Philippine airlines face headwinds

The Philippine airline industry is in for tougher times next year given economic uncertainties, volatile fuel prices and stiff competition, according to a Citigroup equities research.

In a recent commentary, Citi analyst Rigan Wong said domestic competition may ease as some players may slow down capacity expansion due to weaker profitability, especially after a very challenging third quarter.

“International competition may be very intense, but mostly concentrated at Clark Airport, where fourth-quarter 2011 and 2012 capacity additions look onerous for a limited market and where flights are already operating at or below break-even load factors,” the research said.

Given the more challenging industry dynamics into 2012, Citi prefers Philippine carriers that are able to consolidate their market positions—such as increase market share profitably at the expense of competitors—instead of those that are positioned to stimulate and grow the market.

In analyzing Philippine carriers, Citi considered three attributes: ability to leverage existing scale efficiencies; balance sheet strength; and a strong domestic network that is able to offset headwinds to the international network.

With these attributes in mind, the research is upbeat on prospects for Cebu Air Inc. but not too keen on AirAsia Philippines (AAP), which is 40-percent owned by AirAsia Berhad, and for the Tiger Airways/SEAir partnership.

“Cebu Air is likely to consolidate its market position in 2012. We like Cebu Air’s strong market positioning, lean cost structure, ability to reap scale efficiencies, healthy brand equity, and balance sheet strength,” the research said.

Cebu Air is the largest domestic carrier in the Philippines as measured by number of passengers carried and the leading low-cost carrier operating between the Philippines and international destinations.

Citi said AAP, for its part, would be able to leverage the strong brand and marketing platform of AirAsia Group, but lacked scale in terms of fleet size.

Similar to AAP, the research said Tiger/SEAir would likely see limited success given its choice of operating base—Clark Airport.

As for Philippine Airlines, the research said that the company is facing significant challenges.

“Recent move to outsource some noncore operations has been encouraging from a cost-saving perspective, but the ensuing labor disputes and strikes showed the insensitivity of such a move. More urgently, PAL has to relieve concerns on liquidity and solvency, which may otherwise dent passengers’ confidence in PAL and cause them to fly with other airlines,” it said.