I.

INTRODUCTION

Air cargo is typically defined as the sum of freight, packages, and mail.

It is often used

interchangeably with air freight. Figure 1 shows how air cargo is segmented, from documents or smaller parcels to heavy/outsized pieces or larger parcels:

FIGURE 1: AIR CARGO DEMAND SEGMENTATION

Source: Hoppin, D (2005). Air Cargo Industry Supply Issues. Washington DC: Merge Global.

Air Cargo refers also to the use of an air carrier as a transport vessel for shipment purposes. It is growing in popularity as the medium of choice when it comes to shipping goods that are high value, time-sensitive and perishable from one destination to another. Air Cargo can get shipment to its overseas destination within a day and it has become an integral part of the global logistics network chain. In the past, cargo used to be merely a by-product of passenger airlines and a means for transporting emergencies and critical products or medical products. In todays world, air cargo plays a more important role, as it supports trade and investment, promotes connectivity, and improves efficiency and competitiveness among several industries and nations.It enables the movement of commercial goods and freight in the international trade market. It offers a fast and relatively safe mode of transport for low volume, low weight but high value products.
1

Examples of these products are

An Entry Strategy for a Pure Freighter Company, Borlongan, 2007 1

electronics, computer components, precision equipment, medical supplies. Although trade by air is quite small in terms of volume, averaging at 2% to 3% of global trade movements, the volume and direction of air cargo business is driven primarily by economic growth and supported by opportunities created by liberal air cargo policies.2 Types of products shipped by air include: (1) high value products; (2) fast selling or hot products such as clothing, toys and electronics; (3) high obsolescence products such as laptops, cellular phones and software; and (4) critical products.3 Majority of air cargo being exported out of Asia, however, consists of electronics, while imports consist mainly of electronic parts and finished consumer goods.4 The following are characteristics of air cargo: (1) air cargo does not fly return; (2) air cargo is a heterogeneous good and comes in numerous shapes, weights and values; (3) three in-flight-products suffice to satisfy the demands of most airline passengers; (3) cargo customers are concentrated with a limited number of forwarding agencies accounting for the major share of air cargo demand, whereas individuals and companies purchase passenger tickets; (4) numerous companies can be involved in realizing the air cargo transport chain to fulfill the required transport, handling, warehousing and customs tasks; and (5) unlike passenger airlines, air cargo carriers do not have individual customer relationships.5 The air cargo industry is considered to be a part of the services sector. In the traditional cargo chain, there are two (2) types of flows that are taken into consideration:6 (1) the transportation of the cargo, which includes functional communication with the various participants; and (2) the commercial communication, which includes communication flows that are emphasized on the three main parties, the shipper or consignee, the cargo forwarder the airline. Figure 2 shows the types of flows in the traditional cargo chain.

2 3

Center for Research and Communication, 2007 McKinnon, 2011 4 Raagas, 2004 5 Von Vilet, 2010 6 Ibid. 2

FIGURE 2: TYPES OF FLOWS IN THE TRADITIONAL CARGO CHAIN

Source: http-//dspace.ou.nl/bitstream/1820/3705/1MWNSCvVlietmei2010

There are a number of carriers that offer cargo services at present. These airlines are dedicated to air cargo transport, however a number of commercial passenger airlines have separate divisions offering cargo services. Some of these air cargo companies are said to be feeder services for larger express delivery companies and merely work under contract.

II. STRUCTURE AND PROCESS: AIR CARGO INDUSTRY

The air cargo process is a time-definite endeavor that requires the collaboration and coordination of multiple parties, namely: shippers, freight forwarders, trucking companies, shipping companies, customs, warehousing agents, airport terminals, airlines, and consignees. 7 Airports were defined as infrastructure providers charging landing fees and stand rentals or parking fees to airlines, who are their main customers, and rent to service companies for passenger reception terminals, retail and catering outlets offices, cargo transit sheds, air craft maintenance work shops and other services. Airlines were defined as the suppliers of air cargo capacity into and out of a country. The general overview of the entire process can be summarized in the Figure 3.

