Cebu Pacific Would Benefit From Tigerair Purchase

With increasing congestion at Ninoy Aquino International Airport and limited slots available at the country's main international gateway, Cebu Pacific has much to gain from a possible acquisition of Tigerair Philippines.

tigerair cebu pacific
Copyright Photo: Angelo Agcamaran/PPSG
As few slots are available to airlines at Ninoy Aquino International Airport, airlines have been forced to explore mergers and acquisitions as a means to expand their presence in Manila. According to industry experts, mergers and acquisitions are the only way forward for the country's current players in the aviation industry.

"It's a classic move. Mergers and acquisitions are a way of expanding the operation of the company," said Avelino Zapanta, President of Seair International. "They will win additional slots because there's congestion and slotting problems in Manila." He added that with a possible acquisition of Tigerair Philippines, Cebu Pacific would enjoy a windfall of new slots.

Zapanta indicated that Cebu Pacific is replicating a move made by AirAsia Philippines earlier this year which saw the budget carrier make an investment and form a strategic alliance with Zest Air in an effort to gain slot access at Ninoy Aquino International Airport. AirAsia Philippines was previously confined to operations at Clark International Airport. 

In addition to slots at the congested airport in Manila, an acquisition of Tigerair Philippines would also help Cebu Pacific to gain access to additional local and foreign traffic rights as well as destinations. By acquiring Tigerair Philippines, Cebu Pacific would gain access to the airline's routes, aircraft, and passengers. 

Tigerair currently flies to Cebu, Bacolod, Iloilo, Davao, Kalibo, and Puerto Princesa from Manila. The airline recently ended services to Tacloban and Phuket, Thailand. From Clark International Airport, Tigerair flies to Bangkok, Hong Kong, Singapore, Davao and Kalibo. The budget carrier maintains an Airbus fleet of five aircraft including two A319 and three A320. 

Cebu Pacific currently serves 24 international destinations and 33 domestic destinations from hubs in Cebu, Clark, Kalibo, Iloilo, Davao, and Manila using its fleet of 48 aircraft. As Cebu Pacific flies similar aircraft as those in the Tigerair fleet, both airlines will be able to cut costs by sharing aircraft, integrating operations, and expanding routes. The Executive Director of the Civil Aeronautics Board Carmelo Arcilla believes that the country's airline industry is very competitive and that integration is the name of the game for airlines that want to achieve economies of scale and savings. 

Most of the airlines in the Philippines are currently not profitable as there are too many low-cost carriers leading to over-capacity and irrational competition in the market. The trend in the aviation industry is towards consolidation to improve operating performance and boost profits while expanding market share. 

According to the Centre for Asia-Pacific Aviation, mergers and acquisitions will continue in the Philippine aviation industry where the market is saturated with low cost carriers and operations are not sustainable. Conditions improved last year when AirAsia Philippines acquired a 40 percent stake in Zest Air which led to the formation of AirAsia Zest. That reduced the number of budget carriers competing in the domestic market down to four including Cebu Pacific, PAL Express, Tigerair, and AirAsia Zest. 

There is presently an 84 percent penetration rate by low-cost carriers in the Philippines which is considered high in the industry and well above other countries in the Asia-Pacific region such as Thailand at 58 percent and Malaysia at 49 percent. Singapore based Tiger Airways Holdings which owns a 40 percent share in Tigerair Philippines might be relieved at the opportunity to sell its entire stake or partner with an established local carrier like Cebu Pacific since its Philippine affiliate has not posted a profit since it launched in late 2010. Tiger Airways Holdings has recorded millions of dollars in losses over the years related to its investment in Tigerair Philippines. 

However, regardless if a deal with Cebu Pacific pushes through or not, Tigerair Philippines and its Singapore parent remain optimistic about the future in the hopes that the airline will eventually become profitable. Tigerair has struggled to carve a profitable niche for itself in the Philippine market where it was not one of the first budget carriers to enter the market. The group believes that prospects in 2014 look much stronger with the consolidation of AirAsia and Zest Air as well as the shifting of PAL Express from a budget carrier into a full-service regional subsidiary. In addition, the carrier is banking on the opening of the Japanese market to bolster its international operations as well as new routes to China and South Korea. Tigerair Philippines may accept delivery of 2 to 3 new aircraft to support its new flights in 2014. The airline hopes to launch new routes to Japan by the end of the second quarter of 2014 as well as a new route to Macau in the first quarter. 

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