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THE ODYSSEY OF A NATIONAL FLAG CARRIER

IN A LIBERALIZING AIR TRANSPORT INDUSTRY

Roberto C.O. LimPhilippine Airlines, Inc.Fax. (63-2) 867-45-63

Email: rol_legal@pal.com.phwww.philippineairlines.com

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Domestic Route Network

• Serves 18 cities

• Carries an average of 8,600 passengers daily

• Operates an average of 72 flights or 36 round trips per day

Does a Small Country Need a Domestic Carrier?

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DOES A SMALL COUNTRY NEED AN INTERNATIONAL FLAG CARRIER?

• Philippine Constitutional Directives:Art II Sec. 19

“The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.”

Art XV Sec. 10 par. 2“In the grant of rights, privileges andconcession covering the national economy and patrimony the State shall give preference to qualified Filipinos”.

Art XII Sec 11“Public utility subject to nationality requirements”

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Law and Policy

Republic Act No. 2232 (1959) “An Act to Reactivate the International Air Transport Services of the Philippine Air Lines, Inc. and to Appropriate the Necessary Funds therefor” provides, to wit:

“Section 1. Declaration of Policy. – Because of the peculiar geographical location of the Philippines, it is vital to her security and defense and to the enhancement of her commerce that she should maintain her own international air operations.

x x x” 

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• Executive Order 219 (1995) entitled Establishing the Domestic and International Civil Aviation Liberalization Policy (E.O. 219)

“At least two international carriers shall be designated official carriers for the Philippines”

• Civil Aviation Consultative Council Centennial Aviation Conference 1998

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• International Law and Relations– Art. 1 of the Chicago Convention

– Art. 6 of the Chicago Convention

– National flag carrier is a necessity for States to exercise traffic rights and avail the other benefits in Air Services Agreements (ASA)

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International Route Network

• Serves 27 cities (20 direct and 7 through code-sharing agreements) in 17 countries

• Carries an average of 7,000 passengers daily

• Operates more non-stop flights from Manila than any other airline

• Operates an average of 38 flights or 19 round trips per day

• The Economic Importance of a Flag Carrier

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– PAL creates strong linkage and multiplier effects to the local economy

1. PAL generates an average of USD815 million in revenues yearly, about 1% of Philippine Gross Domestic Product

  2. PAL generates about 1.1 million visitor arrivals to the Philippines on an annual basis supporting:

     - Employment of 7,500 persons by PAL

- Employment of 1.08 million Filipinos in the tourism industry

- US$1.0 Billion in consumer expenditures- 4% of the Philippine Gross Domestic Product- US$272 Million in taxes to the Philippine Government

from the tourism industry 

3. PAL offers 1.2 billion ton/kms of cargo capacity per year to service the agribusiness export industry.

– PAL operations is a source of technology

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• Servicing the Overseas Filipino Workers (OFWs)– Planet’s top source of migrant workers

– 7.3 Million OFWs in nearly 200 countries

– In the Middle East approximately 1.5 Million OFWs

– 97% land based

– 890,000 OFWs deployed in 2002

– Natural market for PAL

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• Servicing the Tourism Industry– Symbiotic relationship of the airline industry with

Tourism. i.e. expansion

– Developing countries account for nearly 30% of tourism receipts

– Tourism is the life blood of Southeast Asia

• Contributes US$26 Billion to the service sector

• Constitutes 2 to 4% of the economies of Singapore, Malaysia and the Philippines

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• Tourism in the Philippines– 98% of tourist visiting the Philippines travel by air

– Tourism sector dived due to terrorism and negative travel advisories

– Divergence of approach between national flag carrier and foreign carriers

– PAL leads FIRST, FOREMOST and ALWAYS in promoting the Philippines as a destination

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• PAL the national flag carrier has been privatized– Art. II Sec. 20

“Sec. 20. The State recognizes the indispensable role of the private sector, encourages private enterprise, and provides incentives to needed investments.”

