Philippine Business Magazine: Volume 8 No. 5 - Industry
Bigger Skies
Not only one, but three flag carriers!
By Delma L. Peyra

In business, timing is everything. In 1997, Cebu Pacific was scheduled to ply the profitable Manila-Hong Kong route. Hot on the heels of the Ramos administration’s air liberalization policy, the Civil Aeronautics Board gave the airline a certificate of public convenience and necessity (CPCN) for international flights. But sensing dark clouds in the horizon, the Gokongwei family scrapped plans to fly international routes. It turned out to be a very prudent move as the Asian financial crisis of 1997 wreaked havoc on the airline industry – shutting down Grand International Airways and destroying Philippine Airlines’ ambitious fleet expansion program.

Fast-forward to year 2001. Cebu Pacific has successfully renewed its CPCN and has been designated as the country’s second flag carrier. While the exact date of the start of international operations has not yet been finalized, all indications point to a systems-go.

In San Francisco on 7 September (days before the terrorist attack on the World Trade Center), Cebu Pacific led by Chairman John Gokongwei and his son, President and CEO Lance Gokongwei signed a deal with American firm Pegasus Aviation for the lease of two Boeing 757-200s. Moreover, flight routes to Southeast Asian destinations, among them Singapore and Malaysia are being finalized. Pending applications include flights to the United States, Japan, Australia, Korea, Taiwan, and Hong Kong.

Amidst these developments, Cebu Pacific is banking on its recognized sound business footing to be able to make its regional expansion a success. On the other hand, there are also issues that have implications not only on operations, but also on the whole airline industry and the government’s air liberalization policy.

Running a Good Business
From the start, Cebu Pacific was profitable. In 1996, its first year of operations, it netted P3 million out of P750 million in revenues. Four years later, it has cornered more than 30% of the domestic airline industry, flying to high-traffic routes such as Manila, Cebu, Davao, Tacloban, Iloilo, Bacolod, Cagayan de Oro, Zamboanga, Kalibo, Roxas, and Dumaguete. By fiscal year ending March 2001, Cebu Pacific posted P705 million in net income. This level of profitability was a result of sound strategies. These included leasing a standardized fleet of only one aircraft that meant manageable maintenance as well as crew training for its fleet of 12 DC9s.

Also, the airline has distinguished itself for its dedication to customer service — flying almost always on time (84% of on-time — to the minute — departure while 95% of flights are off within 15 minutes of schedule). Eschewing formality, Cebu Pacific’s employees exude friendliness – dressing more casually than other airlines to encourage more rapport with travelers.

For its regional plans, it pays that Cebu Pacific is 49% owned by JG Summit — one of the country’s biggest conglomerates (current assets: P128.6 billion). It has interests in petrochemicals, telecommunications, property, food, and retail businesses that extends to Southeast Asia and China, employing more than 26,000 employees. JG Summit is also one of the country’s most profitable with net income for the first half of this year reaching P1.5 billion. At its helm is the shrewd but dynamic 75-year old John Gokongwei, who early in his business career was a traveling merchant, selling goods from Cebu to Manila and vice versa.

The Competition
While it is almost sure that the second flag carrier will be plying initially the Southeast Asian routes, the final routes to be awarded by the government to Cebu Pacific have not yet been announced. The delay could be attributed to the government’s desire to accommodate the final plans of Philippine Airlines (PAL) which was saved by the Estrada administration from a final shutdown in 1998. Scouring for investments worth at least US$500 million, PAL plans to launch three new Asia-Pacific destinations, among them Bangkok and Shanghai while cutting Middle East flights.

PAL is bullish about its future. On its third year of rehabilitation, it has posted profits for two straight years, gaining a net income of P486 million for the fiscal year ending March 2001, up 480% from its net earnings of P46 million the previous year. Prior to this, PAL was in the red for six straight years. With its fleet increased to 32 aircraft after a massive cutback to 22 from 54 aircraft during its first year of receivership, it has resumed flights to Sydney, Pusan, Taipei, and Jakarta and added flights to Vancouver and Ho Chi Minh City. Finally, company officials are looking at reducing the period of rehabilitation from ten years to five, depending on how robust the growth and profits are in the coming year.

Meanwhile, the Civil Aeronautics Board (CAB) has also recognized Air Philippines as a flag carrier and has also given it a go-signal to fly abroad. This move by the CAB has become a thorny issue as fears of monopoly in international routes have been raised by some groups. The carrier’s major stockholder is Filipino-Chinese tycoon Lucio Tan, who also owns the biggest stock in PAL.

The Freedom to Fly Coalition, a group which supports an open skies policy for airline industry alleges that the combination of PAL and Air Philippines operating international destinations could crowd out other airlines, including Cebu Pacific. Among the highly profitable routes are Hong Kong and the United States, where a lot of Filipino contract workers and expatriates reside.

Clearly, the direction of how competition will go among local airline industry players also plying international routes will depend a lot on how the government portions out its route assignments. And yet, this far, with two more flag carriers, the policy of liberalization which has seen success in the domestic arena is already on its way to conquering bigger skies.