AIR TRANSPORT AND THE OPEN SKIES OPTION1

Joselito P. Supangco2

INTRODUCTION

Out of the active 33 foreign airlines with rights to Manila, Davao, Zamboanga, General
Santos or Cagayan de Oro, only three have been operating in Mindanao. These are Bouraq,
Silkair and Malaysian Airlines System (MAS). MAS has temporarily suspended its Davao
operations due to the downturn in passenger traffic. While seemingly a profit-motivated response
to a market demand situation, this scenario illustrates an important consideration towards an
“Open Skies” Strategy – route profitability.

Non-utilization of the rights to fly to the local destinations may be attributed to: (1)
inadequate passenger and cargo traffic to justify regular schedules; (2) inadequate airport and
runway facilities; and (3) foreign carriers are not expanding their Asian operations because of the
financial crisis in the Region.

Among the three factors, only (1) and (3) seem to be valid arguments. We only need to
look at General Santos City, Laoag, Clark, Subic and even Mactan, Cebu airports to realize that
there must be some other compelling reasons than infrastructure deficiency that explain the non-
utilization of air rights.

Pressed to create an environment that would attract new international carriers to

Mindanao, an “Open Skies Strategy” seems to be the cure-all. But is it? What other strategic
options can the government consider to serve the national interest of stimulating trade and
tourism in Mindanao?

Another issue that needs to be addressed is whether the Philippines should continue
adopting an “Open Skies Policy” considering the fact that this policy has recently been blamed
for the financial troubles of Philippine Airlines and the excuse for its inability to compete in the
international air services market place.

CURRENT SITUATION IN THE INTERNATIONAL AIR

PASSENGER/CARGO MARKET

The major segment of international air passenger and cargo traffic to/from the Philippines
either originates from or is destined for Manila. The pre-eminence of Manila is largely due to its
position as the nation’s Capital City coupled by the city’s rapid development and its environs
leading to the concentration of the majority of air travellers and cargo in the Capital Region.

1 Paper presented in the Symposium on Economic Policy Agenda for the Estrada Administration, June 1, 1999 at

INNOTECH, Commonwealth Avenue, Diliman, Quezon City.

2 Consultant, College of Economics and Management, University of the Philippines Los Baños, College, Laguna
 In 1996, the Ninoy Aquino International Airport (NAIA) had a 96.01% share of the air
passenger market, 97.70% share of the air cargo markets, and 93.96% share of total international
flights. Another significant market, Mactan-Cebu is getting 3.76% share of the air passenger
market, 2.26% share of the air cargo market, and 5.50% share of total international flights. Other
emerging markets include Davao with 0.08% share of international passenger traffic and Laoag
with 0.15%. By 1998, NAIA’s share of total international passenger traffic dropped to 95.15%,
its cargo traffic share decreased to 96.32% and total international flights declined to 91.59%.
Mactan-Cebu benefited from NAIA’s shortfall; its international passenger traffic share increased
to 4.77%, its cargo traffic share to 3.68% and its share of international flights to 6.93%. Davao’s
share remained at 0.08%, while Laoag did not report any international traffic.

Based on forecasts made in the Civil Aviation Master Plan of January 1997, by 2010,
Manila’s share of the international air passenger traffic will decline to 17.945 million or 92.99%
of total traffic while the shares of the regional airports will increase; Cebu to 772,00 or 3.98%;
Davao to 451,000 or 2.32%; Laoag to 119,000 or 0.61%; Zamboanga to 62,000 or 0.32% (from
nil); and Puerto Princesa also to 62,000 or 0.32% (from nil). Table 1 below presents the forecasts
for international air traffic services for the national airports.

The dominance of Manila in the market for international air traffic services is attributed
to a number of factors, namely:

1. The concentration of economic activity in the Greater Capital Region

(GCR) such as the largest business districts in Makati, Manila and Ortigas and the
industrial estates in Laguna, Batangas and Cavite;

2. The high concentration of urban population in the GCR which is a

potentially large and a stable source of demand for air travel;

3. The advanced and more modern air transport facilities and infrastructures
in the country such as the international passenger terminal I, the new domestic passenger
terminal (NAIA 2) and the on-going construction of the international passenger terminal
III (NAIA 3); and

4. The domestic hubbing operations of PAL and the new domestic carriers at
the Manila Domestic Airport which provide passengers and cargo convenient connecting
flights to other domestic destinations, including the smaller hub at Cebu. NAIA also
offers domestic passengers connecting to international flights with more choices of
airlines, routes and departure times.

The strength of Manila as the preferred port of call is manifested by the high demand for
slots at the NAIA by the different airlines. Most, if not all, bilateral agreements indicate Manila
as the preferred destination point. While the Civil Aeronautics Board (CAB)3 has to force other
country’s airlines to include other ports of call in the Philippines, this attempt is mostly
perceived/seen in the form of “roving points” where the designated airline could choose its
additional points of call in the Philippines. In effect, this has created an “open skies policy” in

3 CAB is the government regulatory agency charged with the economic regulations of the aviation sector,

specifically scheduled and non-scheduled domestic and international carriers pursuant to Republic Act No. 776.

2
specific regional routes, but this has not generated the desired air traffic volume. Manila is still
the preferred port of call.

DISTINCTION BETWEEN “OPEN SKIES”, “LIMITED SKIES”, AND “FAIR SKIES”

Considering the various interpretations that could be given to terms used in this paper, the
definition of selected terms is provided.

