Making Flying Fun
The flight attendants keep the party going in the air with what it calls its Fun Games. Anyone who participates get a round of applause, especially if they win a prize. “Flying used to be like entering a bank,” says Gokongwei. “Many people were intimidated by it. Now that it’s affordable, we have to be approachable.”
This focus on carving out an identity as a fun airline to fly has paid dividends. When Cebu started in 1996, Philippine Airlines had dominated air travel in the country for 50 years. But last year Cebu flew more passengers for the first time–10.5 million versus PAL’s 9.7 million. Cebu captured 48% of the domestic market and 15% of the international market.
Profits have poured in, paving the way for a huge initial offering last October to fund its expansion. Cebu raised $623 million in the world’s largest IPO for a discount carrier and the Philippines’ largest IPO in U.S. dollar terms. In its first annual results as a public company, Cebu reported that net profits last year jumped 112% to $157 million, on revenue of $661 million, up 25% from 2009.
Like most budget airlines, Cebu Pacific changed how people get around and vastly expanded the market for air travel. Air Asia, the region’s largest discount carrier, did the same in Malaysia and then in other markets it entered; last year it ticketed 25.7 million passengers. In the Philippines the number of fliers soared from 7.2 million in 2005 to 16.5 million last year. Cebu flew only 2 million people in 2005, but it’s on track this year to carry 12 million and aims to carry 20 million in 2014. “We call it the Cebu Pacific effect,” says Gokongwei. “If we start flying somewhere, the traffic there will definitely increase. People used to take ferries [around the Philippines], but now they can afford to fly. It’s not that we are taking market share and others are shrinking–it’s that more people are traveling, and more are traveling more often.”
Some 79% of Cebu’s customers are domestic fliers, but the airline has also boosted the international market. “Cebu accounted for 50% of the capacity growth over five years to markets with the greatest increase in tourism to the Philippines–China, Malaysia and Singapore,” says Ian Malin of Seabury Asia Pacific, an aviation consultant.
From the beginning Cebu has had other local carriers to contend with; today PAL has its own budget offspring. So it’s had to keep finding ways to keep costs down and revenue up. It collects revenue from seat selection (more desirable seats such as those in the exit rows cost more), food and drinks (which aren’t offered for free), and merchandise such as Cebubranded travel products. “It’s giving people a choice, as some want essentials and others want the frills,” says Gokongwei. “It’s a continuing education process, but to save money, people learn very quickly.”
Cebu sometimes offers 10-peso fares, and creates a huge buzz when it does this to announce new destinations. “There are more people now going on quick weekend trips because it’s so reasonable,” says Candice Iyog, director of marketing. “And they are going to more places than just tourist hot spots.”
It was Lance’s father, legendary ragsto- riches entrepreneur John Gokongwei Jr., who had the idea to start Cebu Pacific. John, now 84, sits atop JG Summit Holdings, one of the Philippines’ largest conglomerates, and a family fortune that FORBES ASIA pegged at $1.5 billion last year. His interest in aviation was piqued after reading about U.S. discounter Southwest Airlines at the same time the Philippine government decided to open up the airline industry. But Lance believes there was another layer to his father’s interest: “About a year before we bid for PAL and lost. So when deregulation came up, well, my dad loves challenging monopolies.”
For the task of building the airline from scratch, he turned to his only son, Lance, then a 29-year-old Wharton graduate who had cut his teeth working in the family’s food business. “Father came up to my office one day and said, ‘I started this airline–can you think of anyone who could help?’” says Lance. “I figured that meant he wanted me to help, so I did. It was actually the first I had heard of it. It was his baby, but I adopted his baby at one day old, when it had four planes and no people.” Lance remembers being worried. “I had read a quote by [Virgin Atlantic Airways founder] Richard Branson saying the best way to become a millionaire in the airline business is to start as a billionaire.” Challenging PAL would require creativity and patience: “Most [domestic] airports were used to having a single carrier, so just to get counter space and permits or break through to agencies was difficult.”
The excessive regulation meant air travel was very expensive, so Lance knew that to make an impact Cebu would have to be the affordable airline. That meant changing the mind-set of travelers. “Airlines served hot meals, provided blankets and had business class, even for domestic flights, so customer expectation was very different when we started,” says Iyog. “We served snacks.” Lance also had to undo the preconceptions of his staff: “A lot of people came from legacy carriers, so changing their ideas of what guests wanted was a battle. Every time we said, ‘Let’s stop giving out newspapers,’ it would be a three-hour argument. But now no one [at a budget airline] would dream of offering free food, and customers don’t expect it.” Cebu launched its first flights in 1996 at prices 40% to 50% lower than PAL’s.
The company was profitable in its first nine years, but the rising price of fuel in 2005 brought it to a turning point. Lance studied European discounters Ryanair and easyJet and realized that to survive, Cebu would have to stick more strictly to the operating principles of what the industry calls a low-cost carrier. That meant using one type of aircraft, flying only nonstop flights (and not connecting through hubs) and selling tickets online. Cebu had been using inefficient second-hand aircraft, selling tickets largely through travel agencies, and offering meals and premium-class seats on international flights. “We were a low-fare carrier but not necessarily a low-cost carrier,” says Gokongwei. “In 2006 we found religion.”
