The Impact of Budget Fares on Airlines

to Philippine Tourism
A Case Study



Submitted by:

Hazel Anne Guinoo
Patricia Mallari
Rocel Panganiban
Michelle Isarna
Arleigh Isorena
Cindya Jorduela
Jeanalyn Ibanez
Princess Lupig
Liezel Mariquina
Johanna Pedico

Executive Summary
INTRODUCTION
The year 2005, is the year when budget fares were introduced to the Filipinos. The
number of passengers traveling from one of our 7,100 islands to another, or to Asian
countries will take only 4 hours and will not cost the passenger too much of their budget
and this became a growing strategy among airline companies. Our country cater 6 local
commercial airlines among them are Cebu Pacific, Philippine Airlines, AirPhil Express,
SEAir, Zest Airways and Air Asia Philippines, they are all offering budget fares to and
from different local or international destinations. The Cebu Pacific dominated the
Philippine Airlines ruling the domestic market on budget fares. The Filipinos have this
buying attitude that we patronize products and services that are low cost but can provide
what we are looking to be satisfied. These local commercial airlines provide the said
buying attitude of the Filipinos and even the foreigners coming in our country, they also
expand their destinations to over seas. Budget airlines are focused on short- to medium-
haul routes, with their success in winning passengers through low fares forcing many
full-service "legacy carriers" to launch their own low-cost options in response to the
demands of the airline service industry. Recently, Cebu Pacific announced that they are
now flying to Dubai starting October, their first long-haul-flight. The budget fares of
airlines in our country will surely have an impact to the travelers, economy and the
tourism destination itself.
According to Tim Hume of CNN (2012), While European carriers are facing turbulent
times, some Asian airlines are hoping that a cut-price long-haul model will find a ready
market in Asia's growing middle class. Globally, low-cost carriers have been the
industry's success story over the past decade, with their market share rising from 8% of
all seats sold in 2001 to nearly 26% this year, according to the Centre for Aviation.

REVIEW OF RELATED LITERATURE
According to AYA LOWE of RAPPLER.COM, The year 2012 put the global spotlight
on the Philippine aviation industry, largely due to the phenomenal performance of the
low-cost carriers flying domestic and international routes.

The share of budget carriers in the Philippines in the first 9 months of 2012 has soared to
an average of 60%, reflecting one of the highest in the world, according to business
consultancy firm Innodata. Almost 80% of the domestic market's 15.5 million passengers
and about 30% of international's 12.5 million flew budget airlines in January-to-
September.

Since budget flights were introduced to Filipinos in 2005, the number of passengers
hopping from one of the archipelago's 7,100 islands to the next, or to Asian destinations
less than 4 hours away, have been growing by leaps and bounds. The year 2012 saw the
highest jumps.


The promise of low fares and new destinations were key reasons for this exponential
growth. Budget carriers, in turn, battled it out in this increasingly competitive playing
field by acquiring fuel-efficient aircraft and testing new markets. Some beefed up their
war chest by getting new owners or partners with deeper pockets or wider reach.

Of the 6 local commercial airlines, budget carrier Cebu Pacific Air continued to rule the
domestic market that Philippine Airlines (PAL) dominated for decades. Under new
management starting this 2012, full-service carrier PAL remained the leading local airline
flying international skies.

On their heels are SEAir, which Singapore's Tiger Airways partly acquired in November
2010, following a model almost the same as AirAsia, the region's giant, which set up
AirAsia Philippines, a local player. Seair, the smallest player, announced it is looking for
an investor, too. PAL's budget arm, AirPhil Express, has been expanding its route
network abroad.

Consolidation, expansion

While the airlines are taking advantage of the Philippine government's goal to increase
tourist arrivals to 10 million by 2016, a Singapore-based aviation analyst expects some
consolidation in 2013 as well as expansion among the players.

“As LCCs (low-cost carriers) already control over 80% of the Philippine domestic
market, I wouldn't expect further increases in market penetration domestically. I think we
are instead potentially in for a year in which we may see some consolidation in the
Philippines domestic market," said Brendan Sobie, chief analyst at Centre for Aviation
(CAPA).