FIGURE 3: THE AIR CARGO PROCESS

Source: The Airfreight Industry, Peterson, 2007

The process begins with the shipper or consignor, the party or entity who needs service in transporting cargo. Second, the freight forwarder arranges for the transportation of cargo from the shippers warehouse, delivers it to the departing airport, prepares the necessary paperwork, picks it up at the arriving airport, after delivery by the carrier and delivers it to the consignee. Third, the carrier provides the air delivery of cargo from the origin airport to the destination airport. Upon
7

Fung, 2005 4

arrival at the destination airport, the ground handler physically handles the freight and endorses cargo to the freight forwarder, who finally sends the goods to the consignee or the receiving party. The worlds air cargo delivery system is comprised of two networks. The first (1) is essentially the same as the passenger network, which can either be legacy or those pertaining to large aircraft, and the low cost carrier. In this system, passengers are carried above and cargo is carried below in the belly of the aircraft, utilizing space not needed by baggagehence the name belly cargo. These flights are routed and scheduled for the convenience of the passengers. While the passenger airlines are generally willing to sell this otherwise unused space, they have not always wanted to bother with the ground operations of pick-up and delivery and loading the belly containers. With this, there are indirect carriers called the forwarders who has fulfilled this function. Until the Air Cargo Deregulation Act of 1977the United States of America, these forwarders could not operate their own aircraft, although one large forwarder, Emery, organized a fleet of leased aircraft totally dedicated to its service. The second (2) network in the air cargo delivery system utilizes aircraft that carry purely cargo. These dedicated cargo aircraft sometimes referred to as the freighters or all-cargo aircraft come in all sizes from a small, propeller-driven aircraft to a giant Boeing 747s configured to carry only cargo. This network is less extensive than the passenger network, but has over the years carried a growing proportion of total air cargo. The belly cargo was said to cover 90% of the total cargo and 10% is contributed by the all-cargo network. These all-cargo aircrafts generally fly at night and are scheduled for the convenience of shippers. Aside from the said 2 networks, there is also a third kind of carrier, called (3) integrators. These integrators oversee the entire process and act as the forwarder and the carrier. Throughout the history of air cargo, the primary integrators remain the big three: FedEx, DHL, and UPS. 8 It was noted that the big three have indicated a movement away from small packages and documents to larger freight. As industry leaders, new processes or trends initiated by them have profound impacts which affect other players, as they hold a greater share of large cargo transported.

Achard, 2009 5

FIGURE 4: THE AIR CARGO TYPES

Source: Hoppin, D (2005). Air Cargo Industry Supply Issues. Washington DC: Merge Global.

In terms of the Air Cargo types, of the 3 different types of carriers mentioned in this study, the focus shall be given to combination carriers, since belly lift accounts for approximately 50% of global inter-con capacity9. Carriers offer both local and international services, depending on the needs of the client. 10 The identified seven domestic services, namely: (1) Same Day or Next Flight or over-the-counter airfreight services, which are allotted for packages with limited weight and which must be brought to the ticket counter or a special desk at the airline where it moves in the baggage system rather than the freight system; (2) Overnight services, which involve freight that is delivered the next business day; (3) Express services, which are usually offered by integrators, which involves freight moving in their own network or aircraft; (4) Forwarder services, who usually follow 5:00 PM delivery deadlines; (5) Second Day services, which involve freight that is delivered 5:00 PM on the second business day following pickup; (6) Deferred services, which take 3 to 5 business days domestically, depending upon the distance.; and (7) Charter services, which involves forwarders who assist their clients to charter an entire aircraft. Moving onto international services offered by air cargo companies, these are: (1) Consolidation services, which involve shipments from different shippers which are grouped together and tendered to the airline as one shipment, with the forwarder becoming the shipper in the eyes of the airline; and (2) Direct IATA services, which are employed when the shipper needs to send an international shipment with a forwarder to a point not serviced
9

10

Air Cargo Process, Hoppin, 2005 Ibid. 6

by a weekly consolidation. If the forwarders concerned are approved IATA agents, they act as agents for both shippers and airlines, therefore, fill out all airline paperwork required. In terms of market share, scheduled air cargo traffic accounts for approximately 90% of all world air freight (The Boeing World Air Cargo Forecast, 2010-2011), since most shippers use this type of service in order to meet their transport requirements. The remaining world air freight traffic is provided either by charters or express carriers, in order to meet urgent or special needs. Generally, charter freight share rises during times of strong world air cargo growth and, conversely, falls during times of slow or negative traffic growth. In keeping with this general trend, world charter air freight fell 18.4% in 2009, but world scheduled air freight declined at a slower rate of 10.7%
11

11

The Boeing World Air Cargo Forecast, 2010-2011 7

III. GLOBAL TRENDS AND PERFORMANCE : AIR CARGO INDUSTRY As mentioned in the earlier part of this research paper, cargo used to be merely a by-product of passenger airlines and a means for transporting emergencies and critical products. Globally, the industry grew very rapidly during the 1960s, faster than passenger growth over the same period (UK Air Freight Study Report). To date, cargo demand continues to grow faster than passenger traffic resulting in a growth gap, as manifested in Figure 5. As a result, it is expected that more freighters will be required to handle the demand brought about by said growth:
FIGURE: 5 INTERCONTINENTAL PASSENGER CARGO GROWTH GAP Freight Traffic Index based on freight-tonne kilometers (FTKs) Passenger Traffic Index based on revenue passenger-kilometers (RPKs)

Source: Hoppin, D (2005). Air Cargo Industry Supply Issues. Washington DC: Merge Global.

