Philippine Airlines to introduce premium economy, reinforcing a full service network airline model

PAL joins the premium economy trend

There are currently 10 airlines in Asia Pacific offering a premium economy product that includes a different level of service and seat compared with regular economy. Singapore Airlines became in Aug-2015 the most recent airline to introduce premium economy and is currently the only Southeast Asian airline to offer a true premium economy product.

Asia Pacific airlines with premium economy cabins

Airline		Aircraft types
NZ	Air New Zealand	777-200ER, 777-300ER, 787-9
NH	All Nippon Airways	777-200ER, 777-300ER, 787-8, 787-9
CX	Cathay Pacific	A330-300, A340, 777-300ER, 747-400
CI	China Airlines	777-300ER
CZ	China Southern Airlines	777-300ER
BR	EVA Air	777-300ER, 747-400
JL	Japan Airlines	777-200ER, 777-300ER, 787-8, 787-9
QF	Qantas Airways	A380, 747-400
SQ	Singapore Airlines	A350-900, A380, 777-300ER
VA	Virgin Australia	777-300ER

Notes: Aircraft types only included if the seat offered is different from regular economy. For example China Southern offers premium economy on aircraft types not listed here but the seat is the same as the regular economy seat.
Not all aircraft of the types listed necessarily have premium economy. For example Singapore Airlines has opted only to offer premium economy in some of its 777-300ER fleet.
Source: CAPA - Centre for Aviation

Several Asian airlines, including PAL and Vietnam Airlines, offer an extra legroom product at the front of the economy cabin on some aircraft. While some of these products are marketed as premium economy they are essentially extra legroom economy seats, similar to the product offered by the US majors.

PAL has committed to acquiring new premium economy seats for eight of its 15 A330-300s and these aircraft will be retrofitted in 2017 and 2018. It is also acquiring new premium economy seats for the six A350-900s that it has ordered for delivery in 2018 and 2019.

See related report: Philippine Airlines to expand long haul operation after completing A350-900 acquisition

Both the retrofitted A330-300s and new A350-900s will seat just over 300 passengers in three class configuration, including lie flat business, premium economy and standard economy seats. The retrofitted A330-300s will be used on medium haul routes while the A350-900s will be used on thinner longer haul routes. On its thicker long haul routes PAL will continue to use 777-300ERs, which at least for now will remain in two class 370-seat configuration.

PAL will retrofit half of its A330 fleet to premium economy

PAL plans to retrofit the eight A330-300s in its fleet which are currently in high density 414-seat all-economy configuration, made up of 39 extra legroom seats and 375 regular economy seats. The new three class configuration will include a total of only 309 seats with separate business and premium economy cabins, along with regular economy. The eight aircraft will be refitted in phases, with the first aircraft slated to be completed in 2017.

At least for now, PAL plans to maintain the configuration on its seven dual class 368-seat A330-300s, which consists of 18 business class seats, 27 extra legroom economy seats and 323 regular economy seats. These aircraft will be deployed on the routes where PAL now uses the all-economy A330s, while the reconfigured aircraft will be deployed on the routes PAL now uses the 368-seat two class A330s.

PAL mainly uses the all-economy A330s on routes to the Middle East. The dual class A330s have generally been used for Australia, Hawaii and Japan. (PAL also uses A330s on some domestic routes and some regional international flights to Bangkok and Hong Kong.)

The 15 A330s, all of which were delivered in 2013 and 2014, have quickly become the backbone of PAL's fleet. A330s currently account for approximately 234 million weekly ASKs, or nearly 30% of total ASKs at PAL - more than any other aircraft type. (The 777-300ER fleet, not included in the chart below, accounts for approximately 190 million ASKs or approximately 23% of total ASKs.)

Philippine Airlines weekly ASKs by aircraft type (Airbus only): 28-Mar-2016 to 3-Apr-2016

Source: CAPA - Centre for Aviation & OAG

Premium economy reinforces PAL's full service network airline strategy

The initial decision to go with a high-density single class configuration for eight A330s was made by the previous ownership and management team - all eight aircraft were delivered when PAL was controlled by Philippine conglomerate San Miguel.

San Miguel essentially responded to the launch of Cebu Pacific's long haul low cost unit by deciding to operate single class A330s also. Cebu Pacific began operating single class 436-seat A330s in 2013. Cebu's medium/long haul LCC operation focuses mainly on routes to the Middle East including four destinations that PAL now also serves with single class A330s.

The Lucio Tan Group, which took back control of PAL in late 2014, has a different perspective from its predecessor's. After a thorough analysis the new ownership and management team determined that PAL is best to maintain a full service network airline model. It is not interested in positioning PAL or any of the group's subsidiaries as an LCC.

The decision to reconfigure the eight single class A330s was made only a few months after Lucio Tan took back control of PAL and its sister airline PAL Express. The decision to include a new premium economy seat in the retrofit project was made more recently, but follows a similar train of thought as Lucio Tan tries to firmly position PAL as a full service airline.

Initially PAL will only offer premium economy on selected long haul routes

PAL expects that a sizeable portion of its economy customers are willing to pay more for premium economy on flights over eight hours. Ideally, PAL will eventually offer a premium economy option on all its long haul flights, however at least for now there are no plans to offer a premium economy cabin on its 777 fleet.

