Review of Related Literature

REVIEW OF RELATED LITERATURE

Background and Literature Overview

The regulatory landscape of the air transport industry throughout the world has been changing dramatically since the 1980s to meet the growing density of air traffic as a result of the increasing integration of economies. Reforms were made through deregulation and liberalization, all aimed at reducing the restrictions on competition in order to increase the efficiency of the industry.

This study examined the regulatory and policy regimes of the Philippine air transport industry and their effects on the state of competition and market structure of the industry. Until 1995, the country had a one-airline policy. This gave the Philippine Airlines (PAL) the virtual monopoly of the country’s air transport industry. The monopoly, however, created so much inefficiency that the airline was not conscious to keep its service to certain standards. The landmark for reform came in 1995 with the passing of Executive Order 219 establishing the domestic and international civil aviation liberalization policy of the country. For the domestic air transportation, restrictions on domestic routes and frequencies were eliminated and so were government controls on rates and charges. For the international air transportation, the EO allows at least two international carriers to be designated as official carriers for the country. For the negotiation of traffic rights with the country’s bilateral partners, the primary consideration is national interests where it used to be the interest of the flag carrier. In 1999, the government also launched a policy on progressive liberalization of the country’s bilateral air services agreement. Nonetheless, there is really not much liberalization going under EO 219. Several areas remained restricted or regulated. These include ownership and effective control, capacity and frequency, airfares, freedom of rights granted and cabotage.

The Competition and Market Structure of the Philippine Air Transport Industry

The reforms in the domestic air transport made possible the entry of five new players in the industry, namely, Cebu Pacific Air, Air Philippines, Asian Spirit, Mindanao Express and Grand International Airways). This resulted to unprecedented competition. PAL suffered a significant decline in market shares as the new airlines slowly inched their way in the industry. Air Philippines and Cebu Pacific are providing PAL stiff competition. For the past four years, passenger traffic for these two airlines grew by 72 percent and 60 percent, respectively; and by 1999, the two airlines have captured 46 percent of the passenger traffic.

The deregulation resulted to the establishment of niche markets, with the big players (PAL, Cebu Pacific and Air Philippines) concentrating on the major routes where traffic demand is heavier while the smaller airlines (Asian Spirit and Mindanao Express) are flying the secondary and tertiary routes where traffic demand is lighter. The increased competition in the domestic air industry also provided travelers with lower airfares, and from the travelers’ perspective, the lower airfares are the most important result of the deregulation. PAL, however, still charges the highest fare. Only two of the airlines are currently not incurring financial losses. The continued losses of the unprofitable airlines could drive them to withdraw or exit from the industry or merge with the profitable ones.
On the other hand, PAL has remained uncontested as the country’s flag carrier flying the international routes. The absence of competition results to poor performance and growth. This could be seen in the inability of PAL to use all the entitlements in the country’s ASAs(Air Services Agreements). In 1996, for example, PAL used only 61 percent of the country’s traffic rights per week compared to 81 percent for the foreign airlines flying in the country. The financial crisis in 1997 and 1998 severely affected air travel in the region thereby reducing passenger traffic not only in the Philippines but in other countries as well. The industry is suffering from a major setback during the past two years. Since 98 percent of tourists visiting the country travel by air, the restrictive policies limited the potential of growth of the tourism industry. The annual growth rate of tourist arrivals between 1990 and 1998 had been on declining trend and so are the foreign exchange earnings of the industry. This implies that the greater competition in these markets gives tourists greater options for seats, flights and airfare, thereby making the Philippines easy to reach and air travel more convenient.
One area for competition policy is on merger and acquisition. Considering that domestic traffic in the country is relatively small, there is a limit to the number of airlines that would make an efficient domestic airline industry. Considering that only two of the airlines are currently profitable, the fierce competition in the industry could push the airlines into merger and consolidation.

Conclusion

In the 90’s, the Philippine Air transport industry needed competition to meet the demands of Air services. While we need liberalization and deregulation to bring competition on one hand, the number of players has remained the same since the industry was deregulated, this paper has shown that the degree of competition has been increasingly intensified, particularly in the major routes, resulting to lower airfare, improvement in the quality of service and efficiency in the industry in general. The Philippines is keeping to its old restrictive policies and practices. In particular, the government’s stance on issues concerning its air services agreements is not compatible with its pronouncement of a progressive liberalization policy. The effect of such restrictive policies is reflected in the high degree of concentration in the country’s international aviation industry. The outcome is a decline in passenger traffic, tourists and tourist receipts. The government needs to act quickly to promote competition in the i ndustry. As the experiences of other countries have shown, convenient and efficient air services brought about by greater competition are critical to attracting foreign investment, trade and tourism.

Resource:
PASCN Discussion Paper No. 2000-12
The State of Competition and Market Structure of the Philippine Air Transport Industry
Myrna S. Austria
Philippine Institute for Development Studies