Philippines: PAL controls gateways through CAB: experts

This is from abs-cbnnews.
This article gives us an insight into how some of the big business oligarchs operate in the Philippines. Although Tan was born in China his parents moved to the Philippines when he was a child. He was a supporter of Marcos and made money in tobacco. His net worth is in the billions.


PAL controls gateways through CAB, say experts

Here’s what Romulo Neri means when he says that the aviation industry is captured by vested interests
By LALA RIMANDO
abs-cbnNEWS.com/Newsbreak



The Philippine Airlines (PAL) rules among the six commercial airlines in the country not just in market share for the more profitable international flights but even in how the government crafts its policies and strategies for the entire aviation industry.



When former economic planning secretary Romulo Neri included the aviation industry in his diagram of how oligarchs and their influence on policy have set back the country's growth in a December 2007 meeting with opposition senators, he was referring to this lethal mix of business and politics.



The Civil Aeronautics Board CAB, a regulatory body for the aviation industry, is not supposed to interfere or make judgments on the business model of the airline. But during bilateral air rights negotiations, Benjamin Solis, a four-decade industry expert who has sat on negotiating panels, say some CAB officials would sometimes negotiate based on how many seats or flights PAL could accommodate.



"This is where the government seriously failed in its regulatory aspect. It should just be looking into the economic aspect [of the airline]: Are you willing, able and capable of running the business?" Solis explains.



Lucio Tan, Oligarch



Lucio Tan, whose liquor and cigarette business has made him the richest Filipino, controls PAL. The first airline in Southeast Asia was privatized in the mid-1990's. Neri said Tan is one of the oligarchs whom President Arroyo depends on for political survival.



In many instances in the past – mostly when there are controversial air treaties, and recently during the downgrade of the aviation's oversight agency (link to 3-part series on ATO downgrade) – discussions about the aviation industry have been mostly confined among the industry players. But in the past five or so years, other sectors in the country—from tourism to manufacturing to local governments—are pushing to unlock the economic potentials that a liberalized aviation policy brings.



Neri explained that the aviation industry is one of the six major industries in the country under a "regulatory capture." This occurs when the regulatory body—in this case the CAB—established to protect consumer interests equates the "public good" with the interests of the industry it regulates.



CAB is an agency under the transportation department and is vested with the power to regulate the economic aspect of air transportation, and the general supervision and regulation of the air carriers.



Controlling the Gateways



Through CAB, PAL controls the "gateways" to the country, industry experts say. The gateways refer to access to and from Manila, Clark, and other entry points of international flights to the country.



The gateways are regulated by international air services, which are negotiated on behalf of the country by CAB. The CAB exercises a political power in assigning the country's assets, in this case, the air traffic rights.



In the air services negotiations, CAB becomes a collegial body that includes other stakeholders in the industry, such as the tourism industry, foreign affairs, and the local airlines.



Air Service Negotiations


Through the negotiations for bilateral air rights, Solis said PAL is allowed to influence the aviation policy of the country because they get the numbers in the CAB board. And most often, Solis says negotiations are still the old-style zero sum approach: "I give you 10, you give me 10. It's equal exchange."



In controversial air services negotiations with Taiwan and United Arab Emirates years ago, the total seats or weekly flights with both countries have been limited based on how much PAL would be able to mount.



UAE even wanted to expand its flights to Manila from the Middle East because of the high traffic of overseas Filipinos working there. PAL then was cash-strapped and could not allocate enough aircraft to fill the demand. CAB, during the earlier part of negotiations, was not receptive to increasing the weekly seat allocations for both countries.



Some members of the CAB board eventually resigned. One of them was Bertie Lim, who was then an independent member of the CAB negotiating team. Lim, now executive director of the Makati Business Club, experienced how PAL exerted its muscle during the negotiations: "It did not make sense that we were limiting the flights just because PAL could not match the competition's. The clear victims were the OFWs (overseas Filipino workers) who had to wait forever to get a flight."



Exchange of values


Solis said that under the liberalization concept for the aviation industry, "exchanges between or among countries do not necessarily have to be on a 'zero sum basis.' It could be an exchange of values."



He gives an example: "If a Philippine airline sees that there is economic value in flying to Bangkok and then Jakarta, then the air rights should be flexible. It does not have to be a point-to-point kind of connection. It could be Manila to Bangkok to Jakarta."



In the industry parlance, this is called "networking."



Since CAB has not been open to the 'networking' concept, one casualty is already feeling the consequence: the European market for tourists.



