Airline Industry in the Philippines
Introduction In Asia, one of the first countries to embrace air transport is the Philippines. Founded in February 26, 1941, Philippine Airlines made Sais’s oldest carriers and oldest operating under its current name. The airline’s first flight was made on March 15, 1941 with a single Beech Model 18 NP-54 aircraft, which started its daily services between Manila and Baggie, later to expand with larger aircraft such as the DC-3 and Vickers Viscount. Today, despite the numerous challenges faced, the Philippine Airline Industry still survives with more than 50 destinations within the Philippines ND around the world.
This paper aims to show the Market Structure and Outlook of the Airline Industry in the Philippines. Likewise, Porter’s 5 Forces as well as the Threats and Opportunities for the Airline Industry are presented. The top 2 Airlines companies which are the Philippine Airlines and Zebu Pacific, are illustrated to provide more insights as to the strengths, challenges and competition in the industry. Recommendations for improvement are also being given by the end of this paper.
Market Structure For 22 years, Philippines Airlines, being the first air transport company was able o dominate the country’s domestic airline industry. The monopoly created control over the domestic flight schedules, number of routes served, flight frequencies and fare. Moreover, it also resulted inefficiency in the quality of service, since it was not tailored to the demand. The airline was not concern to keep its service to certain standards to keep and attract even more customers since it knows that passengers had no alternatives.
Left with no choice, travelers have to contend themselves of what PAL has to offer. Today, domestic air transport industry has evolved into oligopolies structure. The liberalizing under Executive Order 219 signaled the entry of new airlines in the industry. The bigger players, as defined by the size of their fleet and aircrafts (Philippine Airlines, Zebu Pacific, and Air Philippines) are concentrating on the major trunk lines where traffic demand is heavier while smaller airlines (Zest Air and South East Asian Airlines) are flying the secondary or tertiary/rural routes where traffic demand is lighter.
In contrast, except for the number of sectors, much of the secondary and tertiary routes were now slowly being penetrated by two of the major players (Zebu Pacific ND Philippine Airlines) with the launching of their new small fleet. The presence of big carriers in secondary and tertiary routes could kill small carriers flying the said routes. Competition comes in terms of comfort that a passenger obtains by flying Airline Industry in the Philippines By Imperfective they could charge lower airfare than smaller airlines. Zebu Pacific is providing PAL stiff competition in major trunk lines.
In 2007, Koenig said Zebu Pacific had a 43 percent share of the domestic market while Philippine Airlines had 39 percent and Air Philippines, 11 percent. Last year, Subspace ad a load factor of 83 percent compared to PAL’S 79 percent and Air Philippines’ 73 percent. The entry of new players resulted in intensive competition in the business. Competition opens the air industry to travelers who previously could not afford to travel by air by giving promotional and discounted fares. Furthermore, it provides passengers a wide range of choices on departure schedules, facilities and service quality.
The Industry: Porter’s 5 Forces The growth in the domestic airline industry is fast but the competition has been fierce for the last few years. The Porters 5 forces model is a good representation of our analysis because it stresses the risks of entry by potential competitors, bargaining power of buyers, threat of substitutes, bargaining power of suppliers, and the effects of rivalry within the industry. Threat of New Entrants Regulatory Barriers The Government does not allow foreign carrier to fly the country’s domestic routes, thus limit the domestic market to domestic airlines.
Brand Loyalty In the airline industry, passengers are concerned about safety, reliability, Economies of traffic density This refers to the fall in average unit cost as the number of passengers ravening on a particular route increases. This is achieved if an airline adds flights in a route or seats on existing flights. If the incumbent airline is realizing economies of density in a route, potential entrants are deterred from entry by the choices available to them. That is, entry can be made either on a small scale but with a significant cost disadvantage or on a large scale that is likely to depress airfares significantly (Warren et. L. , 1998). Incumbent airlines possess some advantages that would prevent potential entrants from achieving economies of density. One, incumbent airlines generally eave established interlining agreements with other airlines that could feed connecting traffic into the route at issue. There are significant reductions in transfer costs available for passengers who prefer interline travel. Potential entrants would therefore have difficulty attracting this kind of passengers without interlining arrangements. But making interlining arrangements could also prove difficult and could put the potential entrants at a cost disadvantage.
This would require potential entrants to either duplicate the incumbents existing arrangement or hire existing airlines who can provide feeder services. Most likely, those who can provide feeder services are already committed to the incumbent airline and hence, would only be willing to shift loyalty if offered a higher price (Warren, et. Al. , 1998). Frequent Flyer Program The existing frequent flyer program of the major players in the airline industry (Philippine Airlines: Mayhap Miles) can also act as entry barrier to potential entrants since these programs build passenger’s loyalty to the airline offering them.
