Message-ID: <>
Date: Tue, 18 May 1999 11:08:48 +0800
Sender: Southeast Asia Discussion List <SEASIA-L@LIST.MSU.EDU>
From: Steve Graw <smg7@CORNELL.EDU>
Subject: FWD:PH: disaster of liberalization (in the Filipino airline market)

Who's to blame for PAL's problems?

By Neal H. Cruz, Philippine Daily Inquirer, 17 May 1999

WHEN things go wrong, that is the time to scramble and look for scapegoats. Now that Philippine Airlines is about to crash, there is plenty of finger-pointing. Who is to blame for the erratic flying of PAL?

Lucio Tan? The Asian economic crisis? The PAL pilots? The striking unions? PAL management? The creditors? Maybe the answer is: All of the above. All of them may have contributed to the impending demise of the Philippines' flag carrier. But none of them is as responsible, and guilty, as one government agency whose duty is precisely to rationalize and regulate the airlines operating in the Philippines. That is the Civil Aeronautics Board, the government agency that grants air rights and temporary operating permits (TOPs) to foreign airlines.

Perhaps in its overeagerness to implement the Ramos administration's policy of liberalization and globalization, the CAB opened the Philippine skies to practically all airlines. The theory is that if you open the airline industry to free competition, passenger rates will go down. So the CAB went on a spree of indiscriminate granting of air rights and TOPs to foreign airlines.

The CAB was unusually lax in giving fifth and sixth freedom rights to foreign airlines. (Fifth freedom is the right of an airline from country A to carry revenue traffic between country B and other countries such as C or D. Sixth freedom is the use by airline of country A of two sets of third and fourth freedom rights to carry traffic between two other countries but using its base at A as a transit point.) The bilateral agreements entered into by the past administration and government of other countries--all done without public hearings, due process and transparency--made the playing field uneven in favor of foreign airlines. While the Philippines gave the foreign airlines these fifth and sixth freedom rights, the other countries did not give PAL and other local airlines reciprocal rights. It is hard to understand, but the previous administration discriminated against local airlines by indiscriminately giving away traffic rights to foreign carriers, forgetting that traffic rights are sovereign resources of immense worth that are to be exchanged with other countries only for rights of equivalent value.

Other countries routinely provide the national flag carriers with preferential treatment, such as distribution of airport slots and parking bays, but PAL did not receive this from the Ramos administration.

From 1993 to 1997, the Ramos CAB went on a Santa Claus gift-giving spree, amending or instituting new bilateral air service agreements (ASAs) granting outrageously excessive traffic rights to foreign airlines, disregarding market size, actual growth prospects, common sense and their own responsibility to provide for a healthy Philippine aviation industry.

In fiscal year 1994-1995, PAL estimated that these unjustified grants of traffic rights resulted in a loss of P585 million (or $23 million at the exchange rate at that time) for that year. With the Asian economic crisis, the loss from such grants is estimated to exceed P1 to P1.5 billion per year.

Certain CAB officials were reprimanded by Congress for their profligate ways, and at least two CAB officials were charged for criminal offenses in relation to certain unauthorized bilateral agreements. (You can guess why they did this.) But the unrepentant CAB even issued a formal resolution (in 1993) declaring its new policy to be less protective of the private interest of PAL in future international air sorties consultation(s).

Even with the RP and Asia-Pacific economies growing at their former robust levels, the CAB Santa Claus gifts were already damaging PAL and robbing opportunities for new RP carriers such as GrandAir. PAL alone was losing millions of dollars per year as a result of ruinous competition on a number of key international markets. In its struggle to catch up, PAL invested in a $4-billion refleeting plan that by late 1999 would have made PAL globally competitive with new aircraft and new routes.

However, when the Asian economic meltdown hit, markets on most regional routes slumped drastically even as currency depreciations vastly increased the debt burdens of many Asian carriers. PAL, in the middle of its refleeting program, with both its new and old aircraft still in the fleet at the same time, was hit harder than most carriers.

Some airlines--such as PAL (even prior to the June 1998 pilots' strike), United, Garuda and Vietnam Airlines--reduced their flights in the region in reaction to the crisis.

But some airlines operating under some of the Santa Claus bilaterals, either expanded operations or attempted to secure more rights for expansion to and from the Philippines, seeing the crisis as the opportunity to eliminate PAL as a competitive force. Their tool: the astronomically high capacity ceilings set by the Santa Claus agreements that makes one wonder whether our CAB was working for the Philippines or for other countries.

In a paper, PAL lists the worst offenders as Korean Air and Asiana Airlines of Korea, Cathay Pacific Airways of Hong Kong; China Airlines and EVA Airways of Taiwan; and Singapore Airlines.

All these airlines looked at PAL's situation and smelled blood. They were already armed with the ultra-liberal provisions of the Santa Claus agreement and are using them to maximum effect. Also, by diverting direct RP-US or Middle East traffic via their other hubs in Seoul, Hong Kong, Taipei and Singapore, these airlines are actually promoting their home bases as Asia-Pacific hubs, at Manila's or Cebu's expense, contrary to the Philippines' own national objectives to build up Manila as the hub of Asia.

Luckily, the administration of President Estrada recognized these problems and has promised to renegotiate bilateral air agreements with Taiwan, Korea and Hong Kong.

There are four other airlines (Saudi Arabian Airlines, Emirates, Gulf Air and Air Nauru) that have been granted temporary operating permits by the past CAB. Outright cancellation of these TOPs will help in the rehabilitation of PAL.