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Philippines and Its Compliance to the

ASEAN Framework Agreement on Air

Transport Services

ADVANCING PHILIPPINE COMPETITIVENESS (COMPETE) PROJECT

11 October 2017

This publication was produced for review by the United States Agency for International

Development. It was prepared by the COMPETE Project.

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Philippines and Its Compliance to the

ASEAN Framework Agreement on Air

Transport Services

ADVANCING PHILIPPINE COMPETITIVENESS (COMPETE) PROJECT

Submitted To USAID/Philippines Submitted Under Contract No. AID-492-C-13-00008 Submitted By The Asia Foundation, Nathan Associates Inc., REID Foundation, and Asia Pacific Projects Inc. Submission Date October 11, 2017 Authors Ms. Maria Cherry Lyn S. Rodolfo Ms. Jocelyn B. Mirabueno DISCLAIMER

This publication is made possible by the support of the American people through the United States Agency for International Development (USAID). The contents of this publication are the sole responsibility of The Asia Foundation, Nathan Associates Inc., REID Foundation, and Asia Pacific Projects, Inc. and do not necessarily reflect the views of USAID or the United States Government.

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1. Introduction

Air transport has evolved from being a primary tool for military and political dominance to becoming

an indispensable backbone of the global economy and regional integration project of states. Through air

transport, persons and high-value goods are brought from origin to destination in the fastest manner

possible, thereby allowing for more efficient economic transactions and more pervading exchange of

culture and experiences. That air transport provides international connectivity gives developing countries

opportunities to develop tourism and its allied industries, attract foreign direct investments, generate

productive employment and knowledge transfer among business enterprises, and in the process, enable

its citizens to have better quality of life. Cognizant of these socioeconomic benefits, states have supported

the competitiveness of their air transport services sector so they can establish wider networks of

destinations and gain greater market access for their industries.

In the context of the Association of Southeast Asian Nations’ (ASEAN) aim to complete their regional

integration project in 2020, member-states have identified air transport services as one of the five priority

sectors to be liberalized by 2015. According to the ASEAN Economic Community (AEC) Blueprint (2008),

they envision ASEAN to become a (1) “single market and production base”, (2) “highly competitive

economic region”, (3) “region with equitable economic development”, and (4) “region fully integrated

into the global economy” (pt. 6). Under the goal of having a single market and production base, member-

states have agreed to progressively liberalize their economic sectors towards having free flow of goods,

services, investment, capital and labor within the region. With this end in mind, transport and logistics

services – especially air transport– play an essential role to connect land-locked ASEAN member-states

with archipelagic ones, in order to establish a fully-functioning common market for the region in 2020.

In this paper, one examines the Philippines’ compliance to the ASEAN Framework Agreement on Air

Transport Services (AFAS), which is one of the key policy components for the integration of the ASEAN

aviation sector – a sector in the AEC. In the following section, one briefly discusses the composition and

economic contribution of the Philippine air transport services sector to the national economy. The third

one explains the policy framework governing the actors within this sector, with a particular emphasis on

regulations on market access. After which, the fourth section presents the key achievements of the

Philippines in liberalizing air transport services in the country, specifically in relation to its compliance to

the AFAS on Air Transport Services. The paper concludes with the identification of the growth potential

of Philippine air transport services if it continues to actively participate in the liberalization project of

ASEAN, as well as the challenges it needs to overcome to reap the full benefits of being a party to the AEC.

The whole discussion points out the many benefits that the Philippines has and can continue to enjoy if it

continues to progressively liberalize its air transport services sector, but the country needs to strengthen

its institutional framework, provide the necessary infrastructure, and improve its regulatory practices to

reduce the barriers to the exchange of aviation services within the AEC.

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2. Economic Contribution of the Philippine Air Transport Services Sector

The commercial aviation sector necessitates the collaboration of various market actors and

government agencies in order to deliver its core service – that is, the movement of goods and persons

from origin to destination. In terms of backward linkages, air transport providers deliver their services

through inputs from aircraft manufacturers, fuel suppliers, and professional service providers for ground

handling, baggage handling, catering, air traffic management, air navigation system operations, airport

operations, immigration, customs, quarantine, security, and maintenance, repair and overhaul (MRO)

(Lindh et al, 2007). On the other hand, the tourism, agriculture, manufacturing and logistics sectors benefit

from the increased speed, reliability and security which aviation services bring, especially for high-value,

time-sensitive, perishable and live products for import and export (Wittmer & Bieger, 2011).

