EXECUTIVE SUMMARY

Zest Airways started as Asian Spirit in 1995 but was sold to AMY Holdings, a holding company controlled by businessman Alfredo M. Yao, in March 2008. It was rebranded as Zest Airways, reflecting the flagship business of AMY Holdings: Zest-O. It operates scheduled domestic and international tourist services, mainly feeder services linking Manila and Cebu with 20 domestic destinations and one international destination, but has plans of extending and creating new routes both locally and internationally. Zest Airways takes pride in providing quality services to its customers and continues to improve them by acquiring brand new aircrafts that would provide more comfort and convenience during their flight. Zest Airways’ competitive advantages are the following: Quality of service, has well-trained employees, has online booking, has effective promotion strategies, has brand new fleets, and unlike other domestic and low-cost airlines, it serves free food and drinks. We have three identified major competitors- Philippine Airlines, Cebu Pacific Air, Air Philippines, and some other domestic low-cost airlines. Based on the Competitive Profile Matrix, advertising and market share has the highest bearing since these two factors are very crucial to the success of an airline, Zest Airways has the lowest score of 2.21 because it is was only founded two years ago and doesn’t have that much advertising and has a low market share although it is now increasing. Based on the EFE and IFE matrices in the previous chapters, with the resultant scores at 3.05 and 2.57 respectively, the combined effect of the external and internal analysis falls in cell II. The result of the above internal/External Matrix can be described as grow and build strategies; Intensive (market penetration, market development and product development) or integrative (backward integration, forward integration and horizontal integration) strategies can be most appropriate to this division. We have identified such strategies that can help Zest Airways to improve more. Market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. This includes increasing the number of employees, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts. Product development is a strategy that seeks increased sales by improving or modifying present products or services. Product development usually entails large research and development expenditures. In airline industry, the company always pursuing product development, because customers increasingly are willing to pay more considering the convenience in service like flight booking, on time departure and arrival schedule, that they will experience. Market Development Strategy involves introducing present products and services into new geographic areas. This includes putting additional destinations not only locally but internationally.

