Philippine Airlines' international expansion continues with 5 new destinations, A350-900 HGW order


Philippine Airlines (PAL) is further expanding its international operation as it grows its fleet and improves utilisation of its existing widebody aircraft. PAL's international network will exceed 40 destinations in Jan-2016 compared to only 25 in Jan-2013.

PAL is adding five international destinations over the next two months, including two destinations in the Middle East and three in Australasia. Long haul growth will resume in Mar-2016 with the launch of services from Cebu to Los Angeles, which will be PAL's first widebody international route from Cebu.

Opportunities to further grow the long haul operation will come in late 2016 as PAL adds two more 777-300ERs. The expected acquisition of a new higher gross weight version of the A350-900 will be used to upgrade New York to non-stops in 2017 and potentially be deployed to upgrade Toronto to non-stop and launch a fourth mainland US destination.

PAL has undertaken rapid international growth since 2012

Philippine Airlines currently operates a fleet of 59 aircraft, including 32 A320 family aircraft and 27 widebodies, across an international network of 36 destinations. PAL also has a small domestic operation but the group's domestic services are now primarily operated by full service regional carrier PAL Express, which has a fleet of eight single class A320s and nine Dash 8 turboprops.

PAL carried 773,000 domestic passengers in 1H2015 compared to 2.5 million for PAL Express and 5.8 million for market leader Cebu Pacific, according to Philippine CAB data. The Cebu Pacific Group carried 6.8 million domestic passengers when including subsidiary Cebgo compared to a combined 3.3 million for the PAL Group and 1.3 million for the AirAsia Group (includes AirAsia Zest and Philippines AirAsia).

This report focuses on PAL's international network and expansion. A separate upcoming report will look at the PAL Group's domestic expansion and the overall Philippine domestic market.

PAL carried 2.9 million international passengers in 1H2015 compared to 1.9 million for Cebu Pacific and 357,000 for AirAsia's Philippine affiliates. PAL Express carried 39,000 international passengers in 1H2015 but is now purely a domestic carrier as its only international route, Manila-Dubai, was transferred to PAL in Mar-2015.

PAL is on track to carry about 6 million international passengers in 2015, a 50% increase compared to 2012. PAL recorded 5% international passenger growth in 2013, ending three years of flat traffic, and growth accelerated to 20% in 2014.

PAL's share of the total Philippine international market (including foreign carriers) has increased from 23.6% in 2012 to 27.7% in 1H2015. But its current market share is roughly even with 2010 levels and is still below the 30% share captured in 2006 and 2007.

Philippine Airlines international passenger traffic and share of total international passengers: 2006 to 1H2015

Year Passenger traffic (millions) Passenger share
2006 3.055 30.0%
2007 3.401 30.0%
2008 3.632 29.9%
2009 3.396 26.7%
2010 3.923 27.5%
2011 3.906 24.9%
2012 3.952 23.6%
2013 4.152 24.0%
2014 4.982 27.8%
1H2015 2.867 27.7%

For the second consecutive year PAL will likely end 2015 with annual international passenger growth of about 20%. The Philippine CAB has not yet reported traffic figures for 3Q2015 but PAL reported 17% growth in international passenger traffic in Jul-2015 to 464,000. This represents a two year growth figure of 36% compared to the 341,000 international passengers carried in Jul-2013.

Philippine Airlines monthly international passenger traffic: Jan-2008 to Jul-2015

PAL expands Middle East network from zero to six destinations in just over two years

ASK growth has been even faster - including almost 30% in 2014 - as PAL has rapidly expanded its medium and long haul network.

PAL has added six destinations outside Asia-Pacific since late 2013, including Abu Dhabi, Dammam, Dubai, London, New York and Riyadh. Its network outside Asia-Pacific previously only consisted of five destinations in North America - Honolulu, Los Angeles, San Francisco, Toronto and Vancouver with Toronto having been added in late 2012.

