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Philippines-Middle East market: PAL woos Etihad, Cebu Pacific expands & Emirates seeks more rights

Competition in the Philippines-Middle East market continues to intensify as Cebu Pacific expands and Philippine Airlines (PAL) looks to enhance its partnership with Etihad. But Emirates could see its share of the market decline unless it succeeds at securing new traffic rights, an initiative its Philippine competitors seem eager to block.

Cebu Pacific recently launched services to three destinations in the Middle East, giving it a total of four destinations in the region. PAL also now serves four destinations in the Middle East, all of which were launched in 2H2013, and is upgrading Abu Dhabi to daily on 1-Dec-2014.

PAL could potentially add more capacity to Abu Dhabi under an enhanced partnership with Etihad which could see PAL use Etihad to provide offline access to continental Europe and parts of North America. Eithad rival Emirates however could be forced to reduce capacity as a consequence of its recently terminated codeshare with PAL.

This is the second in a series of reports on the dynamic Philippine market.

The first report looked at the fleet challenges facing PAL’s new ownership and executive group and potential changes to the flag carrier’s business plan. This report looks at the intensifying competition between the Philippines and the Middle East and the intriguing options PAL now faces in serving this market.

See related report: Philippine Airlines looks to slow fleet expansion by subleasing A330s and reducing A321 commitments

Philippines-Middle East capacity has doubled in less than two years

The Philippines-Middle East market saw a rapid surge in capacity in 4Q2013 as Philippine carriers added six new routes. Cebu Pacific launched daily service from Manila to Dubai as its first long-haul route in Oct-2013. PAL re-entered the Middle East market after a several year hiatus by launching service to Abu Dhabi in Oct-2013. This was quickly followed by the launch of Dubai and Doha in Nov-2013 and the launch of Dammam and Riyadh in Dec-2013.

When also factoring in Emirates’ late Oct-2013 launch of service from Dubai to Manila alternative airport Clark, total seat capacity in the Philippines-Middle East market roughly doubled in Dec-2013 compared to Dec-2012 levels. This included capacity growth of over 120% in the Philippines-UAE market, roughly 70% in the Philippines-Saudi Arabia market and about 30% in the Philippines-Qatar market.

See related report: Philippines-UAE market suffers from overcapacity, impacting Cebu Pacific, PAL, Emirates and Cathay

The expansion was clearly unsustainable and not surprisingly two of the new route were quickly dropped – PAL’s service to Doha in Apr-2014 and Emirates’ service to Clark at the beginning of May-2014

But Cebu’s recent launch of services to Dammam, Riyadh and Kuwait and the upcoming launch of Muscat-Manila by Oman Air add new capacity that offsets the reductions from PAL’s Doha and Emirates’ Clark services. As a result total capacity in the Middle East-Philippines market will be about flat in Dec-2014 compared to Dec-2013 at approximately 40,000 weekly one-way seats. Again this represents a doubling of capacity compared to the roughly 20,000 weekly one-way non-stop seats back in Dec-2012.

The UAE is the largest Middle East destination from the Philippines and accounts for slightly over half of the 80,000 weekly return seats between the Middle East and the Philippines. The UAE is now the fifth largest international destination from the Philippines overall after South Korea, Hong Kong, Singapore and Japan.

Philippines to Middle East seat capacity ranked by destination airport: 1-Dec-2014 to 7-Dec-2014

Rank Airport Total Seats
1 DXB Dubai International Airport 27,482
2 AUH Abu Dhabi International Airport 15,204
3 RUH Riyadh King Khaled International Airport 10,628
4 DOH Doha Hamad International Airport 9,410
5 DMM Dammam King Fahad International Airport 6,454
6 KWI Kuwait International Airport 2,616
7 BAH Bahrain International Airport 2,580
8 JED Jeddah King Abdulaziz International Airport 1,732
9 MCT Muscat Seeb International Airport 1,296

The surge in capacity was not necessarily irrational

The increase in capacity since 4Q2013 has significantly intensified competition and impacted yields and load factors. But the new flights from the Philippine carriers have mainly attracted passengers that were flying between Manila and the Middle East via sixth freedom hubs such as Brunei, Hong Kong and Singapore. There is a huge Filipino worker population throughout the Gulf but the Middle Eastern carriers were only carrying a relatively small portion of this traffic as they have been using most of their Manila capacity to attract passengers flying beyond their hubs, particularly to Europe.

Cebu Pacific and PAL have also been able to stimulate demand by offering lower fares. Both carriers operate their routes to the Middle East with high density A330-300s, a sensible strategy given it is a price sensitive market with limited premium demand.