“Open Skies” refers to a strategy of opening up a country’s air transport market to an

unlimited number of foreign carriers without restrictions, regulation and without need for any
bilateral agreement (reciprocity) and carrying any kind or volume of cargo or passenger traffic.
This may include cabotage or the right of the foreign air carrier to pick up domestic passengers
from its initial destination to another destination within the same country.

In an emerging world economic environment of “free market and competition”, “open

skies” policy becomes the preferred way to encourage growth in a “regulated industry”. What
was before the normal means of assuring reciprocity in access to aviation markets between two
sovereign states and their designated carriers, regulation of air rights through bilateral
agreements is now anathema to sound economic development strategy. It has been opined that
“we are not enjoying the benefits of high tourism growth and robust trade with other countries
because our aviation policy is restrictive since we still cling to the archaic practice of regulation.
Therefore, we suffer the consequences of inefficiency, high costs and restricted access to the
world tourism and trade markets.”

The fault is that we view “Open Skies” as a policy, not as a strategy for achieving
economic growth. We lose the very essence of what transportation really is, a means to an end.
Whether that end or purpose is for leisure, social or business (for people travel) or to deliver
goods, transportation is the means to achieving that end. Therefore, demand for transportation is
a derived demand - it is used for a purpose other than the service it provides.

However, the quality and quantity of the transportation service is essential to achieving
the purpose it serves. If tourism and business travel were to grow, then we must have the means
to bring these visitors where they want to go, when they want to go, at a price that is reasonable
and within the shortest possible time. For industry and trade to prosper, our transportation system
must have the capacity to bring goods to their market at the lowest transport cost, on schedule
and in its original condition.

In international air transportation, it is the quantity of the service provided by various

carriers that is strictly controlled through the bilateral agreements. What is therefore being
expounded under “Open Skies” is that, by giving air carriers the market flexibility to respond to
demand through the free market regime of free entry/free exit, the required capacity would be
available. The key requirement is that demand for the service should exist or that there is a high
potential to generate demand to justify a profitable air transportation service. Since profitability
is the prime motivation for the services, international air carriers cannot be “developmental” in
their outlook.

3
 An analysis of “Open Skies Agreements” between the USA and other countries has
shown that the reciprocity principle is still the major consideration. Essentially “Limited Open
Skies” agreements only provide free entry/exit to airlines of the two signatory countries. The
agreements therefore is route-based.

“Limited Open Skies”, therefore, simply refers to a strategy of selected “open skies”
wherein only the routes between two countries are open to unlimited air traffic service provided
by their carriers. This is still normally defined under a bilateral agreement. No cabotage
privileges are given. It is in this context that “Open Skies” is used in this paper.

“Fair Skies” refers to a strategy based on equality of opportunity and meaningful

participation. It recognizes the need (1) to create freedoms for the industry to develop and
improve services, but prefers fair competition over free competition; (2) a consumer-conscious
industry, but also for a safety-responsible industry; and (3) a professional commercially-oriented
industry that recognises the wider economic and social role of air transport and the vital
relationship between civil aviation and national sovereignty.4

Figure 1 below shows the various Freedoms of the Air that are exchanged by each
country, whether for technical or economic reasons. These are further defined in Appendix A.

In addition to the six traditional types of “freedoms of the air”, the “Seventh Freedom
Right”, “Eight Freedom Right”, and “Ninth Freedom Right” also exist.

1. “Seventh Freedom Right” is the right on privilege in respect of scheduled

international air services granted by one State to another State, of transporting traffic
between the territory of the granting State and any third State with no requirement to
include on such operation any point in the territory of the recipient State;
2. “Eight Freedom Right” is the right on privilege in respect of scheduled international
air services, of transporting cabotage traffic between two points in the territory of the
granting State on a service which originates or terminates in the home territory of the
foreign carrier or (in connection with the so-called “seventh freedom right”) outside
the territory of the granting State; and
3. “Ninth Freedom Right” is the right on privilege of transporting cabotage traffic of the
granting State on a service performed entirely within the territory of the granting
State.

4
Fair Skies – An Agenda for orderly change in a world aviation system serving the world community, Opening Statement by the ITF to the 31st
ICAO General Assembly, Montreal, 19 September – 4 October 1995.

4
OPEN SKIES VERSUS FAIR SKIES – THE STRATEGIC ALTERNATIVES

As transportation is considered a means to an end, then, “Open Skies” must be considered

in the same light. To alleviate the country from lagging economic development, “Open Skies”
becomes the ultimate solution to the problems of sluggish trade and tourism development.
Oftentimes, it is an off-the-cuff policy pronouncement, misunderstood and probably ill thought,
without the benefit of careful analysis and in-depth understanding.

The centre of this “Open Skies Strategy” controversy is the exercise of each country’s
sovereignty over its airspace, wherein it may grant access to this airspace usually in exchange for
the same rights being granted to the country’s air carrier (s) or the so-called reciprocity principle.

In May 1992, the US Department of Transportation announced an initiative to negotiate

“Open Skies” agreements with all European countries willing to permit US carriers essentially
free access to their markets. “The US-Netherlands Open Skies Agreement gave US and Dutch
airlines open entry to each other’s market, unrestricted capacity and frequency on all routes and
the greatest possible degree of freedom in setting fares”5 This had resulted in the forging of a
partnership between KLM and Northwest.

