LEARNINGTEAM9A Aquino' Bandivadekar' Jao' Khaleel' Rapeti' COOPETITION(IN(OPEN(SKIES A(Look(Into(the(Air(Transport(Industries(from(the( Perspective(of(the(National(Carriers(of(ASEAN s(two( Archipelagic(Nations Shrivastava' Inpartialfulfillmentof therequirementsof Business Economics: Intro to ASEAN 2015(Term2) and AsianBusinessSystems(Term3)
O nmarch14,2011,philippinepresidentbenignos.aquinoiiisignedintobeingexecutiveorder (EO)29,authorizingtheCivilAeronauticsBoardandthePhilippineAirPanelstopursuemore aggressively the international civil air liberalization policy, more commonly known as Open Skies.Withthis,Pres.AquinounderstandstheimplicationsofadoptinganOpenSkiespolicy, boththegood(i.e.,benefitstotravelersintheformofmorechoices;promotionofinvestment,trade, tourism and employment, etc.) along with the bad (the need to enhance the competitiveness of Philippinedomesticcarriers). However, in the same vein, the order seems to conspicuously ignore the equally important need to enhance the competitiveness of the supporting air travel infrastructure. For example, Ninoy Aquino InternationalAirport(NAIA),theprimarygatewaytothePhilippinesintheheartofthecapitalofMetro Manila,hasbeenexplicitlyexcludedfromtheeffectivityoftheEOinwhatisnowtermedasaPocket OpenSkiespolicy.ThisisespeciallystrikingsinceNAIAwasthe34thbusiestairportintheworldin2012, andthatnaia1and2areoperatingabovecapacity(naia1hasapassengercapacityof4.5millionwith 2012 volume reaching 8.17 million, NAIA 2 has a capacity of 7.5 million with 2012 volume at 7.79 million). 1 2 Indonesiahastakenitastepfurther.Ithasresistedopeningupitsairspacealtogether,optinginsteadto hold out until 2015 in order to have more time to get ready. According to the Ministry of Transportation sdirectorategeneraldecreein2012,indonesiawillopenits29internationalairportson aprogressivebasis. 3 AccordingtotourismministerMariPangetsu, Indonesiaisdifferent.Singaporehas oneairport,butindonesiamorethan20.indonesiaiscommittedandwilldoasmuchaspossiblefor [opening]majorairports butthecountryisn treadyyet. 4 However,Indonesiaintendstoopenits5 majorairportsfirst (Jakarta,Surabaya,Bali, Medan and Makassar), despite the fact that, just likethe Philippines,theseairports,especiallyJakartaandSurabayaareheavilycongested. 5 Jakarta ssoekarnoc Hatta International Airport (Cengkareng or CGK) serves as many as 44 million passengers while its maximumcapacityis22million. 6 Furthermore, the obstacles seem to extend beyond a question of infrastructure and airports. The domestic airlines themselves, especially statecowned flagccarrier Garuda Indonesia, prefer to keep thingsrestrictedandhavebeenexertingpressureonthestategovernmenttoprotecttheindonesian marketforaslongaspossible. 7 WithIndonesiaalonehavingalmosthalftheentireASEANpopulation, itsdecisiontostayouthampersthesinglemarketsignificantly, saysalantan,aviationlawprofessorat the National University of Singapore. Philippine flagccarrier Philippine Airlines (PAL) has previously 1 Agcaoili,L.(2013,January6).NAIAworld s34thbusiestairport.philstar.com.retrievedjune24,2013from http://www.philstar.com/headlines/2013/01/06/893743/naiacworldsc34thcbusiestcairport. 2 Aning,J.(2013,January9).NAIAtoundergoupgradingin2013asnumberofairtravelersincrease.PhilippineDailyInquirer.RetrievedJune24, 2013fromhttp://globalnation.inquirer.net/61209/naiactocundergocupgradingcinc2013cascnumbercofcairctravellerscincrease. 3 Saraswati,J.(2013,April3).Indonesia sstancetowardsopenskies.thejakartaglobe.retrievedjune24,2013from http://www.thejakartaglobe.com/blogs/indonesiascstancectowardscaseancopencskies. 4 Bellman,E.(2013,February19).Asia sopenskiesarecloudedbyindonesia.thewallstreetjournal.retrievedjune24,2013from http://online.wsj.com/news/articles/sb10001424127887323807004578284481581086720. 5 Saraswati,J.(2013,April3).Indonesia sstancetowardsopenskies.thejakartaglobe.retrievedjune24,2013from http://www.thejakartaglobe.com/blogs/indonesiascstancectowardscaseancopencskies. 6 GarudaIndonesia(2012)Indonesianaviationindustry:Thechallenges&opportunities.WillisConference[Presentationslides]. 7 Bellman,E.(2013,February19).Asia sopenskiesarecloudedbyindonesia.thewallstreetjournal.retrievedjune24,2013from http://online.wsj.com/news/articles/sb10001424127887323807004578284481581086720. 1
statedthatanopenskiespolicyisnotathreattolocalairlines,howeverthatassertioniseasiertomake giventhatnaiaremainsrestricted. As the ASEAN Economic Community 2015 deadline quickly looms over the horizon, what strategic optionsareavailabletothenationalflagccarrierairlinestoaccelerateandstrengthentheircompetitive readinessinordertocapturethevaluegeneratedinanopenskiesmarket? ASEANOPENSKIESPOLICY OnNovember20,2007,theheadsofstateandgovernmentofthe10ASEANnationscametogetherin Singaporeforthe40thAnniversaryofASEANand13thASEANsummit.Heretheyaffirmedtheirvisionof establishinganaseancommunityby2020byacceleratingoneofitsthreepillars,theaseaneconomic Community (AEC), into 2015 through the adoption of an economic masterplan known as the AEC Blueprint. In a nutshell, the AEC will be established to allow the free movement of goods, services, investmentandskilledlabor,andfreerflowofcapital(hook,2013).thegoalsoftheaecblueprintare to transformaseanintoasinglemarketandproductionbase,ahighlycompetitiveeconomicregion,a regionofequitableeconomicdevelopment,andaregionfullyintegratedintotheglobaleconomy. 8 Inpursuitofthegoaltobecomeahighlycompetitiveeconomicregion,infrastructuredevelopmentisa keysuccessarea.intheareaofairtransportinfrastructure,theblueprintrequirestheimplementation oftheaseanopenskypolicy(seeexhibit1fortheroadmapforintegrationoftheairtravelsector). ThisRoadmapisimportantbecauseOpenSkiesis notasingle,wellcdefinedconcept. 9 Itisperhapsfor thisreasonthatmoreimportantthantheprojectmilestoneslaidoutintheroadmapisthatitdefines the objective, measures and intended scope of ASEAN Open Skies. The primary objective is the full liberalization of air transport services in ASEAN for both passenger and cargo (air freight). In other words, ASEAN Open Skies is the relaxation of government control and restrictions on air transport services,thegeneralnatureofwhichshallbeexplainedshortly,toachieveasingleaviationmarket.the implementationofthisliberalizationistodependlargelyonthereadinessoftheaseanmemberstates, whicharefreetopursue,negotiate,concludeandsignimplementingagreementswitheachother,beit onabilateral,plurilateral,multilateralorsubcregionalbasis. 10 11 Bysayingthatthemilestonesoutlinedintheroadmaparelessrelevant,thatistosayitisbecausethose targets have expired by now. For example, item nos. 7c8 in the roadmap entails full ASEANcwide liberalizationofscheduledpassengerserviceswithnolimitationsonthirdandfourthfreedomrightsfor thecapitalcityineachaseanmembercountrybydecember2008,andnolimitationsonfifthfreedom rightsbydecember2010.thefactthatnaiaremainsexcludedbythephilippines PocketOpenSkiesas of June 2013, retaining its restrictions on third, fourth and fifth freedom rights, is testament to the difficulties member nations have encountered in liberalizing their air transport services. Yet these milestones do not lose relevance in terms of the necessary steps in progressive liberalization that countriessuchasindonesiahavechosentopursue. 8 AssociationofSoutheastAsianNations(2007)ASEANEconomicCommunityBlueprint. 9 AADCPRegionalEconomicPolicySupportFacilityResearchProject02/008(2004)PreparingASEANforOpenSky. 10 Deardoriff sglossaryofinternationaleconomicsdefinesplurilateralasfallingincbetweenbilateral,whichisbetweentwocountries,and multilateral,whichisamongagreatmanyorall. 11 ASEAN(2003)ASEANAppendixIRoadmapforintegrationofairtravelsector.RetrievedJune24,2013from http://www.asean.org/news/item/appendixcicroadmapcforcintegrationcofcairctravelcsector. 2