Cebu’s initial approach was good enough to compete with PAL on domestic flights, but after it started flying overseas in 2002, it was clear that this wasn’t enough. “We wanted to benchmark ourselves internationally, to have a cost structure that could compete with the Ryanairs,” says Gokongwei. The airline started buying new planes, beefed up marketing and attacked costs. Today it sells 40% of its tickets on the Internet.
By 2008 the airline’s domestic operation was outgrowing its space at Manila Ninoy Aquino International Airport, leading Gokongwei to take a risk. He decided that Cebu should be the first airline to use a mothballed terminal built five years earlier. The move would allow him to consolidate international and domestic operations under one roof. Planes would no longer need to be towed between terminals. “The first two weeks felt like a big mistake,” he says. “The baggage handling and information systems were not working; the air bridges had no power; passengers were getting lost. But everyone pitched in. Management was there at 3:30 a.m., throwing bags into cargo holds.”
Gokongwei has shaped Cebu’s corporate culture as much as he has its discount philosophy. “If we want our people to genuinely smile at our guests, then it’s important they are happy as well,” he says. “There is no [division] between operations and management. Everyone gets the on-time bonus each month if we hit our target. It gets everybody focused on the same objective–making the customer happy.” At the headquarters near the airport the walls are painted to match Cebu’s bright orange and yellow uniforms, and everyone calls one another by their first name. “The Philippines tends to be very hierarchical, but here everyone mingles freely–you will see Lance spending time with the engineers and mechanics,” says Garry Kingshott, Cebu’s chief executive adviser.
The 44-year-old Gokongwei says his management style is a blend of his East- West educational background. “The Filipino side is the sense of humor and approachability, and the Western is more demanding in terms of results and being as objective as you can in assessing risks, opportunities and the talents of people.”
Cebu’s seat capacity has been growing by 20% a year, and that will continue with the delivery of 20 new Airbus A320s over the next three years; it now has 33. After achieving 40% growth in international passengers last year, the airline’s main push is to add overseas routes and build up markets in neighboring countries. But plans to expand beyond the five-hour capability of its planes are not yet in the pipeline. “We are not planning [longer] routes because we have huge growth plans for [short-haul] routes,” says Gokongwei. “We will focus on where we have a clear advantage.”
That will become more important next year when the Philippine government plans to open the industry to more competition. It will become much easier for an airline to win approval to fly to any airport in the country except Manila’s, though foreign carriers will still be prohibited from flying domestic routes.
What’s next for Gokongwei might involve much more than Cebu. The married father of a girl and a boy has already had his midlife crisis, but he put it to good use training for a marathon. That will help to clear his head if he oversees JG Summit some day. Already he handles much of its day-to-day business, along with his uncle, James Go. His five sisters also work in parts of the conglomerate.
Lance is keenly aware of how he’s different from his father and the role he must play. “My father is much more visionary,” he says. “I am more conservative, consensual, whereas he is more of a risk taker. He started as a poor man–he did not need a business plan. He goes more on instinct, and it’s my role to add the science to the method. How to maintain the science without losing the instinct is the key.”
PAL Battles to Reinvent Itself
Standing at the helm of Asia’s first airline, Jaime J. Bautista, president of Philippine Airlines, is a man on a mission. PAL was once the country’s dominant carrier, but today it’s under siege. It no longer carries the most passengers, losing that title last year to upstart Cebu Pacific Air. So Bautista’s mandate is to turn things around.
The 70-year-old PAL generated its biggest profit, $130 million, in fiscal 2007 and its biggest loss, $300 million, two years later. Bautista feels confident, however, “that the airline has hit bottom and is back on track.” For the nine months ended Dec. 31 it reported a $70 million profit, compared with a loss of $30 million for the same period in 2009.
PAL spent more than 20 years as a government monopoly before it was privatized in 1992. It’s now controlled by Philippine tycoon Lucio Tan, whose fortune is pegged by FORBES ASIA at $2.3 billion and who became chairman and chief executive in 1995. Today it carries burdens from its past, such as inflexible and expensive labor contracts. An important cost-saving plan to retire workers and outsource catering, ground handling and call centers was approved by the government, but the union appealed. The president will make the final decision.
As a legacy carrier PAL still offers perks such as hot meals and different classes of service. That makes it impossible to compete on price with budget airlines on domestic routes. But PAL has a sister company, Air Philippines, that converted to a low-cost carrier last year. As PAL’s “entrepreneurial arm” it is poised to compete directly with Cebu. AirPhil took its first step into the lucrative market for short regional flights by launching a Singapore service last October.
PAL’s core strength is with medium-haul destinations such as Japan, India and Australia, and with long-haul flights to the U.S. and Canada. Bautista doesn’t consider Cebu a threat to this business anytime soon, pointing out that it would need to buy different planes to compete.
The biggest headaches for PAL are the U.S. and Europe. In 2008 it was about to take delivery of new planes to expand in the U.S. when it was forced to abandon that effort. The U.S. had downgraded the Philippine agency responsible for overseeing Filipino carriers, meaning that they were no longer allowed to expand in the U.S. or fly newly acquired planes there. And the U.S. ban led the European Union to blacklist all Philippine carriers. PAL’s plan to start flying to Europe was put on hold.
Despite its problems, Bautista believes that the national flagship still has the hearts of Filipinos: “When Filipinos think of flying, they will always think of PAL, because the moment they enter our planes, they will feel they are already in the Philippines.”
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