Sep 202014
 

http://wikileaks.org/cable/2009/01/09MANILA103.html
Reference ID Created Released Classification Origin
09MANILA103
2009-01-15 08:42
2011-08-30 01:44
CONFIDENTIAL
Embassy Manila

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C O N F I D E N T I A L SECTION 01 OF 04 MANILA 000103

SIPDIS

STATE FOR EAP/MTS AND EB/TRA
SINGAPORE AND TOKYO FOR FAA
COMMERCE FOR BERLINGUETTE
STATE PASS USAID FOR EGAT AND ASIA BUREAU

E.O. 12958: DECL: 01/14/2019
TAGS: EAIR ECON ETRD RP
SUBJECT: POLICY REFORM IN THE PHILIPPINES: CIVIL AVIATION AND TOURISM AS AN ENGINE FOR DEVELOPMENT

REF: A. MANILA 1618
¶B. MANILA 1653

Classified By: Larry Memmott, Economic Counselor,
reasons 1.4 b and d.

1.C) Summary: USG policy reform efforts in the Philippines
are resulting in a significant opening in the international civil
aviation regime of the country, contributing to growth in the
tourism industry and the economic development of the
country. A USAID project aimed at introducing greater
competition into the market for civil aviation services helped
to build the pressure from civil society which has resulted in
signature by the Philippine Government of eleven bilateral
and three ASEAN civair agreements espousing liberalization
over the past two years. This is a reversal of at least a decade
of severely restrained growth in air transportation to the
country. End Summary.

Tourism as a Driver of Economic Development
——————————————–

¶2. (U) The Philippine tourism industry took in some %5.5
billion in 2007 and employed some 1.3 million people,
supported by 3 million international tourist arrivals. Visitors
to resort areas and undeveloped areas of the country are
impressed by its potential as a destination for tourism. With
uncounted miles of beautiful white sand beaches, coral reefs
as yet not fully explored, and a workforce with an excellent
service ethic, the Philippines would seem well placed to ride
what is likely to be a wave of new international tourism from
increasingly prosperous Asian countries once current global
economic difficulties are overcome.

¶3. (U) Tourism has the potential to make an important
contribution to Philippine development. Local economists
have estimated that each foreign tourist who visits the
Philippines for a week spends enough to pay the wages of
one tourism-sector employee for a year. With the prospect of
millions of new international tourists being created by the
growing economies of Asia over the coming years, there is
certainly an important opportunity on the doorstep of the
country.

¶4. (U) The Philippine’s most developed tourist destination,
the tiny island of Boracay, serves as to illustrate the tourism
potential of the Philippines. Introduction of competition in
the domestic civil aviation market led to substantial
reductions in the airfares after 1995 allowing tourist visits to
the island to grow from 50,000 in 1995 to 600,000 in 2007.
Increasing openness in the international civil aviation market
has allowed Boracay to attract a growing number of foreign
tourists. Koreans flock to the resort during much of the year
now, and visits by high-spending Russians coming in on
charters from Vladivostok have gone from nothing in 2005 to
1500 arrivals in the last three months of 2008.

Growth Limited by Restricted Air Access
—————————————

¶5. (U) Civil aviation policy in the Philippines has been
geared towards protecting domestic airlines (mostly
Philippine Airlines (PAL), but also, occasionally, the other,
smaller domestic carriers). PAL in particular has benefited
from the high prices which have resulted from very restricted
frequencies and market access. A simple fare comparison
undertaken by Filipino economists last year showed that, on a
seat/mile basis, airfares were twice as high from Japan to the
Philippines than from Japan to Thailand. Similarly, airfares
were three times higher from China to the Philippines than
from China to Bali. Clearly these prices affect the potential
of tourism. PAL’s President told EconCouns last year that the
airline’s most profitable destination was Japan, as a result of
the limited seats available on the route.

¶6. (U) Traditionally, Philippine tourism has suffered not only

MANILA 00000103 002 OF 004

from the limited number of seats allowed, but also from
centralization of arrivals in Manila. The local airlines, of
course, benefit from this restriction, since only they are
allowed to provide the connecting flights necessary to get
tourists to their final destinations, almost always distant from
Manila. Although eight airports have been constructed
around the Philippines and designated as “international” ,
only four are allowed to receive scheduled traffic directly
from abroad. Manila International Airport, already
functioning at full capacity and with no potential for
expansion, has served as another constraint on competition.

¶7. (C) Recognizing both the potential and the constraints on
the tourism sector, USAID established in 2006 an economic
policy reform project aimed to enhance competition and
increase international air access to the Philippines (among
other program areas). USAID made liberalization of traffic
into the airport at the former U.S. base at Clark, now named
Diosdado Macapagal International Airport, its initial target.
USAID grantees identified and supported a broad coalition of
local interests centered on Clark and individuals and groups
interested in increased civil aviation liberalization nationwide
in pushing for liberalization of the regime for Clark.

