Philippine Airlines Faces Challenges from European Carriers in Europe
Following the announcement that Philippine Airlines would be permitted to return to Europe, the airline has been busily working to prepare its first two European routes which they hope to launch before the end of 2013. But before Philippine Airlines can have an opportunity to launch its first flight, other European carriers are already plotting their moves to solidify their positions in the market.
The low cost carriers of Asia are closely monitoring Norwegian's long haul routes to determine if it is possible for an airline to operate long-haul routes between Europe and Southeast Asia profitably utilizing a Boeing 787. If Norwegian proves that the model can work, AirAsia X may decide to re-enter the market. Cebu Pacific is certainly keeping a close eye on the operation as is Philippine Airlines as both of the Philippine carriers prepare to expand their global long haul networks. Both carriers are expected to place further orders for long haul aircraft and the Boeing 787 is currently one of the models being evaluated alongside the Airbus A350. Cebu Pacific has its own ambitions of launching low-cost long haul services to Europe and is preparing to test its own model on routes to the Middle East.
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| Copyright Photo: Angelo Agcamaran/PPSG |
The eyes of the aviation industry have been on Norwegian Airlines, the first low cost carrier to serve the Europe-Southeast Asian market since AirAsia X pulled its services in 2011. The European low cost carrier launched services from Bangkok to Oslo and Stockholm in June 2013 making the airline the eighth European carrier to serve the Southeast Asian market.
Norwegian is trying to pioneer a low-cost model in the Europe-Asia Market
According to a CAPA Centre for Aviation Report, Norwegian is preparing big plans for the Southeast Asian market beginning with the opening of a base in Bangkok which may one day house additional routes to other parts of Europe. The airline's 11 hour flights between Bangkok and Sweden are some of the longest low-cost carrier routes in the world. Norwegian operates the flights using Airbus A340-300 aircraft. The four engined aircraft is the same type that AirAsia X used on its unprofitable services from Kuala Lumpur to Paris and London.
AirAsia X discovered that it was nearly impossible to operate long-haul low-cost routes profitably with a four-engined aircraft at current fuel rates. The challenge that low cost carriers face on penetrating the long-haul market is that fuel represents such a significant portion of total costs that it is difficult for the low cost airlines to generate a sufficient cost advantage over full service carriers to undercut them profitably.
What will distinguish Norwegian's efforts from previously failed attempts is that the airline eventually intends to transition its long-haul flights to the more efficient Boeing 787 aircraft. The carrier originally planned to launch its long-haul flights with the 787 but delivery delays prevented the plan from pushing through. Norwegian finally took delivery of the first of eight Boeing 787-8 aircraft on June 28, 2013. The aircraft are temporarily operating routes within Europe before they are transferred to long-haul routes replacing the A340.
Norwegian is trying to pioneer a low-cost model in the Europe-Asia Market
According to a CAPA Centre for Aviation Report, Norwegian is preparing big plans for the Southeast Asian market beginning with the opening of a base in Bangkok which may one day house additional routes to other parts of Europe. The airline's 11 hour flights between Bangkok and Sweden are some of the longest low-cost carrier routes in the world. Norwegian operates the flights using Airbus A340-300 aircraft. The four engined aircraft is the same type that AirAsia X used on its unprofitable services from Kuala Lumpur to Paris and London.
AirAsia X discovered that it was nearly impossible to operate long-haul low-cost routes profitably with a four-engined aircraft at current fuel rates. The challenge that low cost carriers face on penetrating the long-haul market is that fuel represents such a significant portion of total costs that it is difficult for the low cost airlines to generate a sufficient cost advantage over full service carriers to undercut them profitably.
What will distinguish Norwegian's efforts from previously failed attempts is that the airline eventually intends to transition its long-haul flights to the more efficient Boeing 787 aircraft. The carrier originally planned to launch its long-haul flights with the 787 but delivery delays prevented the plan from pushing through. Norwegian finally took delivery of the first of eight Boeing 787-8 aircraft on June 28, 2013. The aircraft are temporarily operating routes within Europe before they are transferred to long-haul routes replacing the A340.
