21-Aug-2017 11:47 PM

Philippine Airlines' long haul strategy Part 1: accelerated fleet growth and London upgrade

Analysis

Philippine Airlines (PAL) is embarking on a new phase of long haul expansion as the airline takes delivery of eight long haul aircraft over the next two years. PAL will use the expanded long haul fleet to increase its capacity to London significantly later this year, while capacity to North America will likely increase by approximately 50% in 2018-2019.

The Manila-London route has been allocated two additional 777-300ERs, which are being delivered in late 2017. PAL launched London in late 2013 with 777-300ERs, but in the past three years has been serving the London market with smaller A340-300s.

PAL also plans to take delivery of four A350-900s in 2018, and two more A350s in 1H2019. Most of the 10 widebody aircraft being added over the next two years are for growth, although in 2019 PAL intends to phase out its A340 fleet, which is now used on a mix of long haul and mainly short/medium haul routes.

Summary

Philippine Airlines (PAL) is expanding its long haul fleet with the delivery of eight long haul aircraft over the next two years.
PAL plans to increase capacity to London significantly later this year, with the addition of two 777-300ERs.
The airline will also take delivery of four A350-900s in 2018 and two more A350s in 1H2019.
PAL currently operates six long haul destinations: Los Angeles, London Heathrow, New York JFK, San Francisco, Toronto, and Vancouver.
PAL's long haul fleet consists of eight 777-300ERs and six A340-300s, with plans to phase out the A340 fleet by 2019.
PAL's long haul schedule for Aug-2017 consists of 41 weekly flights, with Manila-Los Angeles being the largest route.

PAL has only six long haul destinations

PAL's long haul network currently consists of only six destinations - Los Angeles, London Heathrow, New York JFK, San Francisco, Toronto and Vancouver. Los Angeles, London, San Francisco and Vancouver are served nonstop from Manila, whereas New York and Toronto are served as tags from Vancouver.

PAL primarily uses its fleet of eight 777-300ERs to serve its eight long haul destinations. A340-300s are currently used to serve London Heathrow and three of its 10 weekly San Francisco flights, but London will be upgraded to the 777-300ER in Sep-2017.

PAL still has six A340s in its fleet but the type is mainly used to operate regional routes within Asia Pacific, including a new route to Auckland which will launch on 6-Dec-2017. From Dec-2017 PAL will only operate three long haul flights with the A340 and plans to reduce its A340 fleet gradually over the next two years, using the type mainly as a spare in 2018 and 2019, before phasing out the last two aircraft in 2019.

PAL's widebody fleet also includes 15 A330-300s, which are used on medium haul routes to Australia, the Middle East and Hawaii, as well as some regional routes within East Asia. CAPA will examine PAL's medium haul strategy (covering routes of five to 10 hours) and regional strategy (routes of up to five hours) in separate upcoming reports.

This report focuses on PAL's long haul strategy as the airline expands its long haul fleet. The first part of this report examines expansion of the 777 fleet and PAL's plans for the European market. The second part will analyse PAL's expansion plans for North America and the new A350 fleet.

PAL has 41 long haul flights per week

PAL's long haul schedule for Aug-2017 consists of 41 weekly flights, 33 of which are operated with 370-seat two class 777-300ERs, and eight with 254-seat two class A340-300s. Manila-Los Angeles is by far the largest route, and is served with two daily 777-300ER frequencies.

PAL's long haul schedule for the second half of Dec-2017 and Jan-2018 also includes 41 weekly flights, but more capacity overall as 38 of the weekly flights will be operated with 777-300ERs. The airline is able to increase the proportion of long haul flights operated by the 777-300ER because it is taking two more of the type in early Dec-2017.