Cebu’s A330-300 fleet is configured with 436 seats in all-economy configuration. PAL serves Dubai, Dammam and Riyadh with 414-seat A330-300s in all-economy configuration while Abu Dhabi is served with 368-seat two-class A330-300s that include a business class cabin with 18 lie flat seats. The Dubai route is operated by PAL Express while the group’s other three routes to the Middle East are operated by PAL mainline.

Both of PAL’s A330 configurations include extra legroom seats in the front of the economy cabin that are sold as premium economy. The entire economy cabin features nine seats abreast and wireless IFE, which requires passengers to bring their own tablets, instead of seatback monitors. Almost all full-service carriers operate A330s with an eight seat abreast economy cabin while LCCs generally have nine seats abreast including AirAsia X and Cebu Pacific.

PAL currently operates 13 A330-300s, all of which were delivered since Sep-2013, with two more to be added by the end of 2014. Cebu Pacific currently operates five A330-300s, all of which were delivered since Jun-2013. The carrier is committed to adding a sixth A330-300 in early 2015 and has been looking at leasing two more aircraft which could be delivered by the end of 2015. An eight aircraft A330 fleet at Cebu Pacific would match the number of A330s that PAL has in all-economy configuration.

PAL and PAL Express offer frills on their all-economy A330 flights – including meals, drinks and bags. But their economy seat has a similar spec to Cebu Pacific, which charges for all items.

PAL becomes largest player in UAE-Middle East market

PAL currently offers 19 weekly flights to the Middle East, including seven to Dubai (operated by PAL Express), five to Abu Dhabi, four to Riyadh and three to Dammam. PAL plans to increase Abu Dhabi to daily at the beginning of Dec-2014, giving it 21 weekly flights to the Middle East.

The 21 weekly flights will give PAL and PAL Express almost 8,400 weekly one-way seats to the Middle East, enabling PAL to overtake Emirates as the largest group in the Philippines-Middle East market. Emirates currently operates three daily 777-300ER flights from Dubai to Manila, giving it about a 20% share of total non-stop seat capacity between the Philippines and the Middle East.

Philippines to Middle East non-stop capacity (seats) by group: 1-Dec-2014 to 7-Dec-2014

Rank Airline Total Seats
1 PR/2P Philippine Airlines/PAL Express 16,744
2 EK Emirates 15,582
3 5J Cebu Pacific Air 13,080
4 EY Etihad Airways 10,276
5 SV Saudia 9,526
6 QR Qatar Airways 9,410
7 GF Gulf Air 2,580
8 WY Oman Air 1,296

Cebu Pacific is now the third largest carrier in the market, slightly ahead of Etihad and Qatar. Etihad and Qatar each operate two daily flights to the Philippines.

Saudia, Gulf Air, Kuwait Airways and soon Oman Air also serve the Philippines. Saudia currently operates 11 weekly flights, Gulf Air seven and Kuwait six. Oman is launching three weekly flights to Manila on 2-Dec-2014. (The Kuwait Airways flights all operate via Bangkok and therefore are not included in the chart above.)

Qatar Airways currently serves both Clark and Manila while the other six Middle Eastern carriers that serve the Philippines only serve Manila. Qatar launched services from Doha to Clark in late Oct-2013, but this did not result in any changes to Qatar’s capacity in the Philippines-Middle East market as one of its two daily flights to Manila was dropped when Doha was launched.

Cebu Pacific quickly grows Middle East network

Cebu Pacific now operates 15 weekly flights to the Middle East including seven to Dubai and three each to Riyadh, Kuwait and Dammam. Manila-Kuwait, which is not served non-stop by any other carrier, was launched in early Sep-2014 while Dammam and Riyadh were launched in early Oct-2014.

Cebu’s expansion to Saudi Arabia and Kuwait was part of a dramatic expansion of the LCC’s long-haul network from one to five routes in the span of less than five weeks. Cebu also launched Sydney in early Sep-2014, which is currently served with four weekly flights increasing to five in Dec-2014.

With the exception of Kuwait all five new routes are highly competitive markets that have also seen large increases in capacity from PAL. But Cebu Pacific CEO advisor Garry Kingshott says all the new routes are tracking at or above expectations with Sydney performing particularly well. Mr Kingshott told CAPA TV recently that the performance of the Dubai route, which was shaky in the initial spool up period, also performed well in the northern hemisphere summer 2014 season.

Cebu Pacific CEO Advisor Garry Kingshott discusses how the carrier’s long-haul routes are fairing, how conditions in the domestic market have improved and plans for growing Cebu’s network and fleet over the next year

The Middle East remains the main focus of Cebu’s long-haul unit. Australia and Hawaii, which is now expected to be launched in late 2015, are important destinations as it provides some diversification. But the impetus of establishing the long-haul unit was to meet the huge demand of Filipino expatriates working in the Middle East. (Cebu Pacific previously was looking to launch Hawaii in early 2015 but now expects it will take about another year to secure the 180min ETOPS rating required for the Manila-Honolulu route.)

