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PCC Issues Paper No. 01, Series of 2020 PAPER ISSUES The State of Competition in the Air Transport Industry: A Scoping Exercise Gilberto M. Llanto and Ma. Cherry Lyn Rodolfo The State of Competition in the Air Transport Industry: A Scoping Exercise The State of Competition in the Air Transport Industry: A Scoping Exercise I. INTRODUCTION policies which relate to (i) the opening up Gilberto M. Llanto and Ma. Cherry Lyn Rodolfo1 of regional airports to international flights, This study reviews the state of competition (ii) reciprocity as to whether it hinders in the domestic air transport industry, penetration of regional airports by foreign Published by: specifically focusing on the airline carriers; and (iii) the overall air transport passenger business. In reviewing the policy objective of the government, will Philippine Competition Commission business and economic landscape of remain unaddressed. Despite this limitation, 25/F Vertis North Corporate Center 1 the industry, it considers factors such as the report tries to provide a substantial North Avenue, Quezon City 1105 the market structure of the domestic air analysis of the present situation of the transport industry, the economic incentives2 industry and the competition-related that motivate the airline companies to issues faced by the industry, the public and behave in a certain way, and the regulations3 government. affecting the industry. The study turns to Williamson’s (1975) idea that organizations After a brief introduction, Section 2 presents review organizational costs and configures an overview of the air transport industry a governance structure that minimizes costs and uses an aviation services market value and maximizes revenues subject to the chain as a neat frame for understanding how constraints of extant policy and regulatory several entities collaborate and coordinate PCC Issues Papers aim to examine the structure, conduct, and performance of framework. Because the airline transport in producing the air transport services select industries to better inform and guide PCC’s advocacy and enforcement industry is a complex mix of a competitive consumed by the buyer (passenger/cargo initiatives. The opinions, findings, conclusions, and recommendations expressed and regulated industry, it is important to owner/shipper). A complete understanding in these studies are those of the author(s) and do not necessarily reflect the views determine how government regulations of competition and competition-related of the Commission. This work is protected by copyright and should be cited affect the level of competition in the industry issues in the air transport industry requires (Gowrisankaran, 2002). a study of the various components of accordingly. the value chain. In this study, two such This study is a scoping exercise. It provides components, namely, airlines (main service broad strokes of the current situation in provider) and the airports (a critical fixed The views reflected in this paper shall not in any way restrict or confine the ability the industry, including an assessment of asset in the production process) are of the PCC to carry out its duties and functions, as set out in the Philippine the role of airports, more specifically the considered. Section 3 summarizes the Competition Act. PCC reserves the right, when examining any alleged anti- Ninoy Aquino International Airport (NAIA), performance of the air transport industry in air transport service delivery; identifies after initial liberalization and deregulation competitive activity that may come to its attention, to carry out its own market potential anticompetition issues; and efforts in the industry as gleaned from definition exercise and/or competition assessment, in a manner which may deviate submits some recommendations for further available literature. Section 4 discusses or differ from the views expressed in this paper. detailed study. policy and regulations in the air transport industry and an initial review of air services At the outset, it is important to note the agreement entered into by the country in importance of getting cooperation from order to identify potential barriers to a more concerned government agencies and the competitive air transport market. Section industry players in the conduct of this study. 5 discusses the present situation in the The report does not have any information on air transport industry. Section 6 discusses the operations of Clark International Airport. the important role of airports in the air At this point, it will be difficult to give a transport market with a focus on physical meaningful answer to the question to what infrastructure and slot allocation. The extent does Clark impose a competitive final section summarizes our findings and constraint on NAIA? We were also unable to provides some recommendations. meet with the Department of Transportation and the Civil Aviation Authority of the Philippines (CAAP) to discuss air transport policy, regulation and planning. Thus, the suggestion to include an assessment on the 1 The authors gratefully acknowledge the inputs of Irish Almeida in the section on policy and regulatory framework, the assistance of Ma. Kristina Ortiz with data and preparation of charts/figures, and of Paolo Tejano and Cara Latinazo, both of the Philippine Competition Commission in arranging and participating in meetings with various industry stakeholders. The authors would like to thank participants for 2 Defined as whatever motivates behavior in a certain way in contrast to preferences, that is ‘wants’, ‘needs’. https://study.com/academy/lesson/ their comments and suggestions on the initial draft of the paper during a presentation at the Philippine Competition Commission on August economic-incentives-definition-examples-quiz.html (accessed January 6, 2018). 1, 2018. Likewise, we acknowledge the invaluable inputs provided by individuals whom we interviewed in preparing this paper. 3 The Civil Aeronautics Board (CAB) is tasked with economic regulation while the Civil Aviation Authority of the Philippines (CAAP) is charged [email protected] | www.facebook.com/CompetitionPH | www.twitter.com/CompetitionPH | www.phcc.gov.ph with regulation of technical and safety aspects of the industry. 1 The State of Competition in the Air Transport Industry: A Scoping Exercise The State of Competition in the Air Transport Industry: A Scoping Exercise II. THE IMPORTANCE OF THE AIR Figure 2.1 Aviation services market value chain TRANSPORT INDUSTRY Box 1. The economic impacts of the Philippine air transport industry The air transport industry provides the In 2017, the Philippine air transport industry directly country with vital connectivity within the generated Php 32.7 billion of gross value added major islands of the archipelago and to (GVA) in real terms, equivalent to 12.4% of the GVA the outside world. A well-functioning air of the transportation and storage sector, and 0.21% of GDP. Among the transportation industries, air transport industry correlates positively with transport ranked second to land transport in terms a high level of growth (Perovic, 2013) and of GVA contribution. IATA (2016) reported that the impacts the economy through growth in air transport’s share to Philippine GDP in 2014 was roughly 3.5% due to its direct, indirect, induced and tourism, trade, investments, employment, catalytic effects. The Philippine air transport industry and productivity (Rodolfo, 2017). The supported 1.4 million jobs including 69,800 direct air major purchasers of air transportation jobs and 1.2 million jobs from the wider economic benefits- tourism, productivity and trade. By 2035, the services are high value industries, indicating industry is expected to generate 3.4 million jobs and the air transport industry’s important contribute US$ 23 billion to Philippine GDP. linkage to other sectors of the economy. Air transport is a vital support to the tourism industry. Based on the Input-Output Tables of the In 2017, the Philippine Statistics Authority, drawing Philippines, the wholesale and retail trade from the Philippine Tourism Satellite Accounts, industry is the largest purchaser of air reported that the industry contributed Php 1.93 trillion to the Philippine economy, equivalent to 12.2% of transportation services with 21.5 percent of GDP. The employment in tourism accounted for 13.1% all industry spending on aviation services. of national employment. Air transport moved 99% Telecommunications spending for aviation of the 6.6 million international tourists who spent Php 448.6 billion during their stay in the country. services was at 8.3 percent of all industry Adding airline receipts amounting to an estimated Source: Tretheway and Markhvida (2014) spending on aviation services (InterVistas, Php 68.6 billion, international tourism ranked as the 2015).4 In 2014, Oxford Economics (2016) 4th largest export revenue earner of the Philippines, This study reviews the performance and time constraints. An in-depth look next to electronics and semi-conductors, overseas of airlines and airport infrastructure in at the air transport market for cargo (i.e., estimated foreign tourists spending in the remittances, and information technology and business Philippines at US$4.7 billion; in addition, the process management. While the share to total trade service delivery. It does not include other freight forwarders, cargo integrators, and Philippines exported US$82.2 billion worth volume is a meager 0.5%, air transport moved at components of the value chain, such