The economic footprint of the aviation sector can be measured by looking at the direct contribution

of airlines and airports in national output. However, such an analysis fails to account for the impact of

additional international connectivity to the whole economy. According to the International Air Transport

Association (IATA) (2007, as cited in Perovic, 2013), a 10% increase in global connectivity leads to a 0.07%

increase in a country’s long-run gross domestic product (GDP). In discussing the benefits of the aviation

sector, it is important to account for its indirect and spillover effects.

Oxford Economics (2011) has conducted a study of over 80 countries, measuring the economic

footprint of their respective aviation sectors in terms of direct, indirect, induced and catalytic effects.1 For

the Philippines’ country report, the results of their study can be summarized in the table below.

Table 1. Economic Footprint of the Philippine Aviation Sector

Direct Indirect Induced Total % of

Economy

Contribution to GDP (Php billion)

Airlines 7.9 5.3 3.4 16.6 0.2%

Airports and Ground Services 9.6 4.5 4.8 18.9 0.2%

Total 17.6 9.7 8.2 35.5 0.4%

Catalytic (Travel & Tourism) 50.8 75.0 30.9 156.7 2.0%

Total with Catalytic 68.4 84.7 39.1 192.2 2.4% Source: Oxford Economics (2011)

1 Oxford Economics (2011) categorizes the types of economic impact generated by air transport. Direct effects are based on the economic footprint of locally-based airlines, airport management, and air regulation. Indirect effects measure the impact generated across the aviation sector’s local supply chain, which can include fuel traders or producers, catering, ticketing services, MRO, freight forwarders, construction and facilities management for airports, utilities, financing services for both aircraft purchases and airport development, and other non-airside facilities. Induced effects are measurements of the domestic spending of employees across the aviation supply chain. Finally, catalytic effects refer to the impact of the aviation sector on its forward linkages, specifically tourism and trade.

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Table 1. Economic Footprint of the Philippine Aviation Sector (continued)

Indicators Direct Indirect Induced Total % of Economy

Contribution to employment (thousands)

Airlines 11 23 15 49 0.1%

Airports and Ground Services 33 19 21 73 0.2%

Total 44 42 36 123 0.3%

Catalytic (Travel & Tourism) 153 457 141 751 2.1%

Total with Catalytic 197 500 177 874 2.5% Source: Oxford Economics (2011)

As seen from Table 1, air carriers have directly contributed Php 7.9 billion to GDP and employed about

11,000 persons. However, if we account for the activity they generate across their allied industries and

the spending the employees [from the airlines and their respective supply chains] make, their contribution

is even higher: air carriers contribute Php 16.6 billion to GDP and give 49,000 jobs to Filipinos. On the

other hand, airports and ground services directly contribute Php 9.6 billion to GDP and employ 33,000

workers, but accounting for its indirect and induced effects, they generate Php 18.9 billion of GDP and

bring jobs to 73,000 workers. If we include the catalytic effects that increased connectivity brings to the

Philippine travel and tourism industry, the over-all contribution of the local aviation sector is worth Php

192.2 billion or 2.4% of GDP, and 874,000 jobs or 2.5% of total employment for the given year.

In terms of public finances, the government is able to receive a total contribution of Php 26.4 billion

worth of tax payments, and this amount can be broken down into three sources (Oxford Economics, 2011).

Php 6.9 billion comes from the carriers’ payments of income, social security and corporate taxes, while

airports collect the larger amount worth Php 17 billion from payments of travel tax, alien tax and value-

added tax (VAT). Taxes collected from the transactions within the local aviation supply chain and

employees’ spending are estimated to be worth Php 2.5 billion.

Finally, it is worth mentioning the investment intensity and productivity of the local aviation sector.

According to Oxford Economics (2011), air transport services’ capital investment is worth 83% of its value

of output, vis-à-vis the Philippine economy’s average which is worth 19.1%. They also report that the

Philippine aviation sector’s level of productivity – computed in terms of gross value added per employee

– is 3.8% higher than the country average (i.e. Php 865,000 per person in air transport services vis-à-vis

Php 229,000 for the whole economy) (Oxford Economics, 2011).