The Boeing 787 Might Make Budget Long-Haul Routes Viable
The low cost carriers of Asia are closely monitoring Norwegian's long haul routes to determine if it is possible for an airline to operate long-haul routes between Europe and Southeast Asia profitably utilizing a Boeing 787. If Norwegian proves that the model can work, AirAsia X may decide to re-enter the market. Cebu Pacific is certainly keeping a close eye on the operation as is Philippine Airlines as both of the Philippine carriers prepare to expand their global long haul networks. Both carriers are expected to place further orders for long haul aircraft and the Boeing 787 is currently one of the models being evaluated alongside the Airbus A350. Cebu Pacific has its own ambitions of launching low-cost long haul services to Europe and is preparing to test its own model on routes to the Middle East.
Other low cost carriers including Jetstar and Scoot already have the 787 aircraft on order. Each may look at launching new European services from their base in Singapore if the model is proven to be successful. Meanwhile, the region's low cost airlines continue to focus flights within Asia-Pacific and to the Middle East. There are also rumours that Lufthansa is contemplating the possibly of launching a long-haul low cost carrier to Southeast Asia. Such a move could prompt increased competition and other new entrants.
Norwegian's fares from Bangkok are competitively priced at approximately EUR200 each way including taxes for off-season travel. Although the airline's relatively small presence in the market with just six weekly flights is likely not to threaten full-service carriers, the prospect of the model being successful poses a greater threat as an increased presence would inevitably follow. As a market, Bangkok is huge for inbound leisure travellers but yields to and from Europe are often very low. If such a market was to develop in the Philippines, Philippine Airlines would have a challenge competing profitably if it was unable to improve its product or significantly reduce its fares in this price sensitive market. Another advantage for Norwegian is its ability to offer a wide array of connections throughout Europe from its hubs in Oslo and Stockholm.
Norwegian's fares from Bangkok are competitively priced at approximately EUR200 each way including taxes for off-season travel. Although the airline's relatively small presence in the market with just six weekly flights is likely not to threaten full-service carriers, the prospect of the model being successful poses a greater threat as an increased presence would inevitably follow. As a market, Bangkok is huge for inbound leisure travellers but yields to and from Europe are often very low. If such a market was to develop in the Philippines, Philippine Airlines would have a challenge competing profitably if it was unable to improve its product or significantly reduce its fares in this price sensitive market. Another advantage for Norwegian is its ability to offer a wide array of connections throughout Europe from its hubs in Oslo and Stockholm.
Full Service European Legacy Carriers are keeping their eyes on the Market
Meanwhile, the full-service European legacy carriers continue to flex their muscle in the market. KLM remains the largest European airline in the Southeast Asian market based on capacity and the number of destinations. Although the carrier's fares are typically competitive, Norwegian is now the lowest fare provider. KLM is currently flying to six destinations in Southeast Asia including Manila which is served via Taipei. In the last year, Air France has increased its capacity to Southeast Asia by 29 percent with the introduction of new flights to Kuala Lumpur. The rising popularity of the Philippines as a tourism destination for the French might prompt a direct service to Manila in the future before Philippine Airlines can solidify its position. Air France is now the second largest European airline in the Europe-Asia market. Overall, European carriers combine for a 30% share of capacity in the market.
The on-going economic challenges in Europe have resulted in the weakening strength of the market with a number of European airlines reducing capacity in the last year. Both British Airways and Lufthansa have cut their capacity to Southeast Asia. Norwegian may prove that there is potential in the region with a low-cost model. But the path to profits will be challenging and competition will be intense for a model that has yet to be proven. For now, the other European carriers will continue to explore a growing market that they cannot afford to overlook. Unfortunately, low yields and the high cost structure of European airlines make expansion a risky venture.
