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O 210255Z MAY 07
FM AMEMBASSY MANILA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6577
INFO RUEHZS/ASEAN COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 03 MANILA 001653 
 
SIPDIS 
 
STATE FOR EB/TRA 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EAIR RP
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 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY 
 
¶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 
Summary. 
 
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  An unpublished study by local economists found that 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 
differentials. 
 
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 
Clark. 
 
¶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 
liberalization. 
 
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. 
 
------- 
Comment 
------- 
 
¶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 http://www.intelink.sgov.gov/wiki/Civil_Aviat ion_ 
Policy_in_the_Philippines. 
 
KENNEY