Philippines-India aviation: PAL to Delhi, inbound tourism grows

Summary

• Philippine Airlines is planning to launch services to Delhi in Mar-2019 using newly delivered A321neos.
• For the Philippines tourism industry India is the largest source market that does not currently have nonstop services.
• The Philippines-India market has been growing rapidly in recent years, and even faster growth is likely as nonstop services are introduced.
• Manila-Delhi will be the fifth long haul narrowbody route for Philippine Airlines, along with Manila to Brisbane, Port Moresby, Sapporo and Sydney.

Re-engined narrowbody aircraft improve Manila-Delhi route economics

PAL initially operated widebody aircraft (a mix of A330-300s and A340-300s) to India after launching services to Delhi in 2011. However, the nonstop flights only operated for a few months and were dropped in Oct-2011. The one-stop flights via Bangkok were downgauged to A320ceos in Jul-2012 and dropped entirely in Jun-2013.

The prospects for PAL in the Indian market are much brighter this time around. The Manila-Delhi market - and the overall Philippines-India market - has more than doubled in size over the past five years, making a nonstop service more viable.

PAL is also now able to operate nonstop flights to India with narrowbody aircraft because it recently added A321neos, which have better range than A320ceos/A321ceos and are much more efficient. Widebody aircraft are likely still too large for the Philippines-India market and a one-stop service would not sufficiently differentiate PAL from several competitors.

Manila-Delhi will be PAL's fifth long haul narrowbody route

PAL has taken delivery of five A321neos over the past seven months and is slated to soon receive one more of the type. All six A321neos are configured for long haul operations, having 12 lie-flat business class seats along with 156 economy class seats with seatback IFE.

See related report: Philippine Airlines: big fleet changes as A321neos, A350-900s arrive

PAL is currently deploying A321neos on long haul routes to Brisbane, Port Moresby, Sapporo and Sydney as well as on some domestic and short haul international flights. The airline began deploying A321neos on all its Brisbane flights and some of its Sydney flights in Jul-2018.

Port Moresby flights with A321neos began in Aug-2018. Sapporo was launched as a new destination on 7-Dec-2018, with three weekly flights from Manila. PAL was originally planning to launch Sapporo on 10-Sep-2018 but postponed the launch after an earthquake hit Hokkaido Island on 6-Sep-2018, resulting in significant damage and impacting tourism demand.

Delhi is now in line to become PAL's fifth long haul narrowbody route. PAL needs at least five long haul narrowbody routes - and ideally one or two more - to avoid having to use the new subfleet of six low density A321neos on short haul routes.

PAL also has 15 high density A321neos on order for delivery starting in 2019, which are better suited for regional routes as they will have a large economy class cabin and regular recliner seats in business. PAL also currently operates 24 A321ceos on domestic and regional international routes - some of those will be phased out as the 15 higher density A321neos are replaced.

Philippine Airlines Group fleet summary: as of 22-Dec-2018

PAL uses A321neos to improve product in Brisbane and Port Moresby markets

The six long haul configured A321neos are all growth aircraft and are intended for routes (new and existing) of at least five hours. Sapporo and Port Moresby are five to six hours from Manila while Brisbane and Sydney are seven to eight hours. Delhi is six to seven hours.

PAL previously only used widebody aircraft for Brisbane and Sydney whereas Port Moresby was served using A320ceos. However, the A320ceo was not ideal for Port Moresby as an unscheduled fuel stop in Davao was required during certain times of the year (when there were strong headwinds).

PAL launched three weekly flights to Port Moresby in late 2015 and is one of only three foreign airlines serving the Papua New Guinea market (along with Qantas and Virgin Australia). The airline has been successful in the PNG market, competing against Air Niugini for Port Moresby-Manila passengers and offering connections beyond Manila to destinations throughout Asia, as well as to the Middle East and London.

