Cebu Pacific's Long-Haul Operations Struggling
A recent report published by the Centre for Asia-Pacific Aviation reveals that Cebu Pacific's long-haul operations are not performing well suffering from over capacity in the Philippines - United Arab Emirates market.
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| Copyright Photo: Angelo Agcamaran/PPSG |
Cebu Pacific revealed early in 2012 that it would be expanding its successful budget domestic and regional operations into the long-haul sector using a fleet of 436-seat Airbus A330-300 aircraft. The aircraft happen to be the most densely configured A330 aircraft in the world just four seats shy of the aircraft's maximum design capability. In January 2013, Cebu Pacific announced its first long-haul route to Dubai. It began selling fares as low as one peso. After taxes and fees, you could fly to Dubai for around Php 10,000 round-trip. However, meals, baggage, and seat selection would be additional charges.
Cebu Pacific scheduled for the route to launch on October 7, 2013 giving approximately nine months of lead time in which to generate sales. However, the route's performance in the first month of operations was rather disappointing. In a presentation disclosing its third quarter performance for 2013, Cebu Pacific revealed that its average load factor on the Manila-Dubai route was only about 36 percent for the first month of operation. With its daily flights, the airline carried only about 10,000 passengers between Manila and Dubai when more than 26,000 seats were available for sale. In mid-November 2013, the airline disclosed that advance bookings for the next three months were relatively weak with only 20 percent of available seats sold.
Although the route's performance has improved since the end of November 2013 with much higher loads and some flights even completely full, some industry observers can't help but be sceptical given that December and January are peak months for travel as overseas Filipino workers return home for the holidays. The public will receive more insight into the carrier's performance over the holiday season when the airline reveals its 2013 fourth quarter performance some time in February 2014.
If there is any time that Cebu Pacific will need to prove itself on the route is in February and March which are the lean months just prior to the Easter peak season. Cebu Pacific's poor performance was impacted heavily by the return of Philippine Airlines to the United Arab Emirates. On October 1, 2013, Philippine Airlines launched direct service between Manila and Abu Dhabi while PAL Express launched service to Dubai competing directly with Cebu Pacific on November 6. Both Philippine Airlines and PAL Express have been dumping in low fares into the market but unlike Cebu Pacific, fares at Philippine Airlines include meals and baggage allowance. In spite of all the Philippine carriers offering low promotional fares in an attempt to stimulate demand, the plan failed to generate positive results as October is a weak month.
The Philippines-United Arab Emirates market is already served by full-service carriers Emirates and Etihad. When Cebu Pacific announced its intention to serve Dubai, it estimated that the market was under-served with 70 percent of passengers travelling between Dubai and Manila purchasing one-stop flights rather than flying direct. However, what Cebu Pacific may have not foreseen is the entry of Philippine Airlines that decided to join Cebu Pacific in the market at practically the same time. This is in addition to Emirates adding a new daily service from Dubai to Clark which added further competition. With Philippine Airlines, PAL Express, and Cebu Pacific all entering the market at once, what was once an under-served market quickly became an over-served market. To complicate matters further, the smaller off-peak market was split between three different airlines all trying to serve a similar catchment area. Although Philippine Airlines flew to Abu Dhabi rather than Dubai which is served by PAL Express, both Dubai and Abu Dhabi airports serve a similar catchment area with each airport being only 150 kilometres apart.
Outside of the peak season, it is challenging for airlines to generate profits. Unlike its full-service competitor Emirates, both Philippine Airlines and Cebu Pacific do not have the ability to sell flights beyond the UAE putting both Philippine carriers at a competitive disadvantage. Emirates is able to pick up traffic in Manila and connect passengers to an extensive number of destinations in its world-wide network through its hub in Dubai. The Philippine carriers have little to offer in the way of connections for passengers from the UAE in a market that is dominated by migrant worker traffic.
The United Arab Emirates boasts a population of nearly 700,000 overseas Filipino workers. It is the fourth largest overseas Filipino community after the United States, Canada, and Saudi Arabia. The migrant worker traffic that dominates the market fluctuates dramatically and cab be highly unbalanced with traffic often heading in one direction only. Both Etihad and Emirates have a distinct advantage over their Philippine competitors as they are able to fill their capacity from Manila serving other markets such as traffic between Manila and Europe. Philippine Airlines and Cebu Pacific are limited to connections beyond Manila with most passengers headed to domestic destinations.
Since PAL Express did not enter the Dubai market until the beginning of the peak season, the full impact of this extra competition will not be felt by Cebu Pacific until peak season ends which happens towards the end of January. Cebu Pacific has already cut back service for January and February 2014 down to five weekly flights from its previous daily schedule. In March, six weekly flights will be offered before the route returns to daily service in preparation for Easter. However, it is likely that frequencies will be cut once again according to seasonal demand. In spite of the cuts in service, fares on the route remain incredibly low. The capacity reductions and the low fares are an indication of weak demand. There is a strong possibility of a return of the unfavourable conditions experienced by Cebu Pacific in its first month of operations on the Manila-Dubai route. But this time, such conditions may be even worse given that PAL Express is now competing on the route as well.