European tourism boom in 2008


In 2007 and early 2008, the tourism department has been feverishly marketing the Philippines as a diving destination to the British, German, Netherlands, French, Italian, Swedish and other European markets. Their main pitch are the diving packages.



Tourism Secretary Ace Durano said Europe accounted for about nine percent of the total foreign arrivals last year, and would want to continue tapping them because they stay longer and tend to spend more, compared to other backpacking and short-stay tourists.



In fact, tour operators and local hotels are gearing up for a European boom this 2008.



But by April 2008, German Airline, Lufthansa, which has been operating in the Philippines for about three decades and corners about 30 percent of the European market that comes to the Philippines, will become the latest European carrier to pull out of the country. Earlier, British Airways, Swiss International, Alitalia, and Air France have also stopped their long haul flights to the Philippines.



Not viable



It is not for the lack of a point-to-point air services agreement with these countries, but because it is just not economically viable for these airlines to do a long-haul flight from Western Europe all the way to the Philippines.



Solis explains that European flights cannot fly over restricted airways of China and Russia, which would have been a shorter route, so they usually go through and stop over somewhere in Middle East, into South Asia, then Southeast Asia, before they turn around or proceed to North Asian destinations.



"Long routes usually involve a large aircraft like a Boeing 777 or a 747. And with each intermediate point like Dubai and Bangkok, there are lesser passengers along the way."



Solis adds that most European flights go to hubs in Bangkok or Singapore, which are still a good three hours from Manila. "With thinning load of just about 100 out of the original 300, and since they could not replenish passengers from, say Bangkok, because we don't allow them in our strict zero-sum air agreements with them, then they'll just turn around and not proceed to the Philippines."



Allowing the European airlines to pick up in Bangkok, Singapore, Kuala Lumpur, Hong Kong, and other destinations close to the Philippines, will mean competition to the business of PAL and even to Cebu Pacific, which has been expanding its regional flights with its spanking new Airbus 320s.



The local airlines usually just pick up the European passengers from where their own airlines drop them off in the Middle East or in Southeast Asian points.



This means, however, that there are limited direct flights to the Philippines, making it sometimes more expensive and involves more hassle for the European tourists to come to the Philippines since they still have to take connecting flights. Only KLM now flies direct from Europe to Manila via Amsterdam.



Sellout?



Getting out of the zero-sum mindset seems difficult for CAB because it is convenient for PAL, and now, also for Cebu Pacific. Regional flights are more profitable than domestic ones.



The zero-sum convenient approach was evident when the controversial Executive Order 500, which liberalized aviation activity at Clark. The two major Philippine airline companies contested it. Even the minor airlines, Air Philippines, Asian Spirit, and Pacific East Asia Cargo Airlines joined them. All five local airlines branded the EO-500, and its other version, the EO 500-B, as a "sell out of national patrimony" because there was supposedly no "reciprocal obligation" from the country of the airlines going to Clark to provide the same liberalized aviation policy that our local airlines could enjoy.



Earlier, airline lobbyists were able to overturn the original EO-500 through the EO-500-A, but business groups, tourism-related organizations, and the local governments of the regions benefiting from the influx of cheap regional flights to Clark united to pressure President Arroyo to sign EO 500-B. President Arroyo is yet to sign the latter, but has made pronouncements to beef up expansion of the Clark airport, eventually making it the country's main gateway.



Pocket open skies



Cheryl Lyn Rodolfo, an aviation expert with the University of Asia and the Pacific, notes however that pocket open skies liberalization is not something new. She cites how Bali in Indonesia, Phuket in Thailand, Penang and Sarawak in Malaysia, and lately Siem Riep which is the gateway to Cambodia's Angkor Wat, all have pocket open skies that did not interfere with the bilateral air agreements of these neighbor countries.



"By liberalizing aviation policies in these specific tourism destinations, our neighbors were able to unlock their tourism potentials," Rodolfo told a forum on aviation policies.



Pocket open skies in Clark did not hurt traffic in Naia, currently the main gateway in Manila, which is already bursting at the seams with more than nine million passengers a year.



Instead, liberalized aviation in Clark converted the formerly sleepy post-American airbase from processing just about 50,000 passengers in early 2000's to about 500,000 in 2007.



And the economic benefits are not just trickling; it's pouring. More jobs are available since foreign companies are finding Clark a more attractive location since it is now cheaper to move not just people but also goods through air.



"Why just focus on reciprocal flights? It is naïve to do that. It's bad for our tourism, for potential investments and the jobs they generate," Solis stressed.