Unclear Skies Ahead
To liberalize or not to liberalize the aviation industry
By Maureen Macaraig-Martinez

Philippine skies have just become more open to American carriers. At least that’s the perception when the 1982 RP-US Air Transport Agreement finally took effect on 1 October 2003. But the agreement, while lifting the restriction on the number of passenger flights between the Philippines and the US, does not constitute a full open skies agreement since other restrictions still apply.

Both governments, as a policy, are for the liberalization of the aviation industry. But the degree of the openness of the skies is a very critical issue, especially if both countries are to rationalize how the agreement can boost their respective economies without contradicting their respective Constitutions. Perhaps it is because of this that the two round-table negotiations this year did not end in what each party would consider a “mutually beneficial” amendment to the agreement.

The Philippine panel wanted another 12-year deferment of the air pact implementation, maintaining that the country still cannot fully open its skies to unlimited passenger flights from the US without hurting local airlines. President Gloria Macapagal Arroyo, however, was willing to negotiate an all-cargo open skies aviation agreement, and in November finally agreed to adopt an “open skies” cargo policy at the Clark Special Economic Zone and Subic Freeport Zone.

The government also asked for Philippine passenger airlines to be given new routes within the US – but the US did not agree to this because its Constitution prohibits cabotage or the transportation of persons, property, or mail between points of the US in a foreign aircraft – and to be allowed to pick up passengers from the US neighboring countries.

The US, on the other hand, wanted code-sharing rights for both combination and cargo services – between non-designated bilateral carriers, between US carriers, and between US carriers and Asian airlines – and seventh freedom rights. The Philippines rejected these demands, saying seventh freedom rights contradict the 40% foreign ownership cap as mandated in the 1987 Constitution. This will enable US passenger and cargo planes to mount more flights to and from the Philippines, in effect operating like local carriers.

For Philippine industry players pushing for liberalization – mostly under the Freedom to Fly Coalition (FFC) – the agreement is long overdue. Having been deferred five times in the last 20 years, they feel it is about time for the country’s aviation industry to rise up to the challenges of globalization and let the industry be driven by the market. Other players – mainly those within the Save Our Skies (SOS) group – maintain that certain provisions in the agreement will put the Philippine air transport industry at a great disadvantage.

Policy too protectionist

The Air Transport Agreement was entered into by the Philippines and the US, hoping “to facilitate the expansion of international airport opportunities” and provide various air transport alternatives that may eventually lower the cost of service to the advantage of the traveling public. It has been deferred several times, with the goal of preparing the local industry players for competition against the big aviation carriers of the US.

Local aviation policy is highly protectionist in nature, as with many of our neighboring countries. But over the years, many of these other countries have loosened up their restrictions in aviation services, seeing that it can boost many related sectors such as labor, trade, and tourism. Opening the skies has become their next best step to intensify global competitiveness. Among the countries that have signed more liberal air service agreements – commonly referred to as bilateral agreements – are South Korea, Singapore, Thailand, Indonesia, and Malaysia.

The Philippines looked like it was willing to do the same when in 1995, then President Fidel Ramos signed Executive Order (EO) 219, “Establishing the domestic and international civil aviation liberalization policy.” The policy did not provide a full open skies policy, but is faithful to the government’s gradualist approach to liberalize the aviation industry. EO 219 was signed not only to increase air access for both Filipino and foreign passengers, but also to promote international trade and investment and tourism in a non-monopolized environment. Back then, Philippine Airlines was the only local carrier.

Air Service Agreements (ASAs) with Taiwan and Hong Kong were signed in 1996, including the granting of sixth freedom rights – the right to carry passengers between two foreign countries by stopping or connecting in the home country. For instance, China Airlines and Eva Airways can pick up passengers from the Philippines and fly them across the trans-Pacific route to North America through Taiwan.

As mandated by EO 219, the Civil Aviation Board (CAB) – the agency tasked to regulate and implement the law – also granted franchises to other domestic airlines for local air routes. Among the new players that came in were Cebu Pacific – now the country’s second flag carrier – Air Philippines, Asian Spirit, and Mindanao Express.

Cebu and Davao, and lately, the Diosdado Macapagal International Airport in Clark, Pampanga, are now designated international gateways that are supposed to provide easier and more access to investment and tourism opportunities down South and up North. With additional routes opened for both business and leisure travelers, new international carriers resumed their Philippine operations.

All these developments have contributed to several growth factors in Philippine economy. For one, the so-called “missionary routes” – those routes not serviced by PAL – proved to be highly profitable according to the new players. There also was an increase in tourist arrivals in the country, resulting in higher tourism receipts. More important for the traveling public is the fact that there were more service providers to choose from and fares have dropped due to increased competition.

The PAL Disadvantage

Aviation liberalization and competition have put pressure on Philippine Airlines (PAL). PAL attributed its poor performance to foreign competition, and in 1999, threatened to fold up after a series of labor strikes weakened operations. At that time, then-President Joseph Estrada asked the CAB to review the country’s bilateral agreements.

In October 1999, the CAB abrogated the Philippines-Taiwan ASA, which meant the cancellation of air links between the two countries – and a reversal of the spirit of EO 219. Critics saw the move as highly protectionist, not of the country as a whole, but of PAL. The abrogation was done without consultation with industry players. More importantly, consumers showed weak market influence in the implementation of the existing policy.

The consequence of this move was millions of pesos lost in tourist spending by Taiwanese tourists as well as a drop in business traffic as travelers had to pay higher fares and take an extra stopover in Hong Kong.

Half-hearted Freedom

The Arroyo administration, has reiterated its commitment to liberalize the aviation industry. But as the old cliché goes, “actions speak louder than words.” The President’s instruction to review the Air Transport Agreement between the Philippines and the US can be seen as a sign of uncertainty. Even the Senate now says it has to ratify the agreement, something which hasn’t been done in the case of other existing ASAs.

The government cannot be faulted for making sure the country is not taken advantage of. After all, the law states that the exchange of traffic rights and routes with another country should be based on “the reciprocity between the Philippines and other countries” – the “exchange of rights, freedoms, and opportunities of equal or equivalent value.” Not only does government feel that the already existing agreement between the Philippines and the US is not a fair deal, it is also finding ways to amend the agreement to give local carriers a fighting chance at succeeding in the international market. But it should be clear to the government that it should be fighting for the good of the whole industry and travelers not just for favored industry players.

For the longest time, government has been protective of local aviation industry players, making sure that they are strong enough to fight the bigger international carriers. But the industry itself is divided on this issue. Our flag carriers - PAL and Cebu Pacific, who are affected by competition will definitely say it’s going to lower their profits, while those who are overshadowed by these local players would opt to get a bigger piece of the pie.

To say that the players’ divided stand on the issue of liberalization is hampering the growth of the aviation industry, and consequently, tourism and trade, is an understatement. Too many precautions in the name of protecting local industry players have been made in the past, all in the name of giving them enough room to develop and be highly competitive.

At the end of the day, the country will just have to finally take the plunge into liberalization – as gradual as may be needed – and adjust accordingly. For competition, if taken with full responsibility amidst the many challenges alongside, can actually speed up one’s road to growth.