Meanwhile, the full-service European legacy carriers continue to flex their muscle in the market. KLM remains the largest European airline in the Southeast Asian market based on capacity and the number of destinations. Although the carrier's fares are typically competitive, Norwegian is now the lowest fare provider. KLM is currently flying to six destinations in Southeast Asia including Manila which is served via Taipei. In the last year, Air France has increased its capacity to Southeast Asia by 29 percent with the introduction of new flights to Kuala Lumpur. The rising popularity of the Philippines as a tourism destination for the French might prompt a direct service to Manila in the future before Philippine Airlines can solidify its position. Air France is now the second largest European airline in the Europe-Asia market. Overall, European carriers combine for a 30% share of capacity in the market.
The on-going economic challenges in Europe have resulted in the weakening strength of the market with a number of European airlines reducing capacity in the last year. Both British Airways and Lufthansa have cut their capacity to Southeast Asia. Norwegian may prove that there is potential in the region with a low-cost model. But the path to profits will be challenging and competition will be intense for a model that has yet to be proven. For now, the other European carriers will continue to explore a growing market that they cannot afford to overlook. Unfortunately, low yields and the high cost structure of European airlines make expansion a risky venture.
Competitive Pricing is key to the success of Philippine Airlines
Meanwhile, Asian and Gulf carriers will continue to serve the majority of passengers travelling between Europe and Southeast Asia. As for Philippine Airlines, the outlook is promising but challenging all at the same time. The airline lacks any strategic alliances and competition from established carriers with superior products will squeeze the airline's chances at profitability. According to a former travel agent in London that has specialized in the Philippine market, Philippine Airlines will need to be able to offer a fare between £500-£600 in order to establish itself on the highly competitive route where the carrier faces competition from European, Asian, and Middle Eastern carriers. But whether such a fare can be sustained profitably remains to be seen. The advantage Philippine Airlines will have is that it will operate the only non-stop services between Manila and cities in Europe. The real question is for how long.
Meanwhile, Asian and Gulf carriers will continue to serve the majority of passengers travelling between Europe and Southeast Asia. As for Philippine Airlines, the outlook is promising but challenging all at the same time. The airline lacks any strategic alliances and competition from established carriers with superior products will squeeze the airline's chances at profitability. According to a former travel agent in London that has specialized in the Philippine market, Philippine Airlines will need to be able to offer a fare between £500-£600 in order to establish itself on the highly competitive route where the carrier faces competition from European, Asian, and Middle Eastern carriers. But whether such a fare can be sustained profitably remains to be seen. The advantage Philippine Airlines will have is that it will operate the only non-stop services between Manila and cities in Europe. The real question is for how long.
The title reads "Philippine Airlines faces challenges from European carriers" BUT is this really so? Yes, Norwegian will expand in Southeast Asia through a hub in Bangkok and there might "some day" be a possibility that Norwegian will fly to the Philippines, but if they do then it will not have a major influence on the performance of Philippine Airlines, even if Norwegian was to fly daily non-stop to Europe. Others have tried to hop on the long-haul, low cost bandwagon, such as Laker Airways, PEOPLExpress, Air Asia-X, etc… and failed.
ReplyDeleteAs for the European legacy carriers, well, they are certainly keeping an eye on the market but whether or not they will come back to the Philippines is the big question. Over the past decades, rather than introducing new services, airlines such as Sabena of Belgium, Air France, Lufthansa, Scandinavian SAS and British Airways have stopped flying to the Philippines all together. It is generally known that aircraft that are away for longer than 24 hours from their home base, barely make any money. This can also be seen with European carriers who have significantly reduced flights to/from Australia, or have stopped flying there for just the same reason, preferring to “code-share” with carriers such as Qantas.