This country analysis demonstrates that in terms of jobs, tax contributions, investments, productivity

and national output, the aviation sector is an indispensable contributor to the economic growth that the

Philippines currently enjoys. That the current public investment poured into the aviation sector has

already led to higher levels of productivity and economic output justifies the need to continue developing

its infrastructure, regulatory system and institutional framework. In light of the growing opportunities

brought about by ASEAN integration, the Philippines stands to reap the benefits of this common market.

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In the next section, one will expound on the essential policy and institutional framework enabling the air

transport market in the Philippines.

3. Policy Environment

Amidst the global growth of the air transport services sector, it remains to be regulated by

governments due to the public nature of its service. Air transport relies on states’ bilateral and multilateral

cooperation to permit common carriers to make use of their domestic air space for international

commerce and trade. It also maintains the highest level of safety standards, with the International Civil

Aviation Organization (ICAO) as the foremost agency which formulates and implements commonly-agreed

rules on aircraft, air traffic control, and air navigation regulations. Border control measures are also

stringently implemented, thereby necessitating the involvement of national defense, customs and

immigration agencies in the conduct of international air commerce. However, states still make a conscious

effort to liberalize their air services sectors, recognizing its enormous contribution in facilitating efficient,

reliable and safe commerce, trade and international connectivity. This is the policy and regulatory

backdrop wherein industry players in the aviation industry operate in.

In the Philippines, the government has undertaken concrete policy directives in order to liberalize the

air transport services sector. The evolution of these laws and policy directives are summarized in Table 2.

Table 2. Philippines’ Major Civil Aviation Policies, 1952 to 2011

Year Policy/Program Enacted Impact

1952 Civil Aeronautics Act (Republic Act [RA] 776)

• Established the Civil Aeronautics Board (CAB) and Air Transportation Office (ATO) in order to develop the aviation sector and promote competition, efficiency and affordability of air transport services in the country

1959 RA 2232 • Assigned Philippine Airlines (PAL) as the national flag carrier

1973 Letter of Instructions (LOI) 151 and 151-A

• Repealed Section 4 (e) of RA 776, thereby giving PAL monopoly over all domestic and international routes of the country

1978 Presidential Decree (PD) 1590

• Re-nationalize and gave a new franchise to PAL

1988 Executive Order (EO) 333 • Abolished one-airline policy (i.e. LOI 151 and 151-A)

1989 CAB Accreditation System

• Established the following: - Rules for granting permits to air carriers - Classification of airports (i.e. rural, secondary or trunkline) - Guidelines on airlines’ seat allocations and frequencies in

domestic routes

1992 Privatization Program • PAL was brought by PR Holdings with a 67% equity share Adapted from: Rodolfo (2011), RA 9497, EO 28 s. 2011, EO 29, s. 2011

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Table 2. Philippines’ Major Civil Aviation Policies, 1952 to 2011 (continued)


1993 Mactan-Cebu International Airport as Secondary International Gateway

• Implemented due to the congestion at Ninoy Aquino International Airport (NAIA)

• Established international flights to Cebu, which helped overseas Filipino workers (OFWs) from Visayas- Mindanao

1993-1995

Liberalization of Air Transport Services

• CAB had an average of 1 air talk per month.

• CAB prioritized having routes to the following international hubs: Singapore, Hong Kong, Japan and South Korea

• CAB had 3 private sector representatives seating in their Board.

1995 EO 219 (Domestic and International Liberalization Policy)

• Declared that there will be no restrictions on flights and frequencies for all routes

• Provided for more than 2 operators per route

• Allowed free entry and exit on unprofitable routes

• Prices will be deregulated for routes with at least 2 operators, while those for single-carrier routes remain to be regulated.

• Defined national interest as pertaining to consumer welfare

• No Implementing Rules and Regulations (IRRs) have been issued to implement the law.

2001 EO 219 IRRs promulgated • Led to the opening of air talks with Brunei, Macau, South Korea and Singapore

• Singapore changed its air service agreement from dual to multiple designation, which allows more carriers to mount flights between them and the Philippines.

2003 EO 253 enacted • Expanded international air services in Clark and Subic International Airports, especially for cargo shipping

• IRRs have been approved and amended through CAB Resolution No. 16.

