BUDGET carrier Cebu Pacific (CEB) will finally see its long-haul business’ bottomline swing to a gain by year-end—roughly two years after it started its operations in 2013—driven by its aggressive stance in expanding routes, while successfully maintaining its foothold in Middle Eastern destinations that proved to be profitable over the past few quarters.
Also, a report from the Centre for Asia Pacific Aviation (Capa) showed, that the carrier of tycoon John L. Gokongwei involves the launching of its Manila-Hawaii route by the end of 2015, and the introduction of its operations in Melbourne once the air-services regulator secures additional traffic rights for Australia.
These two additional routes, when launched, would be Cebu’s sixth and seventh long-haul destinations, joining four in the Middle East and Sydney, Australia.
The think tank said the carrier had its eyes focused on launching flights to US territories, since the Federal Aviation Administration, in April 2014, upgraded the Philippines to a Category 1 safety rating. Its desire to expand to the US was also reflected, according to the research agency, on its recent certification for extended diversion-time operations of 120 minutes, which is needed to use the most direct and efficient routing for long-haul routes.
“Cebu Pacific is now waiting for final approval from the US Transport Security Administration, which has to complete an assessment of Manila Terminal 3 before Cebu Pacific can serve the US,” Capa said, referring to the third terminal of the Ninoy Aquino International Airport (Naia). “Cebu Pacific remains optimistic it will be able to launch services to Honolulu by the end of 2015. It is also aiming to launch service from Manila to the US territory of Guam but this shorter route will be operated using Cebu Pacific’s A320 fleet.”
Hawaii’s Filipino community will be the main target market for the planned Honolulu service. The route is only currently served nonstop by Philippine Airlines (PAL) with five weekly flights. Hawaiian Airlines pulled out of the Manila market in 2013, leaving a potential opening for a second carrier. “Honolulu is a key route as it will allow Cebu Pacific to diversify its long-haul network, which now relies heavily on the Middle East,” the think tank said.
The carrier’s only current long-haul route outside the Middle East is Sydney, which it launched in September last year.
“Since launching its long-haul unit in 2013, Cebu Pacific has pushed for an expanded air-services agreement between the Philippines and Australia, which would provide sufficient traffic rights to support a daily service to Sydney, as well as Melbourne. Cebu Pacific is confident a new round of talks between the Philippines and Australia scheduled for April 28 will result in a significant increase in the current cap,” Capa said.
The budget carrier is currently allocated 2,200 of the 6,000 available weekly seats for Filipino carriers, while the legacy airline is allocated the remaining 3,800. Based on the current five weekly flights schedule, CEB currently has 2,180 weekly seats to Australia as its A330-300s are in 436-seat single-class configuration.
The general plan for expansion involves the carrier’s move to secure capacity entitlements to support 14 weekly frequencies to Australia. This would enable CEB to operate daily flights to both Sydney and Melbourne, resulting in 6,104 weekly one-way seats in the Philippines-Australia market.
“Cebu Pacific is optimistic such a large surge in capacity can be supported as its low fares stimulate demand and grow the total size of the pie,” Capa said, citing a 42-percent increase in total Manila-Sydney traffic from September through December 2014, the first four months it was competing in the market.
Both Sydney and Melbourne have large Filipino communities, making both markets attractive to the carrier’s long-haul division. CEB’s long-haul business plan mainly targets ethnic and expatriate or labor traffic, although in the Australia market it also expects a growing segment of inbound leisure traffic as the Philippines emerges as a popular alternative tourist destination for Australians. But maintaining year-round daily flights to two cities in Australia would prove to be challenging to the budget airline, the think tank said.
“Cebu Pacific’s aspirations for two daily flights to Australia, however, could prove overly ambitious. The Philippines-Australia market is extremely seasonal and, at least for the short-to-medium term, is unlikely to support such a large amount of capacity—over 10,000 weekly one-way seats—except during the peak periods,” Capa said. “Most Filipino expatriates, as well as students return home during holiday periods due to their work or study schedules. It will be hard to stimulate sufficient demand from Australia’s Filipino community to fill up a 436-seat aircraft daily from Sydney or Melbourne on a year-round basis.”
