MANILA, Philippines (3RD UPDATE) – Two low-cost carrier giants have joined forces creating Asia’s largest budget airline network using hubs from the Philippines and Singapore in an aviation industry seeing consolidation.
The Gokongwei-owned Cebu Air on Wednesday said it is acquiring in full the local unit of Singaporean low cost carrier Tiger Airways for $15-million (around P665 million) financed mainly via internally generated cash.
Cebu Air will buy Tiger Airways’ 40 percent in Tigerair Philippines and 60 percent held by the Singapore-based airline’s local partners.
The formal announcement was made by chief executives of both airlines, Cebu Pacific Lance Gokongwei and Koay Peng Yen of the Tiger Airways group.
“This strategic alliance will allow both Cebu Pacific and Tigerair to leverage on our extensive networks spanning from North Asia, ASEAN, Australia, India, all the way to the Middle East. Our customers can expect an even wider range of travel options, and seamless travel connections while enjoying our trademark low fares,” Gokongwei said.
“Tigerair and Cebu Pacific share a vision for both airlines to join forces and compete more effectively in the regional market. Through this strategic alliance, we aim to establish a win-win partnership to forge a more competitive Tigerair. We also look forward to achieving greater cost savings from the coordinated operations while providing more travel options and greater convenience for our customers,” the Tiger Airways Group CEO said.
The strategic alliance will mean jointly operating common routes between Singapore and the Philippines as both carriers jointly sell and market their routes using codeshare and interline arrangements effectively expanding network coverage. The move follows similar consolidations in the local aviation market, with AirAsia and ZestAir forming a similar strategic alliance in early last year.
Tigerair will continue to operate under its brand — Tigerair, as the two carriers provide branding support.
By combining their resources, Cebu Pacific will be able to provide services to high growth markets including Australia and India. It will also boost Cebu Air’s flight frequency, as it will have gain more slots in often crowded and tight runways.
Earlier, regional think tank CAPA-Centre for Aviation said Cebu Air’s acquisition of TigerAir would cement its leading position in the local domestic market and result in another round of consolidation in a market which has at times suffered from irrational competition.
It added that domestic trunk routes would be left with competition from only three airlines including PAL, Cebu Pacific, and AirAsia Zest compared to five one year ago.
“Philippine authorities will need to determine if three players are sufficient to maintain competition. With no available slots in Manila, it will be nearly impossible for a new carrier to enter the market,” CAPA warned.
Tigerair Philippines operates out of Clark and Manila, with a fleet of 48 aircrafts. It operates an average of 102 flights per week with five aircraft to 12 domestic and international destinations.
Cebu Pacific meantime operates an average of 2,200 flights per week with 48 aircrafts to 24 international and 33 Philippine cities in its network.
From January – September this year, Cebu Pacific’s profit plunged 71 percent primarily due to foreign exchange losses. Net income stood at P664.1 million for the nine month period from P2.27 billion in the same period of 2012.
It flew 10.9 million passengers, as flights increased by 7.5 percent with the acquisition of new planes.
As of morning trade, Cebu Air (CEB) share price was up 3.45% at P50.95, while parent firm JG Summit also higher by 2.09% at P39.
Good for PH aviation
The deal, the second consolidation among carriers in the Philippines in a year following AirAsia Bhd’s buy-in of unlisted Zest Air, should bode well for the country’s airline sector, analysts say.
“The aviation market in the Philippines is overcrowded and largely unprofitable, except for market-leader Cebu Air. The deal will allow Cebu Air to solidify its market position,” Raymond Yap, analyst at SB Equities Inc, said in a research note.
Cebu Air’s takeover of Tigerair Philippines will allow it to raise its share of slots by about 10 percent in Manila’s crowded runways and limited terminal capacity, Yap said. Cebu Pacific is the country’s largest airline, with a market share of about a third compared with Tiger’s estimated 4 percent.
Tiger Airways has struggled to make headway because of its small operations locally and “irrational pricing” by rivals, Yap said.
Cebu Air’s shares are unlikely to gain much from the deal, with investors concerned higher fuel prices could hurt the airline’s margins and overall profitability, said Gregg Ilag, analyst at brokerage firm AB Capital Securities in Manila.
However, the alliance will strengthen the two carriers’ domestic presence more than its regional market share, some say.
“This alliance will be a threat only on the domestic front, particularly to Philippine Airlines. I think the international route is still more favourable for AirAsia given their network,” Ilag said. – With Reuters