2005 CAB Resolution No. 23 • Liberalized charter policy for Clark and other secondary international airports - Unlimited international non-scheduled chartered flights

secondary international airports allowed upon application for inclusion in the program

- Can cover other routes as may be determined by CAB

2006 EO 500 • Allows foreign carriers flying to Clark to file a waiver on capacity and aircraft type restrictions for non-cabotage traffic rights, without reciprocal granting of such rights

EO 500-A • Limited waivers to officially designated carriers for 3rd to 4th freedom rights only

• 5th freedom rights will be granted depending on its impact to domestic civil aviation carriers

Adapted from: Rodolfo (2011), RA 9497, EO 28 s. 2011, EO 29, s. 2011

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Table 2. Philippines’ Major Civil Aviation Policies, 1952 to 2011 (continued)


2008 Civil Aviation Authority of the Philippines (CAAP) Law (RA 9497)

• Transformed the ATO into CAAP, an autonomous government-owned and controlled corporation (GOCC) in charge of regulating the technical and safety aspects of air transport, and in charge of operating majority of the country’s airports

2011 EO 28 • Reconstitute the Single Negotiating Panel into two: Philippine Air Negotiating Panel which will be in charge of the initial phase up to the conclusion of negotiations for new air service agreements; and Philippine Air Consultation Panel which will do negotiations for succeeding amendments on existing air service agreements

EO 29 • Grants up to 5th freedom traffic rights and unlimited frequencies and capacity on all carriers travelling to secondary international gateways only

Adapted from: Rodolfo (2011), RA 9497, EO 28 s. 2011, EO 29, s. 2011

From the narrative summarized in Table 2, one can see that the Philippine aviation sector had been

heavily regulated and monopolized by a single carrier from the 1950s up to the early 1980s. The turn

towards liberalization has started in the late 1980s, beginning with the privatization of PAL in 1989. The

prevalent globalization trend in the 1990s – especially the global trade integration projects through

ASEAN, Asia Pacific Economic Cooperation, and World Trade Organization – has prompted the Philippines

to also move towards liberalizing its key economic sectors, including the aviation sector. From 1995 until

today, the main effort for progressive liberalization has been shaped by external pressure to comply with

international commitments of removing trade barriers and ensuring seamless connectivity; strong

advocacy for efficient and affordable services from trade-oriented business organizations and tourism

industry stakeholders; and domestic airlines’ constant position to remove market access restrictions on

the basis of reciprocity. Given the growing need to improve connectivity in a globalized economic

environment, the Philippine government has heeded – albeit in a protracted manner – the clamor for

continuous liberalization of aviation services.

In this regard, it is important to discuss the major external influence driving the liberalization project

of the Philippine aviation sector – ASEAN integration. Table 3 summarizes the major agreements which

ASEAN member-states have agreed to accomplish to collectively liberalize their aviation sectors.

Table 3. Philippines’ Compliance to ASEAN Agreements Related to Air Transport

Agreement BRN CAM INA LAO MAL MYM PHI SIN THA VNM

ASEAN Multilateral Agreement on the Full Liberalization of Air Freight Services

R R R R R R R R R R

Adapted from: ASEAN Secretariat (2017, June 2).

Note: R means that it has been ratified and incorporated to the member states’ national laws.

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Table 3. Philippines’ Compliance to ASEAN Agreements Related to Air Transport (continued)


Protocol 1: Unlimited 3rd, 4th & 5th Freedom Traffic Rights among Designated Points in ASEAN

R R R R R R R R R R

Protocol 2: Unlimited 3rd, 4th & 5th Freedom Rights among All Points with International Airports in ASEAN

R R R R R R R R R R

ASEAN Multilateral Agreement on Air Services

R R R R R R R R R R

Protocol 1: Unlimited 3rd & 4th Freedom Traffic Rights within the ASEAN Sub-Region

R R R R R R R R R R

Protocol 2: Unlimited 5th Freedom Traffic Rights within the ASEAN Sub-Region

R R R R R R R R R R

Protocol 3: Unlimited 3rd & 4th Freedom Traffic Rights between the ASEAN Sub-Regions

R R R R R R R R R R

Protocol 4: Unlimited 5th Freedom Traffic Rights between the ASEAN Sub-Regions

R R R R R R R R R R

Protocol 5: Unlimited 3rd & 4th Freedom Traffic Rights between ASEAN Capital Cities