PAL introduced a fourth weekly flight to Port Moresby in Sep-2018. The new four times weekly A321neo schedule to Port Moresby has driven a 44% increase in capacity compared to the prior thrice weekly A320ceo schedule. The transition to A321neos has also significantly improved PAL's product in the Port Moresby market - particularly for the business and corporate segment. Offering lie-flat business class seats is important as the Manila to Port Moresby flight operates overnight.

The A321neo has also enabled PAL to improve its business class product in the Brisbane market. Nonstop Manila-Brisbane flights were launched in Mar-2018 using A340s with outdated recliner seats in business class. Until Mar-2018 Brisbane was served one-stop via Darwin with A320ceos (also with recliner seats in business).

PAL introduced lie-flat business class seats in the Melbourne and Sydney markets in 3Q2017, when it began serving the two routes with newly retrofitted A330-300s. PAL continues to operate A330-300s on some of its Sydney flights and all its Melbourne flights, although the company has been evaluating the deployment of A321neos on some of its Melbourne flights (similar to what it is now doing in Sydney).

India is a strategically important market

Sapporo is an entirely new destination and expands PAL's network in Japan to six destinations. Japan is PAL's largest international market and currently accounts for nearly 20% of its total international seats.

India is a strategically important new market for PAL and the Philippines overall. India is the largest source market for the Philippines that does not currently have any nonstop services.

Cebu Pacific has also been considering India using A321neos, which it is slated to start receiving in late 2018, and previously the airline applied for Philippines-India traffic rights. However, Cebu Pacific does not have any immediate plans for launching any destination in India.

Indian visitor numbers to the Philippines increase rapidly

India is the 12th largest source market for the Philippines, based on 2017 visitor data. The other top 12 source markets all have nonstop services - South Korea, China, the US, Japan, Australia, Taiwan, Canada, the UK, Singapore, Malaysia and Hong Kong.

There were 107,000 Indian visitors to the Philippines in 2017 and only 52,000 in 2013 (the year PAL suspended service to Delhi.). Growth has been consistently in the high double digits, including 18% in 2017, 21% in 2016 and 22% in 2015.

Indian annual visitor numbers to the Philippines and year-over-year growth: 2009 to 2017

Source: CAPA - Centre for Aviation and Philippines Department of Tourism.

The outbound Philippines-India market is smaller and has not been growing as rapidly. India reported 52,692 Philippine visitors in 2016. In 2013 there were 42,224 Philippine visitors to India. (India has not yet reported 2017 visitor numbers for second tier source markets such as the Philippines).

Philippines tourism to benefit from resumption of Indian nonstop flights

Not surprisingly, securing nonstop India flights has been a major objective of Philippine tourism authorities over the past few years. Manila-Delhi flights from PAL should stimulate demand and lead to even faster growth in Indian visitor numbers to the Philippines.

If the flights are successful, a Manila-Mumbai service may also be launched by PAL or another airline. Manila-Delhi is the most logical first Philippines-India route as it is the largest city pair between the two countries, accounting for more than 30% of total Philippines-India traffic. Manila-Mumbai is the second largest city pair but approximately half the size, accounting for more than 15% of total Philippines-India traffic.

Philippines-India is a relatively fragmented market, with several city pairs attracting relatively large volumes of traffic. The fragmentation benefits sixth freedom competitors, which are able to connect multiple destinations in both countries.

Singapore Airlines is the largest airline group in the Philippines-India market and offers connections from several destinations in the Philippines to several cities in India. AirAsia, Cathay Pacific, Malaysia Airlines and Thai Airways also carry significant volumes of Philippines-India traffic, leveraging their large India networks.

PAL will have to rely on the Delhi market as it does not have a domestic Indian airline partner. In addition to an exclusive nonstop service to Manila, PAL will offer Delhi residents connections to popular island destinations in the Philippines such as Boracay, Palawan and Panglao.

Although there are now enough Delhi residents holidaying in the Philippines to support the new service, overcoming fierce one-stop competition could prove challenging.