A CAE simulator of a Hainan Airlines B737-800W.Christinne Muschi/The Globe and Mail
As his low-cost airline rode the early years of the boom in Southeast Asian air travel, Cebu Pacific's CEO Lance Gokongwei had a fairly reliable source of new pilots: the Philippine Air Force.
But Southeast Asia's surging middle class kept on flying and Mr. Gokongwei found it was getting harder to find pilots for his growing fleet. It was also increasingly difficult to retain the pilots he had, as new discount airlines in countries such as Vietnam paid up to recruit experienced expatriates, such as Cebu Pacific's Filipino pilots. With his airline sending pilots to Bangkok and even Miami for training, Mr. Gokongwei realized he needed a more permanent solution to ensure a steady flow of pilots – both to fly the more than 50 aircraft his airline now operates, as well as the 30 additional Airbus A320neo jets he's ordered.
"We were very busy growing our airline, and as we grew larger we wanted to make sure we found an expert partner in training," Mr. Gokongwei said in an interview.
Like other airlines, Cebu Pacific turned to Montreal-based CAE Inc., which partners with carriers around the world to establish joint-venture aviation training centres. As a new middle class begins to fly for the first time on low-cost carriers (LCC) across Southeast Asia, China and India, CAE has found a thriving market for its flight simulators, nearly half of which are now sold in Asia.
Although CAE also sells defence and health-care technology and North America remains a crucial market, the Montreal company's civil-aviation training business now makes up the bulk of CAE's revenues.
And as growth in Asian air travel continues to outpace other regions – with the overall pilot pool expected to grow 30 per cent over the next five years, requiring 44,000 new pilots – the firm's business in the Asia-Pacific has never been more important.
"We've seen a lot of growth over the last five years," said Irfan Khalid, CAE's vice-president for Asia-Pacific.
"A lot of these airlines will start working with CAE on the simulators and that starts the relationship. And from there, if the airline is growing, they may decide to team up with us on a full operation. Before, it was all about the simulator, but our focus has really shifted toward being a training services provider."
These solutions are also additionally attractive for high-growth LCCs, such as Cebu Pacific, Air Asia Berhad and InterGlobe Aviation Ltd.'s IndiGo, which follow the low-cost model pioneered by Ryanair and EasyJet: focusing on snazzy marketing and a short-haul network, while keeping costs low by charging for extras. and operating a uniform fleet of jets to ensure quick turnaround times on the tarmac. This model has proved enormously successful – though not always profitable – in India and Southeast Asia, particularly in island nations with poor infrastructure such as Indonesia and the Philippines.
The growth of these airlines is phenomenal: LCCs in Southeast Asia have increased their seat capacity eight-fold over the past decade, from just 25 million seats in 2004 to more than 200 million in 2014, according to the Sydney-based Centre for Asia Pacific Aviation. These airlines are growing rapidly: IndiGo, for example, was founded in 2006 and has already ordered 530 aircraft from Airbus and Air Asia made a firm order for 200 aircraft back in 2011, with deliveries continuing through 2026. Roughly 40 per cent of new airplane deliveries are going to carriers in the Asia-Pacific region.
CAE now has joint-venture training centres with Cebu Pacific outside Manila, with IndiGo in Delhi and with Air Asia in Kuala Lumpur. It has two joint-ventures in China – in Shanghai with China Eastern and with China Southern outside of Guangzhou – and one with Japan Airlines. The company also has a joint-venture with the Brunei government for helicopter training, and operates training centres in Seoul and Singapore – which trains pilots for the LCC subsidiaries of Australia's Qantas and Singapore Airlines. Most of these deals were struck in the last five years.
Stewart Beck, who was Canada's high commissioner to India when IndiGo's training centre opened, recalled that multiple huge flight simulators were synchronized to "dance" to music at the grand opening – something a spokesperson said is often done at launches.
The training centres allow the airlines to train their own pilots, refresh the skills of existing pilots and also have a small side business serving other airlines. For Cebu Pacific, which has also struck an engineering joint-venture with Singapore Airlines, the training centre allows it to also train pilots for Malaysia-based Air Asia's local subsidiary in the Philippines, as well as ensure a uniform training schedule for its own cadets and pilots.
"It's not just as simple as adding pilots and hardware; we have to train everyone to the same standards so we can give the customer a certain sense of repeatability," said Mr. Gokongwei, who is the son of billionaire businessman John Gokongwei Jr., one of the richest men in the Philippines.
For CAE, providing training solutions is a growing business. In the third quarter, CAE earned $334.7-million, up 4 per cent compared to the same quarter last year, from its civil-aviation training solutions division, with new contracts from Arab Wings, Shenzhen Airlines and Spring Airlines. That compares to $253.3-million in its defence and security unit. In the second quarter, revenues for civil-aviation training were up 23 per cent year-over-year to $365.2-million. Over the next year in its civil-aviation training division, CAE hopes to improve operating margins from the 16.3 per cent it saw last year – margins it thinks will be stronger than what it will see in defence.
Although Indonesia is also growing rapidly, the market is still not overly meaningful for CAE, which has contracts with both Lion Air – the dominant LCC – and Garuda, according to Nick Leontidis, CAE's group president for civil-aviation training solutions. "There's a booming middle class," Mr. Leontidis said. "But for us, it's a bit further out there in terms of materiality. It's got a ways to go."
And with all of the growth in Southeast Asia, particularly in Indonesia, there have been serious concerns about flight safety – in terms of pilot training, infrastructure and local regulatory authorities. High-profile incidents at Malaysia Airlines, Indonesia AirAsia and Lion Air have attracted global scrutiny and shone a light on whether safety measures in Southeast Asia are adequate. Indonesian flights are also often late or delayed, mainly because airports – particularly in Jakarta – are notoriously congested.
Mr. Leontidis suggests the incidents and safety concerns are more likely a product of the huge increases in volume, combined with a lack of infrastructure and systems in place, rather than anything particular to Southeast Asia. But he does note that CAE, which recently sold five full-flight simulators to Lion Air, is doing good business while it helps the region cope with safely expanding its aviation sector.
"Safety is not a function of one thing, it's a complete system," he said. "There's no difference from the regulatory side, it's just that they haven't done it or the regulators are new. Where we add value is, we bring the system. … That's why I think there is a lot of opportunity."