R R R R R R R R R R

Protocol 6: Unlimited 5th Freedom Traffic Rights between ASEAN Capital Cities

R R R R R R R R R R

ASEAN Multilateral Agreement on the Full Liberalization of Passenger Air Services

R R R R R R R R R R

Protocol 1: Unlimited 3rd & 4th Freedom Traffic Rights between any ASEAN Cities

R R R R R R R R R R

Protocol 2: Unlimited 5th Freedom Traffic Rights between any ASEAN Cities

R R R R R R R R R R

ASEAN Framework Agreement on Services (AFAS)

R R R R R R R R R R

Protocol to Implement the 4th Package of Commitments on Air Transport Services under the AFAS

R R R R R R R R R R


R R R R R R R R R R


R R R R R R R R R R



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Table 3. Philippines’ Compliance to ASEAN Agreements Related to Air Transport (continued)



R R R R R R R R R R


R R R R R R R R


R R R R R R

Memorandum of Understanding (MOU) on Cooperation Relating to Aircraft Incident and Accident Investigation

N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

MOU on the Association of Southeast Asian Nations’ Air Services Engagement with Dialogue Partners

R R R R R R R R R R

Air Transport Agreement between the Governments of the Member States of the Association of Southeast Asian Nations and the Government of the People’s Republic of China

R R R R R R R R R

Protocol 1: Unlimited 3rd and 4th Freedom Traffic Rights Between Any Points in Contracting Parties

R R R R R R R R R

Protocol 2: Unlimited 5th Freedom Traffic Rights Between Contracting Parties

R R R R R R R R



It is worthy to note that ASEAN agreements on air transport are the most numerous vis-à-vis land and

maritime transport agreements as well as for those related to trade facilitation. As seen in this summary,

most of the policies related to the market access liberalization of freight, passenger and air services among

ASEAN member-states have already been completely ratified and entered into force [save from the Open

Skies agreement with the People’s Republic of China] (ASEAN Secretariat, 2017). Member-states have also

agreed to coordinate to ensure proper investigation of aircraft incidents and accidents occurring within

the ASEAN region (ASEAN Secretariat, 2017). However, acceptance of the protocols is uneven when it

come to the member-states’ compliance to the 8th and 9th packages of commitments for aviation services

in the ASEAN Framework Agreement on Services (AFAS), an agreement which aims to operationalize the

goal of free flow of services within the region. As of this writing, Brunei Darussalam and Indonesia have

not yet ratified both packages, while Cambodia and Myanmar need to ratify the 9th package of

commitments.

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Using the definitions in the WTO’s General Agreement on Trade in Services (GATS), the AFAS binds

member-states to progressively remove restrictions in the modes of services supply across countries

(AFAS, 1995). In particular, its end is to remove market access and national treatment restrictions in Mode

1 (Cross-border supply), Mode 2 (Consumption abroad), Mode 3 (Commercial Presence) and Mode 4

(Presence of Natural Persons) services supply within ASEAN. In 1997, member-states have released its

initial package of commitments to liberalize certain sectors of their economy, along with its list of Most

Favored Nation (MFN) exemptions, which are types of activities which cannot be deregulated due to

national laws. The Philippines has declared three MFN exemptions related to aviation services which can

be summarized in the table below.

Table 4. MFN Exemptions Applicable to Air Transport Services

Mode of Supply Market Access National Treatment

Mode 3 (Commercial Presence)

• Activities mandated to be reserved for Filipino citizens only (i.e. foreign nationals can only own a minority share) - Participation in the governing body

is proportionate to share - Executive and managing officers

are for Filipinos only.

• Land acquisition - Corporations considered as Filipino-

owned (i.e. at least 60% of shares are owned by Filipinos) can own land or use public lands for lease.

- Foreign investors can only lease privately-owned lands.

None

Mode 4 (Presence of Natural Persons)

Non-residents can provide services in the Philippines if there is no one in the country who is “competent, able and willing” to give it to the company at the time of application.

In terms of access to domestic credit, foreign, non-manufacturing firms (i.e. partnerships and corporations) with [more than 40% of] capital belonging to foreigners can only maintain a 50-50 debt-to-equity ratio.

