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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_at_pal.com.ph www.
philippineairlines.com
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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

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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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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

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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
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•     - Employment of 7,500 persons by PAL
• - Employment of 1.08 million Filipinos in the
  tourism industry
• - US1.0 Billion in consumer expenditures
• - 4 of the Philippine Gross Domestic
  Product
• - US272 Million in taxes to the Philippine
  Government from the tourism industry
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• 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)
• Planets 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 US26 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
• 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
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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
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DOES A LARGE COUNTRY OR ECONOMYNEED AN
INTERNATIONAL FLAG CARRIER?

• Self-evident truth Close links between the
  national flag carrier and the State exist.
• - USs 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
• 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
• 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 communitys 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
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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
• - 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.
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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 US10 Billion in revenues
• Market capitalization plummeted to US4 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 -