In 1995, Austria, Belgium, Denmark, Finland, Luxembourg, Sweden, Iceland, Norway,

Switzerland, the Czech Republic and Romania forged identical agreements, containing the basic
features of the US Open Skies Policy. By 1997, the governments of Panama, Costa Rica,
Honduras, El Salvador, Guatemala and Nicaragua also signed open skies agreements with the
US, with the agreements virtually identical and provide free routes, free third, fourth and fifth
freedom rights, multiple designation and no limitations on capacity, frequency and pricing. In
April 1997, the USA and Singapore agreed on a bilateral open skies arrangement on international
air traffic rights. In 1998, the USA and Japan negotiated for an Open Skies agreement.

As of mid-1999, the Philippines has no similar “Open Skies Agreement” with any
country and continues on with its traditional modus vivendi of granting air rights to carriers of
other countries.

It is still too early to determine the impact of these agreements on each country’s tourism
and trade growth. There are evidences that entering into such agreements may lead to a
consolidation of operations through mergers, alliances or codesharing. The KLM-Northwest
merger serves as an important indicator of what “Open Skies” may actually effect.

CLOSED SKIES AND OPEN SKIES – STRIVING FOR THE BENEFITS

OF OPEN SKIES BY A MIX OF STRATEGIC OPTIONS

What is the Philippine aviation policy at present? Executive Order 219 of January 1995
issued by the former President Ramos espouses for at least two international carriers to be
designated official carriers of the Philippines. Should they fail to use total frequency entitlements
under existing air services agreements, then additional carriers may be designated to operate
these unused frequencies. Exchange of traffic rights and rules with other countries is based on
5
Recommendations for Costa Rica’s Air Transport Policy, Course Notes, 1999

5
national interest, including value for the Philippines in terms of promoting international trade or
investment and tourism and on the reciprocity between the Philippines and other countries.
Reciprocity means the exchange of rights, freedoms and opportunities with equivalent value. The
CAB is tasked to determine what composes the national interest, taking into consideration the
larger interest of the country, especially the users.

While the present policy seems to encourage competition between the Philippine
international carriers to maximize present rights granted under various bilateral agreements, it
upholds not only the existing reciprocity principle, but includes value for the Philippines –
loosely interpreted as the additional benefits (monetary and otherwise) generated by additional
international air services from/to the Philippines and the world.
While EO 219 encourages competition between local carriers in international and
domestic routes, it lacks a regional developmental thrust where international flights by both
foreign and the Philippine-owned carriers are encouraged to call on international airports other
than Manila. It foments the existing dramatic imbalance between Manila and the rest of the
country in terms of international air services. Thus, even the new domestic carriers that are
striving to serve international routes from the Philippines, Manila (NAIA) is still their preferred
origin/terminal node. In effect, even the Philippine carriers recognize that the market indeed is in
Manila and have pursued air rights that entitle them to a NAIA node. How can we, therefore,
attract international carriers to call at regional international airports, when, evidently, even our
local carriers have avoided these regional destinations?

POSITIONING ON ADDITIONAL FREQUENCIES AT NAIA – CAB STRATEGY

TOWARDS BALANCED GROWTH IN AIR TRAFFIC

In an effort to divert additional frequencies to other international airports other than

Manila, such as Cebu and Mindanao, CAB has discouraged additional frequencies at the NAIA
(Closed Skies). However, absence of applications to other local destinations continuous. CAB
has thus been forced to use the granting of additional frequencies at the NAIA as the “lure” for
international carriers to accept other points of destination within the Philippines – oftentimes
referred to as “roving points” as the carriers are left to choose which local destination, other than
Manila, they would prefer to call. In effect, there is a latent “Open Skies Strategy” for
destinations outside Manila, with Manila being used as the leverage in any bilateral negotiations
(from Closed Skies to Negotiable Skies?). However, whether these carriers will actually use
these frequencies to the “roving points” is left to their discretion.

Citing the 1997 ADB-funded “Sector Reform Task Force Draft Report on Institutional
Strengthening for Civil Aviation in the Philippines” undertaken by The Ambidji Group Pty Ltd.
in 1996, there were 22 countries with active air service agreements with the Philippines, with
foreign airlines and Philippine Airlines having entitlements for 202 and 202 flights per week,
respectively. Of these, foreign airlines utilized 163 while Philippine Airlines used 125.
Apparently, there were 39 and 81unutilized entitlements by foreign and Philippine Airlines,
respectively. Thus, even under these existing market conditions, there was an excess of supply
(in terms of entitlements) over demand (utilized entitlements) (See Appendix B). In addition to
the countries given in Appendix B, the Philippines has bilateral agreements with other countries
such as Papua, New Guinea, Canada and Qatar.

6
 Taking the entitlements (in seats or frequencies per week) given to destinations excluding
Manila (so-called regional routes), there were 29 frequencies and 4,000 seats per week–
entitlements to such destinations as Cebu, Davao, Zamboanga, General Santos, Clark, Subic,
Puerto Princesa and Cagayan de Oro. Only the entitlements for Cebu and Davao are presently
partially active. It is worthwhile noting that only the foreign carriers seem to exercise their
entitlements to the regional destinations (except for Cebu), while our national carrier, PAL has
opted to avoid these markets. After all, it can more efficiently serve these regional destinations
through its domestic system, hubbing at Manila and providing for efficient transfer services to
their international hub at NAIA. Entitlements or no entitlements, PAL and perhaps subsequently
Air Philippines could easily consolidate their international passengers through their Manila hub
operations and effect higher load factors. For after all, isn’t the hub just one technique for
maximizing load factors of the bigger aircraft now operating mostly international routes?

