Recorded at CAPA Global LCC Summit, 1-2 Mar 2018

Cebu Pacific Update

Cebu Pacific chief operations advisor Rick Howell discusses the upcoming launch of Melbourne and how Cebu Pacific has succeeded with long haul flights to Australia while the Middle East has struggled. Cebu Pacific cut back its long-haul network in 2017 from five to two destinations, Melbourne and Dubai, as three unprofitable routes to the Middle East were suspended. Mr Howell also discusses plans for Cebu Pacific’s future fleet of A321ceos and A321neos and the growing role of cargo. Cebu Pacific plans to receive seven A321ceos in 2018 and expects to receive the first of 32 A321neos late this year. Cebu Pacific has opted for a palletised underfloor for all its A321s.


Rick HowellThe relevance of it being my hometown is actually unfortunately zero. If I had that sort of influence yeah we would've been doing it a long time ago. I guess capacity opportunity with the 321's entering the fleet, we now have the ability to up gauge on some of the routes that we're running the 330. Up gauge and increase frequencies, we still do have a few slots left at Manila that we can add 321's to and liberate a 330 to do some long haul.

It's taken us a while to build our brand in Australia, but as I think I've said before, six months after we started the Sydney service when we were competing with two well entrenched full service incumbents, we doubled the size of the market. We dropped average fares by about 30% and we'd become the dominate player in the market. It's now a mature market for us, it's well profitable, we've got a great cargo network out of Melbourne. We distribute to lots of different places, we interline with a couple of different airlines, and of course Melbourne as an airport is home for about 30% of Australia's air freight, so Melbourne actually is more air freight than Sydney. So there's a good commercial opportunity below the floor as well as around about from memory, around about 180,000 Filipino or Filipino heritage residents of Melbourne area. So with that sort of diaspora these are people that actually know our brand, we don't have to get out there and advertise and try to drive growth to our airline. But it's just been a case of having the available A330 capacity and once the 321's arrive then we can actually realize some.

Do you remember there was a US Fed Chairman that used the term, irrational exuberance? We saw some irrational exuberance from some of our competitors into the Middle East. Fares were unsustainably low, and if they're unsustainstably low for us then we know that the other guys that were on the same city pairs were losing an enormous amount of money to compete. We don't actually have the sort of ego that requires us to stick to a business model even if it's not the best use of the assets. So the redeployment of the assets from a couple of the Middle East destinations into regional operations was very sensible, in the middle of last year. Because the 321 Neo's been delayed, we needed to find a way to get some more seats into the Asian market, that actually has been a very successful program. But yeah, you're right, if you've told me that four or five years ago that wasn't our business plan but you know what? As a famous economist once said, if the facts change to not fit your argument anymore, change your argument.

The first seven 321's that we're collecting this year are CEO's, so they're a shorter range airplane than the Neo's just by fuel efficiency. They're also coming in at a slightly lower max takeoff weight, so in essence they'll fit into our existing 320 network, sort of light for like. The Neo's have a bit longer range and that gives us the ability to connect some more Asian ports that we don't touch right now. Probably to be honest, from the response that we've actually seen I think that what's coming up for us next on the wide body side is probably some more deployment into some of the major slot restricted Asian airports. 'Cause what we are seeing, and we saw it quite spectacularly with Narita, where we moved from an A320 to an A330, we sustained the same load factor after only a couple of weeks. So the demand actually far exceeded the available supply at the time.

The maximum benefit from the aircraft right now is not in adding another long haul destination. Yup, we're still looking at other options and yeah the opportunity to get to the US is, well further to the US, further than Guam, is very attractive. But it needs to make sense as a business cause, it's not just we've got to do it because it sounds like a good idea.

It varies because of the seasonality, so fortunately for us the seasonality of the network of our Asian network is actually quite different to the seasonality of our Australian network. February's a really busy month for us in the Philippines and around the region here, and February is the death in Australian aviation because everyone's just back from holiday. So a similar sort of argument that the Aligent guys were making about no one fly's in September for Aligent. Well in Australia aviation February's always a very low month, so if you want to look at it from the point of view of holidaying Australians looking for a leisure experience versus Filipinos connecting with friends, relatives, it varies over the season. Yeah, a load factor varies over the season, our yield varies over the season as well. But it's actually, it's turned out to be quite a stable mix.

Look it's a good question, the cargo side of the business has grown about year on year it's actually up over 30%. High 30's in volume and over 30 in revenue as well. A lot of that's been to do with the fact that we've changed the way that we sell cargo, and we've changed the commercial relationships. But on the cargo side of the business I mean we're clearly a low cost, point to point carrier above the floor. But below the floor we're actually a full service cargo network carrier, so you can check in a box at Sydney and have it travel on one of our airplanes and end up in Kuwait, even though we don't fly to Kuwait. I mean we have interline deals with a variety of airlines, we actually aggregate a lot of freight, a lot of cargo out of China to move to Dubai through Manila, which of course is probably not something that would have been forecast. Revenue wise on a lot of our 330 dominant routes cargo's actually is more than 20%, around about 20% of our total revenue, which is sort of similar to Ancillary's. So it's clearly a real driver, it actually changes the way that we can charge for passenger tickets.

The 321 CEO is primarily a ... Sorry just a continuation of the answer to the previous one. We're actually taking all of our 321's with palatalized underfloor. So that actually gives us two opportunities, one we actually get to carry palatalized freight, which freight fallers actually really prefer. Two, that means that we can actually shave about eight minutes out of a turnaround because it's a whole lot faster loading cans and pallets than it is individual bags. So 321 network will actually change the way that we do cargo within domestically. Primarily though the 321 CEOs are just going to be an up gauge of an existing service. 321 Neo's give us the opportunity to operate efficiently at a longer range. We looked at lots of different options for the airplane, it gets us a range circle that takes in part of Russia, Northern Japan, India, parts of Australia so we haven't actually come to a landing on what that's going to do to our network just yet. But it certainly gives us a lot more options.

Yeah we do see a future and we expect that the partnership with Tiger Australia is actually going to be quite beneficial. It's been a while because nothings simple when it comes to rez systems, the software and the business rules and the integration across the seven carriers it's not sort of click your fingers and turn it on. It actually is required quite a lot of oversight and a lot of effort in the background. We're starting to see the increase in throughput of the value alliance now. We're probably benefiting from it more than a lot of other carriers, but we do expect that with Tiger so prevalent in Melbourne that we're probably see a real kick in value alliance bookings once we launch Melbourne in August this year.

Okay, so other than the death threats I got after the morning panel, no, look take aways, it's like most CAPA conferences there are some really interesting people to actually speak to and to listen to. The discussion, sort of the ongoing discussion about long haul and LCC's that I think is ... The thing for me having now been involved in it a few times, I think is that it's possibly a little narrow. Because long haul LCC discussion is not just a discussion about long haul LCC, it's actually a discussion about wide body LCC. So the discussion about what makes it successful might actually just be how the airplane fits into your existing network rather than just finding destinations that are a long way apart.

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