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website. 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: rol_legal@pal.com.ph www.philippineairlines.com. Domestic Route Network. Does a Small Country Need a Domestic Carrier?.

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  1. website 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: rol_legal@pal.com.ph www.philippineairlines.com

  2. Domestic Route Network Does a Small Country Need a Domestic Carrier? • Serves 18 cities • Carries an average of 8,600 passengers daily • Operates an average of 72 flights or 36 round trips per day

  3. 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”

  4. 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”

  5. 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

  6. 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)

  7. International Route Network • The Economic Importance of a Flag Carrier • 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

  8. 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

  9. Servicing the Overseas Filipino Workers (OFWs) • 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

  10. 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

  11. 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

  12. 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 • Commercial business instead of arm of government • No bail out; no subsidy • Simple organizational structure • Corporate Governance • Right sized

  13. The manpower level has been substantially reduced from almost 13,000 in 1998 to 7,161 as of 31 January 2003 Philippine-based Administrative 1,134 General 4,131 Pilots 337 Cabin Crew 1,303 Reg. Part Time 10 Foreign-based Local Hire 225 Expatriate 21 Total Regular 7,161

  14. DOES A LARGE COUNTRY OR ECONOMYNEED 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”.

  15. 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

  16. IMPERFECT COMPETITION IN AN IMPERFECT MARKET • Liberalized market requirements • Possibility of failure is real • All subject to same commercial pressures • Imperfect competition • 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

  17. 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 • 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.

  18. 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.

  19. 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.”

  20. Unused entitlements in ASAs Worldwide • Inventory of traffic rights granted under ASAs worldwide may be • underutilized WEEKLY SEAT CAPACITY ENTITLEMENT AND USAGE By Region

  21. Survey of U.S. Open Skies Agreement 31% or 58 countries have entered into open skies agreements out of a potential 190 bilateral partners - 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 •  - 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 the U.S.A involving the airlines of both sides.

  22. 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.

  23. 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

  24. “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.”

  25. 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.

  26. - 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

  27. http://web500test.pal.com.ph/rlim - Thank you -

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