18-Jul-2013 4:24 AM

Philippine Airlines joins Garuda in plotting ambitious European expansion despite stiff competition

Analysis

Philippine Airlines (PAL) is preparing an ambitious expansion to Europe made possible after the carrier was recently removed from the EU's list of banned airlines. PAL plans to launch non-stop services to Europe within the next few months and serve up to five Western European destinations in the near to medium term.

But PAL faces huge challenges in trying to carve out a sustainable niche in the Southeast Asia-Europe market. PAL and another Southeast Asian flag carrier, Garuda Indonesia, are both entering the market just as competition intensifies and while the European economy remains relatively weak.

PAL and Garuda will need to overcome three much larger Southeast Asian flag carriers which are well established in the European market along with two smaller ASEAN competitors. European and Gulf carriers also continue to expand in the Europe-Southeast Asia market, making it even tougher for a new entrant.

Summary

Philippine Airlines (PAL) and Garuda Indonesia plan to launch non-stop services to Europe in the near future.
PAL and Garuda will face stiff competition from larger Southeast Asian flag carriers, as well as European and Gulf carriers.
PAL aims to serve London, Paris, Amsterdam, Rome, and Frankfurt as its initial European destinations.
Garuda plans to launch non-stop services from Jakarta to London Gatwick, with potential expansion to Germany, France, and Italy.
PAL plans to initially operate its European flights with A340-300s, while Garuda will use its new fleet of 777-300ERs.
Both PAL and Garuda will need to rely on transit traffic to make their new European routes viable.

This is the first of a three part series of reports on the Southeast Asia-Western Europe market. This report looks at Southeast Asian carriers, in particular PAL and Garuda as they join Singapore Airlines (SIA), Thai Airways, Malaysia Airlines (MAS), Vietnam Airlines and Royal Brunei Airlines (RBA) in operating services to Europe. The second part will look at European carriers and the third part at Gulf carriers, both of which have also been expanding their presence in Southeast Asia.

Garuda on track for Nov-2013 launch of non-stop Europe flights

Garuda in Apr-2013 unveiled plans to launch non-stop services from its Jakarta hub to London Gatwick with five weekly 777-300ER frequencies commencing on 2-Nov-2013. The carrier, which currently serves its only European destination Amsterdam via Abu Dhabi with six weekly A330-200 frequencies, is also looking at adding non-stop services to Germany, France and Italy as part of an ambitious push into the European market made possible by its new 777-300ER fleet.

Garuda took delivery of its first 777-300ER in early Jul-2013 and is committed to acquiring at least nine additional 777-300ERs, three of which will be delivered by the end of 2013. Three more 777-300ERs will be delivered in 2014 and the final three aircraft are expected to be added in 2015.

In parallel to its expansion into Europe, Garuda is also targeting the highly competitive Kangaroo route between Australia and Europe, starting with Australia-London. Garuda has been increasing capacity to several of its Australian destinations and re-timing some flights to maximise connections with London (and later destinations in continental Europe). But Garuda will face stiff competition against its Southeast Asian peers as well as the three major Gulf carriers in both the Australia-Europe and Indonesia-Europe markets.

See related reports:

PAL could launch non-stop flights to Europe before Garuda

PAL has not yet set a launch date for flights to Europe but has said it aims to begin serving Europe by the end of Oct-2013. The carrier's majority owner, San Miguel, has talked up operating several European routes since taking control of the carrier in Apr-2012. The EU lifting PAL from its list of banned airlines clears the way for PAL to operate flights to Europe. The EU announced its determination on PAL on 10-Jul-2013 but the lifting of the ban had been expected since Mar-2013, when ICAO concluded Philippine authorities are again in compliance with international safety standards.

The president of PAL and San Miguel, Ramon Ang, said at a 10-Jul-2013 media briefing with the EU Ambassador to the Philippines that London, Paris, Amsterdam and Rome will be PAL's initial European destinations with flights beginning in Sep-2013 or Oct-2013. Frankfurt has also been mentioned separately by PAL as a planned European destination.

Launching flights to Europe in the next two to three months seems unrealistic given the typical lead time for selling new long-haul services. PAL announced and launched Toronto in a similarly short window in late 2012. But the Toronto route, the first component in a major long-haul network expansion project, has had a rocky start with non-stops being dropped.

PAL plans to initially serve Europe with A340s

Mr Ang stated the new European flights will be operated at least initially with recently acquired A340-300s. PAL agreed in May-2013 to a lease deal with Airbus covering four ex-Iberia A340-300s. Two of these 13 year old aircraft were delivered in Jun-2013, according to the CAPA Fleet Database. PAL also operates four 16 year old A340-300s, which are used along with five 18 to 20 year old 747-400s to operate routes to the US.

PAL fleet: as of 18-Jul-2013

PAL should at some point also use its more efficient fleet of 777-300ERs on European routes. PAL currently operates five 777-300ERs and will take delivery of a sixth of the type by the end of 2013. PAL has been mainly operating its 777-300ERs within Asia-Pacific (with the exception of the Manila-Vancouver-Toronto route) because of continued US FAA restrictions, which do not allow Philippine carriers to change the gauge or add flights to the US until the Philippines is upgraded to a category 1 safety rating.