"As for the international market, there should be a further increase in the LCC penetration
rate as several of the local LCCs continue to expand regionally in Asia, and as Cebu
[Pacific], and possibly AirPhil, launch their new long-haul low-cost operations,” he
added during an interview with Rappler.

South Korea is currently the Philippine’s largest market. However, local carriers believe
the Chinese market could eventually overtake South Korea due to China's size and
number of airport connections. Those plans have to be put on hold until the geopolitical
tension between the Philippine and Chinese governments over the disputed South China
Sea (also called West Philippine Sea) is resolved.

Many local airlines have also been eyeing the Middle East, which is a price-sensitive
market as it primarily consists of migrant worker traffic. If the ongoing government-to-
government negotiations on air rights would produce higher seat entitlements to lucrative
markets like Saudi Arabia and United Arab Emirates, keen players with aircraft for long-
haul flights, like Cebu Pacific and PAL, would likely benefit.

Other lucrative long-haul markets, like the United States and the Europe Union, remain
closed to new or additional flights by Philippine carriers. Since 2008, the Civil Aviation
Authority of the Philippines (CAAP), which regulates and oversees the airline industry,
have failed to comply with minimum international aviation safety standards set by the
International Civil Aviation Organization (ICAO).

Markets like South Korea, Japan, Canada, and others have followed suit and have also
blocked any new Philippine carrier from entering its country until the CAAP passes
ICAO safety audit.

Overburdened infrastructure

On top of the limits imposed by bilateral air rights and and regulation, another major
challenge airlines have been facing in the Philippines are infrastructure constraints.

“[Infrastructure] is not up to the challenge of expanding, re-fleeting and unprecedented
orders of aircraft [by local airlines],” Civil Aeronautics Board executive director Carmelo
Arcilla told Rappler in an interview.

The World Economic Forum’s Travel and Tourism Competitiveness Index 2012 ranks
the Philippines 112th among 139 countries for the quality of its air transport
infrastructure. The only Asian countries to rank lower are Nepal, Bangladesh and
Mongolia.

The Terminal 1 of the country's main gateway -- the Ninoy Aquino International Airport
(NAIA) -- has remained on top of the list of world's worst due to the main foreign
carrier's host facility's "collapsing ceilings, overcrowding, rampant bribery."

There is little room for physical expansion of the airport located in the center of the
capital city. The Transportation Department could only announce a slotting system to
shift bulk of traffic to off-peak hours to avoid flight delays and terminal congestion.

The government has been mulling on making the airport in Clark, which is about 80
kilometers away from the capital, as the country's new main gateway, but access has been
an issue as the long-delayed Northrail project remained saddled by financial and legal
issues between the government and the rail system's Chinese contractor.

Meantime, opening up additional access points to the country via regional airports have
been slow, largely due to the mandated auction process and changes in the plans for the
airport projects' financial design. Key airports, including Cebu, Puerto Princesa, Bohol,
Cagayan de Oro, were meant to provide overseas Filipinos, tourists, businessmen direct
and mostly no-frills trip to their destination.
The year that was

Below is a rundown of how 2012 was for each of the local airlines:
Philippines Airlines (PAL)
Destinations: 29 domestic, 31 international
Fleet : 40
Owners: Lucio Tan and San Miguel groups

San Miguel, the country's biggest conglomerate, acquired a 49% stake in PAL's parent
companies in April and assumed control. The legacy carrier has since been aggressively
pursuing lucrative long-haul routes but has been stumped by the Philippine regulatory
body's failure to meet safety oversight standards.

“San Miguel has said it aims to have PAL re-enter the European market and expand in
North America. It is unlikely PAL will resume services to the Middle East as it is more
logical to have its budget brand (AirPhil) operate these services,” said Brendan Sobie,
Chief Analyst at CAPA.

For the US market, currently PAL's cash cow, PAL has announced a workaround the US
aviation ban: It has entered into arrangement with a Cayman-based airline that is not
banned from mounting flights to the US.

“In the case of Europe, the airlines can actually work out an exemption. Unlike in the
U.S., it’s the country (Philippines) that is banned, therefore, the airline is affected. We are
an ISO (International Organization for Standardization) certified airline by IATA
(International Air Transport Association), therefore we can use that to
leverage an airline exemption and we are working on that,” said PAL vice president for
marketing support Felix Cruz.