Applicable to Air Transport

• Special visa category to fast-track entry and temporary stay of foreign nationals which provide services to the country (i.e. all countries are qualified for this allowance but is subject to reciprocity with the person’s country of origin)

• Cabotage transport: domestic shipping reserved to Filipino-owned and registered vessels only, unless the concerned country has granted the same limited access to Filipino vessels (i.e. reciprocity)

Adapted from: Package 1 of AFAS, 1997

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Table 5. The Philippines’ Schedule of Specific Commitments for Air Transport Services

Aviation Subsector Limitation Mode of Supply

Mode 1 Mode 2 Mode 3

Aircraft repair and maintenance

Market Access None None None

National Treatment None None None

Selling and Marketing of Air Transport Services

Market Access None, except for on-line carriers

and agents

None Unbound

National Treatment None None Unbound

Computer Reservation System Services

Market Access None None Unbound

National Treatment None None Unbound

Aircraft leasing with crew



Aircraft leasing without crew

Market Access None (lease subject to CAAP approval)

None None

National Treatment None (lease subject to CAAP approval)

None None

Air freight forwarding services



Cargo handling Market Access Unbound due to technical feasibility

None None

National Treatment Unbound due to technical feasibility

None None

Baggage handling Market Access Unbound due to technical feasibility

None None


None None

Passenger handling Market Access Unbound due to technical feasibility

None None


None None

Adapted from: Package 9, AFAS, Nov. 6, 2015

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Table 5. The Philippines’ Schedule of Specific Commitments for Air Transport Services (continued)

Aviation Subsector Limitation Mode of Supply

Mode 1 Mode 2 Mode 3

Aircraft catering Market Access None None None


Aircraft line maintenance


National Treatment None None None Adapted from: Package 9, AFAS, Nov. 6, 2015

As seen in Tables 4 and 5, the Philippines has successfully liberalized significant air transport services

in the past twenty years. The more notable areas for deeper liberalization concern the relaxation of

foreign equity restrictions for corporations operating in the country, which will enable the country to

exchange Mode 3 air transport services. From this experience, one can see that relaxation of market

access policies is not enough for liberalization to be fully accomplished. Regulatory systems and

infrastructure support are necessary to enable air carriers to exploit the opportunities of increased market

access. The next section described the most recent achievements to improve the regulatory environment

and infrastructure of the local aviation sector.

4. Current Development Initiatives in the Philippine Aviation Sector

To take advantage of the benefits of greater liberalization, the supporting system of policies, programs

and regulations must be in place. For this section, one will discuss major accomplishments in improving

the enabling system for the local aviation sector to grow in light of ASEAN integration – that is, the

increased budget allocation for airport development projects, the safety rating upgrade from

international aviation regulation agencies, reforms in travel facilitation, and reduction in transport costs

borne by air carriers.

The Philippines has recently promoted infrastructure development in the country, with an aim of

allocating and spending a budget equal to 5% of GDP by the end of the administration. In line with this

task, the Philippine government has committed to implement an Airport Infrastructure Multi-Year

Program, which is composed of US$ 2.5 billion of multi-year budget allocation for 49 airports in the

country, and US$ 1.4 billion for 7 international gateways (i.e. Ninoy Aquino International Airport [NAIA],

Mactan-Cebu, Clark, Davao, Iloilo, Kalibo, and Puerto Princesa).

In terms of regulation, there are three success areas which are notable to discuss: safety of air travel,

travel facilitation for greater tourism access, and reduction of transport costs passed onto air carriers and

consumers. With regard to transport safety, the ICAO has recently assisted the Philippines in addressing

pressing issues in the Significant Safety Concerns list. This assistance has been necessary given the

category downgrade received by the country from the United States’ Federal Aviation Administration

(FAA), which prompted them and – in effect – the European Union to cancel flights from the Philippines

to their territories unless those safety issues are addressed. Because of the proactive collaboration of the

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Philippine transport agencies with ICAO, the country has regained its Category 1 status in 2014, which

enabled Philippine air carriers to re-mount flights to the United States and European Union. In terms of

travel facilitation, the Department of Foreign Affairs (DFA) (2014) has also granted additional visa-free

entry to seven more countries [i.e. Belize, Croatia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and

Uzbekistan], bringing the total of visa-free countries to 157.