ThenegotiationofthesefreedomrightsarepreciselywhatPres.AquinodirectedtheCivilAeronautics Board and Philippine Air Panels to do in EO 29, and were defined by the International Civil Aviation Organization(ICAO)in2004,withthemostimmediateintracASEANrelevancetoliberalizationbeingthe thirdtofifthfreedoms,whichcanbesimplydefinedasfollows: ThirdFreedomRight AllowsanairlinetocarrytrafficfromitshomecountrytoanothercountryB. FourthFreedomRight Allows an airline to carry traffic back from another country B to its home country. FifthFreedomRight AllowsanairlinetocarrytrafficbetweenasecondcountryBandthirdcountry C,whereintheflightoriginatesorendsinthehomecountry. OutsidethescopeoftheRoadmap,butwithsignificantintraandextracASEANimplicationsarethesixth andseventhfreedoms,definedsimplyasfollows: SixthFreedomRight SeventhFreedomRight AllowsanairlinetocarrytrafficfromanothercountryAtoitshomecountry beforeredistributingthemtoothercountriesb,candd.inotherwords,this requiresfourthfreedomrightswithcountryaandthirdfreedomrightswith countriesb,candd. 12 AllowsanairlinetocarrytrafficbetweenanothercountryBtoathirdcountry C,whereintheflightdoesnotoriginateorendin,orconnectto,thehome country. Exhibit2liststheformalICAOdefinitionsforthefreedomrights,andExhibit3providescorresponding graphicalrepresentationsofthethirdtoseventhfreedomrights.thesixthfreedomiscriticalforairline hubslikesingapore,whorelyonitsabilitytoconnectpassengersfromaseantotherestoftheworld andvicecversa,butforaslongasindonesiamaintainsrestrictionsonitsthirdandfourthfreedomrights, Singaporeisunabletorealizethefullpotentialofthisopportunity. AsASEANpursuesairtravelliberalizationwithothercountriessuchasChina,JapanandSouthKorea,the problemsassociatedwiththeabsenceofunifiedaseanaviationmarketbecomemoreapparent.for example,theagreementwithchinawillallowchineseairlinestomountflightsfromanywherewithin ChinatoanywhereinASEAN.However,ASEANcarriersareonlyallowedtomountflightsfromtheirown homecountry(theabsenceoftheseventhfreedom).thiswillcreateanetworkimbalancesimilartothat facedbytheeuairlinesinrelationtotheusinthe1990 s,andforaseantorealizethefullbenefits, OpenSkiesmustgaintheacceptanceofallmemberstates. 13 Importantitemsforconsiderationintermsofpolicyoptionswouldbetheeliminationand/orrelaxation of restrictions on investment and ownership, route capacity, fare and pricing levels, aircraft type, gatewayaccess,fifthandseventhfreedomrights,anddomesticcabotage. 14 15 12 Tan,A.(2013,April5).CleartakecoffonASEANOpenSkies.TheStraitsTimes. 13 Ibid. 14 Theeliminationofaircrafttyperestrictionsismoreofafunctionoftheairportinfrastructurethanitisamatterofpolicy.However,tothe degreethatacountryiscommittedtopursuinganopenskypolicy,thenecessaryinvestmentsmustbemadeinordertoeliminatethese restrictionsandmakesecondaryairportsmoreattractive.forexample,indonesiahasheldoutfromopenskiesinordertohavemoretimeto prepare.inviewofthis,supadiointernationalairportinpontianak,westkalimantanhasbeenundergoingrunwayexpansioneffortssince2010 continuingintothisyear(2013)inordertobecomeaworldclassairport. 15 Cabotageistheexclusiverightofacountry sdomesticcarrierstooperatetheairtrafficbetweenpointswithinitsterritory(theamerican HeritageDictionaryoftheEnglishLanguage,FourthEdition&Dictionary.com). 3
BENEFITSANDPROBLEMSOFOPENSKIES It is generally believed and accepted that lowering these restrictions would result in the following positiveoutcomes: 16 Passengers(travelersandtourists)willgainfromlowerfares,betterservicesandmoreoptions. Owingtotheincreaseinattractivenessinairtravel: o Countries will see economic gains from increased tourism arrivals and expenditures, o resultinginincreasedgovernmentrevenues,jobcreationandforeignexchangeearnings. Airlineswillbeabletomaximizecapacity,achieveeconomiesofscaleandscope,andgain accesstonewmarkets. HowimportantistourismtoIndonesiaandthePhilippines?Thefactthatinternationaltouristreceipts onlyaccountfor1.1%gdpinindonesia(2011)and1.7%inthephilippines(2010),vs.8.2%forthailand, 7.7% in Malaysia and 7.9% in Singapore, is cause for concern. 17 There is a lot more potential for the growthofthissectorinthesetwocountries.yetifopenskiesissobeneficialtothecountriesandtheir people,whyhavetherebeensomanyhurdlestoitsrealization? This explanation begins by acknowledging that ASEAN is comprised of a heterogeneous aviation industry. Singapore, Malaysia and Thailand operate ASEAN s best airports and strongest national carriers, followed by Indonesia, Philippines, Vietnam and Brunei, which are considered secondary aviationstates,andfinallycambodia,laosandmyanmar,whoseairtravelaccommodatesonlylessthan 2.5% of inbound and outbound traffic. 18 Among the secondary aviation states, known as VIP+B, Indonesia and the Philippines stand out because of several common characteristics, including an archipelagic and dispersed geography (which lends to a naturally robust domestic market), relatively weakairportinfrastructure,andlesscompetitivenationalairlines. CombiningnowthislackofcompetitivenessandinefficienciesinnationalairlinesPALandGaruda(both arefullservicecarriers,orfscs),withtheproliferationoflowccostcarrierssuchascebupacificandlion Air(LCCs),owingtotheliberalizationoffare,capacity,andfreedomrightrestrictions,anditisalmost certainthatsomeairlineswillemergeaslosers. It can be said then that the intensifyingcompetition amongairlinesmayresultinazerocsumgame,despiteanactivelygrowingmarketfromopenskies,to theextentthatfscs,includingpalandgaruda,areunabletocopewiththeconsiderablepressureon coststructuresfromlccs.lccsbuildtheirbusinessmodelsaroundlowfareswithminimumserviceand nofrillsflying,appealingmostlytobudgetleisuretravelersandcostcconsciousbusinesstravelers. CentraltothestrategyofanLCCistheuseofsecondarygatewaysinordertoavoiddirectcompetition withstrongfscsandalsotolowertheirownoperatingcoststructures.however,thisisonlypartially trueinindonesiaandthephilippines.thefscsinthesecountriesarenotverystrongtobeginwith,and thelccsfindthattheycancompeteheadctocheadwithpalandgarudaoutoftheprimarygateways (i.e., Manila, Jakarta) in what is essentially a very price sensitive market. Lion Air, whollycowned subsidiarywingsair,andindonesiaairasia,indonesia stopprivatelccs,areallheadquarteredinand 16 AADCPRegionalEconomicPolicySupportFacilityResearchProject02/008(2004)PreparingASEANforOpenSky. 17 WorldEconomicForum(2012)TheASEANtravel&tourismcompetitivenessreport2012:Fosteringprosperityandregionalintegration throughtravelandtourism. 18 Saraswati,B.(2011)Anongoingprocess:OverviewoftheASEANOpenSkyagreement.EconomicResearchInstituteforASEANandEastAsia [Presentationslides]. 4
primarily operate out of Cengkareng (Jakarta), while at the same time making extensive use of secondary airports as domestic hubs. It is interesting to note that Lion Air, which is also Indonesia s largest privately owned airline, only flies to Singapore, Vietnam, and Malaysia among the ASEAN nations.similarly,cebupacific,thenumberonelccinthephilippines,isheadquarteredinnaia3,but alsooperatesregionallyoutofsecondarygateways,suchasitsdirectflightstosingaporefromcebu, IloiloandClark,forexample. ThedominanceofLCCsinthetwonationsisstaggering.LionAir,whichbeganoperationsinJune2000, currently allocates 96% of its seat capacity to the Indonesian domestic market and commands 50% marketsharecomparedtolessthan2%forindonesiaairasia. 19 TheIndonesiandomesticmarkethas doubledsince2008,reaching72.5millionpassengersin2012,andisprojectedtoreach100millionby 2015.Ontheinternationalmarket,however,LionAironlyhas5%sharecomparedto25%fortheAirAsia groupand16%forgaruda. 20 CebuPacific,whichbeganoperationsinMarch1996,alreadyholds46%of the20.6millionpassengerdomesticmarket. 21 Altogether,LCCscomprise80%ofthedomesticmarket, leavingpaltotaketheremaining20%astheonlyfscoperatingdomesticallyinthephilippines. These figures are presented to demonstrate that the threats to airlines that are unable to remain competitive are very real. Airlines will feel the pressure from intensifying competition, and drops in profitabilitywilltrickledowntotheairlines employees,andifthenecessaryremedialactionsarenot taken to improve efficiencies and competitiveness, then airlines may soon find that falling profits translate into failure of the business, as was the case of Indonesia s Batavia Air. Batavia ceased operationsonjanuary31,2013andfiledforbankruptcybecauseitwasrunningatalossandcouldnot serviceitsleasepaymentsfor3years. 22 BataviaservedasacruciallinkinmedicalservicesfromJakarta, topontianak(inwestkalimantan),tokuching(insarawak,malaysia)asitcouldbetteraccommodate sickpeopleespeciallythoseonstretchers. 