This became an opportunity for airline companies to recognize the income value of air cargo and therefore, introduced all-cargo services. The growth of all-cargo airlines continued in the 1970s, primarily due to increasing freedoms to operate outside bilateral agreements and growing deregulation of freight operations to and from the USA, UK and other European countries. 12 However, as fuel price increased and economic recession took place in the mid to late 1970s, airline companies were hit badly. The UK Air Freight Study Report recognizes the most significant revolution in the industry to be the development of the express sector. Federal Express, more popularly known as FedEx, was the first to introduce express services. The company also integrated new features such as door-to-door and overnight transport. During the 1980s, the express sector boomed and companies following Federal Express example set up their own airline operations, as well. By the 1990s, integrators had emerged. US integrators include United Parcel Service or UPS, Emery Worldwide and Airborne Express, while European integrators were DHL and TNT. According to the Bureau of Transportation Statistics, US Department of Transportation, freight is generated by economic activity and the industry tends to respond to fluctuations in this activity, along with the level of trade among nations. This is the reason why the global economic downturn in 2008 and 2009, caused by the collapse of major financial markets and decline in U.S. merchandise trade with partners around the world, highly affected the air cargo industry. At that time, an 8.8% decline in world industrial production and manufacturer shipping was reported. 13 By the second quarter of 2009, financial liquidity problems and fluctuations in energy prices affected all modes of freight transportation, including all sectors of the industry. 14 Economic recovery only began in the second half of 2009 and it was only in the third quarter of the same year when industrial and manufacturing activity, particularly in Asia, began to accelerate. 15 Prior to the series of events that took place in 2008 and 2009, the industrys primary challenge was growth in merchandise trade and freight flow that strained system capacity. 16 In general, The Boeing World Air Cargo Forecast, 2010-2011 Issue reported that developing economies suffered less from the downturn; hence, they are expected to lead growth for the forecast period. Africa, Asia, the Middle East, and Latin America are expected to have an average GDP growth of 4% or greater through 2029, with GDP growth in North America, Europe, and Japan

12 13

UK Air Freight Study Report The Boeing World Air Cargo Forecast, 2010-2011 14 Bureau of Transportation Statistics, US Department of Transportation, 2010 15 The Boeing World Air Cargo Forecast, 2010-2011 16 Bureau of Transportation Statistics, US Department of Transportation, 2010) 9

slower than the world average. Moreover, forecasts show that world industrial activity shall expand at approximately 4% per year for the next two decades, which in turn supports the long-term outlook for continued world air cargo traffic growth. Forecasts are based on historical data, as shown in Figure 6, which presents historical data for a period of 10 years, from 1999 to 2009
FIGURE 6: RECORD OF WORLD INTERNATIONAL AIR FREIGHT (1999-2009) (in Millions of Metric Tons)

Source: Hoppin, D (2005). Air Cargo Industry Supply Issues. Washington DC: Merge Global.

In spite of the fact that developing economies suffered less from the economic downturn, logistics costs are usually higher in these countries as compared to logistics costs in developed countries due to factors such as poor quality of infrastructure, weak institutions and greater inefficiencies in the logistics system. On the average, logistics costs account for 10-15% of the final cost of the finished product in the developed world. Based on studies conducted in the United States, these costs include transportation costs which amount to 7-9% of the cost of the final product, warehousing costs in the range of 1-2% and inventory holding costs which are 3-5% of the final product cost. 17

17

Center for Research and Communication, 2007 10

It was also reported that the World Air Cargo traffic will triple over the next 20 years, averaging 5.9 % annual growth, compared to 2009 levels. The number of airplanes in the air freight fleet will increase more than two thirds over the same period.

FIGURE 7: PERFORMANCE OF WORLD AIR CARGO FREIGHT

Source: World Air Cargo Forecast, 2010-2011

FIGURE 8: WORLD AIR CARGO TRAFFIC

Source: World Air Cargo Forecast, 2010-2011

This is a very good indication that there are a lot of opportunities in Air Cargo. With the reported 5.9% growth per year, there is so much future in the said industry.

