Passenger shipping industry drowns while budget airlines fly high

By Lala Rimando,

Posted at Jun 25 2008 07:35 PM | Updated as of Apr 26 2010 10:55 AM

While overloading used to be an easy culprit in most sea mishaps in the Philippines involving passenger liners, the case of the recently capsized Princess of the Stars shows that traveling by sea is not the primary choice to reach any of the archipelago's over 7,100 islands anymore.
The ill-fated Sulpicio Line ship plying the primary Manila-Cebu route had a capacity of 1,992 passengers, excluding crew members. But when it encountered rough waters during a typhoon and capsized in June 21, it was only carrying over 700 passengers and more than a hundred crew members.
It means the massive 23,824-ton ship was going ahead with an expected business-as-usual day with just about 40 percent load.
Compare that with another ship also owned by Sulpicio Line, the M/V Dona Paz, which sank in 1987 after colliding with a small oil tanker. Its weight was just 2,215-ton, a fraction of M/V Princess of the Stars'.
M/V Dona Paz had a capacity of only 1,518 passengers, but after the tragedy it was found to be carrying more than twice what it was allowed. Investigations following its sinking showed that it was overloaded and up to 4,375 people onboard died. It has gone down in history as the worst maritime disaster during peacetime.  
The M/V Dona Paz tragedy, however, occurred during the Christmas holidays, a peak season in the travel industry. M/V Princess of the Stars, on the other hand, was traveling during a traditionally low season.
Nonetheless, transportation industry observers note that a 40 percent load factor even during an off-peak season is low.
This could be explained by recent realities in the inter-island shipping industry and the dynamics in the overall transportation industry in the Philippines, especially those that occurred in the past three years. 

Flying more affordable

The changes in the inter-island transportation were not due to competition among passenger liners themselves. The threat came from substitutes.
It started in 2005 when Cebu Pacific, a local airline which used to compete with legacy and full-service airline, Philippine Airlines, changed its business model and decided to follow a growing trend among the global aviation players—it converted into a low-cost, no-frills airline.
Cebu Pacific and other local carriers were born after the aviation industry in the Philippines was deregulated during the Ramos administration in the nineties.
Cebu Pacific dramatically dropped its fares for various domestic destinations by reducing turnaround time, thus increasing per-plane utilization. In other words, its planes were up in the air most of the day, which meant more revenue per passenger. It also reduced operating cost by removing traditional freebies, such as complementary food. They computerized ticketing and offered lower fares for early bookers.
In other words, it was going for volume. Eventually, other local airlines followed suit. Now, PAL Express, Asian Spirit, and Southeast Asian Air are also offering more affordable plane fares to local and international destinations.
Budget airlines proved to be a hit as more flying passengers increase every year. The increases in airline passengers did not only account for new—and more frequent—inter-island hoppers, it also meant passengers who were on budget and considered flying a luxury now have an alternative mode of transport.
Depending on the season and timing of purchase, a round trip plane fare between Manila and Cebu could go as low as P3,000. In the past, round trip boat fares on the same route hovered between P4,000 to P8,000. But even at reduced rates of up to a little over P2,000, the small difference with the cost of flying have enticed some to convert.
The airlines could afford to offer these low fares after they adopted a sophisticated pricing strategy that guided budget carriers in allocating more discounted seats during the lean months of June to October to improve their load factor, or the measure of how full the aircraft is. Thus, even on lean months, Cebu Pacific's load factor can go as high as 80 percent.
Flying budget airlines is not only more affordable now, it is also more convenient. A Manila-Cebu boat ride, for example, takes almost a day. A plane ride, on the other hand, takes just over an hour.
Richard Pinkham, a Singapore-based aviation expert previously with the Center for Asia Pacific Aviation, explained to what this means to the customers: "If you can lure a new passenger onto an airplane with a super low fare, then it will be harder for that person to accept a long ferry ride in the future. They may return to the airplane even though the price has gone up."