As CAPA has previously suggested, Cebu Pacific is keen to pursue further expansion in the Middle East as early as 2015. While it has looked at several markets including Abu Dhabi, Bahrain, Doha, Oman and Jeddah, the most likely next destination is Sharjah. Cebu Pacific briefly served Sharjah from 1-May-2014 to 20-Jul-2014 during runway construction works in Dubai and was pleased with bookings, including passengers that connected to flights operated by Sharjah-based LCC Air Arabia.

See related report:

Cebu Pacific is confident of securing more traffic rights to the UAE

Cebu Pacific is seeking seven additional traffic rights for the UAE, which would enable it to launch flights to Sharjah. Cebu Pacific is confident it will receive the rights as seven of the 28 weekly frequencies to the UAE available to Philippine carriers are now unused.

PAL currently holds traffic rights for 14 weekly frequencies while PAL Express and Cebu Pacific each hold seven. PAL is now using only five (soon seven) for Abu Dhabi. It had been using the other seven until the end of Oct-2014 under a controversial codeshare arrangement with Emirates in which Emirates was able to use PAL traffic rights although it was the operating carrier.

Cebu Pacific has been a longstanding critic of Philippine authorities allowing Philippine carrier traffic rights to be used by foreign carriers under the guise of codeshares. Emirates and previously Qatar were seen as essentially trading traffic rights from PAL. In theory PAL had codeshares with both carriers but the codeshares were very limited and it is unusual in the global industry for the traffic rights to be held by the marketing rather than operating carrier.

The PAL-Qatar Airways arrangement ended in Oct-2013, forcing Qatar to move one of its two daily Manila flights to Clark. As Clark is an open skies airport it does not count for entitlements under the bilateral. Qatar has only seven weekly traffic rights to Manila.

End of Emirates-PAL codeshare leaves Emirates seeking more rights

Philippine authorities decided earlier this year to not allow the PAL-Emirates arrangement to be extended beyond Oct-2014. But the PAL-Emirates codeshare would likely have ended anyway due to the partnership PAL forged with Emirates rival Etihad in Jul-2014.

Emirates stopped carrying PAL’s code on Dubai-Manila in late Oct-2014. Emirates for now has been able to maintain its thrice daily service to Manila using seven temporary traffic rights as well as its 14 permanent rights. Emirates continues to include three daily flights in its forward schedules but there is a risk the temporary rights will not be extended beyond an initial one or two months.

The UAE is pushing for new bilateral talks with the Philippines which would potentially give Emirates 21 (or more) permanent rights to Manila. But these talks have been pushed back to 1Q2015 at the earliest. Further delays are possible as Philippine carriers do not see a need for a further expansion of the bilateral agreement with the UAE.

It is clearly in Cebu’s and PAL’s interest for Emirates to be forced to reduce Manila to 14 weekly flights as both operate the Dubai route. Total capacity on the Manila-Dubai route has increased by about 160% since Nov-2012, when there was a total of only two daily non-stop flights in the market (both from Emirates). An overall reduction would benefit both Philippine carriers.

Manila to Dubai capacity by carrier (one-way sears per week): 19-Sep-2011 to 19-Apr-2015

Emirates is unlikely to resume Clark and unable to use A380 to serve Manila

Emirates does have the option of maintaining its total capacity in the Philippine market by moving one of its three daily Manila flights to Clark. But Clark proved to be a difficult market for Emirates in late 2013 and early 2014. Emirates obviously prefers to maintain three daily flights in Manila and ideally it would also gain the flexibility to increase in Manila to four daily flights.

Unfortunately for Emirates it does not have the option of maintaining capacity in the Manila market by switching from three 777-300ER to two A380 flights. The Philippines-UAE bilateral is based on frequencies rather than seats and in theory would allow A380 operations. But Manila Airport has decided it cannot accommodate A380s following a trial with an ad hoc Emirates A380 flight.

Due to the limited separation between the airport’s main runway and a parallel taxiway Manila has determined it would need to shut down a parallel taxiway every time an A380 landed. This is seen as an unacceptable compromise as Manila is a very busy airport. Closing a main taxiway once or twice a day would be an inconvenience for other airlines, particularly the two main Philippine carriers.

