Sunday, February 23, 2014

Philippine Airlines: Cambodia Deal Still Open

Philippine Airlines has revealed that it intends to pursue its plan to invest in Cambodia Airlines in spite of warnings from industry experts that the Cambodia market is already adequately served.

pal cambodia
"The first incarnation of Cambodia Airlines in 1997"
Image Source: Wikimedia
In a disclosure submitted to the stock exchange, Philippine Airlines declared that ongoing preparations were in progress for the completion of the contemplated joint venture agreement between Philippine Airlines and Cambodia Airlines. 

Last month, PAL President Ramon Ang indicated that the company was going to review its planned investment due to lingering political instability in Cambodia as it was unclear whether the project was still viable. Under the proposed deal, Philippine Airlines would team up with the Royal Group of Cambodia to establish its first international airline to be known as Cambodia Airlines. The airline would fly to regional destinations in Asia as well as domestic routes in Cambodia. 

In exchange for a $10 million investment, Philippine Airlines would receive a 49-percent stake in the new company and would expect to boost annual revenues by $300 to $400 million under the deal. The original down payment was scheduled to be paid in July 2013 but the project has suffered from continuous delays.

Meanwhile, the Centre for Aviation, a leading industry analyst, believes that Cambodia's aviation sector does not need a second domestic carrier. In a report published earlier this month, CAPA cited Cambodia's unchanged domestic passenger figures and the low average income level in the country that suggest a new airline is not necessary.

According to the report, Cambodia's domestic passenger traffic figures have been relatively flat since 2007, when Cambodia was home to four different carriers which are now all defunct. With Cambodia's sole existing full-service carrier, Cambodia Angkor Air, expanding international capacity by more than seventy percent in the last year alone, there is little room for additional capacity from new carriers. Furthermore, Cambodia is already well served by 27 foreign carriers representing approximately 84 percent of Cambodia's international seat capacity. 

Although opportunities may exist for new services, there is little evidence to suggest the need for a new Cambodian carrier. Philippine Airlines has been considering transferring two aircraft from its Bombardier Dash 8 turbo-prop fleet to launch domestic services competing with Cambodia Angkor Air's traditional routes to Sihanoukville and Siem Reap. The carrier would also launch service to Battamabang and Ratanakkiri provinces. However, CAPA believes that domestic destinations are not large enough to support 50 to 70 seat aircraft and that smaller 19 or 30 seat aircraft are a more logical choice. 

While the Dash 8 aircraft would be suitable for short-haul international markets such as Vietnam, Laos, and Thailand, these markets are already highly competitive and domestic markets could prove to be even more challenging. Cambodia Airlines was also planning to acquire two Airbus A321 aircraft for international operations from PAL's batch of existing orders. 

The decision of Philippine Airlines to proceed with the project is certainly a cause of concern particularly given the weak prospects of the venture. The CAPA report suggested that abandoning the project would be a good move for Philippine Airlines, which already faces struggles of its own attempting to restore profitability in the highly competitive and price-sensitive Philippine market. In its report, CAPA suggested that Philippine Airlines would be much better off focusing on reducing expenditures and improving profitability of its own operations in the Philippines rather than playing in the Cambodian market. 

CAPA added that Philippine Airlines needs to focus on maturing each one of its new markets and building Manila into a stronger hub. In addition, PAL will need to establish new partnerships in order to help market and ensure the long term viability of its new long-haul flights particularly to London. It is the only way that PAL will be able to successfully expand its network. With the absence of a global airline alliance membership and a very limited number of codeshare partners, developing a partnership portfolio is far more important for Philippine Airlines rather than attempting to build an empire with overseas affiliates.

The Centre for Aviation made its position very clear that while Cambodia is a growing market, the opportunities are very small and the existing market can barely support additional capacity to the Philippines without even considering the prospects of a new full-service carrier. CAPA believes that PAL should avoid revisiting any Cambodian project or pursuing any other overseas joint ventures. However, the latest disclosure at the stock exchange suggests that Philippine Airlines executives believe otherwise and has every intention of pursuing the project in spite of the limited demand, market potential and high risk involved. 

Brendan Sobie, Chief Analyst at CAPA, suggested that political unrest in Cambodia will have little influence on the aviation sector. In an interview with Cambodian media, Sobie indicated that the market could sustain political blips. "Political instability could create a blip, but as the tourism industry in neighbouring Thailand has proven again and again, the market will likely recover," said Sobie. "So far, tourists have shown no signs of cancelling trips to Cambodia, despite the recent protests." In spite of continuing garment worker demonstrations and violence, tourist arrivals at Siem Reap and Phnom Penh airports have actually increased by twenty-five percent. 

Although Ramon Ang previously suggested hesitation with the project, David Pearson, Group Controller at the Royal Group of Cambodia, indicated that the project was still on track and very close to being finalised in spite of the original comments made by Ang. "We are in regular discussion with PAL on the project," said Pearson. "Given the information in the reports, it would be foolish of me to give a concrete date and discussions need to be had with PAL to find out what the direction is." Pearson added that although Cambodia Angkor Air's service is good, competition is healthy and that another locally based domestic and international carrier would be good for the Cambodian aviation market. 

Pearson remains confident in the launch of a new full-service domestic carrier in spite of Cambodia Angkor Air's monopoly on the market and it seems that Philippine Airlines is confident as well. PAL Express recently announced that it would be cutting a number of inter-island services in the Philippines in order to "further improve fleet performance." However, one can't help to wonder if PAL is preparing for a deployment of two of its Bombardier Dash 8 turbo-prop aircraft to Cambodia. 


1 comments :

  1. Not need a second airlines? Cambodia needs a real airlines. Currently its a 4 to 6 hour dangerous bus/taxi ride to the beach's at Sihanoukville. It should be noted that Sihanoukville is the only city/town in Southeast Asia that you can walk out of a Casino onto a white sand beach. Cambodia Angkor Air is owned by the Vietnamese and they don't want to fly people to the Cambodian coast/beachs, but to their new international airport in Vietnam just south of Sihanoukville. Sihanoukville could become an international destination like Ko Samui with scheduled jet service. Sihanoukville to China, Sihanoukville to Singapore, Sihanoukville to Bangkok. Take Ko Samui/Bangkok Air as an example of a beach destination served by a real airlines. Phnom Penh is a dead end for tourist's., and that leave Angkor Wat and Sihanoukville with its beach's/islands as an overlooked major tourist destination. Phnom Penh would only be good for people changing planes from China, Manila, Singapore, Japan, etc to fly to Angkor Wat/Sihanoukville.

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