23 Moredisconcertingiswhenthenationalcarrierloses,asnot onlydothepassengersandtravelerssufferfromalossoffullserviceoptions,butthecountryitselfloses apartofitsheritage.yettheseverysamefiguresfurtherthepropositionthatthefscsandlccsare actuallyservingdifferentmarkets.inthecontextoftradeandairfreightservices,airlinesarebestsuited to serve particular markets, with gains realized from specialization and the reliance on comparative advantage.itshouldbenodifferentforpassengerservices,suggestingthatincreasedcompetitiondoes notnecessarilyhavetoresultinazerocsumgame.thequestionthenwouldbewhatcanthenational carriersdotocapturethevaluebeinggenerated? Furthermore,despiteagrowingmarket,andevenifthezerocsumtendenciescanbeovercome,itcanbe seenthatthenationswillnotbeabletorealizethefullbenefitsofincreasedairtravelfromopenskiesif theirinfrastructureisunabletokeepup.takethehypotheticalscenariooffullopenskiesinthecaseof thephilippines.ifforeigncarriersfindthattheirflightsareregularlyloadedtocapacity(duetolower fares,betterservices,etc.),theirnextcourseofactionwouldbetoincreasetheflightfrequencyinorder toabsorbtheexcesspassengers.althoughopenskieshassuccessfullyremovedrestrictions,allowing unlimitedthirdandfourthfreedomrights,anovercongestednaiaissimplyunabletohandleanymore 19 CAPACentreforAviation(2013,March20).Indonesia slionairgrouphasthegrowthopportunitiestosupportthe600aircraftonorder. RetrievedJune24,2013fromhttp://centreforaviation.com/analysis/indonesiasclioncaircgroupchascthecgrowthcopportunitiesctocsupportcthec 600caircraftconcorderc101674. 20 Ibid. 21 CebuAirInc.(2012)2012Resultsofoperations[Presentationslides]. 22 Osman,N.(2013,January31).BankruptBataviaAirtostopservice.TheJakartaPost.RetrievedJune24,2013from http://www.thejakartapost.com/news/2013/01/31/bankruptcbataviacstopcservice.html. 23 Yu,J.(2013,February5).BataviaAirgroundedforgood.TheStar.RetrievedJune24,2013from http://www.thestar.com.my/news/community/2013/02/05/bataviacaircgroundedcforcgood.aspx. 5
flightsandpassengertraffic.thenextclosestairport,diosdadomacapagalinternationalairport(dmia) inclark,pamapanga,is80kmaway.whilethisairportmayappealtothecoststructureofforeignlccs coming in, in the absence of a comprehensive transport network that quickly links Clark with Metro Manila,somemarketsegmentsmaychoosetoputapremiumontheconvenienceandtimesavedby takingaflightthatlandsintheheartofthecity;andindeed,thelccsoperatingoutofnaiaareeven abletoprovidelowfareofferingsforthispurpose. ThebenefitsfromOpenSkiesarethennotrealizedintworespects:thismakesDMIAlessattractiveasa secondary gateway, lessening the willingness of carriers to operate out of there, and the inability to expandflightsinnaiaresultsinopportunitycostsfromaircraftoperationsandpassengerarrivals.the realityofthecurrentunattractivenessofdmiaisreflectedintherecentdecisionofairasiaphilippinesin March2013totakeupa49%stakeinZestAir.TheformerincurredalossofUSD30millionin2012,and the tiecup with Zest signifies an admission that its original strategy to enter the Philippine market withoutmanilaoperationswasflawed;zestisastrategicpartnershipasitholdsvaluabletrafficrights andslotsatnaia. 24 This problem is further complicated by the fact that airport upgrade programs such as runway expansion,upgradeofnavigationequipmentandterminalfacilities,orbuildinganewairportaltogether, are longcterm projects that require massive investments. The ongoing upgrades at Cengkareng, amounting to USD 1.24 billion in investments from Angkasa Pura II (the airport operator), which are expected to raise the capacity from 22 million to 62 million, began in 2012 with the first phase is expectedtobecompletedby2014. 25 Theairport,whichhasnotseenanupgradesinceitsconstruction in1985,isexpectedtobecomeaworldcclassfacilityaftertheproject.however,lessambitiousterminal buildingconstructionandrunwayexpansioneffortsbythesameairportoperatoratsupadioairportin Pontianak,WestKalimantanhavebynowrunintoits4thyear. 26 InthePhilippines,sunsetlimitationsareaprevalentairportinfrastructuralproblem. 27 Eightprincipaland community class airports are slated for upgrade of the lighting, power supply, meteorological and communications systems, but because of significant changes in the project, 6 of these have been suspendedasofmay2013. 28 29 Theupgradeofcommunicationsystemsinthe8airportswillamountto P159.6 million (USD 3.8 million), the meteorological systems in 4 airports will be P16 million (USD 380,000),andthepowersupplysystemsin5airportswillbeP258.9million(USD6.2million). 30 24 CAPACentreforAviation(2013,April2).AirAsiaPhilippinesandZestAiroutlookimprovesfollowingtiecup,butchallengesremain.Retrieved June24,2013fromhttp://centreforaviation.com/analysis/airasiacphilippinescandczestcaircoutlookcimprovescfollowingctiecupcbutcchallengesc remainc103143. 25 Nazeer,Z.(2012,July23).Jakartaairporttoexpectfirstmajorupgradeinover25years.TheJakartaGlobe.RetrievedJune24,2013from http://www.thejakartaglobe.com/archive/jakartacairportctocexpectcfirstcmajorcupgradecincoverc25cyears. 26 Nugroho,O.R.(2013,January3).AngkasaPuraIIsegeraperluasbandaraSupadio.KontanOnline.RetrievedJune24,2013from http://industri.kontan.co.id/news/angkasacpuraciicsegeracperluascbandaracsupadio. 27 Sunsetlimitationsarepertinenttoairportswhoseoperationsonlyallowdayflightsduetotheabsenceofairfieldlightingandaninstrument landingsystem;landingattheseairportsrequiresavisualapproach. 28 Domesticairports,airportsthatonlyservedomesticdestinations,inthePhilippinesareclassifiedaseitherprincipalorcommunity.Principal class1canservejetaircraftwithacapacityofatleast100seats,principalclass2canservepropelleraircraftwithacapacityofatleast19seats, andcommunityareusedprimarilyfornonccommercialaviation.(listofairportsinthephilippines(n.d.).retrievedjune24,2013fromthewiki: http://en.wikipedia.org/wiki/list_of_airports_in_the_philippinescreferenced,valencia,l.b.(2008,march21).dotcreclassifiesrp sairports. PositiveNewsMedia.RetrievedJune29,2008from http://www.positivenewsmedia.net/am2/publish/main_news_1/dotc_reclassifies_rp_s_airports.shtml. 29 ManilaBulletin(2013,May24).Airportsupgradesuffermoredelays.RetrievedJune24,2013fromhttp://ph.news.yahoo.com/airportsc upgradecsuffercmorecdelaysc212833101.html. 30 Ibid. 6
Lumbia Airport in Cagayan de Oro, a city in the southern province of Misamis Oriental, Mindanao famous in tourism for its whitewater rafting and kayaking adventures, was previously among such principalairportsfacedwithweakinfrastructureandsunsetlimitationsuntilitwasclosedpermanently onjune14,2013.anewinternationalairportnamedlaguindinganwasconstructedseveralkilometers away in its wake, which began operation the day Lumbia s closure after despite its incomplete construction(itcurrentlyhasnonavigationalequipment),whichisexpectedtocontinueuntilmay2014. ThisnewairportcomeswithaheftyP7.8billion(USD185.7million)pricetag,barelyaseventhofthe costofupgradingjakarta scengkareng. 31 Timeandinvestmentsremainthemostsignificantconcernsin thescrambletoimproveairtravelinfrastructure. Finally,thePhilippinesandIndonesiafaceonelastcommonproblem:thedowngradeofsafetyrating from Category 1 to Category 2 by the US Federal Aviation Administration (FAA) in 2007, and the subsequent European Union blacklist of the airlines of these countries. This took place after the FAA determinedthatthecountries regulatoryauthorities,thedirectorategeneralofcivilaviation(dgca) ofindonesiaandthecivilaviationauthorityofthephilippines(caap),arenotoverseeingthesafetyof itsairlinesinaccordancewithinternationalstandardssetbytheinternationalcivilaviationorganization (ICAO). 32 This affects PAL far more gravely than it does Garuda, however. Garuda has not operated directflightstotheussince1998andhaddroppeditsunprofitableroutestoeuropejustbeforeitwas blacklisted.palontheotherhandhasbeenrestrictedfromusingitsnewer,moreefficientboeing777c 300ERsonitscurrentUSroutes,andfromexpandingitsservicetotheothermainlandUSlocations,such asnewyorkandchicago,andeuropelocationssuchaslondon. Exhibit4showsasystemsloopdiagramthatdescribestheinteractionsthatfiltertheeffectsofOpen Skies down to the firm level, and how some of the different obstacles described fit into the overall picture. STRATEGICOPTIONS ThefirststepindeterminingwhatstrategicoptionsareavailabletoPALandGarudaasnationalcarriers incapturingvaluefromtheopportunitiesofferedbyopenskieswouldbetoconductaswotanalysis. Naturally,dependingontheperspective,OpenSkiesitselfcanbeperceivedasbothanopportunityand athreat,andthelogicbehindthishasalreadybeenexpoundedoninthediscussionpresentedearlier. Instead, the external analysis for this SWOT will be comprised of global opportunities and threats generated from the International Institute for Management Development (IMD) Competitiveness Roadmap 2012c2050 (Garelli, 2012) as made relevant to the aviation industries of Indonesia and the Philippines.Thiswillbematchedwithaninternalanalysisthattakesanindustryperspective(insteadof theusualfirmperspective)toreflectthecurrentreadinessofthetwonationstodealwithopenskies. The strategic options that arise from this analysis will then be adopted into strategies that can be pursuedatthefirmlevelusingthevaluenetmodelandcoopetitionframeworkofbrandenburgerand Nalebuff (1995). PALandthePhilippineswillbeusedastheprimarybasisforthismodel,andwhere applicable,adistinctionwillbemadeforgarudaandindonesia.otherwiseitwillbeassumedthatthe analysiscanbeappliedforbothsituationsbasedonsimilarities. 31 Gallardo,F.(2013,June14).GoodbyeLumbiaAirport,helloLaguindingan.MindaNews.RetrievedJune24,2013from http://www.mindanews.com/topcstories/2013/06/14/anceracofcaviationchistorycendscwithcclosurecofclumbiacairportcacnewceracbeginscwithc openingcofclaguindingancairport. 32 ACategory2ratingmeansthatairlinesareprohibitedfromexpandingtheirUSnetworks,mountingmoreflights,orevenchangingthe currentaircraftapprovedforflightstotheus.theyare,however,permittedtocontinuetheircurrentoperationsunderheightened surveillance.undertheeublacklist,theairlinesareprohibitedfromoperations. 7
