Brent Hannon/MANILA

New carriers launched since aviation was deregulated in the Philippines in late 1994 have enjoyed rapid growth as a result of the prolonged crisis at Philippine Airlines (PAL). The crisis, which came to a head with a pilots' strike in June this year and a two-week cessation of all flights from 23 September-7 October, served to boost further the load factors and profit margins of the new airlines.

The three new carriers launched since deregulation are Grand Air, Air Philippines and Cebu Pacific Air. Grand Air was first, beginning flights in March 1995, followed by Air Philippines in February 1996 and Cebu Pacific Air in March 1996. All three pursue a similar strategy: to buy cheap, used aircraft; to keep costs low; and to focus on domestic routes. All have continued to blossom in the wake of deregulation because all routes are open to competition and applications for new services are quickly approved. The government has also set a ceiling on fares, but, on most routes, the airlines compete with fares well below this level.

Before the pilot walkout in June, PAL commanded 84% of the domestic market, measured in numbers of passengers. Now, PAL's market share is less than 50%, while Cebu Pacific has 30% and Air Philippines 15%. Grand Air has a 5% share, while a fourth carrier, Asian Spirit, operates a pair of NAMC YS-11 twin turboprops and two de Havilland Canada Dash 7s to small villages and resort destinations.

Cebu Pacific's load factors reached 90% through most of October, up from an average of 80% for the year. Grand Air has been flying about 60% full during October, but marketing manager William Panlillo expects that to rise to 80% by the end of November. Cebu Pacific and Air Philippines were profitable even before the problems began at PAL. Cebu Pacific started making money seven months after its launch, says senior advisor Ron Ridgeway. "For an airline, we make a good return," he says.

Air Philippines operated at a loss during its first year, says president Augustus Paiso, but cleared $175,000 in 1997, and has been profitable this year, despite the Asian financial crisis. "We're meeting our targets," says Paiso. Grand Air is losing money, but Panlillo hopes the coming high season will lift its fortunes.

With low fares and on-time flights, the lean new entrants present a sharp contrast to PAL. A government-owned carrier until 1992, PAL has long been a sinecure for do-nothing employees with government connections, and was typified by high costs and low profits. PAL still has 8,700 employees, a number it wants to reduce to 7,500. "They still have more than 8,000 employees and they're trying to fly 22 aeroplanes. They're really only flying about 10, so they have 800 employees per aircraft," says Ridgeway.

Cebu Pacific, by contrast, has 85 employees per aircraft, while American Airlines, for example, has about 200 per aircraft. "We do all the maintenance ourselves, except the D-check," says Ridgeway. Grand Air, with two aircraft, has 250 employees.

When it had the domestic market to itself, PAL had a reputation for delayed flights. On the busy Manila-Cebu corridor, the first of eight scheduled daily flights would often leave on time, but subsequent aircraft were often delayed until they were filled with passengers, and "extra" flights were cancelled.

The market is now much changed - for the first time, passengers can choose an airline based on price, frequency and service. The Manila-Cebu corridor is now served by four carriers: Cebu Pacific operates five flights a day; Air Philippines and PAL fly four times a day, and Grand Air has two flights a day. Prices for the 50min flight range from 999 pesos ($23) for a one-way flight on Grand Air, to $40 for a one-way flight on PAL. Can the airlines make a profit at that price? "Our planners think we can make just a little bit," says Paiso (Air Philippines charges about $27 for the Manila-Cebu flight).

Cebu Pacific has a fleet of eight McDonnell Douglas DC-9-30s, and has modelled itself on US carrier Southwest Airlines in having point-to-point traffic, low fares, a single aircraft type and on-time flights. Like Southwest, which initially competed with the automobile, Cebu Pacific uses low fares to attract customers who would normally take surface transportation.

"We have 7,100 islands here, and people either get on a ferry or a bus, so our competition originally was the ferry boats and the buses," says Ridgeway, formerly president of Braniff. "From here to Tacloban is 18h by bus, and it's an hour by air." Cebu Pacific will add a further DC-9 in December and another in January. The carrier plans to acquire two more by next March. The aircraft are 30 years old, but are well maintained, says Ridgeway. Finding and importing parts is a major challenge for all Philippines domestic carriers. "We have a manager of imports with three employees who do nothing but clear shipments from customs, full time, seven days a week," says Ridgeway.

