Transcript THE ODYSSEY OF A NATIONAL FLAG CARRIER IN A LIBERALIZING AIR TRANSPORT INDUSTRY Roberto C.O.

THE ODYSSEY
OF A NATIONAL FLAG CARRIER
IN A LIBERALIZING AIR
TRANSPORT INDUSTRY
Roberto C.O. Lim
Philippine Airlines, Inc.
Fax. (63-2) 867-45-63
Email: [email protected]
www.philippineairlines.com
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Does a Small Country Need a Domestic Carrier?
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
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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 and
concession 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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• The Economic Importance of a Flag Carrier
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
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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)
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–
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
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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
General
Pilots
Cabin Crew
Reg. Part Time
Foreign-based
Total Regular
Local Hire
Expatriate
1,134
4,131
337
1,303
10
225
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7,161
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DOES A LARGE COUNTRY OR ECONOMY
NEED 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
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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
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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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Policy of Progressive Liberalization Promotes
Fair Competition
• 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.
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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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• Unused entitlements in ASAs Worldwide
• Inventory of traffic rights granted under ASAs
worldwide may be
underutilized
WEEKLY SEAT CAPACITY ENTITLEMENT AND USAGE
By Region
Region
Capacity
Rights per
Region
Capacity
Rights on the
Route
Airline
Operations
Philippines
Foreign
Total
Seats
Offered
Total
Unused
Rights
Americas
17,500
35,000
8,674
7,557
16,231
18,769
Europe
13,200
26,400
0
6,579
6,579
19,821
Asia/Pacific
71,960
143,920
40,016
50,514
90,530
53,390
Middle East
15,284
30,568
2,820
8,719
11,539
19,030
117,944
235,888
51,510
73,369
124,879
111,010
6,133,088
12,266,176
2,678,520
3,815,162
6,493,682
5,772,494
GRAND TOTAL
Weekly Capacity
Annual
Capacity
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Survey of U.S. Open Skies Agreement
31% or 58 countries have entered into open skies agreements out of a potential 190
bilateral partners
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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
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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
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the U.S.A involving the airlines of both sides.
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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- Thank you -
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