Philippine Airlines long haul routes ranked by weekly return seat capacity: Aug-2017 and Dec-2017

Rank	Route	Aug-2017 frequency	Aug-2017 seats	Dec-2017 frequency	Dec-2017 seats
1.	Manila-Los Angeles	14 weekly (777)	10,360	14 weekly (777)	10,360
2.	Manila-San Francisco	10 weekly (7 777 and 3 A340)	6,704	10 weekly (7 777 and 3 A340)	6,704
3.	Manila-London	7 weekly (A340)	3,556	7 weekly (777)	5,180
4.	Manila-Vancouver-New York	4 weekly (777)	2,960	4 weekly (777)	2,960
5.	Manila-Vancouver-Toronto	4 weekly (777)	2,960	4 weekly (777)	2,960
6.	Manila-Vancouver-Manila	2 weekly (777)	1,480	2 weekly (777)	1,480
	TOTAL	41 weekly	28,020	41 weekly	29,644

PAL typically operates a reduced long haul schedule during the off peak season of September to early December, and will operate 29 long haul flights during most of this period in 2017. It will temporarily reduce Los Angeles from 14 to 10 weekly flights, London from seven to four weekly frequencies, San Francisco from 10 to seven weekly frequencies and Vancouver from 10 to eight weekly frequencies (as the turnaround flights are not operated).

PAL has historically also slightly reduced its long haul schedule in February and early March, which is a shorter off peak season. In 2017 PAL briefly reduced flights to Los Angeles and San Francisco during this period, but maintained capacity to its four other long haul destinations (London, Vancouver, New York and Toronto).

PAL to reinstate 777s on London route

PAL launched services on the Manila-London Heathrow route in Nov-2013, with five weekly 777-300ER flights, then downgauged the London service to five weekly A340-300 flights in Aug-2014.

PAL stopped operating 777s on London in 2014 because the 777 was too big for the London market, given the initial demand, and the airline was better off redeploying the aircraft on US routes. PAL was initially not able to operate the 777 on US routes due to Category 2 restrictions, but was finally able to start deploying the type on its US routes following the US FAA's upgrade of the Philippines to a Category 1 safety rating in Apr-2014.

In ordering the 777-300ER PAL intended to operate the type to Los Angeles and San Francisco - its two largest long haul markets - but was prevented from changing aircraft gauge on any of its US flights during the six years the Philippines was under Category 2. PAL was therefore initially forced to find alternative routes for its first six 777-300ERs.

The first batch of two 777s, which were delivered at the end of 2009 and beginning of 2010, were used for Vancouver. Toronto was launched in 2012, following the delivery of a second batch of two 777-300ERs. London was launched following the 2013 delivery of the last two 7777-300ERs from the original 2007 six aircraft commitment.

PAL started deploying 777-300ER on US routes in 2H2014, using the aircraft that were initially allocated to the London route; it has since served London with the A340-300.

PAL reinstates daily service to London

PAL initially kept five weekly flights to London when downgauging from 777-300ERs to A340-300s in Aug-2014. However, it downgraded the route further in early 2015, to only four weekly A340-300 frequencies. This resulted in only 1,016 weekly one way seats compared to the 1,850 seats PAL had offered when London was launched with five weekly 777-300ER flights.

PAL added the fifth weekly London frequency back in late 2015, and in mid-2016 upgraded the route again, to a daily A340-300 service. This provided 1,778 weekly one-way seats, nearly matching the capacity initially provided with the five weekly 777-300ER flights. PAL decided to upgrade London to daily because the performance of the route significantly improved in 2015, after PAL was able to secure better slots at London Heathrow.

PAL rescheduled its London flights in Mar-2015, moving from an 07:10 departure from Manila and an 18:25 departure from Heathrow to a 13:10 departure from Manila and a 22:20 departure from Heathrow. The new timings improved connections on the Manila end, since previously the flight had departed Manila too early to facilitate connection. The new timings were also more appealing in the local Manila-London market.

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PAL is temporarily cutting London back to four weekly frequencies in Sep-2017 as it switches back to the 777-300ER. However, PAL's London schedule will again feature a daily service from mid-Dec-2017.

As all flights will be operated by the 777-300ER, PAL will have 2,590 weekly one-way seats to London from mid-Dec-2017. This represents its highest ever capacity level in the London market and a 40% increase compared with its initial capacity level when the route was launched in Nov-2013.

Philippine Airlines one-way weekly seat capacity to London: Nov-2013 to Feb-2018

PAL may not be able to maintain daily year-round service to London

PAL is confident London can absorb the additional capacity, given the improved performance of the route over the past two years. PAL also believes the switch to the 777-300ER, which offers a better and more reliable product than the ageing A340-300, enables the airline to attract more passengers.