– Privatization has transformed PAL into a competitive organization with private sector values and attitudes which can bring forward the agenda of liberalization

• Commercial business instead of arm of government

• No bail out; no subsidy

• Simple organizational structure

• Corporate Governance

• Right sized

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The manpower level has been substantially reduced from almost 13,000 in 1998 to 7,161 as of 31 January 2003 

Philippine-based Administrative 1,134General 4,131Pilots 337Cabin Crew 1,303

Reg. Part Time 10

Foreign-based Local Hire 225Expatriate 21

Total Regular 7,161

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DOES A LARGE COUNTRY OR ECONOMYNEED AN INTERNATIONAL FLAG CARRIER?

Self-evident truth: Close links between the national flag carrier and the State exist.

- US’s Policy Objectives

(US International Air Transportation Policy Statement (1995)

- “Provide carriers with unrestricted opportunities to develop types of service and systems based on their own assessment of market demand.” (emphasis

added) (US Statute, No. 49 U.S.C. 40101 (a) (15))

- “Strengthening the competitive position of air carriers to at least ensure equality with foreign air carriers, including the attainment of the opportunity

for air carriers to maintain and increase their profitability in foreign air transportation”.

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– Australian Policy Objectives

(International Air Services Commission Act 1992)

- “The maintenance of Australian carriers capable of competing effectively with airlines of foreign countries.” (emphasis added)

- Large economies maintain state owned carriers- Russia

- China

- France

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IMPERFECT COMPETITION IN AN IMPERFECT MARKET

• Liberalized market requirements– Possibility of failure is real– All subject to same commercial pressures

• Imperfect competition– State aid (i.e. E.U. Commission says it is not absolutely prohibited)– State owned carriers– No international competition law; divergent national competition law – Three fourths of international air transport of passengers is accounted

for by carriers from developed countries– Global market place, Global market distortion

• Each country is free to respond and provide a remedy in accordance with national objectives

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HOW CAN WE ACHIEVE SUSTAINABILITY AND A LEVEL PLAYING FILED

(without leveling the field)

• Maintain the bilateral framework– Safety net for participation and sustainability

• Affords measured pace of liberalization• Safety valves against being overruned by imperfect competitive market

forces

– Positive Asian experience under a network of ASAs • National flag carriers can become healthy and efficient• National flag carriers can compete fiercely• Competition can flourished• Market can grow

- ASAs can be negotiated, amended, interpreted to be responsive to market conditions while simultaneously putting a leash on the law of the jungle.

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• The goal is for a calibrated opening of the skies that provides for additional flights to service Philippine-Partner Country traffic through a market-based capacity formula, providing fair and equal opportunity on a level playing field for the Philippine airline industry, promoting new Philippine tourism gateways and the Philippines as an aviation hub.

• A calibrated opening of the skies is in line with the policy thrust of the International Civil Aviation Organization (ICAO), which affirms that “the aviation community’s general goal [is] gradual, progressive, orderly and safeguarded change towards market access, as well as the effective and sustained participation of all States in international air transport.

Policy of Progressive Liberalization Promotes Fair Competition

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Medium Term Philippine Development Plan of the National Economic Development Agency (NEDA)

x x x A ‘trigger mechanism’ will be institutionalized to facilitate the operationalization of additional seat capacity beyond the entitlements allowed in the pertinent ASA. This will automatically allow an airline already operating at an average load factor of 70 percent to add more seats to immediately respond to increasing demand without the need for renegotiation with other countries.”

