Local LCC market gains from consolidation, says think tank


AFTER a period of rapid fleet expansion that has led to overcapacity, the Philippines’ low-cost carriers (LCCs) are seeing slower growth in 2013, as this aviation sub-sector continues its rapid expansion in the rest of Southeast Asia, a new report says.

The region’s LCC fleet is poised to grow about 20% this year, approaching 500 aircraft at year-end, the Centre for Aviation (CAPA) said in its analysis of the industry released last week.

“With some of the largest airline orders in recent years coming from ASEAN-focused LCC groups, rapid growth for the sector is assured for the medium to long term even as some key markets are approaching saturation,” the report said.

Budget carriers in 2012 accounted for 80% of domestic passengers in the Philippines, giving it the highest LCC penetration rate in the world among medium and large-size markets, CAPA said.

Competition on many routes was irrational and four of the five LCCs were unprofitable – AirAsia Philippines, Philippine Airlines (PAL) affiliate AirPhil Express, Tiger affiliate Tigerair Philippines and Zest Air. Only market leader Cebu Pacific, which captured 46% of the domestic market last year, ended 2012 in the black.

Consolidation came in early 2013 as AirPhil Express rebranded as PAL Express and in the process transitioned to a regional full-service model. AirAsia Philippines also entered into a partnership and cross-ownership deal with Zest, which gives AirAsia access to the Manila market.

“Zest flights are now available on the AirAsia website and the carriers are in the process of integrating further, culminating in Zest adopting the AirAsia brand. The deal means there are now a more palpable three LCC players in the Philippines – AirAsia (including Zest), Tigerair Philippines and Cebu Pacific,” CAPA said.

CAPA said the consolidation has led to more rational capacity levels and an improved outlook for all Philippine carriers. The total LCC fleet in the Philippines is expected to grow in 2013 by a relatively modest 10% to 69 aircraft (excluding AirPhil/PAL Express).

Cebu Pacific plans to expand seat capacity by 11% this year as it adds seven aircraft for a year-end fleet of 48, the report said.

The airline’s seat capacity grew 16% in 2012 but its passenger traffic was up only 11% to 13 million with equal increases across its domestic and international networks. The drop in load factor reflects the overcapacity in the market, the think tank said.

Cebu Pacific was able to improve its load factor in first-half 2013 as it started to benefit from a more rationale marketplace. The carrier reported 8% passenger growth and 6% seat growth for the first half, CAPA said.

AirAsia Philippines plans to add one aircraft in the fourth quarter, its first addition since launching services in March last year with a fleet of two A320s. Zest plans to add two A320s in this half-year for a total 13 A320s but compared to the start of 2013, when it also operated turboprops which have since been phased out, its fleet has shrunk.

Tigerair Philippines plans to acquire two to three Airbus A320 aircraft next year in preparation for flights to Japan, South Korea and China, said Olive Ramos, president and chief executive of Philippine affiliate of Tigerair. She said the LCC could lease the planes from parent Tiger Airways Holdings of Singapore.

Meanwhile, CAPA said the LCC penetration rate within Southeast Asia is now above 50%, having steadily increased over the last 10 years from less than 5% in 2003. Even in the intra-Southeast Asia international market, LCCs now account for 50% of total seat capacity – a remarkable figure given that ASEAN has not yet moved to a single market concept like the EU, the think tank said.

“Opportunities still remain for LCC market share gains in some countries, particularly Myanmar and Vietnam. These important pioneer markets have the lowest LCC penetration rates among the seven main ASEAN countries but LCC start-ups from both countries are expanding rapidly,” CAPA said.

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