KLM
Of the legacy carriers, KLM may be the first or only one who may fight back. When KLM was flying daily non-stop to the Philippines, they were barely making money on the route. Imposing a 3 percent common carriers tax and the 2.5 percent on gross Philippine billings to all airlines by the Phil. government was too much for them. Why would the Philippines (that is trying to attract more tourists to the country) raise taxes to airlines? There are those that say that it was done to chase away foreign airlines and allow Philippine carriers to take their place. Whatever the reason, KLM reacted by significantly reducing the amount of seats available on the Amsterdam-Manila route, instead choosing to fly via Taipei. KLM may decide to offer non-stop flights again some day to countermeasure PAL’s decision to fly to Amsterdam, unless perhaps they decide to work together?
Does PAL have a fighting chance against European carriers?
I certainly think so. To begin with, Europe is in full recession, including it’s airlines who are scrambling to cut costs. For the moment they may not be anxious to jump into new “endeavors”, which is an advantage for PAL. Airlines basically have the same costs when it comes to aircraft financing, spare parts, the service equipment/meals on board, fuel prices, etc… but another advantage for PAL is it’s lower labor costs. This is a very important factor and may make all the difference.
Does PAL need a strategic alliance?
I don’t think so. At least not right away. Balikbayans are all over the world, and certainly in Europe as well. PAL of course plays into that market. There are of course limits to the number of flights that can be offered. At a certain point PAL may want to expand and search for new markets. At this point creating alliances with other airlines can be used to feed PAL’s network, attracting not only other Balikbayans but badly needed tourists as well.
Filipinos will not bother to make an extra stop if the ticket is cheaper. I really think PAL can be successful if they keep their prices at or below the competition. The greatest competition will not be from the Europeans, but rather from the heavily sponsored Gulf carriers.
Just my two cents...
European carriers may not presently be a direct risk to Philippine Airlines. However, we can't assume either that PAL can sustain such routes on O&D traffic alone. They will want to capture some of the Europe-Asia/Australia traffic as well using Manila as a transit hub.
DeleteThe goal of this article was to highlight the activities of European carriers and the role they play in the Europe-Asia sector. Another article will be dedicated to the stronger Middle Eastern carriers and the direct risk that they pose to PAL.
It's hard to say how much of a risk European carriers present to PAL but given that the routes already seem thin with tight margins, even the smallest indirect competition from the European carriers will make all of the difference to PAL's business.
The majority of European carriers may not fly direct to Manila but you can still book tickets with them to Manila as they partner with other carriers including Philippine Airlines to carry their passengers from Hong Kong, Singapore, and Bangkok on to Manila. Let's not underestimate the loyalty of the European market to their respective flag carriers and their alliance partners.
thanks for the comment, its writer apparently has a better knowledge of the workings of the aviation industry than the original writer; missing out on the reason of KLM´s stopping their non-stop flight from Amsterdam to Manila is a cardinal sin....and to my knowledge even a challenge that PAL has yet to overcome....hopefully just another phonecall from Mr. Ang to PNoy is all it takes to remedy this....PPP finally coming alive...
ReplyDeleteThe Common Carrier Tax was already axed in March of this year and therefore should not play a role which is why it was not included in the article. In spite of the removal of the tax, KLM has yet to reinstate non-stop service suggesting that may have not been the sole reason for departing their direct route to Manila.
DeleteRead More Here: http://www.rappler.com/business/23289-philippines-aquino-foreign-airlines-common-carriers-tax-law
I think PAL has got a great chance to win on these EU routes if it could muster more fuel efficient aircraft to service these routes, create alliances with other EU airlines to feed it's network from say London / Amsterdam / Paris / Rome, etc. I agree with the £500-600 fare bracket. For a price sensitive market of Filipinos and tourists, this is just about the limit with the kind of service and facilities available with PAL. There will be almost none of the first class segment as Manila is not a world business hub. A few business class seats for the occasional government official or businessman or celebrity will do. The main attraction will be the direct flight to Manila giving Filipinos extra precious time with their relatives during their very short visits. 12 hours flight mean additional time with families and relatives compared to arriving after a 24-30 hour flight due to a stopover along the way. The flight back may need only the same day, not two days taken off the holiday just because of another stop over that will eat up a day from their holiday. There is also the pride that a Filipino feels when he boards an aircraft from his own country. It feels like he is already in the Philippines. That is something that most foreigners will not understand - one word simply said... homesickness.. it's like an immediate cure. If PAL can tap into this.. it will surely make a good run on these routes to the EU.