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Region CapacityRights per

Region

CapacityRights on the

Route

Airline Operations Philippines

Foreign

Americas 17,500 35,000 8,674 7,557

Europe 13,200 26,400 0 6,579

Asia/Pacific 71,960 143,920 40,016 50,514

Middle East 15,284 30,568 2,820 8,719

GRAND TOTALWeekly Capacity

117,944 235,888 51,510 73,369

Annual Capacity

6,133,088 12,266,176 2,678,520 3,815,162

Total Seats

Offered

TotalUnused Rights

16,231 18,769

6,579 19,821

90,530 53,390

11,539 19,030

124,879 111,010

6,493,682 5,772,494

WEEKLY SEAT CAPACITY ENTITLEMENT AND USAGEBy Region

• Unused entitlements in ASAs Worldwide• Inventory of traffic rights granted under ASAs worldwide may be underutilized

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31% or 58 countries have entered into open skies agreements out of a potential 190

bilateral partners

- Fully 36% or 21 countries have no air services to/from the U.S.A at all. Their open skies agreements with the U.S. are purely symbolic.

Bahrain, Benin, Brunei Darussalam, Burkina Faso, Cape Verde, Luxembourg, Malta,Morocco, Namibia, Netherlands Antilles, Norway, Oman, Qatar, Rwanda, Senegal, Slovakia, Sri Lanka, Tanzania, United Arab Emirates, Uganda and Uzbekistan

Survey of U.S. Open Skies Agreement

 - Fully 31% or 18 countries have unilateral operations only, i.e., only U.S. carriers fly to their country, or only the home country airlines

fly to the U.S.

  Austria, Aruba, Czech Republic, Denmark, Dominican Republic, Finland, Gambia, Ghana, Guatemala, Iceland, Jordan, Malaysia, Nicaragua, Nigeria,Pakistan, Poland, Romania and Sweden.

- 33% or 19 countries have meaningful competitive air services to/from the U.S.A involving the airlines of both sides.

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PROFILE OF AIRLINE OWNERSHIP IN ASIA

GOVERNMENT OWNED OR CONTROLLED AIRLINES (GOCA)

PRIVATELY OWNED OR CONTROLLED AIRLINES (POCA)

Air China ANA Airways

Air India Asiana Airlines

Air New Zealand Cathay Pacific Airways

Air Macau Eva Air

China Southern Airlines Japan Airlines

China Eastern Airlines Korean Air

Dragon Air Philippine Airlines, Inc.

Garuda Indonesia Qantas Airways

Lao Aviation

Malaysia Airlines

Pakistan Airlines

Royal Air Cambodge

Royal Brunei Airlines

Singapore Airlines

Vietnam Airlines

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• Privatization of national flag carriers

In Asia, majority of the carriers are still government owned and/or controlled organizations belonging to strong economies.– Competition is not on a level playing field

– Privatization loosens the cozy ties between the State and State owned carriers

– Singaporean government and other Asian governments have publicly announced privatization of State-owned carriers.

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• The Regulator as a Safeguard of a Level Playing Field– The airline industry is in deep financial distress

• American, United, Delta, Continental, Northwest and US Airways lost US$10 Billion in revenues

• Market capitalization plummeted to US$4 Billion

• United and US Airways in bankruptcy

– Carriers cannot be left alone

– Regulators in the saddle seat to weigh up conflicting interest and make critical choices

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- “Government is a highly imperfect institution, but we must reluctantly concede it is sometimes a necessary companion, particularly to correct market failure in industries essential to the vitality of the nation as a whole.”

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COMMON GROUND; SHARED DESTINY

• Article 44 of the Chicago Convention states, as an objective to “ensure that the rights of Contracting States are fully respected and that every contracting state has a fair opportunity to operate international airlines.”

• The history of aviation shows that the developing world and the developed world share an important element: an overriding motivation in aviation policy to ensure the existence of a national flag carrier. Put differently, no country likes to see its national flag carrier go down.

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- US

–Special Legislation to save the industry

- Switzerland

–Creation of Swiss after the demise of Swissair

- New Zealand

–Renationalization of Air New Zealand

- Malaysia

- Reversed privatization of Malaysia Airlines

• Paradox of Competition

• National Flag Carrier

•Participation and sustainability is a complex issue

•Economic analysis is inadequate. Political dimension must be considered

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http://web500test.pal.com.ph/rlim

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