It’s not just “more fun in the Philippines,” it’s actually sizzling hot! The world’s second-largest archipelagic nation registered strong economic growth of 6.6 percent last year. Its over 90 million population is a young, vibrant and growing middle class with rising disposable incomes. Filipinos with extra cash in their pockets are now taking to the skies, setting an upward trend for air travel growth.
The Philippine government has taken notice of its people’s increased appetite for air travel by further liberalizing the aviation industry. In 2011, President Aquino signed Executive Orders 28 and 29, which formed the Philippine Air Negotiating Panel (PANP) and the Philippine Air Consultation Panel (PACP), to pursue the Philippines’ Open Skies policies more effectively. President Aquino also signed into law Republic Act No. 10374 exempting foreign carriers from the common carriers tax (CCT) and the Gross Philippine Billing Tax (GPBT), when combined, translates into a 5.5-percent tax exemption on airlines.
These regulatory changes, pursuant to the Asean Open Skies policy, have caused an unprecedented surge in air travel, thanks largely to LCCs that serve the middle class. Among them include AirAsia Philippines, which has set up base in Clark, connecting the Philippines to AirAsia’s extensive route network in Asean. Currently, LCCs have secured over 50 percent of market share in Asean. Thanks to affordable fares offered on websites of Asean LCCs, Filipino consumers now have cheaper flights to choose from, as they join millions of their fellow Asean citizens who have taken to the air. These consumers represent the 600 million rising middle class in Asean hungry for air travel, fueling the massive spike in passenger growth in the past decade across Asean airports and LCCs alike.
This massive growth in air travel within Asean poses new challenges for governments and airport operators. The top five busiest airports in Asean are either nearing saturation point in a few years or operating beyond capacity, resulting in longer delays and congestion. For example, Ninoy Aquino International Airport in Manila was built to handle an estimated 28 million passengers in 2011, but soon reached overcapacity, handling close to 31.56 million passengers in 2012. Governments are seeking to address overcapacity issues by rushing to expand existing airports. While the current airport infrastructure in place may be needed for legacy carriers, further expansion plans may not be adequate to address the needs of LCCs.
The International Air Transport Association (Iata) estimates that Asia-Pacific’s passenger growth, both domestic and international, is expected to add about 380 million travelers between 2012 and 2016 to 1.2 billion. According to Morgan Stanley, LCC market share since 2004 has been growing at a historical CAGR of 11 percent, with legacy carriers lagging behind with a 6 percent CAGR in Asia-Pacific. With LCCs driving air travel growth in the region, airports have to cater for increased capacity to accommodate LCCs—nd that requires a different approach to airport development, as LCCs have different infrastructure requirements from legacy carriers. Dedicated Low Cost Airports (LCAs) and the right facilities for LCCs will enhance the contribution of airport operators and governments to the economies of their countries and the Asean region.
LCCs require airports that adhere to their business model: simple, functional, with low charges for LCCs. Here’s why: The LCC business model is premised on simplicity and low cost: high utilization of aircraft with quick turnaround times, lowered operating costs; simple and fast processes. To cater for high LCC aircraft movement, enough runways and bays need to be built to accommodate LCC aircraft types. This will lower the operating cost of the LCCs, which can be passed on as cost savings to passengers. The LCC model is a volume game, focusing on ancillary income to boost yields on a low fare base. Likewise, airports can increase non-aeronautical revenue through retail concessions and F&B. This translates to increased cash flow to airport operators on the back of higher Ebitda (earnings before interest, taxes, depreciation and amortization) margins, as air-side operations incur higher operating costs relative to retail operations.
In addition, the LCC model in airport development provides more business opportunities that are scalable across the region in a shorter time frame. In Asia, at least 268 cities have more than half a million inhabitants, compared with 159 cities in Europe and 70 in the United States. Secondary cities in Asean yield untapped potential for new growth markets. Airport operators can build smaller, functional airports to serve and connect the communities of these smaller cities. This does not render large, prestige airports irrelevant. Prestige airports cater to the legacy carrier market, whereas Low Cost Airports are built to cater to the LCC market. Constructing more LCAs in secondary cities can disperse air traffic caused by LCCs from congested major airports. The building of Low Cost Airports is a repeatable business model that can be scaled across multiple cities with lower initial outlay. This will allow investors to recoup their investments in a shorter payback period, as LCAs will attract LCCs to fly there because of lower operating costs and gain synergies from utilizing similar business principles of simplicity and scalability. In addition, LCAs leave a smaller ecological footprint, particularly when constructed with a green environment concept.
It is time governments introduce competition into airports. Monopolies are inefficient, whether public or private. Competition has worked well in other sectors such as telecommunications and finance, and the aviation industry is no exception. Gradual liberalization measures in the advent of Asean Open Skies have yielded positive growth in the aviation industry by introducing competition, lowering the costs of air travel for consumers. All aviation stakeholders need to urgently address infrastructure bottlenecks as the 2015 timeline to fully implement Asean Open Skies is fast approaching.
In 2011, 81.2 million tourists flew into Asean and 46.5 percent of these tourists traveled within Asean, creating strong market demand for travel and tourism. LCCs are in a sweet spot by connecting intra-Asean travelers from the Philippines to the rest of Asean, and vice versa. Once again, governments have taken notice. At the recent 16th Meeting of Asean Tourism Ministers held in Vientiane, governments officially acknowledged the strong growth of LCCs as a contributing factor to intra-Asean travel. The next step is to build upon this growth with Low Cost Airports.
(The author is a member of the policy research team of AirAsia Asean based in Jakarta, Indonesia.)