Cebu Pacific's weak performance in the Dubai-Manila market in spite of a long lead time for sales is a reflection that the carrier is still educating itself on the unique characteristics of this complex migrant worker market as well as agent purchasing patterns. Although Cebu Pacific has experienced much success serving the large Filipino worker populations in several short-haul international destinations like Singapore and Hong Kong, these markets differ in that most tickets are purchased by workers independently. With long-haul destinations, the majority of purchasing is done through work contractors. Although Cebu Pacific had a head start on Philippine Airlines on the sale of tickets, it turned out to not be an advantage as most tickets sold in the market are purchased with short notice by the labour contractors. Only a handful of Filipinos buy their own tickets and that is in spite of Cebu Pacific trying to stimulate demand with low advance purchase fares.
Whether Cebu Pacific will simply reduce capacity to deal with seasonal fluctuations or drop out of the Dubai market completely in favour of more profitable long-term destinations remains to be seen. The inability of the airline to stimulate new demand in the market with low fares is not an encouraging sign. Perhaps if one Philippine carrier dropped out, the market would be more favourable. But until that happens, Cebu Pacific still has an opportunity to improve its performance if it can successfully tap into the contractors and agents that control the majority of the Philippines-UAE market. It seems that direct sales to these agents would be a better solution than focusing on its online sales. Unfortunately, whatever Cebu Pacific gains will come at PAL's loss and it is unlikely that both carriers will be able to sustain a presence of this size in the market with yields this low. The risk of large losses in the market is huge for Philippine carriers as they begin to realize that they cannot easily stimulate new demand by dumping in capacity and low fares. It will be a challenge to lure passengers away from competitively priced full service competitors and even if the Philippine carriers can, there are an insufficient number of passengers to go around in the off-season. In the end, Cebu Pacific might just decide that its long-haul aircraft are better invested elsewhere. With three more long-haul aircraft arriving this year, it's something that Cebu Pacific better figure out fast.
Cebu Pacific scheduled for the route to launch on October 7, 2013 giving approximately nine months of lead time in which to generate sales. However, the route's performance in the first month of operations was rather disappointing. In a presentation disclosing its third quarter performance for 2013, Cebu Pacific revealed that its average load factor on the Manila-Dubai route was only about 36 percent for the first month of operation. With its daily flights, the airline carried only about 10,000 passengers between Manila and Dubai when more than 26,000 seats were available for sale. In mid-November 2013, the airline disclosed that advance bookings for the next three months were relatively weak with only 20 percent of available seats sold.
Although the route's performance has improved since the end of November 2013 with much higher loads and some flights even completely full, some industry observers can't help but be sceptical given that December and January are peak months for travel as overseas Filipino workers return home for the holidays. The public will receive more insight into the carrier's performance over the holiday season when the airline reveals its 2013 fourth quarter performance some time in February 2014.
If there is any time that Cebu Pacific will need to prove itself on the route is in February and March which are the lean months just prior to the Easter peak season. Cebu Pacific's poor performance was impacted heavily by the return of Philippine Airlines to the United Arab Emirates. On October 1, 2013, Philippine Airlines launched direct service between Manila and Abu Dhabi while PAL Express launched service to Dubai competing directly with Cebu Pacific on November 6. Both Philippine Airlines and PAL Express have been dumping in low fares into the market but unlike Cebu Pacific, fares at Philippine Airlines include meals and baggage allowance. In spite of all the Philippine carriers offering low promotional fares in an attempt to stimulate demand, the plan failed to generate positive results as October is a weak month.
The Philippines-United Arab Emirates market is already served by full-service carriers Emirates and Etihad. When Cebu Pacific announced its intention to serve Dubai, it estimated that the market was under-served with 70 percent of passengers travelling between Dubai and Manila purchasing one-stop flights rather than flying direct. However, what Cebu Pacific may have not foreseen is the entry of Philippine Airlines that decided to join Cebu Pacific in the market at practically the same time. This is in addition to Emirates adding a new daily service from Dubai to Clark which added further competition. With Philippine Airlines, PAL Express, and Cebu Pacific all entering the market at once, what was once an under-served market quickly became an over-served market. To complicate matters further, the smaller off-peak market was split between three different airlines all trying to serve a similar catchment area. Although Philippine Airlines flew to Abu Dhabi rather than Dubai which is served by PAL Express, both Dubai and Abu Dhabi airports serve a similar catchment area with each airport being only 150 kilometres apart.
Outside of the peak season, it is challenging for airlines to generate profits. Unlike its full-service competitor Emirates, both Philippine Airlines and Cebu Pacific do not have the ability to sell flights beyond the UAE putting both Philippine carriers at a competitive disadvantage. Emirates is able to pick up traffic in Manila and connect passengers to an extensive number of destinations in its world-wide network through its hub in Dubai. The Philippine carriers have little to offer in the way of connections for passengers from the UAE in a market that is dominated by migrant worker traffic.
