Philippine low cost carriers expanding fleets and adding routes

Inter-island connectivity and domestic air passenger growth are set to increase significantly alongside rapid expansion of national low-cost carriers (LCC), which have seen surging profits and passenger volumes over the last decade. The Philippines’ largest LCC, Cebu Pacific, is in the midst of an ambitious fleet upgrade that would allow it to maximise limited timeslot availability at Ninoy Aquino International Airport (NAIA). The airline will then focus on augmenting offerings at airports in secondary cities, benefitting from government plans to expand these airports’ facilities and operations, in turn further boosting the LCC market outlook.

Record Expansion

In March 2017 Cebu Pacific announced that its net income rose by a record 122% in 2016 to hit P9.8bn ($207.3m) as a result of bursting domestic demand for low-cost air travel. Passenger numbers also rose, growing by 4.1% to reach 19.1m in 2016 versus 18.4m in 2015. Part of this growth can be attributed to new routes, with the company expanding services to the Visayas regions, and launching routes from Cebu to Ormoc, Roxas and Calbayog. A new direct service between Kalibo and Incheon in South Korea was also launched, as well as its first US service, to Guam. By the end of 2016 Cebu Pacific offered 36 domestic and 30 international destinations, with 102 routes and approximately 2820 flights per week.

LCC Growth

LCCs have become extremely popular in recent years, benefitting from subdued global oil prices and robust economic growth that has enabled a larger number of Filipinos to fly. According to an analysis conducted by the Centre for Asia-Pacific Aviation (CAPA), LCCs’ capacity in South-east Asia rose from 25m seats in 2004 to nearly 200m in 2014. Full-service carriers such as Philippines Airlines recorded 45% growth in capacity over the same period, from 180m seats to 260m. The Philippines has been especially impacted by LCC growth, with CAPA reporting that the country had the world’s highest domestic LCC penetration rate in 2013, at 80%. Cebu Pacific, in particular, held a 58-60% share of the domestic market as of March 2017, according to the company.

Fleet Upgrades

Strong profit and passenger growth will enable LCCs to further augment its capacity in the coming years, and CAPA reports that LCC fleet expansion in South-east Asia is expected to grow by 11% in 2017, or 70 new aircraft, compared to 7% in 2016. In April 2017 Philippines AirAsia announced it plans to launch an initial public offering during the year as it expands its fleet from 14 to 17 aircraft. By 2032 the company expects to have 70 planes in operation in the country. Cebu Pacific is also upgrading, with an investment of $4bn to acquire 46 new aircraft between 2017 and 2021. The company’s fleet stood at 59 aircraft following the addition of two new ATR 72-600 aircraft in February 2017, and is set to grow further as it takes delivery of one Airbus A330, two Airbus A321neos and four additional ATR 72-600s in 2017. Three of its four Airbus A319s will be phased out before the end of 2017, bringing its total fleet to 63 aircraft.

Beyond The Capital

The addition of new Airbus aircraft is significant because it will allow the airline to better capitalise on limited flight timeslots at NAIA, which has been operating above capacity for years. The Airbus 321 model, for example, offers 230 seats compared to 180 on the Airbus 320. Cebru Pacific is also turning to airports outside of Manila as it moves to maintain robust growth, announcing it will develop and invest in five additional hubs outside of the capital city, including Cebu, Davao and Iloilo, which will be served by smaller aircraft. This strategy is well timed; weeks before the company announced its 2016 results, the administration of President Rodrigo Duterte held a pre-qualification conference for investors interested in the operations, maintenance and development of regional airports in Bohol, Laguindingan, Davao, Bacolod and Iloilo. Planned for development under public-private partnership models, the projects are estimated at a collective value of P110.4bn ($2.3m).