Airline Weekly - September 26, 2011

Cover Story

Manila Ice: Philippine national carrier’s turnaround hits the skids, but others sense red-hot opportunity

Not long from now, the remarkable AirAsia will launch its latest joint venture: AirAsia Philippines. In doing so, it enters a market with both promise and peril, and one already a theatre of war between a high-flying LCC and a struggling legacy carrier.

To be sure, the Philippines has its problems as far as airlines are concerned. It’s hardly a wealthy country, with one in four people living on less than $1.25 a day, according to the World Bank. Infrastructure, including airport infrastructure, is underdeveloped. Transparency International ranks it 134 out of 178 on its corruption perceptions index, tied with Nigeria and Bangladesh. Investment is low, income inequality high and tax collection weak. Among ASEAN nations, Thailand, Singapore and Malaysia receive far more overseas tourists. Terrorist threats keep visitors away from parts of the country’s south. Safety concerns dog the country’s aviation sector. And the Philippine economy certainly wasn’t helped by the crisis in Japan, its second largest trading partner after the U.S.

All true, yes. But that’s not the whole story. If the Philippines was all bad news, AirAsia, for one, wouldn’t be so eager to enter. Nor would carriers as diverse as Cathay Pacific, Korean Air, Emirates and Delta be such active players in the market. And nor would the home-grown LCC Cebu Pacific be as successful as it’s been. Indeed, the Philippines offers big opportunities for airlines, ones increasingly being exploited.

Much of this opportunity is linked to the country’s flourishing if still underwhelming tourist sector. Last year, more than 3.5m people visited the Philippines from other countries, 17% more than in 2009 and 12% more than in 2008, the previous peak year. Naturally, this growth is fueled by fast economic expansion throughout East Asia, fast enough to send arrivals up another 12% in the first half of 2011—despite the Japan crisis and despite a massive 21% y/y drop in tourists from Hong Kong following an incident last summer in which eight Hong Kong tourists died in a Manila bus hijacking.

Government officials expect 3.7m visitor arrivals this year and roughly double that in the next five or six years. Helping their cause are the country’s relatively low prices—hotel costs are notably cheap, for example—and tourist draws like spectacular beaches and Spanish colonial cities. The visa regime is relaxed, airport fees are relatively low and northeast Asia in particular can’t seem to get enough of the country. Visitors from Japan are actually up 6% y/y so far this year despite the tsunami, and visitors from mainland China are up a bullish 17%. The volume of Taiwanese visitors is also way up, as... (453 or 1,814 words)

Also Inside this Issue:

What just happened? Suddenly Lufthansa no longer believes it can improve operating results this year. Yes, it still expects to make money in 2011. But not as much as it made in 2010.

That may not be surprising given much higher fuel prices this year. But that’s not news. What seems to have changed Lufthansa’s outlook last week were final revenue and cost figures for the month of August, which came in much weaker than those for July. The world’s increasingly ominous economic outlook moreover, also forced Lufthansa to reconsider its optimism.

The good news: this weakness is coming largely from longhaul economy class demand rather than premium demand, which is holding up rather well. And everyone seems to be scaling back capacity plans, including Lufthansa itself, as well as its national rival Air Berlin.

Not all airlines are becoming more pessimistic. As Lufthansa grows gloomier, easyJet is raising investor expectations. It says revenues are strong, costs are contained and profits for its fiscal year (which ends this week) are greater than previously anticipated.

IATA is more optimistic about the whole industry—sort of. It raised its profit forecast for 2011 thanks to stronger than expected passenger traffic. But 2012 will be a year of “sluggish growth and weak profits.”

There was plenty of other news too: United unveiling its new frequent flier plan, LAN receiving Chilean approval to merge with TAM, Emirates announcing two more Africa markets, oil prices slipping and, with great fanfare, Boeing finally delivering its first B787.

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