An FAA audit of the Philippines is scheduled later this year, which could result in PAL finally getting the green light to operate 777-300ERs and pursue long-anticipated expansion in the US. But the process of upgrading the Philippines to category 1 could take some time and in the meantime PAL is keen to pursue rapid expansion in Europe.

PAL also has been looking at acquiring additional 777-300ERs. The carrier last year ordered 20 additional A330-300s, which can be used to take over and expand medium-haul routes within Asia-Pacific which are now operated with 777-300ERs as well as older A330s and A340s.

PAL faces challenges as it tries to establish foothold in Europe

Several new routes to Europe and the US as well as additional capacity to Los Angeles and San Francisco are part of PAL's plan to significantly expand its long-haul operation. But PAL faces numerous challenges in re-establishing itself globally and competing with the other six main flag carriers of Southeast Asia.

PAL will be the only carrier among the six that is not part of a global alliance once Garuda formally enters SkyTeam in early 2014, which could put PAL at a competitive disadvantage. While the Philippines has one of Asia's fastest growing economies, the market has a relatively high portion of low-yielding leisure and migrant worker traffic compared to higher-yielding business passengers.

Manila also is not positioned well geographically or from an infrastructure standpoint to attract a significant amount of transit traffic. All of the leading flag carriers from Asia and the Middle East now serve Manila and will make it difficult for PAL as the carrier tries to establish a presence in the Philippines-Western Europe market.

Thai and SIA have typically been the leaders in the Southeast Asia-Western Europe market although their positions have been under pressure in recent years from Gulf carriers, which offer attractive one-stop products to a wider range of European destinations at an often cheap price. The Gulf carriers have also significantly impacted MAS, which remains the third largest carrier in the Southeast Asia-Western Europe non-stop market although as a group Air France-KLM is marginally bigger.

Southeast Asia-Western Europe non-stop capacity (weekly seats) by carrier: 15-Jul-2013 to 21-Jul-2013

Thai Airways, SIA and MAS have continued to pursue some expansion in Europe

Thai Airways currently serves 12 destinations in Western Europe while SIA serves 11 and MAS only four. All three carriers have added capacity to Western Europe over the last year although the capacity increases are smaller than the increases these groups have implemented within the Asia-Pacific region. SIA, Thai and MAS have all been increasing their focus on the regional market, where demand remains relatively strong compared to the European and North American long-haul markets.

Thai has increased capacity to Western Europe over the last year by a modest 10% from about 28,500 one-way seats in Jul-2012 to about 31,400 seats currently, according to CAPA and Innovata data. The increase has been driven by delivery of the carrier's first four A380s, which have been used to up-gauge the carrier's single daily flight to Paris and seven of its 12 weekly frequencies to Frankfurt. A further modest increase in capacity to Europe is expected in 2014 as Thai plans to eventually up-gauge at least one of its two daily London flights.

Thailand to Western Europe capacity by carrier (one-way seats per week): 19-Sep-2011 to 5-Jan-2014

SIA's capacity to Western Europe has increased by only about 7% over the last year from about 29,000 one-way seats to a little over 31,000. Almost the entire increase has come in the London market, where SIA added a fourth daily frequency using a 777-300ER. SIA's other three London flights are operated with A380s, which are also used to Frankfurt, Paris and Zurich.

The only other adjustment in SIA's European schedule came in Copenhagen, where a fifth weekly frequency was added. SIA is currently focused on expanding in Asia-Pacific, particularly Australia, although additional capacity increases to Scandinavia are possible as SIA looks to leverage its new joint venture agreement with Scandinavian Airlines. SAS does not serve Singapore but SIA is looking at adding more flights to Copenhagen and potentially launching Stockholm to leverage SAS' hubs.

Singapore to Western Europe capacity by carrier (one-way seats per week): 19-Sep-2011 to 5-Jan-2014

MAS has increased capacity to Western Europe over the last year by 28% from about 10,800 one-way seats in Jul-2012 to about 13,800 one-way seats currently. The increase has been driven by the delivery of five A380s, which have been used to up-gauge both of the carrier's two daily flights to London and its single daily flight to Paris.

MAS capacity to Europe is also up by 12% compared to the beginning of 2012, or just prior to the implementation of its route rationalisation and restructuring initiative. MAS dropped Rome (along with several destinations in Africa, the Middle East and South America) as part of the restructuring, leaving the carrier with only London, Paris, Frankfurt and Amsterdam in its European network.

Malaysia to Western Europe capacity by carrier (one-way seats per week): 19-Sep-2011 to 5-Jan-2014

See relate report: Malaysia Airlines and Thai Airways focus on Europe rather than Australia with A380s

Vietnam Airlines to eventually follow PAL and Garuda in growing European presence

Vietnam Airlines and RBA are the other two existing Southeast Asian carriers serving Europe. Vietnam Airlines currently operates non-stop flights to Frankfurt, London Gatwick and Paris while RBA only serves London Heathrow via Dubai.