INDUSTRY ANALYSIS ECONOMIC FORCE Generating billions in revenues and creating hundreds of thousands of jobs. In recent years, the global aviation industry has been through many ups and downs. From skyrocketing fuel prices to pandemics to recent financial crisis, aviation industry has confronted a very rough weather in last ten years or so. Consolidation in mature markets, higher ticket prices, modernization of airports, policies to reduce emissions and tremendous growth prospects in emerging economies have been some of the trends during the decade. According to recent industry reports, the global aviation industry is on the path of recovery and future looks optimistic and would present ample opportunities for the stakeholders. CHANGES IN THE ECONOMY The airline industry is inextricably tied to the overall economy – even minor recessions result in reduced demand and increased sensitivity to prices for leisure as well as business travelers. Changes in the economy have a big affect on the airline industry. The elasticity of demand, externalities, wage inequality, and monetary, fiscal, and federal policies all have an impact on this industry. The airline industry is constantly changing due to today’s market and today we will be looking at the reasons behind it. By successfully managing opportunity cost, and adapting to an ever changing economic environment, airline industries can have economic success. However, the well-being of the nation’s economy will have a direct impact on the level of success experienced in the airline industry. During economic shortfalls in the nation’s economy, travelers will have fewer resources available to travel for pleasure. Contributing to the negative economic influences in the airline industry, future and existing policies targeting the airline industry will continue to hinder the industry’s ability to recover losses in periods of economic hardships. LAUNCH OF LOW COST AIRLINES The launch of low cost airlines in Philippines has provided a boost for the industry. Airlines that have been part of this trend are Asian Spirit and Southeast Asian Air, offering affordable fares to local and even international destinations. The public seems to have embraced this, as the rate of flying passengers has increased. This increased not only accounts for new fliers but also regular flying passengers who were on a budget and now have a choice to choosing budget over luxury. COMPETING AIRLINES There are quite a few negative externalities in the airline industry. Another thing that the economy is affecting the airline industry is the competing airlines. The bigger airlines can afford lower fares which make it hard for the smaller airlines to compete. Different airlines have plans to expand but will not be able to until the cost of fuel is under control. For the low fare carriers who allow advanced booking, they will need to work on a plan to avoid bankruptcy. This will make the airline industry continue to boost prices due to the fact that oil prices are expected to continue rising due to the supply. SOCIAL, CULTURAL, DEMOGRAPHIC AND ENVIRONMENTAL INCREASE of TOURISM in the COUNTRY Philippines’ domestic tourism has been growing at the rate of 18% per annum since 2005, when it contributed a total of P800 Million to the total tourism traffic. According to the government projections, the country will witness around 3-3.1 Million overseas tourists and 8-8.5 Million domestic tourists in 2009, totaling to nearly 11 Million tourist arrivals. This will represent an increase of 9% from the 2008’s figure. Despite the global crisis, the number of foreigners who arrived in the country increased by four percent in August compared to the same month last year, according to statistics released by the Department of Tourism and the Bureau of Immigration. Statistics showed that some 1.32 million foreigners arrived last month, up by 18,141 over the August 2008 arrivals. From January to August, 3.95 million foreigners arrived, compared to the 3.943 million for the same period last year, according to a press statement of the Bureau of Immigration. DELAYS Airports have become more congested due to more flights and flight departure delays have become the norm. In the Philippines, travelers endure an undeniable increase in congestion, departure delays, and discomfort due to the enormous response of passengers to the availability of options with regard to fares, flight schedules, and aircraft technology. And also, the congestion at airports is exacerbated by the lack of adequate infrastructure to support the increase in the number of departures after 1994. INCOME in RELATION to PRICE Fare should respond positively with income since airlines tend to inflate prices in more affluent markets where passengers are less price-sensitive, while fare should decrease with distance because airlines are able to distribute their fixed costs over a longer distance. A percent increase in per capita income results in a 0.86 percent increase in airfare, which tends to indicate that airfares are higher in markets with a higher per capita. ENVIRONMENTAL ISSUES In terms of environmental issues, the airlines are doing everything they can to conserve fuel. Throughout the history of commercial aviation, airlines have insisted upon the most fuel-efficient aircraft possible and have worked with airframe and engine manufacturers to reduce fuel consumption. There are also problems when it comes to pollution. A major one is the noise pollution by major airports. People that live near the airports constantly hear airplanes departing and arriving. This has been linked to heart disease, breathing difficulties and cancer along with other health issues. The airplanes emission is composed of about 70% CO2. CO2 contributes greatly to the greenhouse effect which is the cause for global warming. There are a few positive externalities along with this industry. FUEL PRICES The fuel prices are becoming outrageous with no sight of slowing down which is highly going to affect airlines. Increased rates for tickets due to the cost of this is really hurting this industry. WEATHER Weather also plays a very important role in the industry. Weather is variable and unpredictable. Extreme heat, cold, fog and snow can shut down airports and cancel flights, which costs airline money. DEMOGRAPHICS Business travelers are important to airlines because they are more likely to travel several times throughout the year and they tend to purchase the upgraded services that have higher margins for the airline. On the other hand, leisure travelers are less likely to purchase these premium services and are typically very price sensitive. In times of economic uncertainty or sharp decline in consumer confidence, you can expect the number of leisure travelers to decline. POLITICAL, GOVERNMENTAL, LEGAL FORCES GOVERNMENT POLICIES There are many issues in the airline industry regarding government policies. There is no doubt that liberalization and deregulation have brought genuine competition in the domestic air transport industry resulting to lower airfare, improvement in the quality of service and efficiency in the industry in general. The deregulation, however, resulted to the establishment of niche markets, with the big players concentrating on the major routes where traffic demand is heavier while the smaller airlines are flying the secondary and tertiary routes where traffic demand is lighter. Liberalization, however, has yet to be done in the country’s international air transport industry. While other countries are adopting more flexible approaches to liberalization and regulation to meet the increasing demand for international air services brought about by the increasing integration of economies, the country is keeping to its old restrictive practices and policies. The effect of such restrictive policies is a high degree of concentration in the country’s international aviation industry. LIBERALIZATION The airline industry was liberalized in 1995 under EO 219, establishing the domestic and international civil aviation liberalization policy in the country. The EO stipulates the removal of restrictions on routes and flight frequencies, as well as government control on fares and charges. One of the benefits of liberalization is the introduction of airline service in new markets, either by the incumbent or the new airlines. Two airline markets that opened in 1996 (Manila–General Santos and Manila–Caticlan) experienced phenomenal growth in traffic between 1996 and 2003. DEREGULATION Under deregulation, competition shifts toward price. More reports that deregulation results in a substantial increase in the number of passengers, especially in the tourist market and those traveling on discount fares. Deregulation allowed airlines to focus on their markets and operations, which produced new core operating capabilities such as the hub-and-spoke delivery systems, as well as computer reservation and yield management systems. CIVIL AVIATION AUTHORITY In addition, President Gloria Macapagal Arroyo signed into law the Civil Aviation Authority Act of 2008 that stands to update and strengthen the international framework of the country’s civil aviation industry and meet the standards set by the International Civil Aviation Organization (ICAO). The government has capitalized on project improvement, expansion and rehabilitation of the aviation industry. It covers the upgrading and modernization of air navigation facilities through the replacement of old equipment and installation of new facilities at selected 25 airports and sites nationwide. With new law in place, you can always fly safety and expect the tourism industry to continue its bullishness, and more investments will come pouring in which will translate into more new jobs for our people. POLITICAL HAZARDS Some political hazards may also harm the industry such as the threat for martial law and rebellion. TECHNOLOGICAL FORCES Nowadays different vendor companies have developed an extensive range of solutions to improve the passenger’s journey, streamline and integrate airline and airport operations, track baggage and cargo, and ensure that the highest levels of maintenance and aircraft safety and security are effectively communicated. Their objective is simple – to assist their customers in delivering the highest quality to the passengers. As airports were flooded by more and more passengers it became more and more obvious that only the technology of the integrated information systems can be the way leading to the future. Nowadays airports are at the very early stages of leveraging the power of the Web. The first initiative airports can take is to improve their websites. Three pieces of information most travelers require are the local weather, the local time and the exchange rate. Few airport websites currently provide this information. One of the breakthroughs in airline marketing is through online communities like Facebook, Friendster, MySpace and Twitter. Customers can easily communicate with the company through those websites and they can share the comments and feedbacks with the whole World Wide Web. The company can also post their promotions, pictures and news about them.