Finally, two important legislations and one administrative order have been approved in order to lessen

transaction costs in air transport. The first one is the Customs Administrative Order No. 07-2011, which

prescribes the removal of overtime charges for customs personnel in international gateways. This policy

lessens the costs paid by carriers for the overtime charges of Customs officials who have to report beyond

normal government working hours due to the nature of international cargo shipments in the country. the

The second one is Republic Act (RA) 10378 (s. 2013), which removes the common carriers’ tax on

international carriers subject to principle of reciprocity. The last monumental law is RA 10863 or the

Customs Modernization and Tariff Act of 2016, which also removes the provision in the former Tariff and

Customs code of the country, thereby relieving air carriers from paying overtime charges of personnel not

only from the Bureau of Customs (BOC) but also from the Bureau of Immigration and Deportation (BID).

5. Opportunities and Challenges for the Philippine Air Transport Sector Amid ASEAN

Integration

As manifested in the previous sections, the Philippines stands to reap from the advantages of

international connectivity brought about by ASEAN integration. Moreover, ASEAN member-states also

acknowledge the need to support the aviation sector as the major transport mode in to connect passenger

and cargo traffic from archipelagic countries to those connected in mainland Southeast Asia. This section

highlights the opportunities and challenges which ASEAN integration brings, in light of the on-going effort

to strengthen the AEC.

Figure 1. International and Domestic Passenger Traffic of the Philippines, 1990 to 2014

Source of data: CAB (various years)

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Domestic Passengers International Passengers Total

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Figure 1 presents the rise in passenger traffic to the Philippines. In 2014, 17.9 million international

passengers have passed to and from the Philippines, comprised of tourists, OFWs and general travelers.

99% of international tourists enter via air transport, and 72% of them use NAIA as their port of entry. On

the other hand, 20.3 million domestic passengers have utilized air transport to move around the

archipelago. On the other hand, Figure 2 illustrates the cargo traffic of the Philippines from 2006 to 2014.

As seen in this figure, domestic cargo traffic has been steadily rising, with a final volume of 250.7 million

kg in 2014. International cargo traffic has not been rising but had a sudden peak in 2013 (at 405.2 million

kg) and went back to its usual trend in 2014 (at 337.5 million kg).

Figure 2. International and Domestic Cargo Traffic of the Philippines, 2006 to 2014 (in million kg)

Source of data: CAB (various years)

In terms of capacity, there is much to be reaped from the ASEAN Open Skies initiative. Table 4

summarizes the country-to-country flights among ASEAN member-states.

Table 6. Country-to-Country Air Capacity (Weekly, Direct Flights)

Source: CAPA, 3-9 Mar 2014

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic International

F\T BN KH ID LA MY MM PH SG TH VN Total

Brunei Darussalam (BN)

1,496 6,858 1,724 3,901 820 14,799

Cambodia (KH)

2,585 6,732 486 716 5,980 17,878 20,361 54,738

Indonesia (ID)

1,352 106,126 2,548 124,338 19,199 1,288 254,851

Lao PDR (LA)

2,585 720 284 9,560 3,697 16,846

Malaysia (MY)

6,858 6,732 106,126 720 5,626 13,605 73,567 51,585 15,788 280,334

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Table 6. Country-to-Country Air Capacity (Weekly, Direct Flights) (continued)

Source: CAPA, 3-9 Mar 2014

As seen from Table 6, the countries with large capacities are in Singapore, Malaysia, Indonesia and

Thailand. On the other hand, Vietnam, the Philippines, Cambodia and Myanmar have median capacities

while Brunei Darussalam and Lao PDR have yet to expand their flight allocations. Air capacity is a function

of the negotiations in air service agreements as well as the capacity of existing infrastructure to hold

traffic. It is most necessary for the Philippines to expand its existing airport infrastructure – and open up

secondary international airports to more flights and seat allocations – so it can take advantage of the

increased market access from other ASEAN countries.

At the same time, economic growth is spurring further growth in air traffic (Oxford Economics, 2011;

Perovic, 2013). Table 7 presents the level of growth which can be expected from major global growth

spots, such as Brazil, Russia, India, China, ASEAN and South Africa. Since air transport provides the fastest

and most reliable transport of high-value goods and investments to a country, there is much promise in

investing more on aviation infrastructure and regulatory reform.