PAL is adding two more Middle Eastern destination in early Jan-2016 as it launches services to Jeddah and Kuwait. This will increase PAL's network in the Middle East to six destinations, compared to zero in 3Q2013, and expand its non-Asia Pacific network from 11 to 13 destinations. But its long haul capacity will only increase slightly as PAL plans to serve both new markets as tags to Dubai.

PAL currently serves Dubai with five weekly A330-300 frequencies. From 1-Jan-2015 Dubai will be increased to daily but with four weekly Manila-Dubai-Kuwait A330-300 frequencies and three weekly Manila-Dubai-Jeddah frequencies.

PAL expands its Australasia network from three to eight destinations in less than three years

Within Asia-Pacific PAL also has added five international destinations since mid-2013 including Brisbane, Darwin, Guangzhou, Quanzhou and Tokyo Haneda.

PAL currently has 25 destinations within Asia-Pacific including five in Australasia. PAL's Australasia network will grow to eight destinations in Dec-2015, giving it 28 in Asia-Pacific, as services are being launched to Cairns, Auckland and Port Moresby.

Philippine Airlines international network summary: Jan-2016 vs Nov-2015 and Nov-2012

Region Nov-2012 Nov-2015 Jan-2016
Asia Pacific 20 25 28
Europe 0 1 1
Middle East 0 4 6
North America 4 6 6
TOTAL 24 36 41

Cairns will become PAL's fifth destination in Australia after Brisbane, Darwin, Melbourne and Sydney, while Auckland will be its first destination in New Zealand and Port Moresby its first destination in Papua New Guinea. PAL also serves Guam, a US territory in the South Pacific which is considered part of the Australasia.

PAL is initially operating four weekly A320 flights on a Manila-Cairns-Auckland routing from 1-Dec-2015 while Port Moresby is initially being served with three weekly A320 turnaround flights from 18-Dec-2015. PAL currently deploys A330s to Melbourne (thrice weekly) and Sydney (daily) while Darwin and Brisbane are coupled with three times weekly A320 service. PAL also briefly served Perth via Darwin in 2013 using A320s but quickly dropped the route while retaining Manila-Darwin-Brisbane. Guam is currently served by PAL with a daily A321 flight.

PAL will deploy about 6,000 weekly one-way seats to the Southwest Pacific in early 2016, nearly double the capacity compared to early 2014.

Philippine Airlines capacity to Southwest Pacific (one-way seats per week): Sep-2011 to May-2016

PAL faces limited competition on new Australasia routes

PAL has competition on only one of its existing Australasia routes, Manila-Sydney, which is also served by Cebu Pacific and Qantas. PAL will also be the only carrier offering direct flights from Manila to Auckland or Cairns but will compete to Port Moresby with Air Niugini, which currently operates only one weekly flight to Manila.

PAL will be only the third airline from outside Australasia to serve Cairns, joining Cathay Pacific and SilkAir. In Port Moresby, PAL will be the only airline from outside Australasia although Air Niugini's network includes four destinations outside the region (Bali, Manila, Singapore and Tokyo).

PAL will rely heavily on sixth freedom traffic in both these markets as well as fifth freedom traffic on the Cairns-Auckland sector. Port Moresby offers high yielding business traffic while Cairns is primarily a leisure market.

PAL's medium haul network faces growing competition from Cebu Pacific

But PAL faces the prospect of new competition from Cebu Pacific to Guam and potentially Melbourne. Cebu Pacific plans to launch services to Guam in 2016 with A320s and has been looking at entering the Melbourne market since a new air service agreement was forged between Australia and the Philippines in late Apr-2015. Prior to the new agreement Cebu Pacific was capped at five weekly A330-300 flights, which it uses for Manila-Sydney.

Cebu Pacific is now analysing the Australian market to see if it can accommodate Melbourne flights without impacting its performance in Sydney as some of its Sydney passengers self-connect to Melbourne and other Australian destinations.

