Several startup carriers are attacking Philippine Airlines' former domestic monopoly and have international ambitions. Tom Ballantyne reports.Considering the skies over the Philippines were a stage monopolised by Philippine Airlines as recently as 18 months ago, the nation has since witnessed one of the Asia-Pacific region's most remarkable commercial aviation explosions.

With four aggressive newcomers - Grand International Airways, Cebu Pacific, Air Philippines and Star Asia Airways - already flying, the Manila-based flag appears under siege. Two others, Asian Spirit and Corporate Air, want to add even more spice to the airline smorgasbord.

Nor is the threat purely domestic. GrandAir already flies to Hong Kong and will launch to Seoul in July. Its sights are set on adding Taipei, Tokyo, Beijing, Vietnam, Brunei, Jakarta, Singapore, Kuala Lumpur and Bangkok. Cebu and Air Philippines each have an almost identical wish list, aiming to grab offshore routes by late this year or early next. Cebu says it will fly to the US and Europe by next year.

Cash-rich tycoons

While each of the newcomers has opted for different fleet solutions to tackle the market, there are some striking similarities between them. Most have ex-PAL executives in their ranks, all have big ambitions, and the majority are backed by cash-rich tycoons. Against PAL's network strength they are offering fares up to 20 per cent lower, hot meals, and - something Filipino domestic air travellers have never had before - choice.

PAL's initial reaction to this avalanche was to fight liberalisation, and it reacted to every new airline application with legal manoeuvres and lobbying, arguing that market demand was inadequate. These days it is taking a calmer line. 'We like competition', says PAL president Jose Garcia. 'Their presence is going to force us to operate more efficiently and we intend to compete on service and efficiency'.

Boosting travel

He admits the new carriers are hurting PAL 'in the sense they are taking passengers'. But he suggests they have boosted travel numbers and are taking incremental traffic rather than existing passengers. The evidence supports him. Prior to GrandAir's entry last year, PAL's domestic load factors were 80.5 per cent. This year they have dipped by only a single percentage point.

Domestic deregulation in the Philippines got underway in earnest early last year, though the first newcomer, Star Asia, was launched in 1994. It remains small, operating a Dash 7 to secondary ports, but has been cleared by the Civil Aviation Board (CAB) to lease two Boeing 737-200s to widen its domestic network. Another early startup, Silangan Airways, ceased operations but hopes to fly again.

The biggest threat to PAL emerged in March 1995, when GrandAir began flying two Airbus A300B4s leased from General Electric Capital Aviation Services from Manila to Davao and Cebu. It has since acquired a third A300 and a B737 and plans to add two more B737s and another A300. Hotelier Dr Rebecco E Panlilio, president and CEO, owns nearly 60 per cent of GrandAir, with another 25 per cent in the hands of chairman Dante Santos, a former PAL president.

GrandAir has quickly built up a solid passenger base. 'In our first year we have been fortunate to capture 30 per cent of the market in Davao and 23 per cent of the Cebu market, and our load factors are in the high '60s and growing,' says Leslie W Espino, a former PAL official who is a director and senior adviser on strategic planning.

The startup boasts its own passenger terminal in Manila, a new facility attached to Panlilio's Philippine Village Hotel on the airport perimeter. It lost money in its first year, though this was expected. 'This calender year we could be making some small profit,' says Espino, who reports 'tremendous revenue growth'.

Passengers turned away

Before deregulation PAL was carrying 4 million domestic passengers a year - meaning that only a fraction of 1 per cent of the population flew - at load factors in excess of 80 per cent. Espino says that while PAL argued there was insufficient traffic to sustain newcomers, during busy periods passengers were being turned away. 'We believe that the true level of market demand for seats was 110-130 per cent of the traffic carried by PAL'.