The United Arab Emirates boasts a population of nearly 700,000 overseas Filipino workers. It is the fourth largest overseas Filipino community after the United States, Canada, and Saudi Arabia. The migrant worker traffic that dominates the market fluctuates dramatically and cab be highly unbalanced with traffic often heading in one direction only. Both Etihad and Emirates have a distinct advantage over their Philippine competitors as they are able to fill their capacity from Manila serving other markets such as traffic between Manila and Europe. Philippine Airlines and Cebu Pacific are limited to connections beyond Manila with most passengers headed to domestic destinations.
Since PAL Express did not enter the Dubai market until the beginning of the peak season, the full impact of this extra competition will not be felt by Cebu Pacific until peak season ends which happens towards the end of January. Cebu Pacific has already cut back service for January and February 2014 down to five weekly flights from its previous daily schedule. In March, six weekly flights will be offered before the route returns to daily service in preparation for Easter. However, it is likely that frequencies will be cut once again according to seasonal demand. In spite of the cuts in service, fares on the route remain incredibly low. The capacity reductions and the low fares are an indication of weak demand. There is a strong possibility of a return of the unfavourable conditions experienced by Cebu Pacific in its first month of operations on the Manila-Dubai route. But this time, such conditions may be even worse given that PAL Express is now competing on the route as well.
Cebu Pacific's weak performance in the Dubai-Manila market in spite of a long lead time for sales is a reflection that the carrier is still educating itself on the unique characteristics of this complex migrant worker market as well as agent purchasing patterns. Although Cebu Pacific has experienced much success serving the large Filipino worker populations in several short-haul international destinations like Singapore and Hong Kong, these markets differ in that most tickets are purchased by workers independently. With long-haul destinations, the majority of purchasing is done through work contractors. Although Cebu Pacific had a head start on Philippine Airlines on the sale of tickets, it turned out to not be an advantage as most tickets sold in the market are purchased with short notice by the labour contractors. Only a handful of Filipinos buy their own tickets and that is in spite of Cebu Pacific trying to stimulate demand with low advance purchase fares.
Whether Cebu Pacific will simply reduce capacity to deal with seasonal fluctuations or drop out of the Dubai market completely in favour of more profitable long-term destinations remains to be seen. The inability of the airline to stimulate new demand in the market with low fares is not an encouraging sign. Perhaps if one Philippine carrier dropped out, the market would be more favourable. But until that happens, Cebu Pacific still has an opportunity to improve its performance if it can successfully tap into the contractors and agents that control the majority of the Philippines-UAE market. It seems that direct sales to these agents would be a better solution than focusing on its online sales. Unfortunately, whatever Cebu Pacific gains will come at PAL's loss and it is unlikely that both carriers will be able to sustain a presence of this size in the market with yields this low. The risk of large losses in the market is huge for Philippine carriers as they begin to realize that they cannot easily stimulate new demand by dumping in capacity and low fares. It will be a challenge to lure passengers away from competitively priced full service competitors and even if the Philippine carriers can, there are an insufficient number of passengers to go around in the off-season. In the end, Cebu Pacific might just decide that its long-haul aircraft are better invested elsewhere. With three more long-haul aircraft arriving this year, it's something that Cebu Pacific better figure out fast.
Actually, PAL Express should just drop out of this route.... they are probably operating this route at a loss as well and probably at a far worse level than Cebu Pacific. After all Cebu Pacific as a whole is the only carrier that is making money in the Philippines... other airlines are operating at a loss. That is one reason Ramon Ang might be thinking of selling his shares at PAL, and Lucio Tan refuses to infuse further into the carrier.
ReplyDeleteThis dismal average load factor of Cebu Pacific will reflect the future long haul operations especially during seasonal months. While Cebu Pacific has no plans of introducing premium economy, I don't think this might be workable for all of A333s considering the length of the route and "hours" of the flight especially to North America (which is beyond A333's range). Bit worrying indeed.
ReplyDeleteBetter yet, Cebu Pacific must focus more with improving their services on the Philippine, Southeast Asian, and East Asian market. After all, they were proved to be stronger on profitability on these routes rather than Philippine Airlines. I believe Philippine Airlines fits on serving passengers internationally having the carrier being long experienced for decades on the world market. As for now, it will only be an adjustment stage for Cebu Pacific on how they can successfully manage long haul operations on the Dubai-Manila route which will prove if they can expand their flight network decently.
ReplyDeleteDismal load factor of 5J is reflected in the reduction of frequency, from daily flights down to 5x week. Not to mention the disgusting feedback from pax who flew with them. PR/2P flights to DXB are doing pretty well and this is reflected in their continuous expansion to middle east flighys .
ReplyDelete