Clearer skies for airlines flying to Clark and Subic?

By Benjamin V. Buco, Jr.
Published Page 2/S4 on the Industry Report of BusinessWorld, May 17, 2007

It has been two years since Singapore’s low-cost carrier (LCC) Tiger Airways inaugurated its regular flight to the Diosdado Macapagal International Airport (DMIA) in Clark Field, Pampanga. Tiger Airways’ decision to fly to the Clark airport starting April 5, 2005 was part of the government’s liberalized charter programs, which allowed foreign budget airlines to ferry passengers to and from DMIA and the Subic Bay International Airport (SBIA).

The Civil Aeronautics Board (CAB) implanted the liberalized charter program in 2003 in an effort to improve the country’s tourism industry. The program allowed charter airlines to issue individual tickets to passengers and to make scheduled trips, especially to areas not served by domestic carriers.

For sure, news about the entry of low fare airlines such as Tiger Airways in Clark has been a delight for Filipino travelers who have been dreaming of spending their weekend in Singapore to either shop or relax. Back then, Tiger Airways sold absurdly cheap ticket, at $16 or P900/pax one-way.

However, after about two years of traversing the Singapore Clark route, Tiger Airways is now threatening to cut and even cancel flights to DMIA after what the airline described as “regulatory uncertainty” at the DMIA. Tiger Airways as well as other foreign carriers operating in Clark are facing possible restrictions due to the issuance of Executive Order (EO) 500-A in August 2006 which practically rescinded the “open skies” policy to set out under the original EO 500 issued early last year.

Stakeholders such as the Joint Foreign Chambers of Commerce of the Philippines (JFC) said they are afraid that if Tiger Airways was to reduce or cancel its flights to the country, other foreign carriers would be cautious about entering Clark. This, according to them, could put the infrastructure projects of the government in jeopardy since foreign carriers support the physical expansion and construction of DMIA through fees.

THE DRAFT

To prevent foreign airlines from leaving the DMIA and SBIA, the people of Clark have drafted a presidential directive numbered EO 500-B which is aimed at amending EO 500-A, which barred foreign airlines not designated by their respective governments under existing bilateral air service agreements (ASAs) to fly to Subic and Clark.

EO 500-B, among others, makes the entry of foreign airlines (especially LCCs) into Clark and Subic a lot easier. The proposed presidential directive seeks to “repeal” and “supercede” EO 500-A. Most of the provisions contained in EO 500-A are practically the opposite of what have been spelled out in the original EO 500.

EO 500 allowed foreign carriers to fly to DMIA without limits to traffic rights, capacity and air freedom rights, except for cabotage or the right to fly or operate within the domestic boarders of another country.

In particular, EO 500 directed the country’s air negotiating panel to formalize special charter permits granted by the CAB into permanent air entitlements. These entitlements are formally known as ASAs, under which other countries and the Philippines designate the carriers that could operate the routes between them. The presidential directive said that those covered by ASAs and allowed to operate cargo and passenger services to and from Clark could “apply for the waiver of any restriction or limitation on capacity, type of aircraft or non-cabotage traffic rights.”

Such aviation privileges given to designated foreign carriers, however, were put to an end when EO 500-A was signed. This presidential directive removed the fift freedom rights for foreign airlines with entitlements to DMIA and SBIA. Fifth freedom refers to the right to carry passengers between two countries by an airline of a third country, with route either ending or beginning at the home country. This means that a foreign airline is allowed to pick up passengers from either Subic or Clark, proceed to a third country before heading back to its home country. An example would be the Clark-Macau-Singapore route.

It is the intention of EO 500-B to amend EO 500-A, which took back rules that liberalized access to DMIA and SBIA under the original EO 500.

“EO 500 made it easier for foreign carriers to access Clark. Then there was EO 500-A, which restricted what was already given in EO 500. EO 500-B seeks to restore that, restore what was put in place by EO 500,” an aviation expert who assisted in drafting EO 500-B told Business World.