Cebu Pacific has achieved relatively high load factors to Sydney since launching the route in Sep-2014 and has been able to grow the overall market by stimulating demand. According to Australia BITRE data, total passenger traffic between Manila and Sydney was up 67% in the 12 months ending 31-Aug-2015 compared to the same period the prior year.

Manila-Sydney passenger traffic: 12 months ending Aug-2015 vs 12 months ending Aug-2014

But the Manila-Sydney route is not yet profitable for Cebu Pacific due to low yields. PAL also has experienced a significant erosion in yields in the Sydney market, which has made the Manila-Sydney route extremely challenging. PAL passenger traffic to Sydney grew by 17% in the first year Cebu Pacific was in the market but it added capacity in response to the new competition, which likely exacerbated the pressure on yields.

PAL would probably be similarly impacted if Cebu Pacific launches Melbourne, particularly as Melbourne-Manila is a much smaller local market than Melbourne-Sydney. PAL also faces the prospect of new competition from Cebu Pacific on Manila-Honolulu, which the LCC plans to launch within the next few months with two weekly A330-300 flights.

Honolulu will be Cebu's sixth medium/long haul destination, joining Doha, Dubai, Kuwait, Riyadh and Sydney. PAL also competes with Cebu Pacific in the Dubai and Riyadh markets.

PAL attempts to improve Dubai performance by adding Kuwait and Jeddah tags

Manila-Dubai has been a challenging market for PAL since the group launched the route two years ago - at about the same time as Cebu Pacific. Manila-Dubai is now profitable for Cebu Pacific, which reported a 3Q2015 load factor of 87.5% load factor for Manila-Dubai, while it is still loss making for PAL.

PAL is hoping the new tag to Kuwait and Jeddah will improve its performance in the Dubai market. PAL will have uplift rights from Dubai to Kuwait and Jeddah which it intends to utilise. It is also hoping to carry significant traffic from Manila through to Kuwait and Jeddah, enabling it to improve load factors on Manila-Dubai.

But in Kuwait PAL will have to compete against Cebu Pacific, which serves Manila-Kuwait with three weekly non-stop flights. Cebu Pacific is now the only carrier with non-stops in this market as Kuwait Airways serves Manila via Bangkok.

PAL sees profits improve but international load factor drop

New Cebu Pacific competition to the Middle East and Australia as well as on some routes within Asia, in particular Japan, has clearly impacted PAL's international operation. Rapid capacity expansion also has had an impact as it takes time for new long haul routes to mature.

PAL's international load factor slipped below 70% in Jun-2015 and Jul-2015 (the last two months of available data). The 66.8% figure from Jun-2015 marked the lowest monthly international load factor for PAL since 2012.

While June and July are traditionally weak months, PAL's 2015 load factor for these months was still 4.1ppt and 1.4ppt below 2014 levels. Through the first seven months of 2015 PAL's international load factor was below already low 2014 levels six months and about flat one month.

Philippine Airlines monthly international load factor: Jan-2008 to Jul-2015

But PAL has been profitable over the last year, boosted by low fuel prices and improving conditions in some of its markets. PAL Holdings recently reported a PHP6.108 billion (USD133 million) net profit for the first nine months of 2015 compared to a net profit of PHP238 million (USD5.4 million) the first nine months of 2014.

For 3Q2015 the company generated a PHP248 million (USD5.4 million) net profit compared to a net loss of PHP322 million (USD7.4 million) in 3Q2014. (Note: PAL Holdings includes non-airline subsidiaries but does not include PAL Express.)

Passenger revenues were up 13% in the first nine months of 2015 to PHP68.4billion (USD1.518 billion), driven by the increase in international passenger traffic. PAL Holdings posted a respectable 6.8% operating profit margin for this period.

PAL focuses its long haul expansion on North America

PAL has historically generated most of its profits on North American routes, where it faces relatively limited competition. PAL is planning to expand capacity to mainland North America over the next few years, a sensible move as competition will likely continue intensifying to the Middle East, Australia and, soon, Hawaii.