Opportunitiesfortheregion saviationindustrybeginwiththespurringeconomicgrowthforsouthern economiesastheybecomemoreinfluentialininternationalinstitutions.thisimpliesthatamoreunited ASEANmayallowitsmembernationstocurbcompetitiveimbalance,suchasthatdescribedearlierin relation to China, through 7th freedom access as a single aviation market. Economies will see the emergenceofanewmiddleclassandtheregressionofabsolutepoverty,whichmayresultinagrowing demographicofcustomerswhohaveneverflownbefore.aslaborcostdifferencesshrink,anincreasein purchasingpowerparitywouldmeanhigherwillingnesstotravel.economieswillalsoseeashiftback from services to recindustrialization, and while airlines are largely a service industry, they depend on important underlying infrastructures such as airports and transport networks, as the ManilacClark conundrum has shown. Finally, with the disappearance of trade and investment barriers worldwide, remotenessbecomesirrelevant,givingaseannationsachancetocapitalizeonthisasasingleaviation market. Threatstotheregion saviationindustryareapparentinthepotentiallowerdiscretionaryspendingby citizensofdevelopednationsexternaltoasean,causedbydesynchronizedeconomicrecovery,massive unemployment in OECD nations, and increasing personal taxes as governments struggle to rebalance budget deficits. Because of this, different market behaviors will be observed because of essential differences between the wants of industrialized economies and the needs of emerging economies, meaningthemarketingeffortsoftheaviationindustryanditsfirmsmustbemoretargeted.oilprices, thesinglegreatestoperationalexpenseofanairline,areexpectedtoriseaboveusd100,andwithitthe emphasisontheneedfornewenvironmentalstrategies.increasingurbanizationisexpectedtocontinue toworsenthecongestionproblemsbeingexperiencedtoday. Finally,withtheincreaseinintegration andconnectivityinadditiontotheincreaseinurbanpopulationdensity,theriskofpandemicswould occurmorefrequentlyandperhapswithgreater,morewidespreadimplications. The previous section already undertook a discussion on most of the strengths and weaknesses the archipelagicnations aviationindustries.forallintentsandpurposes,itwillbeassumedthatthereexists a serious intent in the move towards Open Skies in both the public and private sectors given that reciprocal and fair agreements are reached, as exemplified by the commitment of the national governments towards the AEC 2015, and the concrete actions of the private sector and statecowned enterprisestowardspreparingforliberalization.inaddition,thestrongdomesticnetwork,worldcclass aircraftmaintenanceserviceproviders(suchaslufthansatechnikphilippinesandgarudamaintenance Facility Indonesia), and increased government and private revenues serve to strengthen the aviation industry. On the other hand, weak infrastructure for the primary gateway and secondary/provincial airports,agingfleetsandinefficientflagcarrierairlines,theslowspeedofrequiredgovernmentaction, andtheusfaacategory2andeublacklistserveasthemajorweaknesses. CombiningtheseSWOTelementsgivesthefollowingstrategicoptionsfortheaviationindustriesinthe PhilippinesandIndonesia.Thesestrategiescanbroadlybeclassifiedintothreelevels:regional,national, andfirm. Regionallevelstrategicoptions: Higher level of industryclevel integration/representation within ASEAN in order to push the region s interests, which is necessary to prevent competitive imbalance in extracasean agreements. ASEANclevel and nationalclevel forums to advance industry best practices, with tighter coordination than currently seen in the existing Association of AsiacPacific Airlines, involving 8
other stakeholders, not just airline operators, with working groups at different functional categories such as engineering management, quality management, safety management, and materialsmanagement. BoostandpromoteintracASEANairtravelandtourism. Internationalawarenesscampaignsasaregioninordertodrawtouristsandtraveltoamore pricecompetitiveregionwithastrongnaturalandculturalheritage. Nationallevelstrategicoptions: Seek better management for handling of air travel related government functions, especially thoseincaapanddgca. Publiccprivatepartnerships(PPPs)toovercomenationalhurdlesincomplyingwithinternational regulatorysafetyrequirementsandstandards. CollaborativeinvestmentsamongairlinesandPPPsforairportinfrastructure. Topclevel(headofstate)directiveandresponsibilitytoprioritizedevelopmentandupgradeof airport facilities, equipment and regulatory oversight, including the development of supplementary facilities within the capital or its vicinity, complementary travel infrastructure suchasroadsandrailways,anddomesticoutstations. Possibleprivatizationofairportownershipandoperations. Firmlevelstrategicoptions: Investmentatthefirmlevelforcompaniestoadoptanenvironmentalstrategyandattractthe relevanttalentamidstincreasingcarbonemissionsfromairtravel. Firm level strategic planning, investments and implementation for more progressive and competitiveoperations. Exhibit 5 shows a summary of the SWOT analysis, including the SWOT codes used to generate the strategicoptions. COOPETITIONINOPENSKIES Inordertotranslatethisintoimplementablestrategiesforthefirm,itwouldfirstbenecessarytodraw upthevaluenetbasedonbrandenburgerandnalebuff smodelfromtheperspectiveofthenational airlines,whichisshowninexhibit6.thisshowspalorgarudaatthecenterasthecompanyinquestion. SubstitutorswereprimarilyidentifiedtobedomesticLCCs,foreignFSCs,andinthecaseofIndonesia, other domestic FSCs. Foreign LCCs were not included here as they are primarily the competition of domesticlccs.also,shipandferrytransportswereexcludedbecausetheyarelesseffectiveinbeingthe backbone of resource, people and industry connectivity in an archipelagic nation due to time considerations. 33 Customers were taken to be passengers in general, although more specifically, this wouldpertaintotourists,businesstravelersandreturningresidents.complementorswereidentifiedto bethetourismindustry,whichprimarilystandstogainfromopenskies,airportcustoms,immigrations andquarantine,androadandrailinfrastructure,allofwhichareintendedtoservethesamecustomer baseasthatoftheairlinesandtheircompetitors.supplierswouldprimarilybecomprisedoffuel,airport and maintenance services, regulatory authorities (CAAP and DGCA) that grant operating permits and airportauthorities(e.g.,manilainternationalairportauthorityandangkasapuraii)thatgrantlanding rights. 33 USEmbassyJakartaEconomicSection(2012)Theaviationsector:OpportunitiesinIndonesia. 9