PAL could potentially pursue further expansion in Manila-Abu Dhabi market

Emirates’ success at securing more traffic rights to Manila could ultimately hinge on whether Cebu Pacific succeeds at securing the rights that had been used by the now terminated Emirates-PAL codeshare. PAL could end up keeping these rights by adding a third flight in the Philippines-UAE market, which would quickly change Cebu’s position that an expanded bilateral with the UAE is not needed

PAL could potentially start using the seven unused rights to support a second daily flight to Abu Dhabi as part of an expanded partnership with Etihad. PAL president Jaimie Bautista recently told CAPA that PAL is interested in expanding its codeshare with Etihad to cover destinations in Europe and the US.

The two carriers currently only codeshare on their respective services between Abu Dhabi and Manila as well as domestic connections within the Philippines.

PAL could use Etihad and Etihad Alliance carriers to serve Europe

Abu Dhabi could emerge as a transfer point for continental Europe as PAL’s new ownership and management team is not interested in implementing the business plan of former controlling shareholder San Miguel, which envisioned several new destinations in continental Europe. PAL is instead now focusing on trying to improve its performance on Manila-London Heathrow and using partnerships to cover the rest of Europe.

PAL currently does not have any European codeshare partner. Etihad is a logical partner for PAL in the European market as Abu Dhabi is well connected to Europe. Etihad also has stakes in several European carriers that could also end up as PAL partners.

PAL also does not have any codeshare partners for the US market. PAL is interested in using Etihad to serve offline destinations in the eastern half of the US. A combination of Etihad and other potential new or existing partners, such as All Nippon Airways, could be used by PAL to improve its position in the North American market.

See related report: Philippine Airlines needs more and stronger partnerships. All Nippon Airways tie-up is a small step

An expanded partnership with Etihad could potentially include Etihad placing its code on PAL-operated international flights beyond Manila. Guam and Honolulu could be two markets Etihad serves via Manila.

With the right connections, an expanded partnership could justify additional flights between the two hubs. Etihad is currently capped at two daily flights but PAL could potentially further increase its capacity to Abu Dhabi to match the two daily fights operated by Etihad.

PAL clearly has sufficient capacity to operate a second daily flight to Abu Dhabi as it is now significantly under-utilising its A330 fleet, as outlined in the first part of this series. In fact PAL could even been attracted to operate A330 flights beyond Abu Dhabi with Etihad’s support, particularly if PAL does not succeed in its current effort to sublease or sell several of its A330s.

PAL will need to move fast on a potential increase on Manila-Abu Dhabi as otherwise the seven weekly traffic rights that it has been using for the Emirates codeshare will be allocated to Cebu Pacific. PAL may not be able to conclude an expanded partnership with Etihad quickly enough, resulting in Cebu receiving the rights.

PAL Express may drop Manila-Dubai

But PAL also has the option of potentially moving its Dubai flight to Abu Dhabi, which would allow PAL to increase Abu Dhabi to double daily while still giving Cebu Pacific the 14 rights it seeks without requiring an expanded bilateral.

PAL Express’ Dubai flight has been highly unprofitable as competition with Cebu Pacific and Emirates has been intense, impacting load factors and yields. PAL’s Abu Dhabi route has been performing better, with the Etihad partnership likely helping.

PAL Express now has two A330s in its otherwise all-narrowbody fleet just for the Dubai route, resulting in a very low average aircraft utilisation rate. It would be sensible for these two aircraft and the route to be operated by PAL, which operates the rest of the group’s A330 fleet. But the traffic rights for Manila-Dubai are currently held by PAL Express.

Shifting the traffic rights now held by PAL Express to PAL would require relinquishing the rights held by PAL Express. This would allow other Philippine carriers, particularly Cebu Pacific, to bid for the rights. PAL may not want to risk losing these rights but as seven other frequency rights are currently available, it probably could be successful at transferring the rights if it makes a move now.

PAL Express giving up its UAE rights would increase the pool of available UAE rights to 14. With 14 rights available, Cebu Pacific would likely receive seven and PAL the other seven, enabling PAL to either take over PAL Express’ Dubai flight or add a second daily flight to Abu Dhabi.

Philippines-UAE market has become a high stakes chess game

Clearly there is a lot at play – and at stake. The ball is primarily in PAL’s court as it has several options for the Middle East component of its new business plan.

An expanded partnership with Etihad is highly likely as it would be a win-win for both carriers. Manila is Etihad’s second largest international market after Bangkok. As an added incentive Etihad would be able to potentially increase its share of the Philippine market at the expense of Emirates.

The best scenario for Emirates – and Filipino consumers – would be an expansion of the UAE-Philippines bilateral. But that is far from guaranteed, as the Philippines will also take into account what it sees as being in the best interests of its airlines.

Qatar so far has been unable to get the seven additional traffic rights that would allow it to revert back to its original double daily Manila schedule. It will be fascinating to see if Emirates can avoid a similar fate.

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