Local airlines face profit squeeze amid glut in seats

THE LOCAL airline sector will see challenging profit margins in the medium-term given the recent surge in seat capacity, think tank Capa Center for Aviation said in a report Tuesday.

Capa said Philippine Airlines, Cebu Pacific and Air Asia Philippines would see pressure on yields in the domestic business given the aggressive expansion that followed flat growth in 2013 and 2014.

Capa noted that PAL and Air Asia Philippines resumed domestic expansion this year.

Cebu Pacific, which continued to expand in the last two years, also grew its capacity although the total market during the period “did not grow as AirAsia and PAL contracted.”

For the third quarter of 2015 alone, Capa said Cebu Pacific, which has a domestic market share of about 59.5 percent, grew its local capacity by 10 percent.

PAL and AirAsia, which control 28.7 percent and 11.4 percent, respectively, saw capacity growth rates at 25 percent.

“The capacity increase is alarming as it has come so quickly and as the Philippines is a highly price sensitive market,” Capa said.

It added that “rapid capacity increases cannot be absorbed overnight.”

“Ultimately how quickly supply-demand balance returns to the Philippine domestic market depends on the pace of further capacity growth in 2016,” Capa said.

It noted that the PAL Group, which launched six point-to-point routes from Cebu and new capacity from trunk routes from Manila, plans further capacity increases with the arrival of new Airbus A321s next year.

Capa said this could “lead to a longer period of challenging market conditions.”

“Eventually, the demand should again catch up with the supply as the Philippine economy has been growing steadily at a healthy rate of 6 percent to 7 percent per annum,” it added.

Capa nevertheless noted that the long-term outlook for the domestic business was “relatively bright,” citing significant opportunities to open new point-to-point routes.

“Demand for such routes is growing as the economy expands and a larger portion of the population is able to opt for short flights instead of ferries—particularly as low fares stimulate demand,” Capa said.

Capa noted that the consolidation in recent years—Cebu Pacific’s acquisition of Tiger Air Philippines and Air Asia’s acquisition of Zest Air-helped improve market conditions, overall.

“This has created a relatively rational environment in the Philippines compared to most other major Southeast Asian domestic markets,” Capa added.