Cablegate: Philippines Turbulent Civair Development

DE RUEHML #1653/01 1410255
O 210255Z MAY 07






E.O. 12958: N/A
SUBJECT: Philippines Turbulent Civair Development

REF: A) 06 MANILA 4390 B) 05 MANILA 2330 C) 04 MANILA 0930
D) 03 MANILA 3928 E) 03 MANILA 3752


1. (SBU) Summary: Liberalization of civil aviation is crucial to
the development of the Philippine economy, particularly by unlocking
the potential of Asian tourism into the Philippines. Nevertheless,
vested interests have, until recently, kept the GRP from
implementing liberal policies. Post is assisting a local coalition
in its attempt to crack open the civil aviation sector. End

The High Price of Protectionism

2. (U) With beautiful white sand beaches only a short flight from
China, Korea, Taiwan, and other countries with large numbers of
potential tourists, the Philippines could be on the verge of a
tourism boom. Located centrally in Southeast Asia, the country also
would seem to have the potential to serve as a regional transport
and logistics hub.

3. (SBU) Unfortunately, thus far civil aviation policy in the
Philippines has been geared to allowing Philippine Airlines (PAL) to
maintain high prices and load factors on heavily-restricted routes.
The price of air transportation to and from the Philippines is much
higher than for nearby (and, in the case of tourism, competitor)
countries. An unpublished study by local economists found that
tickets from Shanghai were four times more expensive to Manila than
to Kuala Lumpur on a seat/kilometer basis. Prices from Tokyo to
Cebu, Philippines were more than double those of tickets to Bali,
Indonesia. Although longer flights and market efficiencies may
account for some differences, they cannot justify such high

A Summary History of Liberalization

4. (U) The Ramos Administration liberalized domestic civil aviation
beginning with the 1995 abolition of the "one airline policy."
Several new airlines developed in the mid-1990s as a result.
Increased competition lowered prices and increased travel on the
major domestic routes.

5. (SBU) The closing of U.S. military bases in the early 1990s
inspired a Philippine dream of transforming the world-class
abandoned infrastructure into an Asian transport and logistics hub.
Clark Airport, only 50 miles from Manila, boasts two parallel
runways capable of handling the world's largest planes (ref A).
FedEx and UPS set up hubs in Clark and nearby Subic Bay.
Negotiations that would complement the investments and grant
bilateral cargo open skies failed, however, when GRP negotiators
speciously declared such air traffic rights unconstitutional in
mid-2003 (ref D). Instead, President Arroyo issued Executive Order
253 a few months later without much resistance, unilaterally
granting cargo open skies at these airports.

6. (SBU) Developing airports fit nicely into the Arroyo
Administration's campaign to stimulate economic growth outside the
capital region. The Civil Aeronautics Board (CAB) issued Resolution
No. 23 in 2005 liberalizing passenger travel at Clark, Subic, and
several other "developmental gateways." Airlines were still at the
mercy of the CAB, though, and traffic rights could change with a CAB
board meeting decision. For example, the CAB disapproved
Singaporean carrier Tiger Airways' permits in December 2005 after
two months of successful operations, forcing the cancellation of
flights and stranding thousands of travelers. Advocates of
liberalization took advantage of overreaching by their opponents.
President Arroyo ensured a more stable policy environment for Clark
by issuing Executive Order (E.O.) 500 in January 2006.

7. (U) Unfortunately, there were legal defects in E.O. 500 that
required amendment. Advocates of reform say that their modified
version was hijacked by the Department of Transportation and
Communications and replaced with the E.O. 500A which was signed by
Arroyo. This decree, issued in August 2006, severely curtailed the
liberal aspects of E.O. 500, removing fifth freedom rights and
requiring airlines to be designated carriers. Fifth freedom rights
allow more profitable regional routes such as a Singaporean airline
flying Macau-Clark-Singapore.