The decision to acquire a premium economy seat for the A330 and A350 was unfortunately made after a configuration was already decided for PAL's last batch of two 777-300ERs. In 2015 PAL committed to leasing two 777-300ERs from 2H2016. These aircraft will be delivered in the same two class 370-seat configuration as on PAL's existing six 777-300ERs.

PAL currently uses the 777-300ER to operate most of its Los Angeles, San Francisco and Vancouver flights. Manila to Los Angeles (LAX), San Francisco (SFO) and Vancouver (YVR) are PAL's three largest routes, based on ASKs.

Philippine Airlines top 10 routes ranked by weekly ASKs: 28-Mar-2016 to 3-Apr-2016

Source: CAPA - Centre for Aviation & OAG

PAL plans to use the two additional 777-300ERs to expand Manila-Los Angeles and Manila-San Francisco to double daily from late 2016 or early 2017. PAL also launched three weekly flights from Cebu to Los Angeles on 15-Mar-2016, using smaller 254-seat two class A340-300s.

PAL plans to phase out its A340-300 fleet as it takes delivery of A350-900s, enabling it to introduce premium economy on its thinner long haul routes. PAL plans to use the A350 to replace the A340 on Manila-London and Cebu-Los Angeles, routes that are too thin to support 777-300ERs.

The A350 will also be used to launch nonstop flights to New York and potentially Toronto, both of which are now served via Vancouver using 777-300ERs. In addition, PAL is considering several possible new long haul destinations which would only be viable with the smaller and more efficient A350.

Philippine Airlines fleet summary: as of 30-Mar-2016

Aircraft	In Service	On Order*
Total:	57	42
Airbus A320-200	10	0
Airbus A321-200	20	4
Airbus A321-200neo	0	30
Airbus A330-300E	15	0
Airbus A340-300X	6	0
Airbus A350-900XWB	0	6
Boeing 777-300ER	6	2

Notes: excludes PAL Express
*orders include new aircraft commitments with leasing companies
Source: CAPA Fleet Database

PAL also currently uses the A340 to serve Sydney and Honolulu. But PAL has previously used two class A330-300s on these routes and will likely deploy the new three class A330s in these markets once the A330 retrofit project is completed.

Introducing premium economy on PAL's 777-300ER fleet; another option

Inevitably PAL will need to consider retrofitting its eight 777-300ERs to include premium economy. Not offering a premium economy option on its flagship Manila to Los Angeles and San Francisco routes does not make sense.

PAL perhaps wants to make sure that its initial foray with premium economy on A330-300s and A350-900s is successful before making further cabin product investments. A retrofit of the 777-300ER would be expensive, but should be worthwhile given that PAL has no plans for phasing out these aircraft. At the same time PAL could also consider improvements to its business class product on the 777-300ER, which is currently in a less than ideal seven seat abreast staggered layout.

Offering the same lie flat business class seat and premium economy seat on both the 777-300ER and A350-900 would be sensible, resulting in a standard long haul product. Over the years the lack of a standard long haul product has been a weakness for PAL. Resolving this weakness is crucial as PAL attempts to establish itself as a premium airline.

PAL will also need to evaluate retrofitting its seven two class A330-300s to include a premium economy cabin. This would provide PAL with a more uniform medium haul product. As is the case with the 777-300ER, PAL likely wants to gauge how the market responds to premium economy on the initial eight A330-300s before committing to retrofit the entire A330 fleet.

New PAL strategy embraces premium airline model

While the Philippines is a price-sensitive market, PAL believes that there is sufficient demand to support a premium product. PAL is also confident that there is sufficient demand to maintain a full service economy offering.

PAL will continue to offer an all-economy product on most domestic routes, but is keen to offer a business class option on all of its international flights again. PAL will always have a relatively small business class cabin compared with other Asian flag carriers. Business class is generally only affordable for the wealthiest of Filipinos and PAL does not have a strong enough brand or product to secure a significant share of inbound business class traffic.

With a premium economy product PAL should be able to grow its premium business and boost average yields. PAL expects that there is a segment of the Filipino population - and a growing segment - that will upgrade from standard to premium economy if provided with the option.

Introducing premium economy is the right move for PAL

Premium economy has proven to be successful at several Asian airlines but the product can be challenging to sell. Since premium economy varies widely and distribution systems do not accurately capture the offering, it is critical for airlines to be in touch with their local market and effectively market the product. There is also an issue of selling seamlessly across different airlines on more complex routings, notably among global alliance members.

For PAL there is a very loyal customer base, which should make it easier for PAL to communicate and ultimately sell its new offering.

The Philippines may not seem like a typical premium economy market. However, PAL has acknowledged that foreign airlines, particularly Cathay Pacific and EVA Air, have had success at selling premium economy to Filipino passengers.

The Philippine economy is expected to continue growing rapidly, with average per annum GDP growth of 8% projected for the next five years, pushing up discretionary income levels. Premium economy is no longer a small niche product but has become relatively common throughout Asia - and globally. Joining others on the premium economy bandwagon is a bold yet sensible move for PAL.