Faced with such excess of unused entitlements, the evident refusal of local carriers such
as PAL to fly international flights from the regional airports and the CAB strategy of
encouraging foreign airlines to call at these regional destinations (de-facto open skies strategy for
those routes outside of Manila), we can conclude that the value to the country of such a strategy
is nil at this time.

AIRLINE ECONOMICS AND USE OF ENTITLEMENTS

The previous discussion has pointed to the unequivocal fact that while the country has
pursued a relatively liberalized regime in granting air rights to foreign carriers without
abandoning the reciprocity principle, it has failed to attract the foreign and even local air carriers
to call at the regional airports. For those carriers with entitlements from regional airports to
international destinations, they have failed to utilize even 25% of the total entitlements. Even the
country’s designated carriers such as PAL and Grandair, which should lead in servicing these so-
called regional airports, are remiss in this responsibility. PAL has preferred to concentrate its
international operations at its Manila hub, while Grandair competes with PAL also from the
Manila hub. If the regional airports were served, these are highly exceptional cases and could
even be considered as charter rather the scheduled flights. In some, these are just token services
by PAL, eventually are cancelled for lack of a sustainable market to justify operations.

It is not, therefore, the grant of air rights alone that determines whether an air carrier
would provide service in a specific route. Economics of airline operations more often becomes
the dominant factor to consider whether entitlements would be utilized or not. Is the proposed
route profitable or not? This is determined by essentially two factors: airline operating costs and
passenger/freight demand.

1. Airline Operating Costs

One of the most crucial factors affecting airline operating costs is the average
stage length over which the aircraft flies. The longer the stage length, the lower the cost
per unit, all things being equal. Unit costs are observed to decline rapidly as the stage
length increases because much of the costs associated in operating a flight is incurred in

7
 take off, landing, climb and descent. Higher block speeds and better fuel economy are
achieved on longer sectors. Figure 2 shows the unit operating costs as a function of stage
length. American airlines have the lowest unit operating cost in the shorter stage lengths
of 2000 and less, while Singapore Airline has the lowest unit operating cost for stage
lengths of about 4000 miles and over. There are variations in these unit-operating costs
due to the differences in fleet composition, efficiency and the age of the aircraft in the
fleet. Singapore Airline, for one, prides itself as the airline with the youngest aircraft
fleet. Figure 3 shows the relationship between direct operating costs and aircraft size,
whereas aircraft size increases, cost per seat-km decreases, giving credence to scale
economies in aircraft size. Large aircrafts give the airlines the needed capacity to serve
major markets, but not give the flexibility to serve the smaller markets.

Apparently, based on the airport development program being pursued in

Mindanao, these are being designed to cater to big aircrafts such as the A300, A330,
DC10, A340 and the B747. These require longer runways to maximise load and
bigger/state of the art terminal facilities. However, they do have more seats to fill.

2. Passenger/Freight Demand

Given the various costs that airlines have to consider in the provision of services
to various routes, it is the size of the passenger/freight market that would justify whether
regular air services would be provided. If, as indicated above, 95%and 96% of the air
passenger and freight markets, respectively are in Manila, and 4.77% and 3.68% of the
air passenger and freight market respectively, are in Cebu, then this means that only a
minuscule traffic (0.08%) is in the Mindanao area. Given such a market character, there
seems to be no market justification for airlines to call on the Mindanao airports, other
than the present infrequent services provided by Bouraq, Silkair and MAS.

What determines passenger and freight demand in international air transport? The
more-often used parameter for estimating growth in air traffic is the level of economic
activity in the particular country as expressed in GNP growth. Using international
comparisons, the countries with high GNP per capita exhibit higher trips per capita, while
countries with low GNP per capital show the lowest number of trip per capita. The
Philippines shows only less than 0.1 trip per capita given its 1990 GNP per capita of less
than US$1,000 (Figures 4 and 5).

Based on completed studies, this further supports the popular belief that while
fares have a negative impact on air travel demand, economic growth (GNP) has a
significant effect ranging from an elasticity of 1 to 2. Flight frequency and routes, on the
one hand, have only an elasticity ranging from 0.1 to 0.5 (Figure 6).

However, airlines do have several options to consider in providing a service when

the market is still at its developmental stage such as in the case of Mindanao. The
airlines, when specific routes are unprofitable, can resort to different types of
arrangements with the host country’s designated carrier such as pooling, block spacing,
code sharing, and alliances to maintain their presence in the route. Oftentimes, the
designated carrier generates profits even in routes where it does not fly merely through
these pooling (revenue) arrangements.
8
 While data on the relationship of income, cost, profits and load factors are
unavailable, the CAB uses 60% as the threshold load factor to signal opening a route to
additional frequencies. A load factor of 55% can be considered the breakeven load factor
and at any rate below this, airlines may already be losing money. Evidently, airlines
perceive the Mindanao market as incapable of producing the required load factor for
viable operations. Even the infrequent services that are provided require higher fares than
those regular flights originating from Manila simply because of the fixed costs that have
to be recovered such as ticketing, ground maintenance staff, and ground equipment.

