WORLD ROUTES: Cebu Pacific Plays to its Strengths

Martin Rivers found out more about the business strategy, growth and development plans of Filipino low-cost carrier Cebu Pacific Air for our sister magazine, Routes News.

After receiving its fourth Airbus A330-300 in May, Cebu Pacific, the Philippines’ largest airline, was understandably eager to make good on its promise of rolling out long-haul destinations.  The low-cost carrier began operations in 1996 and has historically focused on domestic connectivity across the archipelago plus regional links throughout Asia.

But under the stewardship of Lance Gokongwei, the son of founder and business magnate John Gokongwei, Cebu Pacific has steadily encroached into the challenging yet ever-more popular sphere of low-cost, long-haul flying.  “Our strategy on long-haul is to offer the same affordable, efficient, safe service that we do on the short-haul and regional markets,” the younger Gokongwei tells Routes News. “Our focus is primarily on routes that can be served by our A330s where there is a large Filipino population.”

The first long-haul destination to enter the network was Dubai, with daily flights launching in October 2013 – four months after Cebu Pacific received its first widebody.  Although the route was initially unprofitable, load factors are now inching towards the mid-80% break-even point and further expansion in the Middle East is planned. Kuwait will become the next destination, with a thrice-weekly service getting under way in September.

Both markets are attractive to Cebu Pacific because of their large expatriate populations – 930,000 Filipinos work in the United Arab Emirates, and 180,000 in Kuwait – but competition is stiff, with Emirates and Kuwait Airways both serving Manila’s main gateway, Ninoy Aquino International Airport.  Elsewhere, a four-times-weekly service to Sydney will also begin in September, rising to five-times-weekly in December.

Although Cebu Pacific hopes to attract Australian leisure travellers on the Sydney route – previously duopolised by Qantas and Philippine Airlines – it is the country’s diaspora that will again fuel much of the low-cost demand. An estimated 250,000 ethnic Filipinos currently live in Australia.  Indeed, with almost one in ten Filipinos living or working abroad – equivalent to about 10.5 million people – labour traffic and VFR (visiting friends and relatives) traffic lies at the heart of the airline’s business strategy.

“Our fundamental brand and culture is based on the low-cost carrier model.  We believe that is a suitable model, especially for a country with the Philippines’ specific characteristics," explains Gokongwei. “First, the Philippines is a relatively low-income market. Second, there’s a lot of Filipino workers abroad. Philippine traffic is almost 95% worker traffic. That creates a lot of opportunity unique to Cebu Pacific for those workers, as well as friends and family who want to visit them.  Third, the rapid economic growth in the Philippines has also created an emerging middle class, especially IT and BPO (business process outsourcing) workers, who now have incomes and want to travel.”

By developing a European-style ultra-low-cost product, Cebu Pacific claims to offer fares that undercut its competitors by as much as 40 per cent.  That gives it an edge in labour and VFR markets dominated by price sensitivity: “cost is critical in the decision-making process,” Gokongwei says of his customers – but it also imposes some limitations for passengers.

The onboard product pushes the concept of no-frills travel to the limit, cramming 436 Economy seats into an aircraft that typically has about 250 when configured with three cabins.  And unlike rival low-cost, long-haul operator AirAsia X, Cebu Pacific has no Business Class. Its standard seat pitch is 30 inches, though passengers can pay extra for 32 inches. Baggage allowances and refreshments are not included in the ticket price.

Stripping down costs to the bare bones also makes partnerships difficult to establish. Cebu Pacific has not signed interline or codeshare deals with other carriers at Dubai, despite a high proportion of its customers requiring onward connections. “We find that our passengers have learned how to self-connect,” Gokongwei says.

Indeed, rather than utilising Dubai as a hub for onward journeys, the airline is sharpening its focus on other under-served regional points.  Saudi Arabia stands out as the obvious choice for future expansion, with approximately 1.3 million Filipinos working in the country.

Saudia and Philippine Airlines both fly to Dammam and Riyadh from Manila – with Saudia also operating a Jeddah-Manila service – but Gokongwei is confident that Cebu Pacific’s lower fares could catalyse higher demand for these destinations.  “The natural routes that we are expecting to add in the next few months would be primarily in the Middle East, particularly Saudi Arabia,” he confirms. “The latest data says that 75% of the traffic to Saudi Arabia does not fly direct at this point. So I do think there is a gap in the market.  If you combine the huge number of non-direct traffic with the stimulation we can provide by offering lower fares, I do think there’s enough room for the Saudi carriers, for Philippine Airlines and ourselves.”

