Cebu Pacific Benefits Most from Aviation Industry Consolidation

With an estimated population of nearly 100 million people, the Philippines is set to become the sixteenth largest economy in the world and the largest in Southeast Asia by 2050 according to a HSBC report. The Philippine aviation sector has much to gain from the dynamic growth in the nation's economy with airline seat capacity growing as much as 18 percent in the last two years. This growth triggered the entry of a number of new entrants into the Philippine aviation market that resulted in irrational pricing, competition, and the eventual consolidation of the industry.

cebu pacific sharklets
Copyright Photo: Angelo Agcamaran/PPSG
According to HSBC, Cebu Pacific stands to gain the most from industry consolidation as airlines begin to operate in more favourable market conditions. "Industry consolidation and disciplined capacity growth together suggest a better operating environment for market leader Cebu Pacific Air," said the report.

Last year, AirAsia Philippines bought into Zest Air, which later rebranded as AirAsia Zest. In January 2014, Cebu Pacific revealed that it would be purchasing 100 percent of Tigerair Philippines. The two acquisitions have resulted in a positive environment and favourable conditions on the yield outlook. With Cebu Pacific's most recent acquisition of Tigerair, capacity in the market is now rationalized and resources can be deployed more efficiently.

However, while the report suggests a better operating environment for Cebu Pacific, it also predicts near-term negative earnings at the carrier resulting from its recently launched long-haul services to Dubai. The authors of the report suggest that Cebu Pacific will need some time to make up for its investment in long-haul which is not currently performing as well as expected. The report cites a weakening peso, higher fuel prices, and lower usage of the long-haul flights as threats to Cebu Pacific's profit projections.

Cebu Pacific - Philippine Airlines Duopoly Threatens Competition

Smaller carriers including Seair International are concerned that the increasing dominance of Cebu Pacific with the acquisition of Tigerair Philippines will leave the country with a duopoly that fails to maintain healthy competition. Avelino Zapanta, President of Seair International, wrote to the Civil Aeronautics Board to review the allocation of slots at Ninoy Aquino International Airport in an effort to leave room for competition. "Because if competition is eliminated, the public interest would be compromised," said Zapanta. "Kasi magtataasan ang presyo ang duopoly na iyan."

Cebu Pacific currently holds 34.68 percent of scheduled commercial aircraft slots at Ninoy Aquino International Airport while Philippine Airlines Group holds 35 percent. Tigerair Philippines holds four percent which is now controlled by Cebu Pacific giving the carrier the largest share of slots at the airport while AirAsia Zest holds 9.3 percent.

According to Zapanta, although Cebu Pacific and Philippine Airlines serve different markets, the two carriers monopolize those respective markets. Both groups combine to control more than 90 percent of the domestic market. "The Civil Aeronautics Board should allocate a certain amount -- let's say 10 or 15 percent of the slots in Manila -- for the new entrants to prevent zero competition," said Zapanta. "How they will compete if malaking hurdle ang pagkuha ng slots."

The Civil Aeronautics Board said that it will look into the concerns raised by Seair International. 

Understanding the Philippine Aviation Sector
The six largest airports in the Philippines in terms of passenger traffic are Manila, Cebu, Davao, Kalibo, Cagayan de Oro, and Iloilo. In 2012, all six airports combined to handle 47 million passengers. More than 71 percent of all seat capacity in the country is allocated to domestic services. Of the 27 countries that can be reached non-stop from the Philippines, South Korea continues to lead the way as the country's top source of tourist arrivals and the top international market for air travel. South Korea hosts 182 weekly flights from Cebu, Manila, and Clark operated by Cebu Pacific, Philippine Airlines, AirAsia Zest, Jin Air, Jeju Air, Air Busan, Korean Air, and Asiana Airlines.

In the last 12 months, the United Arab Emirates has seen the largest growth in air traffic from the Philippines with new services launched by PAL Express, Cebu Pacific, and Philippine Airlines. However, rationalization may occur in the next year as local carriers realize how competitive the market is. Services to Qatar and China have also increased in the last year by more than 50 percent each. Taiwan suffered a reduction in services from the Philippines of nearly 26 percent as AirAsia and AirAsia Zest cut their flights.

On the domestic front, Kalibo and Cagayan de Oro experienced the most growth in weekly seats offered each rising by more than 20 percent. Manila, Davao, and Iloilo experienced decline with Iloilo suffering the largest capacity decrease at 19 percent as PAL Express scaled back flights, and Philippine Airlines along with AirAsia Zest ceased operations at the airport.

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