“Our aviation policy needs improvement. EO 500 was there to improve it and EO 500-B was there to further improve it,” the aviation expert said. The aviation expert added that EO 500-B was drafted in response, among others, to the “growing demand among low cost passenger airlines to flu to the Philippines via the DMIA and a significant increase in passenger charter flights to SBIA.” Titled “Providing for the Further Expansion of Air Services to DMIA and SBIA,” EO 500-B seeks to “unilaterally grant” to any designated foreign airline that applies to operate to and from Subic and Clark a waiver by the CAB of “any restriction or limitation on capacity, route rights imposed by relevant ASAs.” Such provision gives designated foreign carriers the opportunity to apply for third and fourth freedom traffic rights to DMIA and SBIA.

Third freedom refers to the right to carry passengers and cargo from a carrier’s country to another, while fourth freedom refers to the right to transport traffic and cargo from another country to the carrier’s own.

Moreover, EO 500-B seeks to open up the skies of Clark and Subic to any foreign carrier not designated under an existing ASA with the Philippines. This means that any foreign airline wishing to engage in schedule international transportation between DMIA or SBIA could simply file a verified petition with the CAB to fly to and from the two airports.

WHO WILL BENEFIT?

The people of Clark led by the Clark Investor and Locators Association, Inc. (CILA) are among the most active in lobbying for the approval of EO 500-B. In an interview with the Business World, CILA Executive Director Rodrigo P. Verzosa said the association has been very zealous in lobbying for the approval of EO 500-B because it thinks this is the “best way to ensure the accelerated pace of tourism and economic development in Central Luzon and consequently of the manu destinations in the country that local air carriers serve.

“This reform is a vital element for the country’s economic development and in fulfillment of the vision to make the Philippines a transport and logistics hub in Asia-Pacific Region,” Mr. Verzosa maintained.

Mr. Verzosa believes that for the DMIA, and SBIA for that matter, to realize their full potential as a free port, they must have open skies policies, “giving designated and non-designated international airlines and low-cost or legacy airlines, unlimited and unhampered access to it. “This is to ensure that Clark and Subic develop their full potential as the premier economic zones of the country with their unmatched and complementary infrastructure advantages, and secondary but important gateways for tourism and development,” he said.

Mr. Verzosa added that opening up DMIA will not only increase the number of tourist arrivals in Clark but will also create jobs in Central Luzon. Mr. Verzosa cited, for instance, the increase in passenger traffic in DMIA with the promulgation of EO 500 to more than 471,000 last year 232,313 persons in 2005 and from 47,000 in 2004.

He noted that the number of passenger arrivals in Clark from 2004 to 2006 grew 10-fold. “The reason for that is that the airport was serving much more flights in 2007 than in 2004 with the entry of more LCCs in Clark,” he noted. “From these figures alone, you can see the vast potential of Clark of becoming the premier gateway for tourists and overseas Filipino workers (OFW) to and from the Philippines,” he added.

The aviation expert interviewed by Business World agreed with Mr. Verzosa saying no group but Filipino alone, especially those in Central Luzon, would reap the economic benefits created by EO 500-B.

Like CILA, the JFC is also zealous in pushing for the approval of EO 500-B. Representatives of various international chambers said the draft could be a way of “ensuring a stable long-term aviation policy for the development of Clark, DMIA and Central Luzon.

“To ensure long-term policy stability and ensure growth and investment, the JFC recommends the adoption of EO 500-B endorsed by the National Competitiveness Council,” the group said in a statement released last month.

THREAT TO NATIONAL INTEREST?

The Fair Trade Alliance (FTA), however, is questioning the economic gains outlined by Clark stakeholders. “Why would you open up the domestic aviation industry in the name of ‘imaginary gains?’ I have the impression that there’s a lot of hyperbole especially on the claim that tourism is a big gainer. The fact is [with EO 500-B], a lot of Filipinos will become tourists in other countries and not [foreign] tourists coming to the Philippines,” FTA Executive Director Rene E. Ofreneo told Business World.

“It’s all a question of how the entire sector will develop in the context of a general development framework. The false assumption is if you open the skies, everything will follow,” Mr. Ofreneo added.

The FTA, is thus petitioning the Arroyo administration to defend the country’s patrimony and sovereignty by resisting by resisting pressure from foreign airlines.

Like the FTA, the biggest actors in the issue, the country’s domestic airlines, are also doubting the efficacy of the proposed draft in bringing economic development.