WithanunderstandingoftheunderlyingcontextwithinwhichOpenSkiesoperates,byidentifyingthe playersandtheirrelationshipsitisnowpossibletoidentifyhowthegamecanbechangedbypaland/or GarudainordertocapturevalueasASEANgearstowardsOpenSkiesandtheAEC2015.Coopetition entails that in order to change the game, it is necessary to look for wincwin or cooperation opportunities,instanceswhereineventhecompetitionmaybenefit,withtheintentofmaximizingthe valueofthe(aviation)marketbeforemovingintoawinclosestrategyofcompetition.inotherwords,itis necessarytofirstincreasethesizeofthepiebeforedecidinghowtodivideitupandshareit.thiscanbe done by changing any or all of the following: the players (including oneself), their added values, the rules,one sowntactics,and/orthescope(parts). Indeed,upgradingoneselfwouldseemtobethesimplestwaytoremaincompetitive.Garudaplansto order24newaircraftthisyear,includingfourboeing777c300ersandthreeairbusa330s,andgaruda s LCC,Citilink,planstoprocureanadditional16planes. 34 In2012,PALordered54aircraftwithalistprice ofusd7billioncomprisedof10a330sand44a321s. 35 Butbecausethechangingenvironmentwithin whichthesefirmscompetehasbecomemuchmorecomplexduetoopenskies,itwouldnotbeasound strategyforthemtosimplyleaveitatthat.followingontothestrategicoptionsgeneratedbytheswot earlier,thefollowingrecommendationsfollowfourdistinctbutintegratedlinesofstrategythatcantake placeatthefirmlevelbyconsideringthedifferentpartsofthevaluenet: 1) Initiation of an ASEAN working group to at least initially include the primary and secondary aviationstates, 2) Closer ties between government and airline to overcome issues on the government and regulatorysidesuchasefficiencyandtechnicaldeficiencies, 3) Establishanassociationofhorizontalplayerstoincludesubstitutors andcomplementorswith theintentofworkingtogethertowardscommongoals,and 4) Focusonaspectsofcompetitiveadvantagesuchasroutespecialization,productdifferentiation, etc. Exhibit 7 summarizes how each of these strategies fit in with the industry SWOTcgenerated strategic options,andhowitisrelatedtothegame sparts.thesubsequentanalysiselaboratesmoreonthese linkages. ASEANWorkingGroup ThisstrategyfollowsthelogicthatbygettingthesecondaryaviationstatesofVIP+Buptotheprimary statusofsingapore,thailandandmalaysia,theregionasawholewillbeinamuchbetterpositionfor integration and extracasean representation. Seven primary aviation states will also be in a better positiontoquickenthedevelopmentofcambodia,laosandmyanmar saviationindustries,ratherthan three.ofinteresttopalandgarudainpursuingtheseinitiatives,whetherthisbedoneinthecontextof higher regionalclevel stakeholder integration or not, would be the degree to which holdup costs and transactioncostscanpossiblyreduced.forexample,asmultilateralliberalizationisbeingpursuedwith Japan,KoreaandtheUS,andASEANisrepresentedasasingleaviationmarket,thetransactioncostsof these negotiations can be reduced since they are distributed over a wider range of players (ASEAN nations). As a stronger, unified bloc, the likelihood that, or frequency with which, partner countries would attempt to renegotiate such agreements in their favor would also go down, reducing holdup costs.itwouldalsobeeasierforairpanelnegotiationbodiesinasingleaviationmarkettopushformost 34 Tetiro,A.&Nuky,E.(2013,April29).Garudaseeks$400milliontobeefupfleetofaircraft.TheJakartaGlobe.RetrievedJune24,2013from http://www.thejakartaglobe.com/business/garudacseeksc400cmillionctocbeefcupcfleetcofcaircraft. 35 AFP(2012,August28).PALorders54Airbusaircraftworth$7B.TheInquirer.RetrievedJune24,2013from http://business.inquirer.net/79048/palcordersc54cairbuscaircraftcworthc7cbillion. 10
favored nation status with these extracasean partner nations, possibly granting more favorable conditionsforlandingrightsforthesecondaryaviationstates.inthiscase,theplayersinvolvedarethe firm,theirsubstitutorsandsuppliers,includinggovernment,inordertochangetherulesandscopeof thegame. Also,investigationsintoIndonesiansafetystandardsthatledtotheeventualEUblacklistwereinitiated afterastringoffatalaccidents,includingamandalaairlinescrashinseptember2005,whichkilled149, anadamaircrashinjanuary2007,whichkilled102,andagarudacrashinmarch2007,whichkilled21. 36 AnASEANworkinggroupwillallowairlinestocooperatetermsoftherequirementsofsafety,quality andreliabilityastheylearnfromthebestpracticesoftheprimaryaviationstates,andthencompeteon thebasisofotherfactorssuchasservicedifferentiation,routes,schedules,productofferingsandprice. Thisisanothercaseofcooperatingbeforecompetingbytappingintotheknowledgeandexpertiseof competitors,andusingamakecorcbuylogic,allowingotherplayersto buy (ormoreaccurately,adopt) thiscompetencyinsteadofhavingto make (ordevelop)itbythemselves.thisreduceslearningcurve associatedcosts,inwhatcanbeconsideredanotherwaytochangethescope.toillustrate,whywould PALwanttocooperatewithCebuPacificinmeetingsafetyandqualitystandards?InJune2013,inthe spanofonly2weeks,cebupacificwasinvolvedin2noncfatalaccidentsinvolving260passengerson domesticflights.canpalnotleveragesuchnegativepublicityinordertostealmarketsharefromcebu Pacific?Actually,suchaccidentstarnishthesafetyreputationofPhilippinecarriersasawholeamongair passengersandputintoquestiontheabilityofcaaptooverseethesafeoperationsofitsaircarriers. GiventheexposureofPALtointernationaltrafficandhowitsprofitabilityisaffectedbytheFAAsafety downgradeandeublacklist,itisinpal sinterestthatcebupacific soperationsremainsafe.garudawas fortunateenoughtohavevoluntarilycutitsflightstoeuropebeforetheblacklist,butitwouldhavebeen facedwithasimilarsituationaspalhaditmaintaineditseuropeanroutes. Anotherreductioninlearningcurveassociatedcoststhatcanbeattributedtotheestablishmentofa working group can be realized as the airlines of member nations seek to examine and adopt environmentalstrategiesandevaluatetheimplicationsontheindustryandtheiroperations.sincethis approachwouldbenewtoalltheairlines,aworkinggroupwillallowthemtoattaineconomiesofscale inresearchrelatedcosts. CloserTiesBetweenGovernmentandAirline InordertoreapthemuchoftheextracASEANbenefitsofOpenSkiesintheformofincreasedairtravel fromindustrializednations,itisofutmostimportanceovercometheblacklistandratingdowngradein ordertoimproveattractivenesstotravel,expandinternationalnetworks,etc.thisiscloselyrelatedto the problems plaguing CAAP and DGCA in terms of weak institutions, inefficient management, and deficienciesintechnicalexpertise,trainedpersonnel,recordkeepingandinspectionprocedures. 37 There isnosuchshortageoftalentwithinthecountriesthemselvesorwithinpalandgaruda.garudaisoneof the four Indonesian carriers exempted from the EU blacklist, while PAL has been in compliance with International Air Transport Association (IATA) Operational Safety Audit (IOSA) since 2006, the only carrierinthephilippinestodoso.itisapparentthenthatthereisdifficultyinthegovernmenttoattract such talent, perhaps because wages in the public sector are much lower than in the private sector, particularlyinthecaseofthephilippines(becausegarudaisstatecowned). 36 Sukarsono,A.(2009,July15).GarudaIndonesiamayflytoEuropeafterEUliftsban(update2).Bloomberg.RetrievedJune24,2013from http://www.bloomberg.com/apps/news?pid=newsarchive&sid=an_h2fxipixq. 37 FAAReleaseNo.AOC12c07(2007)Pressrelease FAAlowerssafetyratingforIndonesia. 11
Onepossiblestrategyisthatretireeswhowereoncekeypersonnelintheairlinescanbemovedintokey governmentpositionsinordertofullyutilizetheiravailableexperienceandexpertise.itisalsopossible forpalandgarudatoworkcloselywiththeirrespectiveregulatoryauthoritiesinordertoovercome theirmanagerialandtechnicaldeficiencies.thisshouldbemucheasierinthecaseofgarudaasastatec ownedenterprise.inthecaseofpal,theyhaveexpressedeveryintenttoworkcloselywithcaapin ordertoprofessionalizeitsrankssincetheonsetoftheblacklistin2010,andhavebeendoingsoever since. This seems to have yielded positive results. On March 2013, the ICAO has determined that Philippineregulatoryauthoritiesarenowincompliancewithitssafetystandards,whichshouldleadto thephilippinesbeingremovedfromtheeublacklistandthefaaupgradingitsratingtocategory1by theendoftheyear. 38 Bycooperatingwiththegovernment,PALhasstrengthenedthepowerofitsown supplier. However, in doing so, PAL has also demonstrated its willingness for transparency and it serves to gain from the markets that open up once the bans are lifted. In this manner, agency costs associatedwithgovernmentinefficienciescanbeovercomeaswell,andpalraiseditsownvaluewith respecttothegovernmentasanimportantresourcefortechnicalandmanagerialcompetencies.with theicaodetermination,palisalsonowinabetterpositiontocapturethevalueforitself;becauseofits improved prospects, PAL is eyeing the acquisition of 10c20 more Boeing 777X aircraft. 39 Garuda as a statecowned enterprise has not pursued actions in this regard with DGCA, perhaps because it is exemptedfromtheeublacklist,andhasnoplansofreturningtotheusmainlandintheforeseeable future. AssociationofHorizontalPlayersTowardsCommonGoals It is apparent that each of the players located horizontally along the value net are playing their own games, not recognizing that synergies can be realized through greater cooperation. For example, no linkages exist between the airline and tourism industries that would allow them to lobby common concerns, such as the lack of developmental efforts for air transport infrastructure, in a public and formalforum.inthisscenario,asanassociation,shouldtheplayerswishtotakeactionthemselves,they willnowhavemorecollectiveresourcesattheirdisposalinordertocreateacommonpooloffundsthat canbeusedforinvestmentinkeyinfrastructures.toputthisintoperspective,the8philippinedomestic airports slated for upgrade as mentioned earlier require an investment of USD 10.4 million. In 2012, CebuPacificalonepostedanetincomeofP3.75billion(~USD85million). 