Clark's Civair Tug-of-War

8. (SBU) Implementing E.O. 500A, the Civil Aeronautics Board (CAB)
has moved to restrict the operations of foreign carriers at Clark.
In February 2007, the CAB abruptly limited the Tiger Airways permit
to fly from six to three months, forcing Tiger to refund already

MANILA 00001653 002 OF 003

sold tickets and reduce its flights into Clark. The CAB's overreach
once again played into the hands of proponents of liberalization.
Cabinet level Secretaries bemoaned the "regulatory capture" of the
CAB, i.e., the influence of domestic private companies over its
decisions. A new order, E.O. 500B, is now in the Presidential
Palace awaiting signature. This decree is a perfected version of
the original E.O. 500, and thus would reinstate all freedoms except
cabotage for both designated and non-designated carriers flying to

9. (SBU) The debate over liberalized civil aviation policies
intensified in April as advocates and opponents purchased full-page
newspaper ads expressing their views on the proposed E.O. 500B.
Philippine carriers struck a nationalistic tone, demanding a strict
interpretation of reciprocity, misinforming on the implications of
500B, and again claiming that the decree violates the Constitution
(which it does not). Advocates, including local politicians and
chambers of commerce, contended that the economic development which
would come with lower airfares and more tourists would more than
compensate for any damage to the interests of the airlines.

Major Players - Entrenched Interests

10. (SBU) The owners of the two major domestic airlines are
Chinese-Filipinos Lucio Tan and John Lance Gokongwei, Jr. Lucio
Tan, considered one of the foremost cronies of late-President
Ferdinand Marcos, began his empire in the scrap metal business
before diversifying during the Marcos years into tobacco, alcohol,
beverages, hotels, and finance. His holding company purchased
Philippine Airlines from the government in 1992. Forbes Magazine
listed Tan as the 407th richest person in the world in 2007, with a
personal net worth of 2.3 billion dollars. He was considered the
12th richest man in Southeast Asia and the third richest man in the
Philippines. Tan is generally a very reserved, private individual,
preferring to stay out of the public eye (ref E). Contacts in the
civil aviation sector believe Tan has a great deal of influence over
both the Department of Transportation and Communications and the
Civil Aeronautics Board.

11. (U) John Lance Gokongwei Jr. runs an empire that includes Cebu
Pacific Air, the second largest airline in the country, and several
real estate, banking, retail, and petrochemicals companies. Lance,
a Wharton graduate, received the Philippines Entrepreneur of the
Year 2005 award but considers himself risk-averse and conservative.
Lance's father built an empire from virtually nothing after World
War II (ref E). Cebu Pacific began domestic operations in 1996 and
regional flights in 2001. Although the Gokongweis were counted
among liberalization advocates in the 1990's, when they sought to
build up their airline domestically, they have joined Tan as
opponents of E.O. 500B.

Major Players - Advocates of Reform

12. (SBU) The loose coalition that supported liberalization around
the time of the US-RP air negotiations has re-emerged to support
liberalization at Clark. Among active supporters are National
Economic Development Authority Secretary Romulo Neri (ref B), Makati
Business Club Executive Director Alberto Lim (ref C), the National
Competitiveness Summit (a public-private initiative of President
Arroyo), the Philippine Chamber of Commerce and Industry, the Clark
Development Corporation, local chambers of commerce and government
officials, and the coalition of Foreign Chambers of Commerce
(including AmCham). Some Chinese Chamber of Commerce chapters,
realizing the benefits to their retail and tourism-related
businesses from increased tourist arrivals, have parted from the
traditionally protective views of other chapters. They have created
their own business clubs and publicly support the proposed

Our Strategy: Pocket Open Skies

13. (SBU) The USG, together with other countries and international
organizations, has been involved in promoting liberalization of the
civil aviation regime since the 1990s. At present, USAID funds work
to support the coalition seeking the signature of E.O. 500B. Post
also looks for opportunities to informally advocate more liberal
policies with government officials and to build support for
liberalization in the private sector and Congress. Over the past
few months, we have discussed liberalization of the civil aviation
regime at Clark with the Secretaries of Transportation and
Communications, Trade, and National Economic Development, with
numerous lower officials, businesspeople, and influential,
like-minded journalists. Donors joined in support of liberalization
at the Philippine Development Forum, where the U.S. played a
leadership role, albeit behind the scenes. Post is very careful to
keep our support out of the limelight, in order not to detract from

MANILA 00001653 003 OF 003

the effectiveness of the effort.

14. (SBU) For Post, and for many of our allies, liberalization of
the Clark regime is just one more step in a much larger process.
Our expectation is that success at Clark would generate jealousies
on the part of other regional centers, such as Davao, in Mindanao,
and Cebu, in the Visayas. We would exploit those jealousies to
build support for further "pocket open skies" into those airports.
Eventually, we would build toward an open national policy, and even
an open skies agreement with the U.S.


15. (SBU) Liberalization of the Civil Aviation Regime at Clark is
one of Embassy Manila's targets for this year under our MSP goal on
Prosperity and Sustainable Growth. We will continue reporting in
occasional cables and more frequent updates to the Intellipedia page
at ion_


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