PAL is the only airline operating nonstop flights from Manila to London - or to anywhere in Western Europe. However, there is aggressive one stop competition on Manila-London and in the broader Manila-Europe market from the Gulf airlines and Turkish Airlines, which have expanded significantly in the Philippines. (Turkish Airlines is the only European airline serving Manila but relies heavily on connections throughout Europe as Manila-Istanbul is a relatively small market.)

PAL recognises that it may not be able to maintain a daily year-round 777 service to London and could end up again reducing the schedule during off peak periods in 2018. PAL president Jaimie Bautista told CAPA that whether PAL is able to operate the flight daily year-round depends "on the requirement of the market".

Over the years PAL has also evaluated launching services to continental Europe. However, the priority at this point is trying to maintain the new higher level of capacity to London and focusing long haul growth in 2018 and 2019 in North America.

PAL further expands its 777-300ER fleet

The upgrade of London to a daily 777-300ER service is made possible by further expansion of the 777-300ER fleet. As highlighted earlier in this report, PAL's original fleet of six 777-300ERs was delivered from late 2009 to 2013 and initially used to serve Canada and London until the upgrade to Category 1 enabled PAL to begin deploying the 777-300ER on US routes.

The Category 1 upgrade prompted PAL to pursue expansion of the long haul fleet, resulting in a 2015 decision to lease two more 777-300ERs and acquire six A350-900s. The two additional 777-300ERs were delivered in 4Q2016, giving PAL a total of eight 777-300ERs, while the A350s will be delivered from 2018.

PAL used the two additional 777-300ERs delivered in 4Q2016 to upgrade the Manila-Los Angeles route to two daily flights. It also expanded in the Canadian market, adding fourth frequency on the Manila-Vancouver-Toronto route and introducing two weekly Manila-Vancouver turnaround flights.

In early 2017 PAL decided to lease another two 777-300ERs for delivery in early Dec-2017. Mr Bautista said these aircraft had been allocated to London, enabling the airline to increase capacity significantly and improve its product in the London market.

While 777-300ERs are being introduced on the London route from Sep-2017, two months before delivery of the ninth and tenth aircraft, PAL is temporarily using an A340 to operate some flights to Los Angeles in September, October and November.

Therefore, PAL will temporarily use a 777-300ER now allocated to the US market to operate the initial four weekly 777-300ER flights to London. By the time the London route is upgraded to a daily 777 service in Dec-2017, PAL will have expanded its 777-300ER fleet from eight to 10 aircraft, enabling it allocate the equivalent of two aircraft to London while again offering all Manila-Los Angeles frequencies with 777-300ERs.

Philippine Airlines widebody fleet summary: as of Aug-2017

Aircraft	In service	On order
Airbus A330-300E	15	0
Airbus A340-300X	6	0
Airbus A350-900XWB	0	6
Boeing 777-300ER	8	2
Total:	29	8

PAL decides against using the A350 on London route

PAL initially was initially considering a transition of the London route to the A350. However, it was eager to move the A340 off London, a flagship route, as soon as possible, because of the product and reliability issues with the older A340 fleet.

Waiting for the A350 to improve the product on London would have taken at least a year, given delivery delays with PAL's initial batch of A350s and PAL's preference to use the initial two A350s to upgrade New York to nonstop. The new 777 lease deal enabled PAL to bring forward the upgrade of London by at least one year.

Expansion of the 777 fleet beyond eight aircraft was not in PAL's fleet plan at the beginning of this year. However, a reduction in lease rates for new 777-300ERs - due to declining demand for the type globally - and an opportunity to transition London out of the ageing A340 earlier made an attractive scenario. PAL considers itself an opportunistic buyer in this case, as the deal was done with short notice - only nine months prior to delivery - and the airline was able to secure a relatively attractive price due to the slump in demand for new 777-300ERs with near term delivery dates.

The latest PAL network plan does not envisage using the A350 for London, or anywhere in Europe. PAL's network plan is now focused entirely on using the A350 to expand in the North American market, which CAPA will explore in the next part of this report