40 Suchanarrangementwould workbygrantingareprieveonlandingfeesofparticipatingairlines,forexample,andtheairportscould maintainoperatingrevenuesfromterminalfeesowingtoincreasedpassengerflowsinsteadoflanding fees. An upgrade of the 8 domestic airports would help ease the congestion problem at NAIA by allowing more domestic flights to be redistributed to offcpeak hours as the airports would no longer havesunsetlimitations. Morecollectivepowerwillalsostrengthenthecasefordevelopment,andplayerssuchashighwayand raildevelopersandpublictransportcompaniesariseascomplementors,whichwouldbenecessaryto makeclarkappealingasanalternativegateway,forexample.asanassociation,thehorizontalplayers wouldbeinabetterpositiontoexertthenecessarypressureonthegovernmenttoactwithasenseof 38 CAPACentreforAviation(2013,April4).PhilippineAirlinesbanksrecoveryoninternationalexpansionbutfacesuphillbattle. RetrievedJune24,2013fromhttp://centreforaviation.com/analysis/philippinecairlinescbankscrecoveryconcinternationalc expansioncbutcfacescuphillcbattlec103604. 39 Rappler.com(2013,March25).PALeyes20newBoeingplanes.RetrievedJune24,2013from http://www.rappler.com/business/industries/171caviationctourism/24729cpalceyesc20cnewcboeingcplanes. 40 CebuAirInc.(2012)2012Resultsofoperations[Presentationslides]. 12
urgency.inthecaseofthecongestionproblemsatnaia,anotherpossiblesolutioncanbeprivatization, whereininfrastructurewouldbeupgradedbycapitalinfusionandairportemployeeswouldbenefitfrom higher pay, better working conditions, and higher motivation, thereby increasing efficiency in airport operations. However, it would be impossible for any single player to push such an agenda by themselves.anassociationofhorizontalplayerswillgivethestakeholdersthevoicethattheyneedin ordertobeheardbythegovernment,possiblyallthewaytotheheadofstatelevel.inthiscase,the gamechangesinscopebylinkingtogetherrelatedgames. FocusonAspectsofCompetitiveAdvantage Thefinalstrategywouldbeforthefirmstofocusonaspectsofcompetitiveadvantage.Thismaysound liketheobviousthingtodo,butitisnotsoapparentinanindustrywhereproductdifferentiatorsand cost leaders attempt to compete head on, whether through predatory pricing or price wars. The hypothesispresentedearlierproposesthatfscsandlccsarereallycompetingindifferentmarkets,and should therefore focus their efforts in satisfying and growing their respective market segments. One cannot expect to capture value by being all things to all people. Sometimes, in order to do this, it requires changing oneself to change the game, and that is exactly the case of PAL and its LCC sister companyairphilexpress. The PAL group has historically used AirPhil to compete with Cebu Pacific since its rebranding from regionalfscairphilippinesin2010.onoctober2012,palandairphilstoppedoperatingsidecbycsideon practically all domestic routes, with PAL maintaining the trunk routes and with AirPhil taking up the smallermarketsfrompal. 41 InMarch2013,AirPhilwasrecbrandedasPALExpress,signifyingitsreturn asaregionalfsc.thistookplacefollowingrecommendationsofanoutsideconsultancythatairphilwas cannibalizing PAL instead of competing with Cebu Pacific. The CAPA (not to be confused with CAAP) CentreforAviationanalysisbelievesthatthegroup slongtermprofitabilitywillslipasaresultofceding itsdomesticshareandrapidmarketgrowth. 42 However,inordertofullyappreciatethisstrategy,itisnecessarytolookatitfromtheperspectiveof coopetition.todootherwisewouldbetopaintanincompletepicture.capaacknowledgesthatpaland AirPhil sdomesticoperationshavebeenintheredforsometimenow,andthisincludesalldomestic routesoperatedbypal.whatcapa sanalysismayfailtorealizeisthatbypullingoutofthelccmarket, itissignalingtocebupacificthatitislessinterestedinengagingincostlypricewars.bysimultaneously weakeningitsfootholdonthedomesticmarket,itisinfluencingtheperceptionofthemarketandof CebuPacificthatFSCsaremorevaluablethelongertheflightsbecome.Onelikelyscenariotohappenis thatcebupacificwilldevotemoreresourcestothedomesticmarketasitmovesintopickupthevalue thatwasdroppedbypal.sincecompetitionisnolongerasintensedomestically,thereislessofaneed tokeeptheirpricestoolow.meanwhile,aspalstrengthensitsinternationalandregionalposition,itcan devoteitspreciousresourcestocompetingagainstforeigncarrierswhichhold55%shareinthismarket, avoidinginfluencecostsfromneedlesscompetitionagainstcebupacificandfromthepoorutilizationof landingrightsatnaia.inrealityitisintheinternationalmarketwherethevalueforpalistobemade, holding 25% of the market against Cebu Pacific s 16%. 43 By changing themselves, PAL is now better positionedtoachieveeconomiesofscaleinmarketingeffortsaswell(asaunifiedbrand),andbetter 41 CAPACentreforAviation(2013,April3).PhilippineAirlinesgroupfaceschallengingfutureafterexitingbudgetcarriersector.RetrievedJune 24,2013fromhttp://centreforaviation.com/analysis/philippinecairlinescgroupcfacescchallengingcfuturecaftercexitingcbudgetccarriercsectorc 103430. 42 Ibid. 43 CebuAirInc.(2012)2012Resultsofoperations[Presentationslides]. 13
loadfactorsalongprofitableroutes.thismutuallyassureddominancewillalsoserveasadeterrentto newentrants,whichiswhatairlinesgenerallywanttoavoidinanopenskiesenvironment. BUSINESSSYSTEMSINOPENSKIES OnethingthatcanbenoticedfromthesestrategiesisthatthelinkbetweenGarudaandPALisnotvery evident.sofar,theyseemtobelimitedtothefirms interactionswiththeirrespectivenationalplayers. Tobringthisuptoalevelwhereinthesestrategiestranslateintoaregionalperspectivesuchthatthe opportunitiesandhindrancestoacooperativerelationshipbetweenthetwoplayerscanbeevaluated andconcretized,thebusinesssystemswithinwhichthesefirmsoperatewillbeexamined.forthis purpose,themodifiedreddingframeworkforunderstandingaseanbusinesssystemswillbeemployed (seeexhibit8). FormsofOwnership ThisbeginswithidentifyingperhapsthemostimportantdifferencebetweenGarudaandPAL:the formerisastatecownedenterprisewhilethelatterispartofafamilycownedconglomerate.thisis consistentwithhowtheenterprisesystemischaracterizedinasean,whereafterliberalizationfrom theirrespectivecolonizers(thedutchforindonesia,thespanishandamericansforthephilippines),the statehadretainedtheroleofcapitalist,ownerandcontrollerofcertainkeyindustries. 44 Indeed,PAL wentthroughacoupleofcyclesofnationalizationandprivatization,afterworldwarii,withthefinal privatizationtakingplacein1992byluciotan smajoritypurchase(althoughhedidnotbecome ChairmanandCEOuntil1995).AlthoughmanagementcontrolhassincebeencededtoFilipino businessmanramonangin2012,oncemore,thiswaslargelyconsistentwithhowtheregion s enterprisesystemsarecharacterized,whereintheprivatesectorisdominatedbyfamilycownedor familycmanagedcorporationsledbyeliteethnicchinesetycoons. 45 46 Thisisthestartingpointofanexaminationofhowthebusinesssystemshavecontributedtochallenges facingtheindustrynowasitmovestowardseconomicintegration.theeconomicstrengthwieldedby ethnicchinesebusinessmenandthestrongpoliticaltiesinherenttoansoeresultinadegreeof bargainingpowerwiththenationalgovernments,whichinthiscasehassuccessfullystalledthefull adoptionofopenskiesinthetwocountries.thisisespeciallyevidentinthecaseofgaruda,which unabashedlypublicizesthepressureitexertsonthegovernmenttoprotecttheindonesianmarketforas longaspossible.anycooperativeactivitiesbetweenpalandgarudamustthereforetakeintoaccount thattheinteractionwillbebetweenaprivateandstatecownedentity. Ultimately,thisoverlapswiththecoordinationlayerofabusinesssystembydescribingthefirms forms ofownership.othercommonformsofownershipthatdominateasean,namelymncsandsmes,are typicallynotapplicabletoairlineoperators.mncsusuallytaketheformofthirdpartyserviceproviders suchaslufthansatechnikinaircraftmaintenance,althoughmncairlinessuchasairasia,whichhas affiliatesinbothindonesiaandthephilippines,alsoexist.thepresenceofsmesisdiscouragedbythe largecapitalinvestmentsandoperatingfixedcostsinvolvedinoperatinganairline. 44 Briones,D.T.(2013).SoutheastAsia.AsianInstituteofManagement. 45 Ibid. 46 Redding,G.(2009).Asianbusiness&management:Theory,practice,andperspectives,Chap.1.ThebusinesssystemsofAsia.NewYork: PalgraveMacmillan. 14