A feasibility study showed demand was surging and indicated a need for 'substantial additional capacity' to Cebu and Davao. Having established these services, GrandAir added Cagayan de Oro, Ilo-Ilo and Tacloban in May, with flights to General Santos and Porto Princesa planned for later in the year. Officially designated the country's second overseas operator, and with services to Hong Kong and Seoul, the airline has established itself as PAL's primary rival.

Close on its heels is Cebu Pacific Air, owned by Chinese-Filipino tycoon John Gokongwei. Cebu opted for 102-seat DC-9s and a ValuJet-style operation based on low costs, no frills and friendly service. It aims eventually to grab 30-50 per cent of PAL's market. With four DC-9s already flying, by year's end Cebu Pacific will serve Cebu, Cagayan de Oro, Davao, Dumaguete, Ilo Ilo, Bacolod and Tacloban.

Enrique Davila, the airline's senior adviser, says regional targets are Kuala Lumpur, Bangkok, Jakarta, Hong Kong, Seoul and Guam. Cebu Pacific also has Europe and the US earmarked for March or April next year. Japan too is on the shortlist, though capacity will depend on forthcoming bilateral talks between Manila and Tokyo. According to Davila, the carrier is considering B767s and A330s for these routes. 'Because of our cost structure we should be able to operate very competitively to regional and longhaul destinations', he says.

Air Philippines completes the triangle of strong startups. Also owned by a Chinese-Filipino magnate, 'plastics king' William Gatchalian, it has maintained a lower profile than the others but already has made a significant impact. Sales manager Lingling Rodriguez says the carrier projected a modest 40 per cent load factor before launching in February. 'During that month the actual load factor reached 72 per cent and in March it rose to 76 per cent,' she says.

Air Philippines is using YS-11 turboprops supplied by Japan Air System plus two B737s. Initial services were from Manila to Iloilo, Zamboanga and Subic, and three more destinations were added in May. It expects to have 16 aircraft by next year, including another three leased B737s, serving at least 12 domestic ports. The B737s, or Airbus A300s, will be used for regional international flights, possibly late this year or early in 1997. Talks are underway with a view to JAS taking a significant equity stake.

Opposing application

Corporate Air, a charter company which feeds Federal Express' hub at Subic Bay, has yet to get off the ground as a passenger carrier. PAL is opposing its application for passenger services on the grounds that it 'is not financially fit and operationally capable of operating the services it has applied for'.

PAL will continue to dominate the market because of its extensive network, serving 43 cities and towns outside Metro Manila with a fleet of 22 aircraft. The big carrier's major complaint today is not the presence of startups but the system which sees it forced by government to continue flying highly uneconomic secondary routes 'in the public interest'.

PAL president Garcia says breakeven load factors on some of these routes are 140-150 per cent. He argues that either startups should be forced to operate under the same conditions, or PAL should be free to select where it flies.

The newcomers merely smile at that suggestion saying, despite PAL's complaints, it towers over them like a giant. 'There is no way we can compete with them, but we also know there is enough market out there and it is a matter of us maturing as an airline and offering passengers the service they want,' says Air Philippines' Rodriguez in a fairly typical reaction.

New passengers

Between 1985 and 1994, with PAL in a monopoly position, domestic passenger traffic rose on average 4.1 per cent annually. It is estimated traffic lifted 10 per cent last year, and forecasts project growth of 12 per cent a year through to 2000. The new arrivals say that means there will be plenty of new passengers to go around, and insist that competing with PAL is not on the agenda.

This is a familiar refrain from startups entering a newly deregulated market against a big, established incumbent. If experience elsewhere is duplicated, competition will intensify as the newcomers get established and grow. PAL is likely to react, probably touching off bouts of price discounting as the parties vie for passengers.

The startups will need to beware of growing too rapidly, particularly on their hoped-for international routes. It will be critical to focus on keeping costs low while maintaining yields.

Ultimately, not all the startups are likely to survive, but most are showing signs of being around for a while. Even if some fall by the wayside, PAL will have to become accustomed to the company.

Source: Airline Business