Airlines Jostle for Terminal Space and Lower Fees

UNCLAS SECTION 01 OF 02 MANILA 000335 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/MTS AND EB/TRA FAA FOR TOKYO SINGAPORE AND TOKYO FOR FAA COMMERCE FOR BERLINGUETTE E.O. 12958: N/A TAGS: EAIR ECON EINV ETRD RP SUBJECT: Airlines Jostle for Terminal Space and Lower Fees REF: A) 06 MANILA 3743 B) 06 MANILA 3596 Sensitive but Unclassified - Protect Accordingly -------------- Summary -------------- ¶1. (SBU) In a highly advantageous deal for the national carrier, the Philippine Government agreed to let Philippine Airlines (PAL) shift its international and domestic operations to the long-mothballed new terminal and to allocate remaining space to foreign carriers. The government is planning a trial run for March 2007 but continuing legal battles over payment and ownership and necessary construction work will delay full terminal use. U.S. carrier Northwest Airlines (NWA) is seeking GRP financial protection in case structural defects or court orders interrupt service but is anxious to reserve gates for its twice daily flights to and from Japan and the U.S. NWA is also protesting the capricious doubling of fees assessed airlines for the overtime, meals, and transport costs of Customs officials at the airport. End Summary. -------------- PAL Moving Operations to New Terminal -------------- ¶2. (SBU) In a meeting January 12, Northwest Airlines (NWA) General Manager Todd Anderson told econoffs the Manila International Airport Authority (MIAA) is letting national carrier Philippine Airlines (PAL) move all its domestic and international operations to the long-mothballed new terminal, Terminal Three. MIAA is preparing for a trial run in March 2007. Anderson heard reports that PAL had simultaneously agreed to pay MIAA about three billion pesos ($60 million) to cover its arrears on landing fees, although there are no commitments in writing yet. Speculation has it that Asian Emerging Dragon Corp. (AEDC) may also withdraw its court case seeking control of Terminal Three as part of this deal. AEDC, like PAL, is owned by Philippine-Chinese magnate Lucio Tan. ¶3. (SBU) Anderson complained that MIAA planned to give top priority in allocating space at Terminal Three to those airlines using PAL's ground handling service. (Note: Embassy understands that MIAA will also use conventional criteria such as passenger and cargo capacity and flight frequencies. End note.) Airlines, such as NWA, that use other baggage handling companies, may be relegated to the deficient Terminal Two vacated by PAL. Anderson commented that excluding NWA from Terminal Three would put the company "in a very untenable and uncompetitive position." NWA does not want to move to Terminal Two. Even though it is a newer facility than the decrepit Terminal One, it does not have sufficient space to handle overseas luggage or to efficiently process passengers through immigration, customs, quarantine, and security. ¶4. (SBU) The airlines had collectively insisted on guarantees against disrupted operations from MIAA as a pre-requisite for relocating to Terminal Three. Their demand was the result of uncertainties caused by continuing legal squabbles over ownership and payment and a partial ceiling collapse last March that suggests there may be structural defects in the terminal (Ref A). Anderson said PAL broke ranks with the Board of Airline Representatives (BAR) over the demand for financial guarantees, in order to move all its operations under one roof. ¶5. (SBU) In a separate meeting, BAR Chair and PAL VP for Marketing Felix Cruz said the move to the new terminal was a part of the national carrier's Government-approved rehabilitation plan. He likened the savings of operating from just one terminal to the equivalent value of two planes. He said BAR was still advocating for a standard leasing agreement with uniform conditions for all airlines. ¶6. (SBU) Anderson said NWA is otherwise faring well in the Philippines. During the build-up to the Christmas holidays, it filled over 92% of its 820-plus seats on twice daily routes to and from Japan and the U.S., as compared to about 88% throughout Asia. It cannot accommodate a third flight to Manila per day, however, because of less hefty demand during off-peak seasons. -------------- MANILA 00000335 002 OF 002 Customs Fees Doubled -------------- ¶7. (SBU) Airlines are also seeking repeal of a Customs Order dramatically increasing the rates charged for aviation services, according to NWA Finance Manager Ceazar Veneracion. He told econoffs that airlines pay overtime, meals, and transport for Customs, Immigration, and Quarantine officers at the airport. These assessments were valid when offices for these services were not located at the airport and officials had to make special trips after hours to accommodate international flights. Now that agencies have full-time staff right at the terminal, the airlines should be excused from these fees altogether, he said. "These services are the government's responsibility." Instead, the Customs Order effectively doubled the assessment, raising the annual overtime charge from 115 million pesos in 2005 to 230 million pesos ($4.8 million) in 2006. The BAR argues the rate increases are inappropriately justified by the depreciation of the peso even though none of the services incur foreign currency expenses. Veneracion said the airlines protested the increase to the Bureau of Customs and are awaiting its response. ¶8. (SBU) According to Veneracion, the increase is ill-timed because the airline industry is still reeling from the higher fuel costs and SARS. Many airlines have ceased flights to the Philippines in recent years because of the low rate of return. BAR is seeking permission from the Philippine Civil Aeronautics Board to charge $1 for each ticket to pass these costs to passengers. Veneracion said the consumers of these services should pay for them, not the airlines. He said the Board has deferred its decision in order to study its jurisdiction over the matter. In the meantime, the airlines are worried that other agencies drawing stipends from the airlines may soon impose new and heavier fees. ¶9. (SBU) MIAA General Manager Alfonso Cusi told econoffs that he supported reforming the airline assessments, but said it can only be changed by legislation. Cusi said the Philippines is one of the few countries in the world to charge such fees. He is discussing other options with the Department of Transportation and Communications, such as embedding costs into terminal fees or ticket prices. -------------- Comment -------------- ¶10. (U) The Embassy is encouraging the Philippine Government to use a transparent process in assigning terminal space. We support NWA's efforts to operate from the new terminal and to seek fair resolution to the disputed airport fees. Kenney