11

IV. TRENDS AND PERFORMANCE IN ASIA: AIR CARGO The Asian region has become a big player in the world air cargo market, with the highest growth rates for airfreight as compared to any other region, ever since the 1980s. There are more than 40 countries of various economic levels located in the Asia-Pacific region, with the Asian region being segmented into two main parts namely: (1) Intra-Asia region or Northeast & Southeast Asian regions and Southwest Asia, which comprises the Eastern Pacific Rim - Japan, China, Taiwan, Korea, Singapore, the Philippines, Indonesia, Malaysia and Thailand; and (2) the southwest region, which includes India, Pakistan, Bangladesh, Sri Lanka, Maldives, Nepal, Bhutan and Afghanistan. 18 Asia has the opportunity to lead the world, since the demand for air cargo in the Asian region is massive, as a result of its high population density, strong economic growth and development, raising per capita income, improving political stability and wide spread adoption of open skies policies. 19 As can be seen in Figure 7, Asia dominates the fastest growing air freight markets, based on a 6-year period:
FIGURE 9: INTERCON MARKWTS (2004-2009) Traffic in Thousands of Metric Tons Per Year

Source: Hoppin, D (2005). Air Cargo Industry Supply Issues. Washington DC: Merge Global.

Air cargo markets linked to Asia, especially the Pacific Rim countries, will lead all other international markets in average annual growth between 2009and 2029.

18 19

Senguttuvan, 2006 Senguttuvan, 2006 12

FIGURE 10: PERFROMANCE OF ASIA MARKETS

Source: World Air Cargo Forecast, 2010-2011

Because of growth forecasts in air cargo, several countries in the Asian region are exerting efforts to augment their existing airport systems, so that they can hold on to the growing demand of air cargo traffic and compete with regional hubs. What radically transformed Asian regions are the comprehensive forces of liberalization and globalization, particularly ASEAN countries, who have adopted a policy of moving toward open skies in recognition of the important role played by the aviation sector in linking export-oriented economies with the global economy. 20 The most recent report published by the Association of Asia Pacific Airlines or AAPA last January 30, 2012 recorded that Asian air freight demand fell 4.8% year-on-year in 2011, reflecting weak worldwide economic conditions.
21

AAPA Director General Andrew Herdman added, Air cargo

demand weakened significantly compared to the restocking surge experienced in 2010, reflecting cautious management of supply-chain inventories in the expectation of weaker growth prospects for the major developed economies. On the contrary, he pointed out that Asian airlines continue to remain optimistic about longer-term growth prospects, as evidenced by ambitious fleet plans, ongoing service enhancements and the launch of innovative new business ventures. 22 It was also reported that China's cargo market will lead the global industry. Chinese carriers will add +/300 freighters by 2028, almost quadrupling its total freighter fleet size (Boeing)

20 21

Tham, 2008 http://www.eimportexport.com/ 22 Ibid. 13

FIGURE 11: FORECAST OF GDP

V. PHILIPPINE AIR CARGO INDUSTRY

A. Structure of the Industry The Philippine Air Cargo delivery system in the Philippines consists of two networks. (1) The first network is same as the passenger network. These are the legacy planes such Philippine Airlines and low cost carriers such as Cebu Pacific and Air Phil Express. In this network, passengers are carried above and the cargo is carried at the belly of the aircraft, usually called belly cargo. The cargo in these aircrafts are dependent on the scheduled flights of the passengers. In the Philippines, these airlines partner with freight forwarders who in turn handle pick-up and delivery of the cargo upon arrival at the airport. (2) The second network which operates in the Philippines is the pure cargo or what is called the all-cargo aircrafts. However, in the Philippines this is used interchangeably with the integrators These are dedicated aircrafts just for cargo alone but they also act as carriers and forwarders. Examples of these are Federal Express (FedEx) and that of UPS. The former used to have its hub in Subic where it brings in a lot of cargo in the country. However, due to insufficient cargo traffic volume in the country, FedEx decided to transfer its operations to Guangzhou in China, where it was said to have lower taxes and high cargo traffic volume. One reason why it left the Philippines is because Subic runway was also unable anymore to support their expanded needs, including flying higher-capacity planes. FedEx also mentioned that at the time, everyone had to be in China with the sheer size of its domestic market plus the fact that Shenzhen was closer to center point

14

compared to the Philippines. 23 There have been reports that FedEx is thinking of bringing back a portion of their operations back to the Philippines due to the fact that they are experiencing difficulty engaging in business with China. United Parcel Service (UPS) on the other hand, still has its warehouse and operations in Clark, Pampanga. However, from seven aircrafts with two flights a day before, they are down to having just one aircraft with 2 flights a day landing in Clark daily bringing in cargo to Manila and flying it out to different Asian destinations. UPS is known as the worlds largest package delivery who used to have its operations in Clark as what was mentioned above, however it relocated its air hub to Shenzhen, China since it is speeding up its expansion into the fast growing Chinese market. Shenzhen and neighboring Hong Kong would provide much more volume than the Philippines. China has also five times bigger volume than Clark and that it has an improving foreign trade which is driving demand for freight and logistics services. Another reason for transferring its hub from Clark to China is that UPS is directly competing with DHLs Hong Kong and Fed Exs Guangzhou hubs.
24

B. Key Players in the Industry: Its Performance and Market Share B1. Domestic Air Cargo25 The Philippine Domestic Air Cargo decreased slightly in 2011 due to the slow economic activity. The volume shipped by the countrys top 5 airlines, namely Cebu Pacific, Philippine Airlines, Air Phil Express, Zest Air and Seair declined 0.09% from 183.477 million kilograms in 2010 to 183.312 million kilograms (kgs) for the whole of last year. This year, the Philippine Air Cargo Shipments handled by the countrys top 5 airlines increased 4.9% in the 1st quarter of the year to 45.74 million kilograms (kgs) from 39.80 million kilograms (kgs) in the same period last year.