Coordination:NetworksandManagement Theothertwoaspectsofcoordination,networksandmanagement,whichpertaintorelationships betweenfirmsandmanagingthecooperationneededtoefficientlybringresourcestogether respectively,willserveastheconvergencepointforthecoopetitionopportunitiesthatcantakeplace betweenpalandgaruda.themodifiedreddingframeworkpresentedintheexhibit8showsthat coordinationisdirectlyinfluencedbybothformsoforderandculture,whichwillbethenextstepin analyzingthebusinesssystemsinindonesiaandthephilippinesinthecontextofthechallengesof adoptingopenskies,beforegoingbacktocompletethecoordinationframework. FormsofOrder Itmustberecognizedthatbeyondtheseveralcommoncharacteristicssharedbythetwocountriesas secondaryaviationstates,previouslyidentifiedastheirarchipelagicanddispersedgeography,weak airportinfrastructure,andlesscompetitivenationalairlines,theyshareformsoforderthathave likewiseshapedtheirsocioceconomicsystemsinasimilarmanner.asalludedtoearlier,thisincludesthe factthatbothwerecolonizedandcontinuetobearthoseinfluencesintheirpresentinstitutions,but morethanthat,bothhavestruggledwithdevelopmentoverthepast50years. 47 HugepopulationshavestuntedGDPpercapita,owingtothereligiousinfluencesofCatholicismand Islam,whichprohibittheuseofartificialbirthcontrol.Administrationsdidnotensuretheefficientuse offinancialresourcesintermsofpolicyandplanning,andersatzcapitalismprevailed,supportedbythe availabilityofeasymoneyfromadventurouswesterninvestors. 48 Whenmassivecapitalflightensuedat thefirstsignoftrouble,itultimatelyledtotheasianfinancialcrisisof1997,whichseverelyaffected bothgarudaandpal.forgaruda,thismeantseverecutbacksandrouterationalizationactivities.for PAL,thismeantmassivelaycoffsanduniondisputesthatculminatedinalaborstrikethathalted operationsfor14days.itwouldtakemorethanadecadebeforebothairlineswouldrecover,andthis explainsmuchofwhytheflagcarriershavelongbeentoutedasinefficient.recallthatitisthisvery inefficiencythathascompelledthefirmstotakeadvantageofprotectionistmeasuresforthelongest time(althoughthisismuchmoreimplicitforpalthanitisforgaruda). Finally,bothcountriesarenotablyinfamousforunusuallyhighlevelsofcorruption,whichserveto furthererodealreadyweakinstitutions. 49 Infact,corruptioncanbetracedastheprimarycauseasto whyindonesiaandthephilippinesareconsideredsecondaryaviationstatesinthewakeofthelackof airportinfrastructure,lackofsupplementaryfacilitiesandsupportinginfrastructure,andthedowngrade ofsafetyratingsoftheaviationauthorities.withregardtothelatter,misuseoffundshindersthe authoritiesfromofferingcompetitivesalariestoskilledworkersthataboundinthecountryor comprehensivetrainingprogramstonewhires,consequentlyaffectingtheirabilitytoeffectively performtheirdutiesofregulationandoversight(providingtherationaleforthesecondcoopetition strategypresentedearlier). AlthoughASEANnationshaveenteredaperiodofreformsincethe1997AsianFinancialCrisis,which includeseffortstoreducecorruption,indonesiaandthephilippinesneedtostrengthentheantic corruptioninstitutionswhicharecurrentlymiredinuncertainty.althoughtheoutlookinindonesiahas seenimprovementsincethefallofsuhartoin1998andtheestablishmentoftheanticcorruption 47 Ibid. 48 Ibid. 49 Ibid. 15
Commissionin2003,lackofconfidenceinthecourtsystemcontinuestoprevail. 50 Asimilartalecanbe toldinthephilippines,wheredespitetheconvictionofformerpresidentjosephestradaofplunderin 2007andtheimpeachmenttrialofChiefJusticeRenatoCoronaoftheSupremeCourtin2012,the countryisstillinneedofamoreefficientjudiciarynotsubjecttopoliticalinterference,andupholds transparentenforcementofthelawthatcaninstitutionalizethereformsforgoodgovernancebeing pushedbypresidentbenignoaquinoiii. 51 Itmustbenoted,however,thatbecausetheroleoftheseinstitutionsistoestablishorder,thatis,a modeofconductthatbecomespredictable,corruptioninthesetwocountrieshassomehowreached thepointwherethecorruptionofthepasthasbeenperceivedbysometobemorestablethanthe uncertaintybroughtaboutbysuchatentativetransitiontogoodgovernance.forexample,inthewords ofawesternexecutivebackin2007, InSuharto sday,everybodyknewtherulesaboutpayoffsand kickbacks.the[currentsituation]makesforuncertainty,andbusinessesdon tlikeuncertainty. 52 It sa classiccaseof betterthedevilyouknowthanthedevilyoudon t, however,thesearebetterseenas laborpainsinthelengthyandpainfuljourneytostrengtheningtheinstitutions. Culture Becausechangesarenotexpectedtotakeplaceovernight,thisleadstotheimportantinsightthatifthe weaknessesofcountries aviationindustriesarecausedbytheweakinstitutions,andifthecoopetition strategiesdevelopedweremeansbywhichthefirmcanovercometheseindustryweaknesses,the modifiedreddingframeworkproposesthatunderstandingtheculturalsimilaritiesbetweenindonesia andthephilippineswillbethekeytounlockinghowcoopetitionopportunitiescanmaterializebetween thetwofirms.forthepurposeofexaminingtheseculturesinthecontextofthebusinesssystems,geert Hofstede sculturaldimensionsanalysisforthetwocountrieswillbeemployed.thehopeistoestablish thatanalliancebetweenpalandgarudawouldbecharacterizedasalowdiversityhybrid,thatis,one withhighuniversalityormanycommonalities,therebyloweringtheobstaclestomakingasuccessful collaborationpossible.exhibit9showsthehofstede5cdindexscoresforbothcountriestogetherwith themeaningsofeachdimension. 53 WithbothcountriesscoringhighonthePDI,organizationsinbothcountriesareverydependenton hierarchicalstructures.thismeanspoweriscentralizedandsubordinatesareexpectedtodowhatthey aretold.ontheotherhand,thisalsomeansthatemployeesexpecttheirsuperiorstotellthemwhatto do.managersarerespectedfortheirpositions,butcommunicationfromthebottomupisindirectand negativefeedbackiskepthidden. 54 Thiskindoforder,however,isconducivetomentorshipdynamics. Likewise,withbothcountriesscoringlowontheIDV,bothcountriesarecollectivisticsocieties,which primarilymanifestsinfamilyrelationships,buteasilyextendsintoworkrelationships.theoverarching valueinthiskindofsocietyisloyalty,andittakesprecedenceovermostothersocietalrulesand regulations.thisfostersstrongrelationshipswhereeveryonetakesresponsibilityforfellowmembersof theirgroup. 55 InconjunctionwiththePDIscore,thisequatestoapatrimonialapproachtomanagement 50 Porter,M.&Ketels,C.(2013).Indonesia:Attractingforeigninvestment.HarvardBusinessSchool. 51 Briones,D.T.(2013).Philippines.AsianInstituteofManagement. 52 Porter,M.&Ketels,C.(2013).Indonesia:Attractingforeigninvestment.HarvardBusinessSchool. 53 TheHofstedeCentre(n.d.).Philippines,Indonesia.RetrievedNovember2,2013fromhttp://geertchofstede.com/philippines.htmland http://geertchofstede.com/indonesia.html. 54 Ibid. 55 Ibid. 16
thatseesthebosslookingafterthesubordinatesinexchangefortheirloyalty,ratherthananautocratic dictatorialstyle. 56 OntheMASindex,thePhilippinesisconsideredamasculinesociety,whileIndonesiaisconsideredlow masculine(notquitefeminine,butexhibitsthetraitsofamasculinesocietytoalesserdegree).this meansinthephilippines,moreemphasisisplacedoncompetitionandperformance,andleadersare expectedtobedecisiveandassertive.inindonesia,status,materialgainandvisiblesymbolsofsuccess areimportant,butsometimesevenjustmaintainingtheoutwardappearanceortheimageofstatus aimedatimpressingisenoughofamotivatingfactor. 57 ForalowmasculinitysocietylikeIndonesiaas well,organizationalpoliciesandprocedurestendtobemorehighcontextandrelymoreonsocial relationshipsthanwrittendescriptions. 58 TherelativelybalancedscoreofthePhilippinesisprobablya resultofamericancolonialinfluences. BothcountrieshavealowtomediumclowpreferenceforavoidinguncertaintybasedontheirUAIscores. Thisresultsinamorerelaxedattitudeinthefaceofuncertaintyanddeviationsfromthenormaremore easilytolerated.inthesekindsofsocieties,thereisthebeliefthatthereshouldbenomorerulesthan necessary,andiftheyareambiguousorineffective,theyshouldbeabandonedorchanged,and innovationisnotseenasthreatening. 