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By Darwin G. Amojelar, Reporter
LOCAL airlines are turning to domestic routes to
hedge against tight competition in foreign destinations and record
jet fuel costs.
Last week, Philippine Airlines (PAL) unveiled
its new low-cost unit, which will fly mainly to the country’s
smaller islands, or the so-called missionary routes that the flag
carrier had abandoned when it entered into corporate rehabilitation.
Asia’s oldest carrier has since emerged from
rehabilitation, and last week launched PAL Express, which will start
flying on May 5 between Manila and Caticlan, with plans of
dispatching flights from its reactivated Cebu hub to five other
points in the Visayas and Mindanao.
PAL Express is similar to the set-up found in
other international airlines, where the “legacy” carrier
establishes an operating division aimed at a market niche distinct
from the main operations.
The airline’s move is aimed at routing foreign
low-cost carriers, which have intensified competition in regional
routes and now operate from major Philippine airports such as the
Ninoy Aquino International Airport and the Diosdado Macapagal
International Airport.
Most of the budget airlines have fuel subsidies
from their government, thus Philippine carriers cannot compete on
the same footing. This already forced domestic airlines to cut their
fares to prevent an erosion of volumes.
PAL’s revival of its missionary routes
therefore meant to offset high jet fuel prices, which according to
the carrier will account for about 40 percent of total expenses this
year, up from 35 percent last year.
Jaime Bautista, PAL president, said the company
expects lower income for its fiscal year ending 2009 because of
skyrocketing jet fuel prices.
“Fuel cost is becoming a very big percentage
of our operations. We want to target a higher income, but with the
present increasing fuel, we might not be able to reach the target
because we cannot pass [on] everything to the passengers. [But] we
will still grow [our] revenue at least 8 percent to 10 percent,”
he said.
Low fares to pay for operating expenses
“We can offer a different type of fare
depending on the demand of the market. The fares that we will offer
will allow us to pay our operating expenses,” Bautista said.
PAL Express will operate a fleet of nine small
aircraft from Cebu, including 50-seater Bombardier Q300s and six
76-seater Q400s, which PAL will acquire this year at a cost of $100
million.
The new aircraft will have a break-even load
factor of about 40 percent to 45 percent. PAL Express expects almost
a million passengers every year at full operations.
“We are expecting profits by around P300
million at full operations every year. Revenue will be a billion
pesos a year,” Bautista said.
“We will leverage on the strength of the PAL
brand to make PAL Express the leader in the markets it serves. In
turn, PAL benefits from the expansion of its network to areas it
does not presently fly to, from where PAL Express aims to draw
traffic to feed the main trunk routes,” he added.
Astro del Castillo, managing director of First
Grade Holdings, said PAL Express’ pricing strategy as well as
higher jet fuel prices could have an impact on PAL’s bottom-line.
He said PAL’s strategy is to regain its number
one position in the domestic market.
“Before they have to compete regionally, they
should compete in the domestic market to regain the number one
position in the country,” del Castillo said.
To regain leadership in the domestic arena, PAL
through its new unit has taken over Air Philippines’ profitable
destinations.
Bautista said the low-cost unit will “protect
market share” particularly in the domestic market.
“Air Philippines will continue to operate its
frontline flights. These are new routes except with the Cebu hub,”
he said.
Bautista said Air Philippines will no longer
pursue its expansion plans, which it had announced earlier. “It
was stopped because we will acquire all the Bombardiers
aircrafts,” he said.
In its audited 2006 financial statements, Air
Philippines said it posted a net loss of P153.42 million, a reversal
from the P55.07-million profit in 2005.
Growing the entire pie
The number one spot was snatched from the flag
carrier by leading rival Cebu Pacific, which announced having flown
4.45 million passengers within the country last year, compared with
PAL’s 4.03 million.
Avelino Zapanta, a former PAL executive who now
heads smaller rival Seair, agreed, saying, “Air Philippines
couldn’t handle Cebu Pacific. Air Philippines [couldn’t make
headway] because of its image and the intense competition,” he
said.
Lance Gokongwei, Cebu Pacific president, sees no
threat from PAL’s all-out venture into the low-cost segment.
“We’re not threatened. Our job is building
the entire travel market in the Philippines. It is not to gain
market share but to grow the entire pie. I think the set-up of the
low-cost [operation] of Philippine Airlines is to further enhance
the continuing growth in the Philippine travel market,” the Cebu
Pacific executive said.
Gokongwei said the market is huge and consumers
and the tourism industry will benefit from heightened competition
among budget airlines.
Data from the Civil Aeronautics Board showed the
number of domestic passengers last year rose 22.7 percent to 10.38
million from 8.46 million passengers in 2006.
Last year, Cebu Pacific announced its domestic
expansion by acquiring 14 ATR72-500 aircraft worth more than $250
million.
The new aircraft will be used in medium-sized
airports nationwide. Of the nearly 70 airports, only about 25
percent are Airbus-capable owing to runway length and strength
limitations.
“There’s really a lot of room for growth and
if you look at the ratio of population per flights is one in every
10. But if you look [at] other countr[ies] with the same GDP [gross
domestic product] growth as the Philippines [it’s at] one in every
six,” Candice Iyog, Cebu Pacific vice president for marketing and
products, said.
Stiff competition in air market
With PAL’s entry to the budget airline
business, industry insiders admit that competition will heat up.
Zapanta said Cebu Pacific and PAL Express’
operations will impact on the viability of smaller players like
Asian Spirit and Seair. “It may be difficult to compete,” he
said.
Asian Spirit and Seair are consolidating their
operations to become stronger and survive competition. Alfredo Yao,
who owns the maker of Zesto juice drinks, plans to buy Asian Spirit
and merge it with Seair.
Despite the two leading airlines’ focus on the
domestic market, Zapanta remains confident about the prospects of
Seair, which he said has its niche market.
“The more rational thing is that PAL Express
should fly in domestic points that are not being served by the
existing carriers,” he said.
For Bautista, the entry of PAL Express will be
beneficial to the public as more airlines would offer cheaper fares.
“The industry will continue to grow, the
people will continue to travel and more and more people will prefer
to travel by air because people now will realize the importance of
time and of course it will be more comfortable to travel by air
rather than bus or boats,” he said.
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