In terms of the market share of the top 5 airlines in the Philippines carrying cargo, it can be seen that Cebu Pacific got half of the pie share. With its aggressive operations it has overtaken the performance of Philippine Airlines in terms of cargo volume.

23 24

BOI Interview with FedEx BOI Interview with UPS 25 Port Calls Asia, May 22, 2012 (data from CAB) 15

FIGURE 12: DOMESTIC CARGO MARKET SHARE AS OF 1Q 2012

0%

8%

13% CEB PR 50% Air Phil Zest Air Seair

29%

Source: Civil Aeronautics Board

It was reported that Cebu Pacific (5J) has a cargo volume of 89,435,447 tons, PAL (PR) has 53, 975,550 tons, its sister company Air Philippines (2P) was next with 24,497,898 tons, Zest Air (Z2) was fourth with 15, 233,210 tons and last was Seair (DG) with 170,574 tons. In the above data from the Civil Aeronautics Board, it can be seen that Cebu Pacific (5J) has 50% market share in terms of Domestic Cargo Key Players. Philippine Airlines is at the second slot with 29% of the market share. PALs sister company, Air Phil Express is at 3rd slot with 13% of the pie. Zest Air comes in at 4th with 8% of the market and Seair with les than 1 % of the market.

According to the Civil Aeronautics Board, Scheduled Domestic Cargo Statistics show that from 2006 until 2007, PAL has been doing good in terms of cargo volume. During that time PAL sustained its position to be the number one airline in the country. But from 2008 until the present it could be seen that Cebu Pacific has been slowly making its way to the first spot. At present, Cebu Pacific has 22.82 million kilograms in terms of cargo while PAL has only 12.513 million kilograms.

16

TABLE 1: SCHEDULED DOMESTIC CARGO STATISTICS (1Q 2012)

1. Cebu Pacific (CEB)

Cebu Pacific Cargo started its operations in January 2000 with a vision to be the preferred and dominant air cargo carrier in the Philippines and in the region, linking islands together through the exchange of goods, in contribution to the economic growth of the nation. It is now the largest domestic cargo carrier which provides competitive, fast, flexible and straightforward air cargo service to individual shippers and cargo agents within the country and overseas.26 Services Offered:27 CEB offers the best value for money as it provides the following services: (1) CEB-X - it is the fastest and most efficient way to get urgent and rush cargo to its destination. (2) Blocked Space Arrangement(BSA) this is an arrangement for clients who require a fixed and guaranteed space arrangement. (3) ATR Charters this includes the chartered services to its clients using ATR 72-500 aircraft. (4) Plastic Jack-Wrap Services This
26 27

Cebu Pacific Cargo Website Ibid. 17

service is for all flights from Manila to a destination in Luzon, Visayas and Mindanao. This protects and ensures efficient cargo handling protecting shipments and preventing them from getting wet or damaged. (5) Transit Shipments (Tran-shipments) CEB has four major hubs (Manila, Cebu, Clark, Davao) that allow efficient and seamless inter-island connections. This allows the movement of the cargo shipments to onward destinations with no direct flights from the point of origin. (6) Cargo Interline For cargo to and from Europe, Africa and the Americas to all other cities in the world, CEB has 15 interline partners. These are Air Astana, China Airlines, Continental Airlines, Emirates Sky Cargo, Singapore Airlines, Etihad Airways, Gulf Air, Delta Air, Nippon Delta Cargo Airlines, Lufthansa, Northwest Airlines, Qantas Airways, Qatar Airways, Royal Brunei and Saudi Arabia Airlines CEB Performance and Market Share:28 Cebu Pacific Cargo transported more domestic cargo than other airlines in the 1st quarter of 2012 according to the Civil Aeronautics Board. CEB carried 22.1 million kilograms of cargo for the 1st quarter. It was said to be even higher than the combined cargo load of Philippine Airlines and Air Phil Express. It was quoted from CEBs Vice President for Marketing and Distribution, Candice Iyog, that they have captured 48% of the domestic cargo market in the 1st quarter of 2012. This highlights Cebu Pacifics extensive domestic network. She also mentioned that they have multiple daily flights to most key cities in the Philippines. Cargo forwarders and shippers trust CEB to bring their valuable cargo in the soonest possible time. It was reported also that CEB also led the domestic cargo market in 2011 with close to 89.5 million kg carried for the full year. From this we can see that CEB is really very aggressive in its growth and development. The airline was said to have increased domestic capacity in Q1 of 2012, with the arrival of one more brand new Airbus 320 aircraft this January. At present, CEB operates 52 routes to 32 domestic destinations. This is believed to be the most extensive network in the Philippines.29 As part of their network expansion plans, there are three more Airbus 320 aircraft to arrive in the second half of this year. It was reported as well that they will be launching four times in a week flights from Davao to Kalibo and Davao to Puerto Princesa. Ms Candice Iyog further shares in the report that CEB at present services more than 2000 accounts, tailor-fitting cargo products to their clients domestic and international cargo needs. This includes express cargo service, seamless transshipment and 16 interline partnerships for worldwide reach. CEB currently operates 10 Airbus A319. 20 Airbus A320, and 8ATR 72500 aircraft. Its fleet of 38 aircrafts with an average age of 3.6 years is the largest aircraft fleet in the Philippines. It was reported that between 2012 and 2021, Cebu Pacific will take delivery of 22 more Airbus A320 and 30 Airbus A321 neo aircraft.30