MEASURING THE IMPACT OF AN OPEN SKIES AVIATION STRATEGY

Given that the “Open Skies” strategy has been a relatively new development in the
aviation industry, it is still too early to determine whether it has generated the magnitude of
benefits anticipated. T o measure its impact, the use of indicators would be essential. These
indicators include the following:

1. Increase in the volume of international passenger traffic per entry of new carrier on the route;

2. Increase in the volume of international cargo traffic per entry of new carrier on the route;

3. Increase in Regional GDP as a function of the increase in international flight frequencies

over the baseline;

4. Increase in the number of tourism accommodation facilities as a function of the increase in

international flight frequencies over the baseline; and

5. Increase in income from international passenger terminal fees over the baseline.

There could be other indicators to measure the success or failure of an “Open Skies”
strategy, though.

9
RECENT “OPEN SKIES” POLICY CONTROVERSY – THE PHILIPPINE AIRLINES’
QUEST TO RETURN TO PROTECTIONISM

There are opposing views regarding the adoption of an “Open Skies” policy in the
country.

In a series of newspaper articles published in June 1999, PAL has blamed unfair
competition from the flag carriers of Taiwan, Singapore, Hongkong, and South Korea for many
of its financial troubles by offering cheaper fares and exceeding limits on the number of
passengers they were allowed to pick up in the Philippines. PAL regards any further moves to
liberalize the sector as a serious threat to its rehabilitation and recovery (Makabenta, 1999).

As reported in the PDI Research (1999), “PAL is partly blaming the government for the
alleged indiscriminate granting of fifth freedom rights to many airlines, thus adversely affecting
PAL’s business. Fifth freedom rights refer to the transport of passengers to another country via
another destination.”

As a penalty for allegedly violating bilateral air agreements, CAB suspended for a month
all flights of the China Airlines (CAL) to Hong Kong and back effective July 22 (PDI Research,
1999). On July 30, the Philippines also informed Taiwan that it would scrap the air agreement
between the two countries and stop Taiwanese carriers from flying to the Philippines after
September 30 due to violation of the bilateral air agreement. Taiwanese airlines were accused of
flying a large aircraft and carrying more passengers than allowed. Moreover, CAB has required
Cathay Pacific, China Airlines, Eva Airways, Silk Air, and Singapore Airlines to reduce their
seating capacities and follow strictly the air service-agreements under which they operate.

In an “Open Skies Policy” Symposium organized by the Transportation Science Society

of the Philippines (TSSP) in 1997, the issue of whether the Philippines should adopt an “open
skies policy” was debated by representatives from the academe, industry and government
sectors. The differences and divergence of opinion were evident.

Atty. Roberto Lim representing Philippine Airlines, was sceptical at what such a policy
could lead to – “create an environment that breeds ruinous competition.”6 It could result in other
airlines exploiting their own competitive advantage by virtually creating a different gateway, say
Hong Kong, for travellers to the Philippines from all over the world. This “would marginalize
the government efforts to make the Philippines an attractive destination and to render its airports
a major transhipment or crossroad for passenger and cargo traffic.”7

Atty. Guia Martinez, Executive Director of the CAB, opined that the Philippines is not
yet ready for open skies since efforts to lay the foundation towards global competitiveness are
still on-going. Under EO 219, “the exchange of traffic rights and rules with other countries will
be based on the national interest which shall include value for the Philippines in terms of

6
Open Skies Policy Symposium, Keynote Speech of Atty. Roberto C. Lim, Vice-President, Philippine Airlines,
p.6, 1997.
7
Ibid, p. 6, 1997

10
promoting international trade or investment and tourism, among others, and on the reciprocity
between the Philippines and other countries.”8

On the other hand, Undersecretary Evelyn Pantig of the Department of Tourism (DOT)
supported an “open skies policy” since it “provides for the greatest access into and out of the
Philippines for international tourism and within the country’s territorial waters for domestic
tourism.” Given an option between protecting the interest of the national carrier that does not
have the capacity to respond to demand, or to take the interest of the larger economy and tourism
in particular, the DOT will always opt for an “open skies policy.”

Recently, the tourism industry, which will be directly affected by reduced air access to
the Philippines, is protesting PAL’s protectionist stance (Makabenta, 1999). Based on tourism
industry estimates, reducing air access to the country would result in losses of amounting to $1.4
billion a year, with the attendant effect of 2.3 million Filipinos whose employment is dependent
on tourism. Tourism industry leaders added that by preventing these airlines which are charging
lower fares from flying into the country in order to protect PAL, the government is turning away
foreign visitors who would then go to other neighboring countries in Asia like Thailand and
Indonesia.

Tourism Undersecretary Evelyn Pantig also reported that the Department of Tourism has
been forced to scrap its earlier projection of an 8% growth in tourism arrivals in 1999 partly due
to the non-availability of seats in the Philippines (PDI Research, 1999). According to her, the
government should allow for a limited “open skies” policy to bolster tourism receipts.

Similarly, businessmen in the main southern island of Mindanao said the government
should allow foreign airlines to operate domestically even if PAL was allowed to fly again
because local flights were inadequate (PDI Research, 1999). The Chamber of Commerce of
General Santos City suggested that Continental Air Micronesia be allowed to carry tuna from the
city to Japan via Guam. Moreover, the Mindanao Business Council proposed that the US
international cargo forwarder Federal Express be permitted to expand domestic operations.