The low-cost carrier, the think tank noted, should be able to attract some Australian outbound holiday traffic, as well as connection traffic beyond Manila to destinations, such as Hong Kong, South Korea and Japan—by offering significantly cheaper fares than the nonstop providers.
“But demand from such sectors also varies significantly depending on the time of the year. And competition in the one-stop Australia-North Asia market is extremely intense. Even with the current Australia schedule of five weekly flights Cebu Pacific has been struggling during off peak and shoulder months. For example, after a strong January CEB saw a decline in its Manila-Sydney load factor in February, which is typically a relatively weak month for the Australian market as it falls between the southern summer holiday period and Easter,” the research agency said.
These plans, plus the carrier’s foothold in the Philippines-Middle East market, would pave way for CEB’s long-haul business to post at least a little profit this year.
The long-haul unit of the leading low-cost carrier in the Philippines is expected to post profits this year, as it continues to gain traction in the Middle Eastern flying market with a 19-percent projected share in the sector by June this year, Capa said.
“Cebu Pacific has been successful at securing a significant share of the Philippines-Middle East market in a relatively short period and has stimulated demand with its low fares,” the think tank said.
“But Cebu Pacific’s operation in the Middle East, which was always the main target for its long-haul unit, has faced challenges and has so far been highly unprofitable.”
In 2014, the budget carrier posted roughly $23 million or about P1 billion in losses from its long haul unit. This figure includes continued losses on Manila-Dubai as well as start-up costs for Dammam, Kuwait, Riyadh and Sydney.
“Cebu Pacific should continue to see improvements in Dubai and is confident it will also see gradual improvements in 2015 across the three new long-haul routes it has maintained. In the Manila-Dubai market Cebu Pacific should benefit from Emirates’ reduction at the end of January-2015 from three to two daily flights,” Capa noted.
The low-cost airline started its long haul operations in 2013, and has since then rapidly expanded its route network. But this, according to the research agency, proved to be very challenging to the carrier.
Typically, newly launched long haul flights have longer spool-up periods versus short haul routes. Its average load factor on long haul routes was at 61 as of end-December, most of which are booked from its operations in Dubai.
The carrier is banking on the Middle East as it tries to prove it made the right decision in 2012 in taking the long-haul low-cost plunge.
“Given the reduction in fuel prices and the fact Cebu Pacific has now had plenty of time to iron out the initial kinks and get accustomed to the intricacies of the Middle East market, 2015 is likely to be a make or break year for the long-haul operation,” the research agency predicted.
Part of its expansion plans this year, is to add the Manila-Doha route to its long haul operations list by June.
“Cebu Pacific is confident its long-haul operation will broadly break even in 2015. The airline expects an average load factor across its long-haul network in 2015 of more than 70 percent. Higher yields and lower fuel prices will also help drive the hoped for turnaround,” Capa said.
Cebu Pacific is the third most profitable carrier in Southeast Asia with a net income of P853.50 million in 2014, representing a 66.7-percent rise from P511.95 million the year prior, as revenues increased by 26.8 percent to P52 billion from P41 billion. Expenses, meanwhile, rose by a slower 23.9 percent to P47.84 billion from P38.6 billion due to the expansion of the airline’s long haul operations and the overall the acquisition of new aircraft.
The Gokongwei-led airline company operates an extensive route network, serving 57 domestic routes and 37 international routes with a total of 2,652 scheduled weekly flights. It operates from seven hubs, including the Ninoy Aquino International Airport (Naia) Terminal 3 and Terminal 4; Mactan-Cebu International Airport; Diosdado Macapagal International Airport in Clark, Pampanga; Davao International Airport; Ilo-ilo International Airport; and Kalibo International Airport in Aklan.
The airline’s 52-strong fleet is comprised of 10 Airbus A319, 29 Airbus A320, five Airbus A330 and eight ATR-72 500 aircraft. Between 2015 and 2021, Cebu Pacific will take delivery of nine more brand-new Airbus A320, 30 Airbus A321neo, and one Airbus A330 aircraft.