Diminishing sea passengers 

The diminishing trend in the number of people taking sea craft as a means of transport was evident in the decreasing growth rates. According to the Philippine Ports Authority data, in 2005, overall recorded passengers taking sea-based transport grew by only 2.55 percent. It has been downhill since.
In 2006, total sea craft passengers dropped by 8.27 percent. That's only 42.56 million passengers for the entire year. Data for 2007 is expected to show that passenger counts plunged deeper.
The business decisions of market leader and publicly listed Aboitiz Transport Services in 2007 provided indications on where this industry is headed. The dramatic reduction in their passenger loads cut their revenues up to 30 percent in 2007.
To adapt, they have converted several of their passenger-cargo lines, under the Superferry brand, to accommodate more cargo than passengers.
This means shipping companies such as Aboitiz Transport and Sulpicio lines have joined another competitor—the government-backed roll-on-roll-off (RORO) operations, which resulted in lower operating costs not only for cargo operators but also as another substitute for passengers who still could not afford flying.
Roro is less expensive for those involved in the cargo business because of its multi-port approach. For example, a Roro boat that leaves the Batangas port can pass by various smaller islands, such as Mindoro and a few more islands, which are not traditionally serviced by other big boats because business there used to be not as brisk as, say the likes of Cebu, Iloilo, Davao and Cagayan de Oro, where there are more commercial activities.
Roro, which was launched in 2003, has since led to changes in areas and islands that used to be left behind in terms of economic development. According to Henry Basilio, a transportation export from the University of Asia and the Pacific, cargo traffic for Roro vessels in 2003 was only at 30,000 metric tons. He said this has since increased exponentially to 240,000 metric tons recently.

Poorer customers take sea-based transpo

Several short-haul inter-island ferries have also increased their business as cargo and passengers between two nearby islands have increased. These routes are usually serviced by fastcraft ferries that could carry a few hundred passengers.
Basilio said the Roro is also cost competitive for passengers. Roro vessels carried only 130,000 passengers in 2003, and has since skyrocketed to about 700,000 passengers in 2007.
"The winner in this case is the riding public. The competition not just among the shipping liners’ peers but from other modes of transport as well," Basilio said.
Basilio said that the budget airline industry has eaten into the first and second class passengers of the shipping industry. "Those who still could not afford the few hundreds or thousands of peso difference between a plane and ferry fare are still taking the latter."
These include housemaids from the southern part of the country who are working in Metro Manila or students from the south studying in universities in Metro Manila.
"Domestic sea passengers in the country are mostly the C and D crowd or low-income group of the society," Basilio said.

Passengers are gravy 

Shipping companies which ply longer inter-island distances, such as Manila-Cebu and Cebu-Zamboanga, among others, are traditionally not dependent on revenues from passengers alone.
"Passengers are just their gravy," Basilio said. "They [shipping companies] really earn their dough from their cargo business."
These liners derive about 70 percent of their revenues from cargo and about 30 percent from passengers, Basilio explained.
Historically, ships carry passengers onboard because it translates to scheduled departures and specific routes, elements that assure a cargo client that he could plan and manage the movement of his goods.
This 70:30 ratio is almost similar to that of long-haul commercial passenger airlines, which also carry cargoes in their bellies. Electronic shipments are particularly sensitive to delivery timing, since electronic companies require limited transportation lead time from the port of origin to their destination.

Bigger, better ships 

Nonetheless, the different alternative modes of transportation for passengers have wreaked havoc on shipping companies' previous plans and investment strategies. When sea travel was still the preferred mode of inter-island transportation, especially between Manila and the regions of Visayas and Mindanao, the players, such as Aboitiz Transport and Sulpicio Lines, were forced to improve the quality of their service to passengers.
Improvement in the quality of service meant the introduction of new facilities and amenities on board, and improvement or upgrading of facilities in passenger accommodation and in ticketing and booking facilities.
Improvement and upgrading of facilities resulted in the modernization of the domestic fleet. Bigger and better vessels were acquired starting in the nineties. M/V Princess of the Stars, which was acquired for $5.25 million in 2004 and was the newest and most technologically advanced in the fleet of Sulpicio Lines, featured spa services, a karaoke lounge, a pool and a game room on board.
But these investments were based on expectations of increase in demand, which did not materialize. Shipping companies, such as Aboitiz Transport and Sulpicio, have since reduced their fleet and rationalized their operations to adjust to the changing transportation game.
Nonetheless, M/V Princess of the Stars, which had a gross tonnage of 23,824, was meant as a Roro vessel. Its cargo operations meant it was important to be at its destination as scheduled.