Civil Aeronautics Board (CAB) Manila Times.net (validated as well by the author with the interview with CEB cargo sales representatives) 30 Ibid.
29

28

18

CEB Fleet: FIGURE 13

CEB Routes: FIGURE 14

19

2. Philippine Airlines (PAL)

Philippine Airlines is Asias first Airline and the Philippines foremost flag carrier. They are the only Philippine carrier that offers the following: Non-stop flights between Manila and USA, Extensive Philippine domestic destinations, Strong presence in Asia and four destinations in Western Canada and USA, utilizing a wide-body aircraft in its international and Philippine domestic flights. Services Offered:31 (1) Express Service Rapid Handling of Urgent Shipment. Their airport to airport express service is handled with the highest priority, guaranteed uplift once booking is confirmed with money back guarantee and shipment is released within 3 hours upon arrival at destination. All cargoes within the minimum weight requirement and brought in 2 hours before the scheduled departure time and tender the goods in 2 hours before the flight. Cargo Classification: a. Special Cargo Commodities that require special or advance arrangement, packing, handling and in certain cases, documentation. Acceptance of these type of cargo are subject to specific regulations. Special Cargo includes, Baggage and special effects that are treated with special care and stored at special location and Perishables, which are shipments which are so labeled and are stored under specific temperature. b. Valuable Cargo these are shipments with very high commercial value. c. Restricted Articles or Dangerous Goods These are inflammables, explosives, radioactive materials and corrosive substances like acids that may endanger the safe operations of the flight. d. Livestock, Live Animals and Plants these are shipments that need special attention and care. e. General Cargo these include all articles or materials that are not included in the list of Special Cargo.

31

Philippine Airlines Cargo Website 20

PAL Performance and Market Share:32 Philippine Airlines accounted for 12.51 million kilograms or 27.3% of the market in year 2011. PAL came in only as second compared to Cebu Pacific. PAL has been only on the second spot starting 2008 until the present. PAL Fleet: Table 2: PAL Fleet Type Boeing 777-300ER Power 2GE90-115Bl Speed Capacity Number

482 knots / 555mph 370 Passengers and 3 28 tons of Cargo

Boeing 747-400

4 CF6-80C2B1F

488 knots / 562 391/425/427 mph Passengers and 24 tons of Cargo

Airbus A340-300

4 CFM56-5C4

480 knots / 533 264 Passengers and 4 mph 23 tons of Cargo

Airbus A330-300

2 CF6-80E1A2

480 knots / 553 302 Passengers and 8 mph 22 tons of Cargo

Airbus A320-200

2 CFM-56-58

458 knots / 528 150/156 Passengers 15 mph and 7 tons of Cargo

Airbus 319-100

CFM-56-5B6/P

503 knots / 579 134 Passengers and 4 mph 6.7 tons of Cargo

32

Civil Aeronautics Board (CAB) 21

PAL Routes: FIGURE 15

3. Air Phil Express

Air Phil Express is known to be the sister company of Philippine Airlines. Air Phil was created to answer to the growing need of a low cost carrier. Due to the popularity of Cebu Pacific, PAL came out with its own Air Phil Express. The mission of Air Phil Express is to provide customers with safe and reliable air transportation with the best service at the least cost. It also provides employees with career development and job satisfaction, and lastly it provides stockholders with fair return on investment. Services Offered: (1) Valuable Cargo these are cargo with very high commercial value (2) General Cargo / General Commodity these are all materials and articles that are not included in the list of Special Cargo and (3) Commodity Cargo Air Phil Express Performance and Market Share:33 PALs sister company budget airline handled 13.3% 0r 6.09 million kilograms (kgs) in the first quarter of 2012.