PAL also has looked at expanding in Europe but has put new destinations in continental Europe on the back burner, another sensible move given the intense competition to Europe from Gulf carriers. In Europe PAL is instead focusing on improving its performance in London, which it now serves with five weekly A340-300 flights.

PAL has selected Cebu-Los Angeles as its next long haul route, which it plans to launch with three weekly A340-300 flights on 15-Mar-2016. PAL currently serves Los Angeles from Manila with 11 weekly flights, including seven with 777-300ERs and four with A340-300s.

PAL also currently serves Manila-San Francisco with daily 777-300ER flights and three additional A340-300 weekly frequencies during peak periods. Vancouver is served with 10 weekly flights, including four weekly 777-300ER frequencies which continue to New York, three 777-300ER frequencies which continue to Toronto and three A340-300 frequencies which turn around at Vancouver. Honolulu is served with five weekly A330-300 frequencies.

Cebu-Los Angeles route is part of a plan to grow the Cebu hub

Los Angeles will be the first long haul destination for PAL from its secondary hub at Cebu. PAL currently only has four international flights from Cebu - Nagoya, Osaka, Seoul and Tokyo Narita - all of which are served with A321s.

PAL is building up its hub at Cebu due in part to congestion at Manila, where a lack of slots precludes additional flights. The group has launched or resumed several domestic routes from Cebu in 2015, which will help feed the new flights to Los Angeles. More domestic expansion at Cebu is planned for 2016 and will be analysed as part of the next report in this series.

But PAL also sees strong local demand for Cebu-Los Angeles and is hoping the new non-stops will win over passengers who are now flying one-stop options from competitors. While PAL offers Cebu-Los Angeles passengers a connection in Manila most passengers currently travel via Seoul on Korean Air or via Hong Kong on Cathay Pacific.

PAL can add further North American capacity as two 777-300ERs are added

PAL is able to add Cebu-Los Angeles using its existing long haul fleet as its six A340-300s are not currently fully utilised. PAL will also have an opportunity to add long haul capacity in late 2016 as two additional 777-300ERs are delivered.

PAL currently has six 777-300ERs and committed in Jun-2015 for two additional leased aircraft which will be delivered in 4Q2015. For now PAL plans to use these two aircraft for a combination of growth and replacement. While none of the A340-300s are expected to be phased out as soon as the additional 777-300ERs are placed into service there will likely be a gradual drop in utilisation for the A340 fleet.

PAL intends to keep operating its six A340-300s, which were added in 2013 and early 2014, until the engines require overhaul. This is logical given PAL only recently invested in acquiring the aircraft and the current low price of fuel. A spike in fuel prices could prompt PAL to accelerate the phase out of A340s and potentially suspend Cebu-Los Angeles.

PAL closes in on A350-900 HGW acquisition

The A340-300s are now slated to be phased out as new generation widebody aircraft are delivered. PAL is close to committing to at least six A350-900s for delivery from 2017. A formal announcement is expected by the end of 2015.

PAL is looking to acquire a new high gross weight (HGW) version of the A350-900 which is available from 2017 and will enable non-stop Manila-New York flights in both directions without payload limitations. Airbus has informed PAL that it does not need the recently launched A350-900ULR, which will be available from 2018 and has been ordered by Singapore Airlines for non-stops to the US.

Trans-Pacific flights from Manila are about three hours shorter than flights from Singapore. But flights from eastern North America to Manila are still slightly too long for the current version of the A350-900 or the 777-300ER.

PAL is also looking at using A350-900 HGW aircraft to potentially upgrade Toronto to non-stop and launch a fourth destination in the mainland US. Chicago is the most likely new destination for the A350-900 HGW.

PAL has also been evaluating other potential US markets in both the east and west coasts. New destinations in the western US can be launched using the existing widebody fleet, potentially as early as late 2016 as the two additional 777-300ERs are delivered. PAL previously served Las Vegas and at one point was considering San Diego, which has a large Filipino community.