In the domestic market, PAL has dropped several of its smaller secondary routes which
are leisure-focused and have limited demand for premium or business passengers such as
Puerto Princesa. As a result, PAL now accounts just 18% of total local capacity.

PAL's fleet modernization program has lifted the country's imports portfolio in July, and
has led the two global giant aircraft manufacturers -- Airbus and Boeing -- scrambling for
PAL's orders. In August, PAL placed a US$7 billion order, the biggest airline deal in
Philippine aviation history.
Cebu Pacific
Destinations : 32 domestic, 19 international
Fleet : 41
Owners: Gokongwei group

The year 2012 was marked with aggressive fleet expansion -- mostly Airbus and ATR
aircraft -- as well as of local and regional routes.

It opened 10 new domestic routes in 2012 and expect to begin long-haul services (over 4
hour distance) in the 3rd quarter of 2013. It also expects the delivery of 20 more Airbus
single-bodied aircraft in 2013, with most to be allocated for Middle East routes where 2.3
million Filipinos are working.

Poised to be a new entrant in the long-haul market, which PAL has dominated, Cebu
Pacific has been pushing for seat entitlements from bilateral air negotiations. Cebu
Pacific pioneered the low-cost model in Asia, but only started
implementing it in 2004.


AirPhil Express
Destinations: 30 domestic, 3 international
Fleet : 21
Owners: Lucio Tan and San Miguel groups

AirPhil is the budget brand of the PAL group. Its operator, Air Philippines Corp., was
part of the deal when San Miguel acquired a stake in PAL in April.

San Miguel has rebranding plans for AirPhil. “It will be called PAL Express. There won’t
be Airphil Express anymore,” said Ramon Ang, the president of PAL, the parent firm of
Airphil Express and PAL Express, which is currently non-operating.

AirPhil has launched a new strategy to increase its domestic network taking over some of
PAL’s domestic routes. AirPhil will also focus on new markets as it expands its
international operation, which currently only consists of 5 scheduled routes. The
international expansion is part of strategies to lower its cost base through higher
utilisation of its Airbus A320 fleet.


SEAir
Destinations: 10 domestic, 5 international
Fleet : 5
Owners: Tiger Airways, Filipino partners

The year 2012 was a landmark year for South East Asian Airlines Inc. (SEAir). Its former
marketing partner, Singapore’s Tiger Airways, acquired a 40% stake for $7 million in
August. New managers have since assumed control.

During the same year, the airline also embarked on its largest network expansion ever. It
expanded its Airbus A320 family fleet from two to 5 aircraft in July.

It continued to adopt Tiger's low cost business model, then created SEAir International, a
full service airline that, starting on November 30, took on some of Seair's routes. It is
eyeing to increase its popular Batanes and Kalibo routes in 2013.

Zest Airways
Destinations: 14 domestic, 4 international
Fleet : 14
Owners: Alfred Yao group

Previously known as Asian Spirit, Zest Airways marked 2012 as a year when it
announced it is eyeing to sell up to 40% of the airline to another investor. Its yearend
deadline was not met, even after the group of juice magnate Alfred Yao said 3 foreign
groups, including a Chinese carrier Hainan Airlines Company Limited, have expressed
interest.

Zest is considered as one of the "most vulnerable" airlines in the low cost airline sector,
mostly because it does
not have the finances or fleet size compared to its bigger competitors. Its most valuable
assets are its slots in the congested Ninoy Aquino International Airport (NAIA), the
country's main gateway.

It adopted its low-cost model in 2008 and started to pursue a more aggressive expansion
in 2010. It has been looking to launch international flights to Hong Kong, Bangkok and
Singapore.

AirAsia Philippines
Destinations: 3 domestic, 3 international
Fleet : 2
Owners: AirAsia Berhad and Filipino partners

AirAsia Philippines, which is part of the Asian network of the Malaysia-based budget
carrier, AirAsia Berhad, is the newest player in the industry having only launched its
local operations in March 2012.

It allows AirAsia -- which has been operating low-cost regional flights in Clark in
Pampanga since 2005 -- to fly domestic routes and to mount flights from its hub in Clark
to other international destinations, complementing the expanding Asian route network of
the AirAsia family.