Study shows that travelers particularly business travelers always chose their flights in order to accumulate FTP mileage points. These FTP points can eventually be converted into free airline tickets or seat upgrade. Thus, potential entrants would have difficulty pulling the existing clients who are already a member of the carrier’s FTP. The use of Computer Reservation Systems has also the potential to close out potential players from the market of ticket sales. The CARS is a device that can be used to save time and cost in handling the growing number of flight reservations.
With the existence of CARS, travel agencies can easily view the seat allocation as well as the prices available of the certain airline. About 75 percent of flights made through CARS are made from the first screen page of the CARS (Hanson, 1996). Thus, airlines displaying their seat availability on the first screen of the page can be a vital source of competition. Bargaining Power of Customers Despite the Global crisis, the Airline Industry is trying to stay afloat and profitable. The trend in the Domestic Airline industry has changed over the years. The consumers demanded a more competitive industry by seeing lower prices.
This cause the airline to charge prices according to the current demand of the passengers. Threat of Substitute Products The source of competition in the airline industry is coming not only in the industry itself but also from the alternative modes of transportation such as water and land. The shipping industry is one of the major competitors of the air transport industry in providing transport services in the southern part of the country. Currently, shipping companies are also offering discounted and promotional fare to remain competitive in the growing market of the airline industry.
Another substitute for air travel in the business segment is teleconferencing. It geographic locations. Thus, business travelers have an option not to travel. Bargaining Power of Suppliers Labor Costs Labor is the largest single expense of the airline companies. The Airline workers who belong to one of a dozen labor unions have strong power in negotiation with the airlines since most of them belong to labor unions. Fuel Costs Next to Labor, fuel Cost is the second highest expense in the airline operations. Prices of fuel tend to fluctuate on a monthly basis. The increase in the cost of Jet fuel will also increase the operating cost.
Thus, monitoring the prices of fuel in the world market is crucial. Competitive Rivalry within an industry The airline industry in the Philippines is highly competitive. Though there are only few players, all are basically offering the same product. As a result, companies generally earn low returns because the cost of competition is high. Currently, major airline companies namely Philippine Airlines and Zebu Pacific are slowly dominating the secondary and tertiary routes. Last year, the two airlines bought new smaller fleet to cater to the demand of the growing market in the cities with small airports.
The entry of these airlines can serve as a major threat to small layers like Zest Air and Sear who are previously capturing majority of the passengers. Moreover, since CUBE and PAL have larger aircrafts, the spread of cost is bigger. Hence, they have more ability to charge lower airfare compared to the latter. Head to head in the international destinations. Zebu Pacific is increasing its passenger traffic in the international scene with the launching of new routes and buying more aircrafts. The potential merger of Zest Air and Sear can strengthen the competition within the industry.
They plan to purchase additional aircraft to enter onto the international market and to streamline the redundant domestic destinations to cut down the costs. External Threats and Market Opportunities External Threats Fuel Price The current threat in the airline industry is the fuel price. The increase in the jet fuel cost makes the airline cut in the domestic passenger fares. At Present, the fuel surcharge being imposed to the travelers is a temporary relief granted to the airlines to help them recover losses they incur from higher Jet fuel prices.
Government Intervention The implementation of open skies policy can have an adverse effect on the operations of local airline companies. Under the open skies policy, national carrier would have the right to fly over a country without landing, to stop in a country for refueling or maintenance without transferring passengers or cargo, and to carry it from one country to another and vice-versa. There was no limitation on airline designation,that even non-flag carriers can fly there from multiple designations. (www. Fining. Com).
Granting access rights to foreign airlines has no clear guarantee that governments of the participating foreign carriers would also grant the same concessions to Philippine carriers. Low Fare Concept The Domestic Airline industry faces imminent competition and price wars among the domestic players. Passengers are slowly accepting the concept of the low cost carriers. To adapt to the demand of the traveling public which is low cost and high quality airline, the industry players are continuously reducing its regular fares. Passengers can now enjoy all year round discounted fare by planning and buying their tickets ahead of time.
The advance booking is a major boost for any airline as it allows them to better forecast passenger volume and maximize revenues on a per light concept. More importantly, the new low fare concept will able to capture a good fraction of the alternative sea transportation market, therefore, further growing their base market. Tourism as a complimentary Industry ; Complimentary industry like tourism will increase the demand for airline service. A high volume of tourist arrivals means a high probability of tourists taking the air as a mode of transportation to explore the available tourist spots in the country.