Cebu Pacific flies to eight cities: Bacolod, Cagayan, Cebu, Davao, Iloilo, Kalibo, Manila and Tacloban. All flights originate in Manila, except for a flight from Cebu to Davao, and another from Cebu to Iloilo. "Those are the biggest markets," says Ridgeway.


Air Philippines serves many of the same destinations, but includes smaller cities in its network. It has eight Boeing 737-200s, of which seven are in service, plus four YS-11s, of which two are flying. Air Philippines also wet-leases three Boeing MD-88s from Taiwan's U-Land Airlines, but is unhappy with the aircraft - their long wheelbases prevent them from making 180¼ turns on provincial runways. As a result, while Air Philippines' 737s can operate into 23 airports, the MD-88s can use only 10. Air Philippines has backtracked from a proposed partnership with U-Land, in which the Taiwanese carrier was to have taken a 40% stake in the airline.

Air Philippines would prefer to acquire additional 737-200s and -300s, says Paiso, and plans to buy two used Raytheon Beech 1900s for resort destinations. "We plan to bring our fleet up to 12 aeroplanes," he says.

Grand Air, after a promising beginning, is struggling. It has a poor reputation, and stories abound of flights delayed for hours without explanation, or cancelled without notice. One of its 737-200s remains on the tarmac at Taipei's Chiang Kai-Shek Airport as the company negotiates with creditors. Its two 737-200s both fly part-time.

In March 1995, Grand Air launched flights to Cebu and Davao, and soon added more domestic routes. In late 1995, with three leased Airbus A300B4s, the carrier began flying to Hong Kong and Taipei, and added Seoul in early 1997. Soon after, it suspended all three international routes and returned the A300s.

Grand Air's early domestic routes were successful initially, but its overseas expansion coincided with the Asian crisis, which raised costs and reduced traffic. The carrier's problems have made rivals cautious - Air Philippines and Cebu Pacific have no immediate plans to fly overseas.

PAL remains the top player on domestic routes. Its fleet of new Airbus A320s, A330s and A340s contrasts with the older aircraft used by its competitors and its reputation has given it a boost. "On 7 October, our first day back, we had very bad load factors, around 33%," says vice-president for finance Jaime Bautista. "On the second day, it was up to 40% and, on the third day, it was 60%. Now we are running at around 80%, and certain flights are 100%." On-time performance is running at 95%, says Bautista.

PAL has streamlined operations since resuming flights. It has reduced the number of domestic flights, lowered fares and emphasised on-time performance. Its ticket prices, however, remain 10-20% higher than the others. Bautista says the carrier will instead emphasise on-time performance and reliability. At the end of October, Manila's Securities and Exchange Commission approved a request from PAL to return 14 leased aircraft and pay off 84.6 million pesos in debts. PAL will terminate leases early and return four A340-200s and four A300B4s to Airbus. Six Fokker 50s will be returned to Fokker leasing subsidiary Aircraft Financing and Trading.


PAL's future fleet size will depend on whether it finds another airline willing to invest about $130 million for a 40% share. That would allow it to keep 22 aircraft, including four Boeing 747-400s and two A340-300s, and fly overseas routes. If no backer is found, PAL would return all but 13 aircraft to creditors and become a strictly domestic airline. Even so, it would have the country's largest and newest fleet: six 737-300s, three A320s and four A330s.

The airline faces a daunting challenge. Even before the pilots' strike, it had been hurt by the Asian crisis. The 50% devaluation of the peso pushed costs up, while yields and load factors fell as regional traffic declined. The airline has lost $350 million in the last five years, and an additional $170 million since 1 June.

The other carriers have also been hurt by the crisis: the costs of spare parts, fuel and lease payments have risen sharply as the number of overseas visitors to the Philippines has dropped.

Safety is another concern. All three of the new airlines have been grounded for safety violations within the past year by the Philippines Air Transportation Office (ATO). The ATO sharpened its surveillance of the fledgling carriers as a result of a Cebu Pacific crash on 2 February, when a DC-9 flew into a mountain in Mindanao, killing all 104 people aboard.

Grand Air and Air Philippines were grounded in August for various infractions, most involving record keeping. Despite their past problems, all four airlines are flying, while the Philippines has emerged from the Asian crisis in better shape than most of its neighbours. With a stable economy, and the deregulated airline market, the domestic passenger market is expected to grow by 9-10% a year, says Paiso.

Source: Flight International