Mission

Zest Air is a domestic passenger airline with the mission to

operate scheduled  services to tourist destinations and

secondary and tertiary airports where other airlines don’t

                            dare to operate.

Vision

Zest Air, the airline with vision to be Asia’s

refreshing airline.

Zest Airways Inc. (formerly Asian Spirit) is an airline based in Pasay City, Manila in the Philippines. It operates scheduled domestic and international tourist services, mainly feeder services linking Manila and Cebu with 24 domestic destinations in support of the trunk route operations of other        airlines. Its main base is Ninoy Aquino International Airport, Manila, and with a hub at Mactan-Cebu International Airport. Also these hubs outside Manila still have to be made operative as of July 2009. The airline was originally founded as Asian Spirit, the first airline in the Philippines to be run as a cooperative.

Zest Airways Fleet

Zest Airways has 6 aircrafts, three A320 aircraft / 1-A319 aircraft with a capacity of 162-168 Passengers (1-class layout) + 37.4 cu. m. cargo space in A320 and 144 Passengers (1-class layout) + 37.4 cu. m. cargo space in A319 and three MA60 with a capacity of 56 Passengers (1-class layout) + 9.5 cu. m. cargo space.

The founding member of the best selling Airbus single aisle family, the Airbus 320/319 is the world’s pioneering fly-by-wire jetliner. In addition, the aircraft has a commodious cargo hold equipped with large doors to assist in expedient loading and unloading of goods. It provides customers with added space and comfort, reduced noise levels in the community we serve and allows Zest Air to operate a more cost efficient and reliable fleet.

The MA60 is an advanced 50-60 seat class regional turboprop aircraft developed by Xi’an Aircraft Company of China aviation Industry Corporation I (AVICI). Characterized by remarkable passenger comfort, operational adaptability and low operating cost the MA60 is suitable for frequent short and medium-haul commuter operations as well as multi-role applications. The MA60 can meet the increasingly demanding needs of modern transport and offer operators with the greatest operating benefits.

Zest Air Fleet Expansion

Zest Air recently acquired its fourth Airbus, the 44-seater Airbus 319 last October 2010 to meet passenger demand on Zest Air’s domestic and international destinations.  The company will be receiving delivery of two (2) more airbus aircraft Airbus A-320 with 174/180 seating configuration this mid December, 2010 as part of its expansion plans.   According to Zest Air’s President Mr. Alfredo Yao, the company will be adding more planes to its fleet as part of its long term plans.  Internal and external operational provisions are also being weighed for efficient fleet expansion.  

Currently, Zest Air has four (4) Airbus aircraft and four Modern Ark 60s (MA60s).   By the end of 2011, the company will have acquired additional aircraft in operations on top of its existing fleet.   Zest Air is also mulling over the acquisition of two B-777s for its intended long haul flights which may commence during the third or fourth quarter of next year.    VP-Marketing, Mr. Leveric T. Ng added that flights from Kalibo to Incheon have been increased from four times weekly to daily effective Dec. 21, 2010.  Kalibo to Pusan and Cebu to Incheon retains its twice weekly flights.   Zest Air will be flying twice weekly to Shanghai starting January 24, 2011. 