RBA has not pursued any expansion to Europe in several years and has no ambitions for growing beyond its single daily flight on the Bandar Seri Begawan-Dubai-London routing. But RBA will improve its product offering on the route in late 2013 as it transitions from 777-200ERs to 787s. The 787 should allow RBA to compete more effectively against larger carriers in the Southeast Asia-Europe market. RBA will be Southeast Asia's first 787 operator.

Vietnam Airlines' capacity to Europe has been relatively flat since it launched services to London at the end of 2011. But the carrier has big medium to long-term ambitions for growing its European network as it expands its long-haul fleet, which currently consists of only 10 777s. Vietnam Airlines, which also operates A330-200s on regional and medium-haul routes, has 10 A350s on order and plans to acquire at least 19 787s.

Vietnam Airlines also has ambitions to target more sixth freedom traffic as it expands its long-haul network. Southeast Asia's smaller flag carriers - including Vietnam Airlines, Garuda and PAL - will need to rely more heavily on transit traffic to make new European routes viable. Thai, SIA and MAS all now rely heavily on transit passengers in their European markets.

PAL and Vietnam Airlines could potentially match Garuda's strategy at targeting the Australia-Europe market. Vietnam Airlines and PAL both now have about 3,700 weekly one-way seats to Australia. PAL has doubled capacity to Australia over the last year and launched service to Darwin, Brisbane and Perth on 1-Jun-2013, giving it a network of five cities in Australia along with Melbourne and Sydney.

Jakarta and Manila will struggle to match other Southeast Asian and Gulf hubs

Jakarta and Manila are both geographically well positioned for Kangaroo route traffic. But Australia-Europe is one of the lowest yielding markets in the world. Transit traffic from other Asian markets are generally higher yielding and has become a larger focus for SIA, Thai and MAS as they expand their regional operations and look to reduce their reliance on the ultra-competitive Kangaroo route. But Jakarta and Manila are not well geographically positioned to attract traffic heading to Europe from other countries in Southeast Asia or the rest of Asia.

SIA, Thai and MAS also target Indonesia and the Philippines for their European flights, as do the three main Gulf carriers - Emirates, Etihad and Qatar Airways. While all these carriers only offer a one-stop product to Europe from Indonesia and the Philippines, all of them with the exception of MAS offer large European networks, providing passengers a multitude of options including open jaws.

These carriers also have successfully developed brands in the Indonesian and Philippine markets. SIA and the Gulf carriers are particularly strong at attracting premium passengers from Indonesia and the Philippines. Garuda and PAL have been working on improving their product offering but will face an uphill battle in persuading premium passengers to consider them for long-haul services.

PAL is banking on growth in the Philippines' tourist sector to attract Europeans and will also look to target Filipinos working in Europe. But there is a much larger Filipino population in the Middle East, which is being targeted by Cebu Pacific's new long-haul operation as well as a planned all-economy A330 sub-fleet from PAL.

The Philippines is emerging as a more attractive tourist destination but inbound tourist traffic can be seasonal and originates in a wide array of cities. Gulf carriers may be better positioned to carry European leisure travellers heading to the Philippines given their much larger European networks. PAL could also struggle to access offline markets in Europe because it is not in a global alliance and does not currently codeshare with any European carrier.

PAL and Garuda face huge risks

A large online network could help and quickly build PAL's brand in the European market, where the carrier is relatively unknown. But operating several 12 to 13-hour routes in a market that is highly price sensitive and has limited premium demand is very risky. Such long-range flights are expensive to operate and PAL could struggle to achieve the yields necessary to make the routes viable, particularly as it will need to price competitively against more economical one-stop products.

KLM is currently the only European carrier serving Manila. But it dropped non-stop services on the Manila-Amsterdam route in Mar-2012 and currently serves Manila daily via Taipei.

Jakarta is also served by KLM as well as Turkish Airlines. But KLM serves the market via Kuala Lumpur and Turkish via Singapore.

Garuda has the benefit of forthcoming membership in SkyTeam and a partnership with Etihad, which gives it offline access to secondary cities in Europe. Garuda CEO Emirsyah Satar told CAPA recently that Garuda aims to also eventually serve five destinations in Europe. He said Paris will most likely be the second non-stop destination after London. Mr Satar said Garuda also aims to have one destination in Germany and one in Italy but has not yet decided between Frankfurt, Berlin or Munich in Germany and between Milan and Rome in Italy.

Garuda for now plans to continue only serving Amsterdam via Abu Dhabi with A330s, allowing the carrier to use its new fleet of 10 777-300ERs for the other four European destinations and Sydney. Mr Satar expects transit traffic to be an important player particularly in the early stages, with about one third of London passengers originating or heading to Australia. Indonesia has potential to grow local traffic to Europe as income levels continue to increase, but the market will take time to develop.

The Garuda and PAL strategies for Europe could prove to be overly ambitious. Just as Southeast Asia's larger flag carriers have discovered, focusing on the better performing Asia-Pacific market is generally a more profitable option, particularly in the current competitive and economic environment.