The Philippine unit has since then been working on expanding its regional operations
while reducing its local flights. - Rappler.com

It was the year of 2005 when the budget fares on airline industry was introduced to the
market. Aya Lowe (2012) from Rappler said that, the share of budget carriers in the the
Philippines in the first 9 months of 2012 has soared to an average of 60%, reflecting one
of the highest in the world, according to business consultancy firm Innodata. Almost 80%
of the domestic market's 15.5 million passengers and about 30% of international's 12.5
million flew budget airlines in January-to-September. The introduction of budget fares
and new leg destinations were key reasons of exponential growth in the economy.
Competitions in the local airline players become very tight. We currently have 6 local
airlines routing one of the archipelago's 7,100 islands to the next, or to Asian
destinations. The airline players are Cebu Pacific, Philippine Airlines, AirPhil Express,
Zest Air, Sea Air and Air Asia Philippines.


According to Eurocontrol and ELFAA, the market share of low cost carriers (LCCs) in
Europe increased from 4 percent in 1998 to 38 per cent in 2010; ENAC-KPMG (2011)
estimates a 18 per cent annual growth rate in the offered seats for LCCs in Europe over
the period 2004-2009, compared with zero growth for traditional airlines.

With the incumbent full service carriers (FSCs) crowding the available (and costly) slots
at the main hubs in the late 1990a, entrant low cost carriers were forced to turn to cheaper
secondary (local) airports; hence, LCCs developed a new model of airline connectivity,
based on point-to-point routes rather than the hub-and-spoke network, characterizing the
FSCs. By targeting secondary airports, often far away from the main hubs, in many cases
the growth of LCCs in the 2000s provided powerful opportunities for local development.

According to Alivernini (2012), Among the many different factors that affect tourism
trends, the affordability of international flights has been claimed to play a very important
role. This is why the presence of low cost carriers is often linked to tourism growth in
certain areas. This evidence, however, is both scarce and partial; it mainly focuses on
single-airports' analysis, carried out as case studies or assessed by means of time series
data. Moreover, while claims of a positive relationship predominate, the econometric
analysis does not always take into account potential reverse causality bias.
(www.congress.is)


The effect of budget fares to tourism industry is that the customers tend to buy cheaper
price for an airline. A low-cost carrier or low-cost airline (also known as a no-frills,
discount or budget carrier or airline or cheap flight) is an airline that generally has lower
fares and fewer comforts. To make up for revenue lost in decreased ticket prices, the
airline may charge for extras like food, priority boarding, seat allocating, and baggage
etc.
The term originated within the airline industry referring to airlines with a lower operating
cost structure than their competitors. While the term is often applied to any carrier with
low ticket prices and limited services, regardless of their operating models, low-cost
carriers should not be confused with regional airlines that operate short flights without
service, or with full-service airlines offering some reduced fares.
In due course, some airlines have actively sought to market and advertise themselves as
low-cost, budget, or discount airlines while maintaining products usually associated with
traditional mainline carrier's services which often result in increased operational
complexity. Among these products which tend increase complexity to reduce efficiency
are preferred or assigned seating, catering other items rather than basic beverages,
differentiated premium cabins, satellite or ground based wifi internet, and in-flight audio
video entertainment. As such by advertising themselves as low-cost, this branch and
category of airlines seek to gain a competitive marketing advantage over other similarly
priced air transportation carrier's products; even though in actuality fare prices for the
passenger may be parallel to other airline options due to the associated add-on fees low-
cost, discount, or budget; are increasingly accessing travelers to appear less expensive
than traditional network or airline alliance linked carriers.
METHODOLOGY
Research Design
This study will use the descriptive qualitative design. The descriptive method involves
the description, related literature and interpretation of the Impacts of budget fares in
Philippine tourism.The Review of related literature will try to ascertain the Budget Fares.
Data Gathering Procedures
The case study that we had done discusses about how impacts of budget fares are
affecting our tourism industry. We got our information by the use of World Wide Web
and the library. The researchers also include some Related Literature of the study to
prove that the case study is effective.

STUDY








ANALYSIS








CONCLUSIONS AND RECOMMENDATIONS