Local carriers composed of Philippine Airlines (PAL), Cebu Pacific Air, Air Philippines, Asian Spirit, and Pacific East Asia Cargo Airline argue that the draft does not promote economic growth but is in fact a threat to national interest. They said EO 500-B is tantamount to a “unilateral grant of aviation privileges to foreign air carriers.”

Said the group, “We strongly object to the unilateral grant of aviation privileges to foreign air carriers… in particular the grant of fifth and seventh freedom and other non-cabotage rights.”

Seventh freedom is the right to carry revenue traffic between two countries without extending the route to the home country.

Further, “No country in the world has given seventh freedom rights for passenger services to foreign airlines, not even for reciprocity,” the group claimed.

In the airline’s view, the grants of aviation privileges to DMIA and SBIA are devoid of reciprocity or the exchange of air rights in ASAs.

“While foreign airlines enjoy full access to DMIA and SBIA, the Philippines’ own airlines will have to negotiate for the same privileges from foreign governments, a feat that EO 500-B’s unilateral giveaway will make more difficult if not impossible to achieve,” the airlines complained.

The Airlines also expressed fear about the possibility of EO 500-B causing a serious adverse impact on other routes operated by local airlines. According to the group, this could put more than P150 billion in aviation investments and 15,000 jobs at risk and consequently imperil the long-term growth of Philippine tourism and the downstream sector.

The airlines also warned that the proposed draft could lower the standard for the issuance of permits to foreign carriers since the CAB, an agency tasked to regulate, promote and develop and develop the economic aspect of the country’s civil aviation, would be turned into a mere “rubber-stamp” body. “Who will be responsible for protecting consumers by ensuring that competition is fair and healthy?” asked the airlines.

The group added that EO 500-B could force the country to give up valuable bargaining chips as well as put the government in a weak negotiating position. They also claimed that the draft, especially its provision of granting seventh freedom rights to foreign airlines, would go against a number of constitutional and legal provisions. “[It] violates the mandate of Constitution that our trade policy should be based on equality and reciprocity.”

CILA has been quick to deny the domestic airlines’ allegations. For one, the association denies the claim that EO 500-B gives seventh freedom rights to foreign airlines. This, CILA said is a false assumption. “EO 500 and EO 500-B do not grant seventh freedom rights. What is granted is unlimited fifth freedom rights,” CILA said.

CILA also said EO 500-B would not have an adverse impact on the existing routes operated by local carriers. The association noted that the entry of low fare airlines at DMIA since two years ago had not adversely affected the load factors of local carriers.

“PAL’s load factor for its equivalent routes, in fact, rose from 68% to 76%.” It claimed.

DIALOGUE NEEDED

The debate on whether the government should open up the skies of Clark and Subic, thereby allowing the unilateral liberalization of our domestic aviation sector is far from over.

But while the country is divided on the issue of liberalizing our aviation sector, growth of the sector itself is being fettered. And the lackluster showing of this sector this year and the years to come could have a multiplier effect, affecting the rest of the economy in the long term.

Hence, FTA’s Mr. Ofreneo is proposing that the government hold an aviation summit in order to have an “honest to goodness assessment” on how to develop the aviation sector beyond open skies. “The problem is the government seems to be listening to only one group. It seems that we have a government that doesn’t even bother to sit down with the domestic aviation industry,” Mr. Ofreneo said.

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  1. Ted

    I hope Filipinos are smart enough to realise that free trade is in everyones’ ultimate best interest. After all, trade is by its nature an exchange of mutual benefit. It applies to air travel just as much as it does to the exchange of dollars or pesos for chocolate, or any other product. If foreign airlines have extra traffic rights into Manila (Clark), then local employment will increase; Filipinos will have a greater choice of frequency or destinations served by air; fares may drop as more airlines compete. Local airlines should only survive if they are offering a good product. And some are: after all, look at how Cebu Pacific now serves places such as Bangkok and Singapore, not just internal Filipino destunations. Yes, people in the Philippines, be shortsighted and restrict airlines just like you have restricted mining for many years. Who loses: only the Filipino people, and most of all the less affluent!

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