According to Prof. Limlingan of the Asian Institute of Management (1999), the key to
the country’s achieving its tourism targets was providing enough air transport. He said that we
have to provide the air seats to bring the tourists to the Philippines. He claimed that the
Philippines was able to draw 2.2 million tourists in 1998. Considering that the tourism target
from 1999 to 2004 is 4.4 million, he said that there should be 9 to 10 million air seats available to
bring these tourists to the Philippines. Owing to the fact that PAL can supply only 1.2 million
seats, there is an 8 to 9 million shortage of seats. He also mentioned that tourists want cheap and
competitive rates.

To my mind, it seems that PAL has not emerged from its monopolistic behavior and has
refused to recognize that to survive, the airline must be competitive. To be competitive, it must
be cost-effective, service-oriented and give value to its customers’ money. Why should the air
traveler be faulted for choosing an airline that offers a lower fare, perhaps a higher level of
service and convenient schedules? Why should foreign airlines be faulted for utilizing their

8
Ibid, Reaction by Atty. Guia Martinez, CAB Deputy Executive Director, p.11, 1997

11
entitlements provided under bilateral agreements entered into under the traditional principle of
reciprocity? Why should there be a claim that we have an “open skies” policy when we don’t?

The May 1997 Draft Report on Institutional Strengthening for Civil Aviation in the
Philippines” provided a more succinct view of PAL :

1. The vision of PAL was not only to position the airlines into its rightful place in the industry,
but to be Asia’s best airline. If this vision is realistic, why then should the airline be protected
from competition of foreign carriers soon to be inferior in competitive power. If the vision
does not materialize, protection from foreign competition cannot affect PAL’s final destiny.
Rather, this would be determined by its long-run efficiency as an international and domestic
carrier, and

2. As is also true in many countries, the flag carrier makes a relatively small contribution to the
national economy. However, it maybe a tool in formulating an international aviation policy
and in taking symbolic tourism and trade promotion roles.

While EO 219 seeks to implement the “Value to the Philippines” concept, this was
intended to further promote liberalization and to supersede the previous lodestar, “protection of
the national flag carrier”. This did not result in an “open skies” policy for the Philippine aviation.
We are still implementing the reciprocity principle in bilateral air agreement negotiations.
Hence, all air rights are governed by bilateral agreements which continue to provide reciprocal
rights to the airlines of signing countries.

STRENGTHENING THE AIR TRANSPORT MARKET IN MINDANAO

Given the above factors to consider, it becomes obvious that an “Open Skies Strategy” is
not an appropriate option to achieve the underlying objectives of growth in tourism and trade
traffic. In fact, the 1997 Civil Aviation Master Plan (CAMP 2) staunchly repeated the 1992
CAMP 1) observations that:

“… the world wide growth in the number of bilateral air service agreements continued
apace. In some cases agreements were reached for the first time. However, within the
bilateral or multilateral agreements, the tendency in the world is towards liberalization in
capacity sharing, price controls and market access”.

Thus, liberalization of international aviation in the Philippines must also follow this
guarded steps and for the Philippine negotiators to remain vigilant to ensure that they do not give
freedoms away and receive little or nothing in return. The concept emphasized in EO 219 was
“value to the Philippines, not protection of the national flag carrier”.

If not “Open Skies”, then what?

For Mindanao to generate the level and growth of passenger demand that will justify the
profitable services that air carriers require or even the potentials for such a growth, it must
undertake a concerted effort and the commitment to sustain that growth. We must therefore first

12
look inward, before we consider the international air passenger/freight market. Even Manila
depends largely on the traffic generated by local residents leaving the country for work, business
or leisure purposes. This could easily account for at least 70% of arriving and departing
passenger traffic. What must we then do?

Awareness of the factors that affect passenger demand should lead us towards sound air
traffic development strategies, not the one-shot solution that an “Open Skies” strategy seems to
so wonderfully offer. Table 2 summarizes the factors that affect the air traffic market.

Table 2. Factors affecting levels and growth of passenger demand

Affecting All Markets Affecting Particular Routes

Level of Personal Disposable Level of Tourist attraction
Income Scenic/Climatic/Historical/
Supply Conditions Religious Attributes
Fare Levels Adequacy of Tourist
Speed of Air Travel Infrastructure
Convenience of Air Travel Comparative Prices
Level of Economic Activity/ Exchange Rate Fluctuations
Trade Travel Restrictions
Population Size and Growth Historical/Cultural Links
Rate Earlier Population Movements
Social Environment Migrant Labor Flows
Length of Holidays Nature of Economic Activity
Attitudes to Travel
Source: Rigas Doganis, Flying Off Course, The Economics of International
Airlines 2nd Edition, Routledge, 1991

Tourism

Without domestic tourism, there is no market that could sustain the investments in
infrastructure, accommodation facilities, attractions, restaurants and other services that
both local and foreign tourists require. Unfortunately, while we count our foreign visitor
arrivals, we fail to appreciate that most often, this is only less than 10% of the entire
Philippine tourism market. Even Cebu depends largely on the local
convention/meetings/conference market to sustain its tourism industry especially during
the lean periods of foreign tourist arrivals. Table 3 provides an overview of the tourism
market in Mindanao from 1993-1998. On the average, only 6.8% of the total number of
visitor arrivals in Mindanao during the period 1995-98 was comprised of foreign tourists.