The increasing passenger traffic in cities like Babushka and Catalan can be attributed to the growing number of tourists. Airline companies locally are starting to build partnership with hotels and resorts creating tour packages to cater to the demand of both local and foreign tourists. Philippines Airline Companies Philippine Airlines Company Background Philippine Airlines (PAL) is the flag carrier of the Philippines. Founded in 1941 by a group of businessmen led by Andrea Syrians, it became the first airline in Asia.
With a long and distinguished history pning over sixty years, PAL deeply involved itself and touchdown, PAL planted the seed of growth. PAL has become one of the most respected airlines around the world with a young ND modern fleet of 47 diverse aircraft and a route network that ps 31 foreign cities and 30 domestic points. Strengths and Challenges Experience With more than 60 years of industry experience, PAL has the capability to adapt to any situation or circumstances that they may face. Market Leadership Philippine Airlines has long been the market leader of the industry.
However, since the deregulation of the industry, it has lost its leadership in the domestic market but it has remained to be the country’s leader in international flights. This might be short-lived as its local competitors are now eyeing the international routes. Fare and Quality of Service Fierce competition has left PAL to improve on its services and slash fares to keep up with other local airlines. It began to embrace the electronic business by improving its website and adding new features such as online booking. Mayhap Miles Mayhap Miles is the Philippine Airlines frequent flyer program.
It was established in 2002 by merging all existing PAL frequent flyer programs namely, Palsies, the Mayhap Club and the Flying Sportsman. In line with this, Mayhap Miles members earn miles that can be redeemed at face value on most Philippine Airlines-operated lights, as well as on code-shared routes of partner airlines. With this Mayhap Miles program, members can enjoy free trips, travel award ticket or service class upgrade award. Zebu Pacific Zebu Pacific (CUBE), a subsidiary of the Consignee’s JAG Summit Holdings, is the low fare leader in the Philippines.
Launched in 1996, it became the country’s leading domestic carrier with the most number of flights and routes. It now flies to more than 30 domestic points and 15 Asian Cities. CUBE now operates the youngest fleet in the country with 21 Airbus and seven TAR 72-500 aircrafts. Lowest Fares CUBE offers the lowest year round fare for all its domestic and international destinations. Even in difficult economic condition, it continuous to be the pioneer in creative pricing strategies as it manages to offer the lowest fare in every route it operates.
Innovation & Creativity Considered as a young airline company, it was able to propel itself to be the country’s leading domestic carrier through its innovation and creativity. Customers are treated with a unique upbeat flying experience with CUBE, as this is the only domestic carrier that offers fun in the skies with its games on board popularly known as “Fanlights” gather with its entertaining in-flight magazine – Smile. Electronic Services By taking advantage of electronic commerce, CUBE was the first to introduce the E- ticketing service, prepaid excess baggage, and seat selection in the country.
It has also used email alerts to announce low fare promos to customers. Partnerships CUBE has partnered with various destination hotels, car rental service, travel insurance, and entertainment ticketing service, to provide its passengers a more Market Outlook Throughout the world, the air transport industry experienced radical changes nice the sass’s to meet the emergence of air traffic as a result of the ever-increasing integration of economies. From government owned or supported to independent, for-profit public companies, has been the pattern of ownership.
To increase the efficiency of the industry, reforms were made through deregulation and liberalizing towards decreasing restrictions on competition. The overall trend of demand to the Airline Industry has been consistently increasing. It can be seen that there would be more competition and greater pricing freedom. This will result in lower fares and sometimes dramatic spurts in traffic Roth. The industry has been observed to be repeating in its financial performance. Four or five years of poor earnings proceed five or six years of improvement.
But profitability even in the good years is generally low. In times of profit, the airlines will lease new generations of airplanes and upgrade services in response to higher demand. The entry of five new players in the industry, namely, Zebu Pacific Air, Air Philippines, Asian Spirit, Mindanao Express and Grand International Airways resulted to a strong and tough competition in the domestic flights. As the new airlines grow, PAL suffered a significant decline in market shares. Air Philippines and Zebu Pacific are currently PAL’S stiff competition in terms of the domestic flights.
However, even with the increased competition in the domestic air industry, this gave travelers lower airfares. The outcome is the rapid growth in domestic travel. PAL, however, still charges the highest fare. This picture shows that competition in the industry enables the more efficient, low-cost airlines to operate at fares lower than pre-competition days and yet continued to be profitable. There would be only a small number of big efficient airlines in the long run to arrive, should a financial problem in the industry occurs.
The Airlines with continued losses could force them to withdraw or exit from the industry or merge with those profitable. When it comes to flying international, PAL has remained recognized as the country’s flag carrier. Nevertheless, the absence of competition results to poor performance and growth. This could be seen in the lack of ability of PAL to take advantage of the opportunities in the country’s air services agreements (Sass). Based on the Philippine APACE study centre network (PAPAS), during 1996, PAL used only 61