Table 7. Emerging Markets: Nest of Emerging and Growth Leading Economies (EAGLES)

BRICA + South Africa

Population (millions)

GDP Value (current prices,

US$ billion)

Foreign Exchange Reserves

(US$ billion)

Real GDP Growth

2013 2013 2013 2013 2014F

Brazil 198.3 2,242.9 358.8 2.5 0.3

Russia 143.0 2,118.0 509.7 1.3 0.2

India 1,243.3 1,870.7 298.1 4.7 5.5

China 1,360.8 9,181.4a 3,880.4 7.7 7.5

ASEAN 625.1 2,398.5 755.1b 5.0 4.6

South Africa 53.0a 350.8a 49.7 1.9 1.4 a – estimates; b – 2011, F – forecasts from the presentation of Dr. Bernardo Villegas (Nov. 2014) Source: IMF World Economic Outlook, Oct. 2014; World Bank Key Development Data & Statistics; ADB Asia

Development Outlook 2014; Selected Basic ASEAN Indicators as of Aug. 14, 2014 (asean.org)

F\T BN KH ID LA MY MM PH SG TH VN Total

Myanmar (MM)

486 5,626 8,741 24,110 1,157 40,120

Philippines (PH)

1,724 716 2,548 13,605 29,940 10,574 2,795 61,902

Singapore (SG)

3,124 5,832 124,338 284 73,707 8,741 29,940 59,700 23,603 329,269

Thailand (TH)

820 17,878 19,199 9,632 51,474 24,110 16,574 60,417 27,889 227,295

Viet Nam (VN)

20,971 1,288 3,697 15,788 1,157 2,795 23,455 27,889 97,040

15

Looking further within ASEAN, international tourists have been visiting the region in a growing pace,

with an over-all growth of 11.73% from 2012 and 2013. Table 8 presents the volume of international

tourist arrivals to ASEAN, with winners coming from Myanmar – whose tourist arrival growth has almost

doubled in a span on one year – Thailand, Cambodia and Lao PDR.

Table 8. ASEAN International Visitor Arrivals, 2012-2013

No. Member State 2012 2013 Growth (%)

1 Brunei Darussalam 213,026 224,904 5.18

2 Cambodia 3,584,307 4,210,165 17.46

3 Indonesia 8,044,462 8,802,129 9.42

4 Lao PDR 3,330,089 3,795,045 13.96

5 Malaysia 25,032,708 25,715,460 2.70

6 Myanmar 1,058,995 2,044,307 93.04

7 Philippines 3,830,723 4,681,307 9.56

8 Singapore 14,500,000 15,619,485 7.40

9 Thailand 22,353,903 26,546,725 18.76

10 Viet Nam 6,847,678 7,572,352 10.58

Total 88,795,851 99,211,879 11.73

Source: Submissions of ASEAN Member States

Given all these trends, there is much work left for the Philippines to accomplish in order to exploit the

opportunities brought about by ASEAN. First of all, increased market access must be matched by

infrastructure holding capacity and efficient ancillary services within airports. Table 9 presents the

pressing need to expand airports in the country due to the extremely high levels of capacity utilization,

most of which have gone beyond its original structural design.

Table 9. Capacity Utilization of Major Airports in the Philippines

AIRPORT MAX. PASSENGER CAPACITY PASSENGER VOLUME UTILIZATION RATE

NAIA 35,000,000 34,198,982 97.7%

Mactan-Cebu 4,500,000 6,839,349 152.0%

Davao 2,000,000 3,452,479 172.6%

Kalibo 700,000 2,321,162 331.6%

Iloilo 1,600,000 1,677,632 104.9%

Laguindingan 1,600,000 1,553,346 97.1%

Puerto Princesa 350,000 1,378,580 393.9%

Bacolod-Silay 800,000 1,317,841 164.7%

Clark 4,000,000 877,757 21.9%

Caticlan 500,000 507,621 101.5%

Reproduced with permission from Basilio, E. et al. (2016). National Logistics Master Plan.

16

Corollary to this is the need to develop and implement a national route development strategy, which

is in accordance with executive directives to promote secondary international airports instead of putting

more capacity at NAIA, whose capacity utilization is already at 97.7%. Border control procedures, cost

structures and safety and security procedures must be reexamined to see duplication of items which add

unnecessary burden to air carriers, air cargo operators and other members of the aviation supply chain.

At the same time, stronger implementation of consumer protection must be ensured in order to improve

the reputation of the Philippines as a premier tourist destination. Finally, the Philippines must continue

to participate in the implementation of the ASEAN Single Aviation Market so that it continues to take

advantage of the opportunities from the AEC.

17

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