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What would this require?

Firstly, peace and order and security must prevail in the area. These are essential
requirements that visitors often consider before they visit a country. The media hype over
kidnappings, encounters between government and rebel groups, crimes, etc. only
provokes an image of trouble and danger in Mindanao. While only occurring in isolated
areas, these have been made to appear as Mindanao-wide events.

Secondly, there must be a concerted and joint effort between the private sector
and government to implement the various tourism master plans prepared for each region.
This would require greater private sector participation in the development of world class
tourist attractions/destinations that are competitive not only in the Philippines but in other
countries as well. Government must, at the same time, provide the needed infrastructure
support such as roads, water supply, electricity and communications facilities. While
international-standard airports may be required, the current development plans for the
region’s airports would seem to be sufficient for the foreseeable future.

And third, a well-defined and sustained marketing of the region as a tourist

destination similar to that of Cebu must be pursued. Thailand’s response to its financial
crisis was an even more aggressive worldwide promotion of the country as an
inexpensive tourist destination. This resulted in the immediate return of foreign visitors,
eager for the bargains that the devalued baht offered. In the Philippines, we scrimped on
our tourism promotion and marketing budget and eventually suffered the expected
decline in arrivals of foreign tourists.

Trade and Industry

The country will not prosper from tourism earnings alone. Local industry must
develop in order for trade to prosper. This would create the freight demand that industries
generate and which airlines require to fill up the cargo belly of their aircrafts. Again,
Cebu’s success is that it has the tourism to fill up the seats and the freight to fill up the
cargo spaces. In fact, the growth in freight has attracted FedEx to fly regularly to Cebu
with wide-bodied aircraft from their Asian One Hub (Subic).

It is this growth in trade and industry, aside from tourism, that would result in an
increase in GNP and GDP – the main determinants of increases in travel demand and in
the propensity of the growing population to travel.

Thus, it is the continued growth of the Philippine economy that would result in
more disposable income for the people to use for leisure activities. This is illustrated in
Figure 7.

Taking Advantage of the Market

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 The Asia-Pacific market has been considered as a high growth area, forecast to
grow at more than 7% per annum prior to the Asian financial crisis. There is no reason
why the country cannot rebound from the financial quagmire and resume the growth
patterns that it has experienced. However, Manila’s polluted environment, traffic
congestion and other developmental mishaps offer Mindanao an opportunity to promote
itself as the alternative destination. This, however, cannot be accomplished overnight or
by government alone. The private sector must play the leading and primary role in the
rising of Mindanao as the major tourism and business destination in the Philippines.

Asia has been identified as being in the rapid growth stage in the market life
cycle for air services. There is really no way to go but up (Figure 8).

CONCLUSIONS AND RECOMMENDATIONS

Evidently, there is a lot of misconception with regard to the “Open Skies” Policy in Civil
Aviation. People conclude that we, in the Philippines, have in fact opened our skies to all foreign
carriers irregardless of whether we have an agreement with their country of origin or not. We
have not. We are still implementing the traditional practice of entering into bilateral air
agreements with other countries under the same principle of reciprocity that has existed through
the years. The only important deviation is that we have shifted from a less protectionist stance
with regard to our designated international carrier, Philippine Airlines, to a bilateral agreement of
more value to the country. Hence, the growth of international trade, travel and tourism in the
country is no longer a seamless connection to the fortunes of PAL. We have realized, albeit quite
late, that the economic growth of the country could be achieved even without a national flag
carrier.

This policy paper has reached what may be considered as valid and well-supported
conclusions:

1. We do not have an Open Skies Policy as far as International Civil Aviation is

concerned. We have merely redefined one of the basic premises in entering into
bilateral agreements that have value to the country, not to the national flag carrier;

2. The fortunes of PAL are distinct and separate from the growth in international air
traffic. This is well-proven when PAL ceased operations and foreign carriers have
taken up the deficiency in seat capacity with minimum disruption in international air
service other than those who were taking PAL in the first place. While we may have
experienced a sudden decline in international passenger and cargo traffic, this was
normal under such a situation and market correction mechanisms could have resulted
in the restoration of traffic at their pre-PAL closing levels. Admittedly, PAL is an
effective bargaining chip that prevents foreign airlines from exercising monopoly
pricing over certain routes. However, new local carriers may be more than willing to
take over some of PAL’s international routes. In fact, the imbalance in air services in
favor of foreign carriers is a direct result of PAL’s inability to operate the negotiated
number of flights under the various air agreements, not because of any inequity in
the air agreements;

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 3. PAL must learn to compete in the market place and not rely on government
intervention or economic protectionist policies to save it. Under a free market
regime, there is free entry and free exit. The demise of one competitor will result in
the emergence of a newer and more robust competitor in its place. To compete, PAL
must match if not be better than foreign carriers in terms of operating costs, service
and efficiency;

4. PAL has not performed as an effective promoter of the Philippines. In Mindanao,

most, if not all of the EAGA routes to Mindanao are being developed by foreign
carriers such as Silk Air, Malaysian Airline System, and Bouraq. PAL is nowhere to
be found;

5. Admittedly, some foreign carriers may have abused their entitlements due to
deficiencies in CAB’s monitoring of use of such entitlements. CAB must be
provided with the required resources and manpower to effectively oversee
compliance with air agreements; and

6. While Mindanao expects more foreign carriers and international flights to call at its
emerging international airports, providing the needed infrastructure facilities such
as world class airport terminal buildings and long runways is not the only
requirement. There should also be a simultaneous growth in passenger and air cargo
traffic to justify foreign carriers’ calling at these airports. Without the existence of a
market, there would be no flights, for such is the nature of the airline service. This
growth in international passenger and cargo traffic can only occur if the economy
also grows. The higher is the economic growth rate, the more robust is the air traffic
market. The opposite is also true.

