Friday, June 24, 2011

Sky Battles: Cebu Pacific's Edge

Philippine low-cost carrier nearly doubles its fleet as aging opponent struggles
Cebu Pacific, the upstart low-budget air carrier based in the Philippines, announced this week that it is nearly doubling its fleet with orders for 30 new Airbus A321 Neos and seven A320s costing US$3.8 billion.

The order was described by Cebu Pacific CEO and President Lance Gokongwei, as the biggest firm order for the 220-seat A321 in the world and is designed to serve cities in Australia, India and Northern Japan, which the airline’s A320s can’t reach. The planes are to be delivered between 2015 and 2021, in addition to 18 Airbus A320s that are to be delivered from the second half of 2011 until 2014. That increases Cebu Pacific’s total firm orders from the Toulous, France-based Airbus Industrie to 55.

Behind the aircraft order is the story of intense competition between two enormously rich Chinese-born Filipino tycoons, who control the country’s two leading airlines. Cebu Pacific, controlled by the Gokongwei family, is currently winning, built partly on newer, more fuel-efficient planes, lower fares, a strong regional route strategy – and a publicity stunt, the media sensation caused by a 2010 video of flight attendants prancing to Lady Gaga’s “Just Dance” as they demonstrated the normally staid flight safety instructions on a chosen flight. The buzz factor on the sexy dance was huge, even if it is not normally seen on actual flights.

By contrast, the flight attendants of Philippine Air Lines, owned by tycoon Lucio Tan, are seen as older, serious and drab, dressed in conservative, 1980s-style uniforms. But they will slip the passenger an occasional extra glass of wine and the airline has meal service on international routes. Cebu Pacific carries no wine — and nothing free. Passengers pay for everything, including all check-in baggage and water. If you’re hungry you can buy a greasy fast food snack off a cart, with all products on offer manufactured by the Gokongwei empire’s food division.

The Gokongweis’ JG Summit Holdings is one of the largest conglomerates in the Philippines. The patriarch, Fujian-born Chinese immigrant John Gokongwei, controls holdings in real estate, telecommunications, financial services, petrochemicals, power generation, aviation and livestock farming. Other companies are into retail, food and publishing. In one of the great oddball urban legends of the Philippines, the Gokonweis are also said to keep a six-foot snake with a human head in the basement of the Manila headquarters of their Robinson Malls empire. As proof, the snake appears in a Youtube video, looking distinctly like it was created out of Play-Doh, cotton wool and various art-store supplies.

Gokongwei, ranked the Philippines’ third-richest businessman with a net worth of US$1.5 billion, is one of a triumvirate of Fujian-born entrepreneurs who emigrated to the Philippines to become the country’s richest men. The richest is Henry Sy, who controls SM Prime Holdings, Asia’s biggest shopping mall operator with 41 malls throughout the country, said to be worth in excess of US$4 billion. The third is Lucio Tan, a crony of the late strongman Ferdinand Marcos, who controls a US$2.5 billion empire of at least 300 companies that includes Tanduay Holdings, the world’s largest distiller of rum, and Asia Brewery, the second largest brewery in the Philippines, as well as Fortune Tobacco, the country’s largest tobacco company. His PAL carries no San Miguel beer, a direct competitor of his Asia Brewery.

Cebu Pacific is going head to head with Philippine Airlines, which is the oldest international carrier in Asia, born in 1941 with a single twin-engine Beechcraft that flew the 212 km from Manila to the mountain resort town of Baguio. In 1946 it became the first Asian carrier to fly across the Pacific to the United States, using DC4s.

Tan took over the airline, which was nationalized in 1975 by Marcos, as majority shareholder in 1995, amid much opposition from former anti-Marcos activists and others who wanted PAL to stay in government hands. He quickly ran into the 1997-1998 Asian Financial Crisis. The airline was forced to downsize its international operations, cutting its European service and Southeast Asia flights and firing thousands of workers. The airline was forced into receivership, which it didn’t exit until 2007.

Cebu Pacific started in 1996 as Cebu Air, flying between Manila, Cebu and Davao only to face tragedy two years later when an ageing DC-9 that made up part of its original fleet smashed into a mountain above the city of Cagayan de Oro on Mindanao, killing 104 people and resulting in the temporary grounding of the airline.

Almost immediately, however, it began to demonstrate the advantages of a no-frills carrier in a poverty-stricken country, a lesson that is being repeated in the region by the hugely successful Air Asia based in Malaysia and others, bringing competition to some of the region’s patrician carriers such as Singapore Airlines and Cathay Pacific, which provide some of the best airline service in the world but are also pricey.

Despite the fact that PAL had a exclusive use of the best of Manila’s three shabby airport terminals, by early 2010 Cebu Pacific narrowly surpassed PAL as the country’s largest domestic carrier in terms of passenger miles. Although PAL’s widebody fleet extends its network to the United States and Europe, it has ceded dominance of regional routes to Cebu Pacific. Cebu Pacific has no widebodies yet, allowing PAL’s long-haul fleet to keep the older airline in the game.

While both airlines are now profitable, Cebu Pacific’s profits are soaring, according to the Center for Asia Pacific Aviation, with revenues up 25 percent on higher passengers carried and fares. Cebu Pacific raised US$600 million with a very successful 2010 IPO in Manila while Philippine Airlines was in talks over bank loans. Asia Sentinel

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