Cebu Pacific, Tigerair deal shows consolidation is the way to compete

^{Cebu Air president and CEO Lance Gokongwei and Gokongwei patriarch taipan John receives a new Airbus A330 at the Ninoy Aquino Internaitonal Airport in October 2013. Photo by Reuters} 

Consolidation in the airline industry seems to be a widely-accepted trend nowadays in order to compete in the crowded low-cost carrier sector.

 

Cebu Air Inc.'s intention to fully acquire the local affiliate of Singapore's Tigerair seems to bode well for the low-cost carrier and its frequent passengers in the domestic market, analysts noted.

 

This is second case of consolidation in less than a year after the Philippine unit of Malaysia's AirAsia Bhd bought 49 percent of Zest Airways in March 2013, according to Reuters.

 

On a wider scale, consolidation has also been the path to competition in Asia-Pacific among budget airlines, with Singapore's Tigerair partnering with India's SpiceJet and Singapore Airlines' long-haul low-cost subsidiary Scoot, according to aviation think-tank Center for Asia Pacific Aviation (CAPA). 

 

Cebu Air, the operator of Cebu Pacific – intends to expand its scale of operations and market share with the buyout of Tigerair in Tigerair Philippines, lending the Gokongwei-led airlines the assurance of capturing a lead position in the Philippine market.

 

As of the third quarter of 2013, Cebu Pacific cornered 51.2 percent of the domestic market, PAL and PAL Express with 35.4 percent,  AirAsia and AirAsia Zest with 8.6 percent and Tigerair with 4.8 percent, based on Civil Aeronautics Board (CAB) data.

 

Once approved by CAB – and in the absence of any regulatory impediment it would seem so – the acquisition of Tigerair Philippines by Cebu Air will leave travelers with three choices, namely Cebu Pacific, Philippine Airlines (PAL) group and AirAsia Zest.

 

In a January 7 report, CAPA said having three main competitors "is probably sufficient" given the size of the domestic market, which had been plagued by over-capacity and irrational competition.

 

"The consolidation could leave each group stronger which is a more healthy situation for the industry long-term," Brendan Sobie, a Singapore-based analyst at CAPA, said in an e-mailed response to GMA News Online.

 

3 groups, 6 airlines

 

There will still be six airlines – but three groups with each group having two air operators’ certificates (AOCs). "So, three players, excluding some very small regional carriers that don't operate on the main routes anyway," said Sobie.

 

For now, the Philippine domestic market does not need more players, especially in the congested Manila gateway.

 

“The Manila airport has peak times which is congested and the domestic market at these times is already saturated,” CAB's Hearing Examiners Division chief Maria Elben S.L. Moro said in a phone interview.

 

“If there are more players in the market, it will be better for passengers but what we encourage is more players in other routes and since we're an archipelago, there are still other areas to be offered,” she said.

 

High oil prices is also a factor for a new market player to consider, apart from the stiff competition in the low-cost carrier, said Gregg Adrian Ilag, equity analyst at AB Capital Securities Inc., said.

 

“I do not see the need for more market players in the industry. The higher price of jet fuel has made it hard to earn profits in the industry and less industry competition will be helpful in generating profits,” he said.

 

$15-million deal

 

On January 8, Cebu Air announced it is buying Tigerair Philippines for $15 million as part of a strategic alliance forged with Singapore's Tigerair for codeshare and interline arrangements.

 

Tigerair Philippines is 40 percent owned by Singapore's Tiger Airways Holdings Ltd., through Roar Aviation II Pte. Ltd., with 60 percent in the hands of Filipino partners.

 

Cebu Pacific president and CEO Lance Gokongwei earlier said the Tigerair brand will remain as an independent operation while the management will be retained after the takeover.

 

Initially, Civil Aeronautics Board (CAB) sees no negative impact in terms of competition in the Philippine aviation industry.

 

"Tigerair is a small airline and there are still other competitors in the market," CAB's Moro said. 

 

Acquisitions and buyouts of airline companies go through CAB's Hearing Examiners Division. 

 

Moro said they have yet to receive the details of the buyout even after Cebu Pacific filed an application to acquire 100 percent of Tigerair.

 

"In our evaluation, we will look at how will Cebu Pacific will takeover operations of Tigerair Philippines and how will the latter continue to operate, which include slots, traffic," she said.

 

Expanded market 

 

With Tigerair under its wings, Cebu Pacific is expected to have an expanded market share in the domestic market.

 

"I see more advantage for Cebu Pacific on the domestic routes as its market leadership will be strengthened and pricing flexibility should help generate better margins on a longer horizon," AB Capital's Ilag said.

 

Data from CAPA showed Tigerair Philippines operates a total of 12 domestic routes, eight of which are major routes also served by Cebu Pacific. The remaining four are not covered by Cebu Pacific and are served not on a daily basis.

 

Apart from a bigger market share for Cebu Pacific, Ilag said the merger will definitely decrease the  competitive pressure in terms of pricing.

 

“I also think that this will be accretive for Cebu Air’s market share in domestic routes. Passengers will likely stick with Cebu Air given better pricing flexibility from the additional seat capacity,” he added.

 

Cebu Pacific and Singapore's Tigerair strategic alliance also allows both airlines to brand each other as partners, to collaborate on other common destinations in Asia and to leverage on networks spanning from North Asia, ASEAN, Australia, India, all the way to the Middle East.

 

However, CAPA's Sobie said Tigerair and Cebu Pacific currently only have two overlapping routes, which are Singapore to Cebu and Manila. 

 

He said the more important thing about the interline agreement is it opens up South Asia and over 10 additional destinations in Southeast Asia to Cebu Pacific.

 

'Virtual expansion'

 

The Tigerair group currently serves over 50 destinations while Cebu Pacific has a network of 24 international destinations and 33 domestic points in the Philippines.

 

"As for the interlining, indeed this is virtual expansion and it's not the same as expanding with your own aircraft. But it's impossible for each carrier to viably serve every market on its own," Sobie said.

 

"Pursuing partnerships is a smart strategy as it provides improved network access for your passengers without having to invest in expanding your own assets," he added.

 

The alliance also allows both airlines to use their respective websites as sales and distribution platforms to market all routes.

 

"CEB could benefit from Tigerair’s network and have flights towards new routes. This should improve both their competitive stance towards other airlines," Ilag said. – VS, GMA News