The exercise of “fifth freedom” rights by international air carriers operating between
Mindanao and other EAGA countries is prohibited under existing bilateral agreements. This is to
prevent these carriers from encroaching on the market of local air carriers such as Philippine
Airlines which would be adversely affected by the grant of such rights. In fact, this is the same
contentious issue that had led to the cancellation of the air agreement between Taiwan and the
Philippines. China Airlines and Eva Air, the Taiwanese designated airlines, started picking up
passengers from Manila to destinations other than Taipei and vice-versa. These airlines
encroached on the market of Philippine Airlines as it was unable to compete with the low airfares
that were being offered by the Taiwanese carriers for travel from Manila to the United States via
Taipei as compared to its Manila to United States flights. This would also impact on the growth
of our local airports as potential hubs for direct international flights, as the market may be shifted
to the hub airports of foreign carriers such as Kuala Lumpur for MAS, Singapore for
SilkAir/Singapore Airlines, and Brunei.

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 APPENDIX A
FREEDOMS OF THE AIR

Negotiated in Bilateral Air Services Agreements

First Freedom - The right to fly over another country without landing.

Second Freedom - The right to make a landing for technical reasons (e.g. refuelling) in
another country without picking up/setting down revenue traffic.

Third Freedom - The right to carry revenue traffic from your own country A to the country
B of your treaty partner.

Fourth Freedom - The right to carry traffic from country B back to your own country A.

Fifth Freedom - The right of an airline from country A to carry revenue traffic between
country B and other countries such as C or D. (This freedom cannot be
used unless countries C or D also agree.)

Supplementary Rights
Sixth ‘Freedom’ - The use by an 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. For example, Royal Jordanian carries sixth freedom
traffic between London and Middle East Points via its base at Amman
even though it has not been granted fifth freedom rights between these
points and London.

Sixth freedom rights are not formally recognised in air services

agreements, though several Confidential Memoranda of Understanding
make implicit reference to them, especially when dealing with capacity
issues.

Cabotage - The right of airline of country A to carry revenue between two points in
country B. For example, Air France for many years had cabotage rights
between various points within Morocco.

Cabotage rights are very rarely granted. Nevertheless, several countries

whose carriers are currently flying to the United States are pressing the US
government for cabotage rights.

Source: Flying off Course – The Economics of International Airlines 2nd Edition, Rigas
Doganis, Routledge, N.Y., 1991

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 APPENDIX C
MAIN FEATURES OF THE US DEPARTMENT OF TRANSPORTATION’S
DEFINITION OF “OPEN SKIES”

! Open entry in all routes;

! Unrestricted capacity and frequency on all routes;

! Unrestricted routes and traffic rights, that is, the right to operate service between any point in
the US and any point in the contracting country, including no restrictions as to intermediate
and beyond points, change of gauge, routing flexibility, coterminalization, or the right to
carry fifth freedom traffic;

! Double disapproval pricing in the third and fourth freedom markets and price leadership in
third country markets to the extent that the third and fourth freedom carriers in those markets
have it;

! Liberal charter arrangement (the least restrictive charter regulation of the two governments
would apply, regardless of the origin of the flight);

! Liberal cargo regime;

! Conversion and remittance arrangements (carriers would be able to convert earnings and
remit in hard currency promptly and without restrictions);

! Open code-sharing opportunities;

! Self-handling provisions on commercial opportunities, user charges, fair competition and

intermodal rights;

! Pro-competitive provisions on commercial opportunities, user charges, fair competition and

intermodal rights; and

! Explicit commitment for non-discriminatory operation of and access to computer reservation

systems.

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 REFERENCES

Doganis, Rigas. 1991. Flying off Course. The Economics of International Airlines.
2nd Edition, Routledge.

Hanlon, Pat. 1996. Global Airlines Competition in a Transnational Industry,

Batterworth/Heinemann.

ITF. 1995. Opening Statement on An Agenda for Orderly Change in a World Aviation System
Serving the World Community. 31st ICAD General Assembly, Montreal, Canada.

Lim, Roberto. 1997. Keynote Speech during the Open Skies Policy Symposium.

Limlingan, Victor. 1993. Airline Restrictions “Disastrous to Tourism”. Philippine Daily

Inquirer, Aug. 8, 1999, p. 8.

Makabenta, Leah. 1999. Tourism Leaders Lament “Back-Door Bailout” for PAL. Philippine
Daily Inquirer, June 20, 1999, p. 6.
Martinez, Guia. 1997. Reaction paper during the Open Skies Policy Symposium.

PDI Research. 1999. Air Policy Reviewed As Row Flares Over Taiwanese Flights. Philippine
Daily Inquirer, Aug. 8, 1999. p. 8.

The Ambidji Group Pty. Ltd. 1997. Civil Aviation Master Plan.

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