33

Civil Aeronautics Board (CAB) 22

Air Phil Express Fleet: Table 3: Air Phil Express Fleet Airbus A320 Airbus A320 has been redefined to provide exceptional levels of comfort with optimized seating, legroom and elbowroom and substantial stowage space. Considered as the safest narrow-body aircraft equipped with advanced avionics systems. Air Phil Express operates the youngest fleet of brand new Airbus A320s in the Philippines. Bombardier Q300 It can take-off and land on short runways that is perfect for most airports in the archipelago. This is nicknamed as the quiet one as it provides a jet like, soft and quiet ride because of its state of the art Noise and Vibration Suppressing System. Bombardier Q400 Known as the worlds fastest turbo-prop in the 70seater category, is a pilot favorite because of its speed and comfort like a jet. It is faster, more efficient and friendly to the environment.

Air Phil Express Route: FIGURE 16

23

4. Zest Air

Zest Airways Inc. formerly Asian Spirit is an airline based in the Asian Aeronautics hangar in the General Aviation Area in Pasay City. It operates scheduled domestic and international tourist services, mainly feeder services linking Manila and Cebu with 24 domestic destinations in support of the other trunk route operations of other airlines. Services Offered: (1) Valuable Cargo these are cargo with very high commercial value., (2) General Cargo / General Commodity these are all materials and articles that are not included in the list of Special Cargo, and (3) Commodity Cargo. Zest Air Performance and Market Share:34 Zest Air has reported a big improvement in the efficiency of its cargo operations due largely to the automation of its system. Automation enabled the company to offer better and faster cargo services.35 According to its President and CEO, Processing of airway bills is now faster and transaction time has been greatly reduced since we automated our cargo system. Zest Air was able to ship about 15.2 million kilograms of Cargo in 2011 because of its more efficient cargo operations. In the first quarter of 2012, it was reported that Zest Air carried 4.97 million kilograms as it comes in at 4th slot in the countrys major airlines. Zest Air Fleet:36 Table 4: Zest Air Fleet A320 / A319 This airbus is the worlds pioneering fly-by-wire jetliner. It has a commodious cargo hold equipped with large doors to assist in expedient loading and unloading of goods. It provides customers with added space and comfort, reduced noise levels and allows Zest Air to operate a more cost efficient and reliable

34 35

Philippine Daily Inquirer, January 10, 2012, Civil Aeronautics Board (CAB) Zest Air CEO and President Alfredo M. Yao (article in PDI, January 10, 2012) 36 Zest Air Website 24

fleet. Number: 9-A320 aircraft / 1-A319 Aircraft Capacity: 162-168 Passengers and +37.4 cu.m. cargo space A320 144 Passengers + 37.4 cu.m. cargo space A319 MA60 It is an advanced 50-60 seat class regional turboprop aircraft developed by Xian Aircraft Company of China aviation Industry Corporation. It can meet the demanding needs of modern transport and offer operators with the greatest operating benefits. Number: 3 aircrafts Capacity: 56 Passengers +9.5 cu.m. cargo space

5. Seair

South East Asian Airlines was set up in 1994 to provide a safe, reliable and economical air transportation for travelers in the Philippines. Known as Seair Inc., it is the second locator in Clark and registered in SEC and Clark Economic Zone Development. It is a private corporation that is majority owned by a Filipino, German and American Managers. It was awarded as the Best Airline of the Year for two consecutive years, 2002 and 2003 by the Philippines largest Consumers Excellence Award. Services Offered: (1) Valuable Cargo these are cargo with very high commercial value, (2) General Cargo / General Commodity these are all materials and articles that are not included in the list of Special Cargo and (3) Commodity Cargo. Seair Performance and Market Share:37 Seair comes in at the 5th slot with 67,631 kilograms (kgs) of cargo. Seair Fleet: Seair operates the youngest fleet of aircraft in their segment of the industry. Its fleet is made up of 3 Dornier 328 and 9 LET 410 UVP-E aircraft for use in chartered and scheduled flights.

