Bloomberg News

Cebu Air to Serve Middle East on AirAsia Threat: Southeast Asia

October 16, 2012

Cebu Air to Serve Middle East on AirAsia Threat

Passengers board a Cebu Air Inc. airplane in Legaspi City, the Philippines. Photographer: Edwin Tuyay/Bloomberg

Cebu Air Inc. (CEB), the Philippines’ biggest budget carrier, plans to get 33 percent of sales from long-haul flights within five years as AirAsia Bhd. and Tiger Airways Holdings Ltd. challenge its grip on the domestic market.

The airline, which operates as Cebu Pacific, will begin the push in the second half of 2013 by adding flights to the United Arab Emirates and Saudi Arabia, President Lance Gokongwei said in an interview yesterday in Manila. It will target the more than 3 million Filipino nurses, maids and other workers employed in the Middle East, who generally fly there via Singapore or Hong Kong.

“Our key project next year is the long-haul expansion,” Gokongwei said. Singapore Airlines Ltd. (SIA) and Cathay Pacific Airways Ltd. “will be my main competitors” on Middle East routes as no Philippine carriers fly them, he said.

Cebu Air intends to get 25 percent of the 50 billion peso ($1.2 billion) Philippine-Middle East market by 2015, Gokongwei said. The carrier has also said it may fly to Australia, the U.S. and Europe as its 45 percent share on domestic routes is threatened by Philippine Airlines Inc. and low-cost carriers.

“This expansion to the Middle East can give Cebu Pacific an edge because its rivals don’t fly there,” said Edmund Lee, an analyst at COL Financial Group Inc. In the domestic market, “I don’t see competitive pressure easing anytime soon.”

Tiger Air, part-owned by Singapore Air, entered the Philippine market this year by buying a 40 percent stake in Southeast Asian Airlines Inc. AirAsia’s Philippine venture began flights in March and it plans to have a fleet of 16 planes in five years. Philippine Air and its low-cost affiliate Air Philippines Inc. are also expanding after winning investment from San Miguel Corp.

Share Slump

The increasing competition has contributed to Cebu Air dropping 12 percent this year in Manila trading, compared with a 24 percent gain for the benchmark Philippine Stock Exchange Index. The carrier closed unchanged yesterday at 57 pesos, compared with the 125 peso price in its initial public offering about two years ago.

The budget carrier has probably “seen the worst” in its share price as it is addressing the risks from greater competition, Gokongwei said. The billionaire Gokongwei family, headed by Lance’s father, John Gokongwei, controls Cebu Air’s biggest shareholder, JG Summit Holdings Inc. (JGS)

Cebu Airport

The parent company is in talks with potential partners to bid for the expansion and operation of the Mactan Cebu International Airport, the nation’s second biggest, Gokongwei said. Cebu is a resort island, south of Manila.

Gokongwei also said he would support San Miguel’s plans to build a new Manila airport to replace Ninoy Aquino International Airport, the country’s busiest. Cebu Air flies from Ninoy Aquino and the capital’s more distant second facility, Clark.

“If they can build an airport that’s 15 minutes away and structure it in such a way that the fees are transparent, we will encourage it,” Gokongwei said. “That being said, I do believe there’s room for both Clark and Manila to prosper.”

Passenger numbers at the state-owned Ninoy Aquino have surged more than 60 percent in the past five years because of economic growth and rising budget flights.

Cebu Air’s long-haul plans “won’t make sense” unless there’s enough airport capacity in the Philippines, said COL’s Lee. The carrier announced plans to lease as many as eight Airbus SAS A330s in January.

Middle East Traffic

The airline may carry as many as 400,000 passengers annually to and from the Middle East by 2015, Gokongwei said. About 1,000 passengers a day travel from Manila to Dubai, he said. Emirates, the only airline with direct flights on the route, plans to start a third daily service in January.

The new Middle East routes may help Cebu Air boost passenger numbers to 15 million next year from about 14 million this year, Gokongwei said. Sales may rise to about $1 billion, he said.

The carrier flies to 52 domestic and 28 international routes from four hubs in the Philippines, according its first- half report. It had a fleet of 38 aircraft, with an average age of 3.6 years.

Sales rose 17 percent to 33.9 billion pesos in 2011 and may increase 18 percent to 39.8 billion pesos this year, according to the median of 10 analyst estimates compiled by Bloomberg.

To contact the reporters on this story: Clarissa Batino in Manila at cbatino@bloomberg.net; Cecilia Yap in Manila at cyap19@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net.


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