59 Thereisalsothetendencyforpeopletoputupahappyfront evenwhentheyareupset,whichequatestothepreservationofharmonyintheworkplaceconsistent withthepdicharacteristicthatnegativefeedbackiskepthidden.conflictresolutionalsotendstobe coursedthroughthirdpartintermediariesratherthandirectcommunication,whichmakesitpossibleto exchangeviewswithoutthelossoffaceinkeepingwiththeirlowidvscores.whiletheuseof intermediariesremovestheuncertaintyassociatedwithconfrontations,andismorecharacteristicofa highuaiscore,thisisconsistentwiththecollectivisticandhierarchicalaspectsoftheorganizations. Finally,thePhilippineshasbeendeterminedtobeashortctermorientedsociety,whichalsoseemstobe aresultofthewesterninfluencesprevailinginthecountry.becauseshortctermorientedsocietiesare moreconcernedwithquickvictoriesandsatisfyingimmediateneeds,itmaybedifficultforthemto appreciatethestrategicvaluebehindnoncintuitiveapproacheslikecoopetition.indonesiahasnodata ontheltodimension. STRATEGICPARTNERSHIPFORCOOPETITION Puttingthesefactorstogetherleadstotheperspectivethatmustprevailwhenattemptingtoextendthe relevanceofthecoopetitionstrategiespresentedtoapossiblestrategicpartnershipbetweenpaland Garuda.Theideaisthatbyconsideringhowitispossibletouseculturalsimilaritiestotheiradvantage, theprobabilityofsuccessofsuchastrategicallianceincreases,consideringthatthereislittlethefirms candotodirectlychangetheinstitutions,coordinationmechanisms,andenterprisesystemswithin whichtheyoperate.usingaculturalbasetouchpoint,itbecomespossibletocreateworkaroundsfor thevariousweaknessesoratleastinfluencetheaforementioneddimensionsofthesesecondary aviationstates. 56 Redding,G.(2009).Asianbusiness&management:Theory,practice,andperspectives,Chap.1.ThebusinesssystemsofAsia.NewYork: PalgraveMacmillan. 57 TheHofstedeCentre(n.d.).Philippines,Indonesia.RetrievedNovember2,2013fromhttp://geertchofstede.com/philippines.htmland http://geertchofstede.com/indonesia.html. 58 Noronha,C.(2009).Asianbusiness&management:Theory,practice,andperspectives,Chap.5.CultureandbusinessinAsia.NewYork: PalgraveMacmillan. 59 TheHofstedeCentre(n.d.).Philippines,Indonesia.RetrievedNovember2,2013fromhttp://geertchofstede.com/philippines.htmland http://geertchofstede.com/indonesia.html. 17
18 First,thissuggeststhattherelationshipmustbeinitiatedbytopmanagementofthetwocompanies, thatis,networksonlyneedtotakeplacebetweentheorganizationalleaders,whichwouldgreatly simplifythetaskofhavingansoerelatewithaprivateconglomerate.ifastrategicpartnershipcanbe establishedatthislevel,therestoftheorganizationwillbeinclinedtosupporttheprogramandmakeit succeed.second,althoughshortctermorientednessinthephilippinesmaybeconsideredahindranceto achievingthebenefitsthatcanbederivedfromthispartnership,theideaofcooperationitself, especiallyifitisinthebestinterestofthefirm,shouldbeafamiliarnotiontobothcompaniesdueto theircollectivisticnature,andcanquiteeasilyovercometheformeriftheabilityforsuchapartnership toenhancecompetitivenessbecomesapparent.lastly,itshouldbeconsideredthatmodelsof coopetitionalreadyexistamongairlinesintheindustry,primarilythroughairlinealliancesand codeshareagreements. 60 Thisservestomitigatesomeoftheuncertaintyassociatedwithengagingina coopetitionstrategy. RevisitingnowthestrategythatinvolvesestablishinganASEANworkinggroup,PALandGaruda,being someofthestakeholderswithhighestinterestinseeingaworkinggroupestablishedthatwouldhelp themreachthelevelofprimaryaviationstates,wouldbestcooperatetopushsuchanagendawithinthe region.aspreviouslymentioned,airlinesoftheprimaryaviationstateswouldbenefitfromthis arrangementthroughincreasednegotiatingpower,mostfavorednationagreements,landingrights, reducedholdupcosts,etc.,butontopofthat,palandgarudawouldfurtherincreasein competitivenessthroughsharingofbestpracticesinsafety,qualityandreliability. OfgreaterinterestarethethreeremainingstrategiesbecausetheinteractionbetweenPALandGaruda hasverydifferentimplicationsonthesefromthosepreviouslydiscussed.recallthatpalwouldliketo expanditsoperationstotheusandentertheeumarket,butisunabletodosobecauseofthecountry downgradeandblackliststatusbytherespectiveregulatoryauthorities.garuda,ontheotherhand, despitedgcahavingthesamestatusascaap,hasbeengrantedanexemptionbytheeu,butoptsnot tooperatemorethanoneroutethatisnotoncodesharingbecauseofprofitabilityconcerns.however, bothairlineswouldcertainlyliketoseetheirfleetexpansioneffortsyieldgoodreturnbyfinding profitableroutesthatwouldmaximizetheutilizationoftheirnewaircraft. Buildingontheideaofstrategicpartnershipstowardsachievingcommoneconomicgoals(thethird coopetitionstrategy),therearetwoopportunitiesthatpalandgarudacancapitalizeonhere:1)they canworkwithpartnersfromthetourismsectorsuchastravelagenciesandtouroperators(e.g.,palhas asistercompanycalledluckytravel)(acomplementor,basedonexhibit6)tocomeupwithtourism productsthatencourageandfacilitatethemovementofvisitorsbetweenthephilippinesandindonesia, and2)garudacanprovideassistancetopalinseekingexemptionfromtheeublacklist.theendresult ofbothopportunitiesistheincreaseinloadfactors,whichtranslatesintoimprovementsinprofitability. Thelogicbehindthisisapparentinthefirstopportunity,butnotsoforthesecond,andtherefore warrantsfurtherexplanation. 60 Acodeshareagreement,sometimessimplycodeshare,isanaviationbusinessarrangementwheretwoormoreairlinessharethesameflight. Aseatcanbepurchasedononeairlinebutisactuallyoperatedbyacooperatingairlineunderadifferentflightnumberorcode.Itallows greateraccesstocitiesthroughagivenairline'snetworkwithouthavingtoofferextraflights,andmakesconnectionssimplerbyallowingsingle bookingsacrossmultipleplanes.mostmajorairlinestodayhavecodesharingpartnershipswithotherairlinesandcodesharingisakeyfeature ofthemajorairlinealliances.underacodesharingagreement,theairlinethatactuallyoperatestheflight(theoneprovidingtheplane,the crewandthegroundhandlingservices)iscalledtheoperatingcarrier.thecompanyorcompaniesthatsellticketsforthatflightbutdonot actuallyoperateitarecalledmarketingcarriers.(codeshareagreement:http://en.wikipedia.org/wiki/codeshare_agreement)
Garuda sassistancetopalwouldbynomeansguaranteethatitwouldbeabletoobtaintheexemption; however,ifitissuccessfulindoingso,itwouldopenupmarketstoandfromtheeu.naturally,thenext questiontoaskwouldbe whatdoesgarudahavetogaininallthis? Nowconsiderfurtherthekindof relationshiptheairlineshavewiththeirgovernments(thesecondcoopetitionstrategy)asexhibitedby theirbargainingpower,andrecallthatopenskiestypicallyunfoldsonthebasisofbilateralagreements betweenmemberstates.palandgarudaalreadyoperateacodesharingpartnershipforthemanilac Jakartaroute,butitmaybepossibletoexpandonthisfurtherbylobbyingwiththeauthorities(a supplier,basedonexhibit6)for6th,andpossiblyeven7th,freedomrightsfortheairlineswitheach others countries. Thisiscontingentontheabilitytobuildacompellingtravelandtourismproductthatlinksboth countries;butifsuccessful,bothpalandgarudawillseemuchbetterloadfactorsontheirflights, therebymakingfulluseoftheircapacity,whicharetheairlines primarysunkcosts.ifpalisableto reachexemptionstatus,itwillbeabletodeploytheirlongcdistanceaircraftonlongchaulroutes,catering primarilytodestinationslikelondonwhichhasthelargestfilipinopopulationintheeu,whilegaruda canfocusonattractingeuropeantravelers,thehighestspendingtourismmarketintheworld,whichwill seestrongerflowsfromvisitorswantingtoexperiencebothindonesiaandthephilippinesinonetrip ratherthanindonesiaalone(thefourthcoopetitionstrategy).inthelattercase,theexistingcodesharing arrangementsbetweenpalandgarudaforthephilippinecindonesialegswouldbestrengthenedaswell. IfPALisunabletoreachexemptionstatus,thenusing7thfreedomrights,Garudawouldhavethe opportunitytofillanicheofnoncstopflightsfrommanilatoeurope avoidthatwaslefteversinceair FrancecKLMceasedtheirnoncstopflightsfromManilatoAmsterdamonMarch25,2012.AirFrancecKLM hassincerevisedtheirroutetopickuppassengersatastopoverintaipei(a5thfreedomright)before proceedingtoamsterdam.otheralternativesforpassengerswishingtoreacheuropefrommanilaare transferflightsoutofsingaporeandhongkong.ifa7thfreedompluscodesharingagreementcanbe reached,garudawillbeabletotakeonadditionallongchaulroutesusinglongcdistanceaircraft,whichis importantinthefaceofadearthofprofitableindonesiaceuroperoutescombinedwithanexpanding longcrangefleet.palwouldbenefitfromthisarrangementbybeingabletoofferconnectionstoeurope fromitsotherroutesusingitsownflightcode,therebystrengtheningtheloadfactorsandfurther incentivizinggarudatotakeupthismarket. CONCLUSION ForASEANeconomies,themovetowardsAEC2015isnotaquestionofif,butwhen.OpenSkiesserves as an integral aspect of regional integration, and is a game changer in the business of commercial aviation. PAL and Garuda have many options available to them, the most obvious of which is a fleet upgradeinordertoremaincompetitiveamidstchangingplayers,addedvalues,rules,tacticsandscope. But if the firms fail to view things from a perspective that goes beyond themselves through an understandingoftheparts,theirquesttocapturetheincreasingvalueinagrowingaviationmarket wouldultimatelyfail.byunderstandingcoopetitionandtheresultingstrategies,itbecomespossiblefor thenationalcarrierstonotjustbegametakers,butgamechangers.forwhatbetterwayistheretobe competitiveinagamethantochangethegameyourself? 19