¶8. (C) As a result of the work of USAID through this
informal coalition, in January 2006, President Arroyo singed
Executive Order 500, allowing unlimited flights to Clark by
domestic and international air carriers from all countries. As
a result of this innovation, arrivals at Clark grew by more
then 70 percent from 55,000 in 2005 to 93,000 in 2006
generating an additional estimated $200 million in earnings
from tourism in 2006. Budget carriers took advantage of the
liberal regime to establish hubs in Clark, carrying passengers
on routes between other countries, such as Macau-Clark-
Singapore. Increased arrivals to Clark fed a rapidly growing
domestic network of connecting flights to final tourist
destinations. For example, one low cost domestic company
Seair increased its flights from Clark to Boracay from 74 in
2005 to 142 in 2006 and 369 in 2007.

¶9. (C) A wide open Clark clearly benefited the tourism
industry and the Philippines as a whole. However, the effect
on Philippine air carriers was mixed. Philippine Airlines,
which has never seen itself as a low cost airline, resisted
forcefully. It was able to bring along most of the rest of the
local carriers with the argument that, by abandoning
reciprocity in civair negotiations, the government would
allow their international competitors to get the jump on them.
Under pressure, the government pulled back from the most
liberal aspects of EO 500, issuing a new order, EO 500A,
which retracted the rights necessary for foreign carriers to
operate an international hub (fifth freedom) and allowed only
carriers designated by states with civair agreements with the
Philippines to serve Clark.

¶10. (U) Both sides of the fight took their arguments public
with newspaper ads and public pronouncements. Proponents
of liberalization proposed another executive order (500B) to
reverse 500A. Opponents of liberalization were able to
restrain the growth of the smaller budget airlines by lobbying
the bureaucracy to hold up permits and, in one spectacular
case, cancel the permit of Tiger Airways, stranding hundreds
of passengers (ref. b). While EO 500B still has not been
signed, charters continue to support growth, though at a
slower pace, in Clark arrivals.

¶11. (SBU) Under pressure to advance liberalization at Clark,
but unwilling to take on the domestic airlines, the GRP hit
upon a middle road in mid-2007. Rather than unilateral
opening of specific airports, the GRP began to conduct
bilateral civil aviation negotiations with an eye toward
limited liberalization of its international civil aviation market.

¶12. (SBU) From 1997 to 2007, the Philippine government
had negotiated an average of only one bilateral air service
agreement per year. As a result of its reversal in policy,

MANILA 00000103 003 OF 004

between May 2007 and December 2008, the Philippine
government signed eleven bilateral air service agreements.
Allowed seat number under all bilateral agreements increased
by 150 percent from 50,000 to 125,000 seats per week. The
Korea agreement was the turning point. Its doubling of seats
was resisted furiously both behind the scenes and in the press
by Philippine Airlines. However, Cebu Pacific, the country’s
second largest carrier, supported the government’s policy. As
Lance Gokongwei, President and owner of Cebu Pacific told
EconCouns he would support liberalization in order to begin
to take his airline international. The unilateral liberalization
of Clark did not do that, but civair negotiations would. Cebu
Pacific also recognized its own interest in reducing the
monopoly rents earned by Philippine Airlines, its principal
competitor on domestic routes.

Going Multilateral
——————

¶13. (SBU) In November 2008, the Philippines hosted
ASEAN transportation ministers who signed three air
transport agreements: the ASEAN Framework Agreement on
the Facilitation of Inter-State Transport, the ASEAN
Multilateral Agreement on the Full Liberalization of Air
Freight Services and the ASEAN Multilateral Agreement on
Air Services. These agreements are designed to gradually
simplify and harmonize transport, trade and customs
regulations and improve the efficiency and competitiveness
of the region’s air travel. The agreements provide for
unlimited flights between capital cities beginning in
December, 2008. The right to pick up passengers in a third
country before proceeding to the final destination (fifth
freedom) between capital cities is to be implemented without
restriction by 2010. The ultimate goal is to achieve a unified
ASEAN market in civil aviation by 2015.

¶14. (C) With USAID support, advocates for liberalization are
pressing to maximize the potential benefits of the ASEAN
open Skies Agreement via designation of Clark as an airport
serving Manila, thus bringing it into the ASEAN Open Skies
regime. USAID also continues to support advocates of
unilateral liberalization at Clark, and is now working with
other cities and economic hubs to broaden the coalition of
interests that support enhanced competition and increased
liberalization.

Comment: Flexibility and Determination Pay Off
——————————————— –

¶15. (C) Our assistance to local forces working for
liberalization has paid off, if not in the expected currency.
By helping them build support in civil society for
liberalization, we put the government into the position of
looking for ways to please both the forces of liberalization
and the entrenched interests. In this case, we discovered that
the airlines could be broken apart. Some of the smaller
airlines have been induced to support and even spearhead
increased competition and liberalization. Most important
was the decision by Cebu Pacific to support liberalization via
air service agreements.

¶16. (C) As in other cases, we have found that State
Department advocacy efforts and USAID policy reform
project can support each other very effectively. In this case,
the Economic Section met frequently with representatives of
the domestic airlines discussing and exploring their positions
and with Department of Transportation and Department of
Tourism officials to promote liberalization, while USAID
was building grass-roots support for more liberal policies.
To advocate policy reform in the very resistant environment
of the Philippines we have to attack the problem
simultaneously from as many angles as possible. (Embassy
Manila’s economic policy reform efforts are reported
continuously on the Intellipedia at
http://www.intelink.sgov.gov./wiki/Philippine s_Economic_P
riorities.)

MANILA 00000103 004 OF 004

KENNEY

   

 

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