ReplyDeleteAllan Marmita
Bravo!!!
DeleteThe title of this article is very misleading, PAL faces challenges from European carriers...but the writer was talking about Norwegian airlines half the time--and Norwegian does not even fly to Manila...so, how is that a threat to PAL? Hardly discussed the plans of Lufthansa, Air France, British Airways, and KLM to return to Manila. Fact is, PAL has more problems dealing with Middle East carries to Europe. European carriers are having problems of their own serving Asia as a whole.
ReplyDeleteUNTIL there is a European carrier that will fly direct to Manila--European carriers will NOT pose a threat to PAL. Middle East carriers do.
In my opinion I think that Philippine airlines will do just fine in Europe like London or Frankfurt because it offers direct flights to and from the Philippines. They need them b777-300er in Europe or order new aircraft to save fuel and efficiency also this will help boost profits and might help for passengers going transiting to Australia or some parts of Asia as long as the price is competitive.But I do hope that European carriers like Lufthansa or british airways go back to manila hopefully to compete with philippine airlines in the nearby future.
ReplyDeleteThis will help for Filipinos that wanna go a-b instead of doing a 1 stop or 2 stop and eating precious time on their holiday waiting at an airport
Some interesting comments here and I remember flying LHR to MNL non-stop in the late 1990s on one of the new PAL 340s...not an unpleasant flight by any means but 15 hrs or so with fairly basic service.
ReplyDeleteI have just been MNL-LHR-MNL on SQ for the equivalent of GBP800 - albeit with a bounce off SIN....but the SQ service can't really be faulted can it! Just today they have offered me the same 'from' GBP672 so they are taking the PAL threat seriously.
I think that the price PAL would need to arrive at would be no more than GBP500 if it is to succeed (but can they afford to operate at that cost) and I can see the likes of SQ dropping their price to around GBP600 to keep me (nice of them - but I am NOT the level of Krisflyer I once was).
The nonstop MNL-LON route (again) certainly appeals to me but I have less constraints on my time being retired. What is of interest is the lack of direct (re)action from the middle east airlines - Etihad is showing around are GBP875 whilst Emirates is nearer GBP1100 - maybe wait and see for them
I think it was a right decision to wait a certain time with the introduction of new legs to Europe and to focus on flights to middle east, canada and the us, where the biggest group of oversea filipinos work and live. In the meantime you can observe the markets and the development. I wish that the old terminals of NAIA airport will get improved.
ReplyDeleteyeah were's the middle east airlines in the topic? arent they the darlings of aircraft manufacturers because of their cash.. In my opinion PAL should thread lighty or carefully in europe. I consider europe a continent where filipino's are scattered around. i think its best if they determine where the majority of filipino's are? if it is in London and Paris then maybe as a starter is to fly there once a week to consolidate the number of travellers into one flight but if they also plan on targeting filipino's scatter all around europe then they better make sure their price is way competitive enough that a passenger would be willing to pay for plane ticket of another airline to travel to london or paris just to board a PAL Flight to manila is way cheaper than other airlines offering a one stop to manila.
ReplyDeleteThere will be another article completely dedicated to the stronger Middle Eastern carriers and the challenges that they pose to Philippine Airlines. The purpose of this article was merely to highlight the activities of the European carriers on the Europe-Asia sector and what role they may play as competition even if it is not direct.
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