Asked about other long-haul markets, he notes that the A330’s limited range prohibits him from opening up European routes in the near future.  The EU’s decision to remove Cebu Pacific from its aviation blacklist in April means the airline could now consider the continent, but “on a practical basis, flying directly to Europe is still a few years away”, admits Gokongwei.  Any such route launches would require the addition of new widebodies, Gokongwei notes, singling out the Boeing 777, 787 and A350 as the “three decent choices”.

Philippine Airlines was also removed from the EU blacklist in July 2013 and has since resumed flights to London Heathrow Airport. The flag carrier is evaluating other western hubs, such as Rome, Paris, Amsterdam and Frankfurt.  “There’s been a clear delineation in strategy, where Cebu Pacific is pursuing the low-cost market … and Philippine Airlines is focused on building their routes towards more high-yield or long-haul markets,” Gokongwei explains.

Although recent attention has centred on long-haul expansion, the airline is by no means neglecting its domestic and regional presence.  Widebodies account for just four of the airline’s 52-strong fleet, which also includes 30 A320s, 10 A319s and eight ATR 72s. A further 43 aircraft are on order: two A330s, 11 A320s and 30 A321s.  The turboprop fleet is described by Gokongwei as being a “good workhorse” for island-to-island hops across the archipelago, with runways at airports like Boracay and Busuanga unable to handle larger aircraft.

Cebu Pacific’s domestic footprint encompasses 34 destinations, while its regional network comprises 23 cities spread across 11 foreign countries. Both sectors will continue to expand, with Tandag in Surigao del Sur becoming the latest addition inside of the Philippines’ borders.

Overseas routes are more difficult to add because of bilateral restrictions, though progress is steadily being recorded in key markets like Japan.  The airline was at the forefront of lobbying efforts to establish open skies between the Philippines and Japan last year, eventually being rewarded with new designations for Tokyo and Nagoya, as well as higher frequencies to Osaka.  As a consequence of the route launches, the Japan National Tourism Organisation reported that Philippine visitor arrivals to Japan jumped by 129.5 per cent between March and April.

Bilateral talks continue elsewhere, with the country’s Civil Aeronautics Board (CAB) filing a request on behalf of Cebu Pacific with Myanmar.  CAB is also seeking to renegotiate traffic rights with Malaysia, perhaps mindful that the aim of securing ASEAN Open Skies by 2015 looks increasingly unlikely to be achieved.

But alongside further organic growth, Gokongwei is also tentatively exploring a partnership with Singapore’s Tigerair.  Cebu Pacific completed its acquisition of loss-making subsidiary Tigerair Philippines in March, lifting its overall domestic market share to 60 per cent. As well as bolstering its presence at home, the deal opens up the potential for a metal-neutral agreement with the Tigerair parent in Singapore.

“We fly into North Asia, into China, Korea, Japan. Whereas Tiger has real strength going into a lot of Southeast Asian countries: Indonesia, Thailand, Malaysia and particularly into India,” Gokongwei notes.  “We are already selling each other’s tickets on each other’s sites. Now for the routes between the Philippines and Singapore, we are going through the various competition regulators to seek a revenue sharing model.”

The CEO is careful not to overstate his appetite for foreign partnerships, however, stressing that Cebu Pacific has little interest in joint ventures.  “I don’t want to be the fourth or fifth entrant into the market,” he explains when quizzed about the issue.  Instead, Cebu Pacific will keep its focus firmly on the Philippines, cementing its first-mover advantage in the rapidly consolidating market.

In March 2013, AirAsia Philippines and Zest Airways agreed a share swap that would later create the merged entity AirAsia Zest. That same month, Philippine Airlines withdrew from the low-cost market by rebranding its subsidiary AirPhil Express as full-service PAL Express.  Together with the acquisition of Tigerair Philippines, these moves reduced the number of major domestic players to just three: PAL Group, AirAsia and Cebu Pacific.

Whereas the wider Asia-Pacific region continues to suffer from fragmented competition and rampant over capacity, the Philippines is now setting the standard for a more disciplined tenor of growth.  Little wonder that Maybank, Malaysia’s largest bank, recently concluded that the Filipino “fare war” of 2013 has ended and profitability among the country’s airlines is rising.  Although Philippine Airlines and AirAsia will draw some benefits from this, Cebu Pacific is in prime position to reap the spoils.

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