-Jan-2016, Emirates suggested Manila Airport could be reconsidering authorising the A380. Emirates stated that it hopes "our desired introduction of the world's flagship A380 aircraft on one of our daily Manila services will take place soon".

Manila would be an ideal market for the new high density 615-seat A380, which Emirates is now using on some its flights to Bangkok and Kuala Lumpur. Emirates already uses its highest density 777-300ER configuration on the Dubai-Manila route as the Philippine market consists primarily of price sensitive economy passengers with limited premium demand.

The 615-seat A380 would enable Emirates to increase capacity to Manila by 44% without increasing flights. This is likely the only opportunity for Emirates to expand further in Manila given the current bilateral and slot constraints. Even if the Philippines agreed to further expand the bilateral with the UAE, an unlikely scenario given the staunch opposition from Philippine carriers, there are virtually no available slots at Manila Airport - even for late night departures.

Cebu and Clark could see more Gulf carrier traffic

Cebu and Clark are well placed to benefit from the constraints at Manila. CAPA recently highlighted the rapid growth at Cebu and reviewed how Mactan-Cebu International Airport is well positioned to expand due to the limitations at Manila.

The new Emirates flight from Dubai to Cebu will become only the second long haul route for Mactan-Cebu after Los Angeles, which PAL is launching on 15-Mar-2016 with three weekly A340 frequencies. Mactan-Cebu is keen to further grow its long haul network and is courting other Gulf carriers.

At Clark, Qatar Airways is currently the only carrier operating long haul services. Qatar launched Clark in Oct-2013, when it was forced to drop one of its two daily Manila flights. (PAL and Qatar had a codeshare similar arrangement to PAL and Emirates which enabled Qatar to use PAL traffic rights in the Philippines-Qatar market.)

Qatar was able to add back its second Manila flight in Oct-2015 after securing additional entitlements made possible by a newly expanded Philippines-Qatar air services agreement. But Qatar has at least for now kept its Clark service.

Qatar is unlikely to be able to add a third daily flight to Manila but could add capacity to the Philippines by following Emirates in Cebu. Several years ago Qatar served Cebu via Singapore.

Emirates tests the Cebu and Clark markets with circle routing

Emirates decision to serve both Clark and Cebu rather than just one, which would have met the requirement under the Philippines-UAE bilateral, is logical. Emirates is generally not keen to do circular routings but the circular routing enables it to test out both markets.

Eventually Cebu and Clark could potentially support its own flight, particularly if Emirates is unable to add capacity at Manila through more frequencies or up-gauging existing flights to the A380. Emirates may also ultimately select one over the other depending on how each destination performs.

While Clark did not work the first time around for Emirates, coupling it with Cebu will reduce the risk. At the time Emirates first tried Clark it also had 21 weekly flights at nearby Manila while this time around it will be limited to 18 weekly Manila flights.

There is also some logic to operating non-stops to Cebu and from Clark given how most Filipino Middle East worker traffic flows. A large portion of the Filipino migrant worker population is not from Manila but generally need to stop in Manila on their way to their assignments to pick up visas and meet with their contractors. On the journey home such a stop is not required, making a direct flight to Cebu for Filipino workers with families in Cebu or the central Philippines appealing.

Emirates to become the second largest foreign carrier in the Philippine market

The new Dubai-Cebu-Clark-Dubai route could still prove to be challenging. But Emirates is making the right move to test out secondary Philippine airports while continuing to push for more capacity at Manila through the proposed deployment of the A380.

The Philippines is a strategically important market for Emirates. After it launches Cebu and Clark, Emirates will have more capacity in the Philippines than any foreign carrier except Cathay Pacific.

Top 10 foreign carriers in the Philippines ranked by seat capacity: May-2016

Rank	Airline		Total Seats
1	CX	Cathay Pacific	33,120
2	EK	Emirates Airline	21,400
3	OZ	Asiana Airlines	15,940
4	SQ	Singapore Airlines	15,904
5	EY	Etihad Airways	14,008
6	KE	Korean Air	13,328
7	QR	Qatar Airways	12,992
8	SV	Saudia	9,912
9	TR	Tigerair	9,000
10	BR	EVA Air	8,948

Etihad will also become one of the top five foreign carriers in the Philippines after it expands its Manila operation to 17 weekly flights. Qatar is currently in the fifth spot but will move to the seventh spot as it is overtaken by Emirates and Etihad.

Gulf carriers will inevitably continue to expand in the Philippines, further pressuring Cebu Pacific and particularly PAL as the flag carrier aims to expand its European network.

Approval for the A380 in Manila could result in A380 operations from all three Gulf carriers.

If Manila continues to reject the A380 there will still be opportunities to expand in the Philippine market by focusing on secondary airports such as Cebu and Clark.