More international destinations (Taipei, Palau, Singapore, Bahrain and Dammam) are currently being considered and negotiated.  On the domestic front, the company will be increasing domestic frequencies on their top destinations (Cebu, Davao, Iloilo, Bacolod among others) to offer better passenger choice and convenience.

Zest Air is presently operating to twenty (20) domestic destinations as follows: Boracay via Kalibo, Bacolod, Busuanga Northern Palawan, Calbayog, Catarman, Cebu, Davao, Iloilo, Legazpi, Marinduque, Masbate, Puerto Princesa Palawan, San Fernando La Union, San Jose Occidental Mindoro, Tablas in Romblon, Tacloban, Tagbilaran in Bohol and Virac in Catanduanes.  For the International flights, Zest Air operates to Incheon and Pusan, South Korea from Kalibo and Cebu.

INTERNATIONAL DESTINATION

Zest Airways was established as Asian Spirit in September 1995 by three friends: Antonio “Toti” Turalba, Emmanuel “Noel” Oñate and Archibald Po, who contributed $1 million each to start up the Airline Employees Cooperative (AEC). They invited 36 of their friends, mostly former Philippine Airlines employees, to run Asian Spirit through a salary-to-equity swap deal.

It started operations in April 1996 with two second hand Dash 7 aircraft servicing only one scheduled commercial route with two flights per day from Manila to Malay, serving the fledging resort island of Boracay. To maximize its aircraft utilization, it introduced new routes to the present-day towns of San Jose, Virac, Daet and Alcantara, and the cities of  Cauayan  and 

Masbate, regarded as secondary and tertiary routes by Air Transportation Office, and are not serviced by major airlines. In 1997, the cooperative changed to a corporate set-up with the establishment of Asian Spirit, Inc., whose registration was approved by the Securities and Exchange Commission in 2005.

At the time, Asian Spirit has the distinction of being the first scheduled airline to serve Boracay. Other operators served the airport on a charter basis then. It became the Philippines’ fourth flag carrier (after Philippine Airlines, Cebu Pacific and Air Philippines) in 2003.

Transition to Zest Airways

Asian Spirit was sold to AMY Holdings, a holding company controlled by businessman Alfredo M. Yao, in March 2008. After the success of the takeover, Yao expressed interest in merging Asian Spirit with South East Asian Airlines (SEAIR). The two airlines have been in merger talks and were expected to make a decision soon. Yao was supposed to purchase a sixty percent stake in SEAIR, although the deal fell through because of a stolid response from SEAIR management. The merger talks failed and both airlines are operating independent.

On September 30, 2008, Asian Spirit officially announced that it will be re-branding itself as Zest Airways. Reports say the name switch reflects the Yao’s stake in the company, as well as an allusion to the flagship business of AMY Holdings: juice maker Zest-O. The firm’s board approved the name change in August, while the Civil Aeronautics Board approved the switch earlier.

PORTERS FRAMEWORK

            Spirit of Manila Airlines is a low-cost airline based in Angeles City, Philippines. Its main base is Diosdado Macapagal International Airport. It commenced its operations 2008.

BUYERS

            Tourist, vacationers, travellers and tourist are the common customers of every airline company. They tend to go too far places locally and internationally.

1. Tourist arepeople that make a tour for pleasure or culture, in beautiful spots in a certain country but don’t have intentions to stay long.

2. Travellers refer to a person who travels, especially to distant lands.

3. Vacationers people who are devoted to pleasure, rest or relaxation, enjoying, who usually go to different places during holidays or days off.

4. Businessmen tend to travel due to business trip and meetings.

MAIN COMPETITORS (COMPETITORS PROFILE)

» Philippine Airlines is the national airline of the Philippines and Asia’s first airline. It is headquartered in the Philippine National Bank Financial Center in Pasay City and was founded in 1941 and is the oldest commercial airline in Asia operating under its original name. Its hubs are at Ninoy Aquino International Airport of Manila and Mactan-Cebu International Airport of Cebu City.

» Cebu Pacific Air, is based on the grounds of Ninoy Aquino International Airport in Pasay City, Metro Manila, the Philippines. It offers scheduled flights to both domestic and international destinations. Cebu Pacific Air is currently the country’s leading domestic carrier, serving the most domestic destinations with the largest number flights and routes, and equipped with the youngest fleet. Its main base is Ninoy Aquino International Airport, Manila. Cebu Pacific is Asia’s third largest cost airline based in Pasay City, Philippines.

