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PAL &
Free Trade
By Michael Alan Hamlin
June 03, 2002
Speaking at the Makati Business Club
symposium entitled, "Asean Free Trade Area and Beyond"
last week, President Gloria Macapagal-Arroyo made a couple of interesting
proposals. Her first proposal was to "re-nationalize"
Philippine Airlines (PAL), which is currently owned by tobacco taipan
Lucio Tan. The second proposal had two parts. First, accelerate
free trade within the 10-member Asean (Association of Southeast
Asian Nations) and China and Japan. Second, ask developing countries
to stop being hypocrites about free trade and lower tariffs, subsidies,
and other barriers to trade.
One of these proposals is right on the mark. The other
is, well, pretty bizarre. Guess which one is which?
To be fair, Ms. Arroyo's PAL proposal has admirable
roots. The president apparently has bought into the idea that a
healthy tourism industry can bring billions of dollars into the
country. Tourism, in fact, pretty much resuscitated Thailand after
the 1997 Asian financial crisis. In 1999, 8.65 million tourists
visited Thailand. If each one spent a conservative US$1,000, that
would amount to US$8.65 billion, more than overseas Filipinos send
back home every year.
Despite the strategic success of tourism in Thailand,
Malaysia, Singapore, and Hong Kong, until now, no administration
has really taken it seriously. Instead, other administrations have
focused on traditional foreign direct investment (FDI), and with
the exception of the administration of Fidel V. Ramos, not done
a very good job at that either. Yet a good reputation as a tourist
destination actually contributes to efforts to attract FDI. Part
of the reason is the overall positive image of a country. The other
is that many tourists are also executives who frequently can influence
investment decisions.
So it is extremely positive that Ms. Arroyo takes tourism
seriously. Now, she believes that an open skies policy - essentially
liberalizing air traffic in and out of the country - is one of several
keys to attracting more tourists. And she's right. Things get murky,
though, when she proposes to re-nationalize PAL as a precursor to
shifting to an open skies policy.
She bases her proposal, she says, on her observation
of Thailand and Malaysia, where the flag carriers are owned by government.
She believes that those airlines serve as loss leaders to attract
tourists. Ms. Arroyo notes that a privately-owned airline can't
be run as a loss leader because management is obligated to make
money and otherwise serve its (usually) relatively limited shareholders'
interests.
There are at least two problems with this argument.
The first is that Thai Airways (TA) and MAS both run profitable
international routes. It is domestic routes that are subsidized,
and those routes do not contribute to bringing in foreign tourists.
Second, Thailand has wanted to privatize TA for years, but has trouble
doing that because the airline is run by the military, who regard
it as their own fiefdom and source of foreign exchange.
Malaysia Airlines was actually privatized back in the
90s. But when the controlling stakeholder, Tajudin Ramli - a protégé
of now disgraced former finance minister Daim Zainuddin - got into
trouble pretty much the way PAL did (bought a new fleet of airplanes
right when the crisis stuck), government bailed him out, paying
a 250% premium. The controversy that resulted cost Daim his job
and his friendship with prime minister Mahathir Mohamad, and Tajudin
his holding company (which he is trying to buy back from a state-owned
asset management company for half the value of loans he earlier
said he couldn't pay back) and his reputation.
Then there is the matter of how the airlines are run.
Once proud TA has seen service decline steadily over the past decade,
to the point where even prime minister Thaksin Shinawatra publicly
disparages the carrier. Poor service on MAS is almost as legendary
as it once was on PAL. It's also important to consider that Malaysia
opened its arms wide to international airlines only when its near-empty
but beautiful new international airport opened. Thailand has more
annual arrivals than Singapore because like Singapore, government
has long worked to make the country an important transportation
hub. That's good for consumers, too. The cheapest airline tickets
in Asia are found in Thailand.
So I suspect that the principle reason Ms. Arroyo proposes
to re-nationalize PAL is because the real roadblock to open skies
is its principal shareholder, who hasn't been able to display much
skill for managing in non-monopolistic scenarios. But he is adroit
at managing political opposition to any proposal for open skies.
But does government intend to bail this shareholder out at a 250%
premium, as Malaysia did?
Well, no. That would be political suicide even if the
government did have the money. And since Mr. Tan can generate as
much opposition to re-nationalization as he can against open skies,
is there a real proposal in the president's public reflection? I'm
afraid that the answer to that question is probably not, and that's
too bad. Because the country does need tourism and it does need
open skies.
(Michael Alan Hamlin is the managing director of consultancy
TeamAsia and the author of three books on Asian economies and companies.
His latest book is Marketing Asian Places, of which he is co-author.
His e-mail address is mahamlin@teamasia.com)
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