A fleet of eight 777-300ERs and six A350-900s will enable modest growth of the long haul network with a focus on North America. Even if PAL ultimately opts for a few more A350s the long haul growth should be manageable.

PAL is likely to remain for at least the medium-term the only non-stop operator between Philippines and continental North America, which has a large a loyal Filipino population. PAL is fortunate to only have to compete against North Asian carriers in the Philippines-North America market as one-stops via the Middle East is a much longer option.

PAL is expected to keep its A330 fleet at current levels

PAL does not have any medium haul widebody aircraft on order but has room to grow using its existing A330-300 fleet. The current fleet of 15 A330s should also be sufficient given competition is expected to further intensify in all the international markets the type is currently used - the Middle East, Australia, North Asia and Hawaii.

Philippine Airlines fleet summary: as of 20-Nov-2015

Aircraft In Service On Order*
Total: 59 37
Airbus A320-200 13 0
Airbus A321-200 19 5
Airbus A321-200neo 0 30
Airbus A330-300E 15 0
Airbus A340-300X 6 0
Boeing 747-400 0 0
Boeing 777-300ER 6 2

As CAPA has previously highlighted, PAL was significantly under-utilising its A330s in 2014 as the last batch of aircraft were delivered. But the utilisation rate has improved as PAL has expanded in the Middle East and replaced A340s with A330s in some medium haul markets. PAL also has been planning a reconfiguration project for the seven A330s which are in 414-seat all economy configuration.

See related reports:

PAL has delayed the retrofit of the all economy A330s until 2017. But ultimately a fleet of 15 dual class A330s, all of which are currently less than two and a half years old, should reinforce its position as a premium carrier.

The decision to go with single class aircraft was made by PAL's previous management and ownership team, which responded to Cebu's decision to establish a widebody operation. But PAL is ill-equipped to compete with Cebu Pacific at the bottom end of the market. There is still room for a full service carrier in the Philippines, but it is critical for PAL to stay modest and not pursue overly ambitious expansion.

PAL to expand A320 family fleet by three aircraft in 2016

PAL has a much larger narrowbody order with commitments for five additional A321ceos for delivery in 2016 and for 30 A321neos for delivery from 2017. But PAL can manage this order to keep expansion at a rational pace.

PAL plans to return two of its older model A320s in 2016, resulting in net growth of three aircraft as the last five A321ceos are delivered. PAL plans to use the three growth A320 family aircraft to pursue a mix of domestic and regional international expansion.

With the 30 A321neos PAL will have the opportunity to replace and up-gauge its remaining A320s as well as open new medium haul routes which are too long for current A320/A321ceos. As CAPA has previously outlined, PAL is looking at converting some of its A321neo orders to A321LRs and using the type to launch new non-stops to destinations such as Brisbane (now served via Darwin) and Perth (which had been served via Darwin before it was dropped in 2013).

PAL still has opportunities in the regional international market within Asia Pacific despite the intensifying LCC competition.

Smaller niche markets such as Cairns, Port Moresby and Perth do not have the volume to support LCCs but can be potentially lucrative for a nimble network carrier such as PAL.

However PAL will need to need to be relatively conservative and cautious as it continues its regional expansion.

It is time for PAL to pause after recent rapid international expansion

The international expansion PAL has pursued over the couple of years was extremely ambitious. It is rare to see such an established flag carrier - PAL is over 70 years old - increase the size of its international network by 70% in three years.

PAL is extremely fortunate to have oil prices plummeted just as it was expanding rapidly, particularly given its acquisition of A340s. But PAL cannot bank on oil prices remaining at its current level.

Low fuel prices and improved profitability give PAL an opportunity to take a pause to let all the international capacity added in recent years be fully absorbed. Now is the time to pursue relatively modest expansion and plan for a possible future with higher oil prices.

PAL is on the right track with the acquisition of six A350-900s to replace its A340-300s and avoiding the temptation to expand the widebody fleet beyond 30 aircraft.

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