» Air Philippines Corporation is a low-cost airline based in Pasay City, Philippines. It operates extensive domestic scheduled services from Manila and Cebu. Air Philippines is operating all PAL Express flights on behalf of their parent company, Philippine Airlines.

» South East Asian Airlines is an airline based in Pampanga, the Philippines. It operates domestic services and its main bases is Ninoy Aquino International Airport, Manila, with hubs at Godofredo P. Ramos Airport, Malay, Aklan, Puerto Princesa Airport and Zamboanga International Airport. Despite its name, its focus is to serve remote destinations throughout the Philippines

SUBSTITUTE

1. Ship transport effective for short trips and pleasure cruises. Transport by water is cheaper than transport by air.

2. Personal Transport can choose where to go and can stop anywhere they want. It is not advisable to long distance travel because of the fuel cost and it can be very tiring.

3. Buses are design to carry a large capacity of passengers by land. It it’s the cheapest way of transportation by land.

4. Trains are good substitute for air and water transportation because they also travel between many cities and/or regions of a country, but it has only limited stations.

SUPPLIERS

• Xi’an Aircraft Industrial Corporation also known as Xi’an Aircraft Company Limited (XAC) is a Chinese aircraft manufacturer and developer of large and medium-sized airplanes. It is based Yanliang District, Xi’an, Shaanxi Province. It is joint partners with 603^rd Aircraft Design Institute of military aircraft. XAC was established in 1958 and has more than 20,000 employees.

• Airbus is an aircraft manufacturing subsidiary of EADS, a European aerospace company. Based in Blagnac, France, near Toulouse, and with significant activity across Europe, the company produces around half of the world’s jet airlines.

EXTERNAL FACTOR EVALUATION

Basis: Industry Analysis

EFE Analysis

Based on the evaluation of General Environment Analysis data was acquired for the EFE Matrix.  Eternal factors of the business are analyzed to get the potential opportunities and threats for Zest Air Airlines.

Over-all the company Zest Air Airlines is above average in terms of strength in the industry. It has been coping well with other competitors and is slowly moving up the ranks of the industry.

INTERNAL FACTOR EVALUATION

Basis: Industry Analysis

IFE Analysis

IFE matrix Zest Air Airlines scores 2.57 that show that the company is higher than average rate and has strong internal position.

The company takes pride in the fact that they can service any need of their customers. Zest Air Airlines demonstrates a commitment to excellence which enables us to deliver high quality service in addition to delivering a positive experience.

COMPETITIVE PROFILE MATRIX

Basis: Internet Research, Philippine Daily Inquirer

ANALYSIS:

According to the table above, advertising s the most important factor in airline industries because customers need to be conscious of those airline companies to be able to know about their different services, destinations, promos, and fares.

Philippine Airlines has the highest advertising rate because of numerous commercials, and although they don’t have commercials now, they are still well-established and majority of the people know about PAL even though they have issue about their employees. Zest Airways doesn’t have TV commercials but they have page on different networking site such as facebook and twitter where they have numerous print ads.

Philippine Airlines has the most destinations having 31 international and 30 domestic destinations. Cebu Pacific flies to 15 international cities and 27 domestic destinations. Zest Airways has only one international destination (Incheon, Korea) and 20 domestic destinations.

Zest Airways has the cheapest fares among the three based on the fare comparisons we made through our internet research.

Philippine Airlines has 41 aircrafts, Cebu Pacific has 29 aircrafts and Zest Air has only 6 aircrafts.

TOWS ANALYSIS

Basis: EFE and IFE

STRATEGIES:

1.                  Market Penetration

·        The strategies to develop new advertisements in commercials and in billboards, develop marketing plans that will address all customers needs and developing more competitive marketing promotions will seek market shares for present products in present markets.

2.         Market Development

·        A strategy to put additional destinations internationally will help zest airways by introducing them in new geographic areas.

3.         Product Development

·        By offering different flight packages and discounts, giving different freebies on customers, and developing new technology or process that will easily give back refunds are strategies that will surely help zest airways to increase sales by improving or modifying present products.

4.         Concentric Diversification

·        Byacquiring new planes for back up purposes of Zest air is a strategy of adding new but related products.

Conclusion:

X-Axis = (IS + CA) = -1.75 + 5.00 = +3.25

Y-Axis = (FS + ES) = +4.33 -2.00 = +2.33