37

Civil Aeronautics Board (CAB) 25

B2. International Air Cargo38 The Philippine International Air Cargo Volume increased by 20% in 2011 due to the import sectors strong performance. Throughput reached 282,497 million kilograms (kgs) compared to the previous years 234, 635 million kilograms (kgs). Inbound Cargoes and mail reached 144.309 million kilograms (kgs) and comprised the bulk of the total outbound air cargoes hit 138.188 million kilograms (kgs) Philippine Airlines was the countrys top cargo carrier in 2011 handling 24.57% of the aggregate at 69.412 million kilograms (kgs). Of this, 65.723 million kilograms (kgs) were booked at PALs Manila Terminal and 3.689 million kilograms (kgs) were booked in Cebu. Cargoes shipped were electronics (70%), Tuna (20%), Garments, Spare Parts and Live Animals (10%). Hong Kong based airline, Cathay Pacific was the countrys second biggest cargo in 2011. It handled 36.678 million kilograms (kgs) with 29.548 million booked in Manila and 7.13 million kilograms booked in Cebu. Third was Singapore Airlines with 20.822 million kilograms (kgs), followed by Korean Air with 18.631 million kilograms (kgs) and at the 5th slot is Gulf Air at 11.932 million kilograms (kgs) Below are the top 10 International Air Cargo Players. (1) Philippine Airlines (PAL), (2) Cathay Pacific, (3) Singapore Airlines, (4) Korean Air, (5) Gulf Air, (6) United Parcel Services (UPS), (7) Eva Air, (8) Thai Airways, (9) The Emirate. (10) Qatar Air

38

Port Calls Asia, Feb 22, 2012 (data from Civil Aeronautics Board) 26

TABLE 5: INTERNATIONAL SCHEDULED AIR CARGO STATISTICS

In this table, we can see that Philippine Airlines leads the international air cargo volume with 69, 412,675 kgs. The data for Foreign Carriers, at 213,085,262, has no breakdown.

C. Performance of the Industry In terms of the relationship of Air Cargo to Economic Development 39, it is not just a trade facilitator; it is a trade creator that contributes to the competitive advantage of nations. Air cargo enables nations, regardless of location, to efficiently connect to distant markets and global supply chains in a speedy, reliable manner. Thus, in the new fast-cycle logistics era, nations with good air cargo connectivity have competitive trade and production advantage over those without this capability. Such advantage, as Michael Porter 40 and others have documented, is fundamental to economic development, the latter typically measured by gross domestic product (GDP), in the aggregate or on a per capita basis. A strong statistical relationship therefore exists between levels of air cargo volume and both GDP and GDP per capita.

When compared dynamically with changes in trade and GDP, air cargo emerges as the catalyst and leader for growth. Even with such strong long-term growth, the aviation market in recent years has experienced difficulties; challenges triggered by turbulence and uncertainty in world events such as the tech bust, terrorism, SARS, and rising jet fuel costs. Historically, however, air cargo traffic,

http://www.aerotropolis.com/files/2005_07_AASL.pdf Air Cargo, Liberalization and Economic Development bu J. Kasarda amd D. Sullivan, 2005 40 M. Porter, The Competitive Advantage of Nations (New York: Free Press 1990). 27

39

when subjected to downturns impacting the aviation sector, has typically recovered at a much quicker rate than passenger flows; as it has from the most recent aviation downturn. In fact, air cargo is increasingly being viewed as an important lead indicator of the direction the larger economy will be going.

C1. Gross Domestic Product (GDP) Based on the recent study conducted by the International Air Transport Association (IATA) last February 29, 2012, the local aviation sector contributes 2.4% to GDP. Direct output of the aviation industry contributes P35.5 billion or 0.4% to the Philippine economy. Majority of the sectors contribution to GDP can be attributed to its support for tourism. Aviation Industrys catalytic benefit from tourism is worth P 156.7 billion.

C2. Employment Another contribution of the industry to the Philippine economy is its generation of employment and its substantial contribution to public finances. As of the first quarter of 2012, the industry employed 123,000 doing highly productive jobs at airlines, airports, ground services, and the supply chains. Of these, majority are working directly and indirectly with the aviation sectors supply chain. In the same study of IATA, it was noted that employees of the said industry generates P865, 000 gross value added annually, which is almost 3.8 times higher than the Philippine average.

C3. Public Finances The industrys contribution to public finances is over P 26 billion. This comprises: P 7 billion from employees income taxes, social security contributions, and in corporate taxes on profits, P 17 billion from travel tax, alien head tax and VAT, P1.4 billion from aviation sectors supply chain, and P 1.2 billion from spending of employees and its supply chain. Oxford Economics estimated that the industry facilitates P575 billion-worth of consumer benefits, which includes 27 million visiting friends and relatives to 596,000 tonnes of freight travel to, from, and within the country, which is worth P 81 billion.

C4. Volume According to the 2006-2011 scheduled cargo statistics provided by the Civil Aeronautics Board, domestic air cargo has been continuously increasing at 7.5% growth rate. The increase in domestic air cargo statistics maybe attributed to the increasing number of fleets and destinations across the country. While on the other hand, International cargo in the Philippines has been underperforming with an average decline of 2.62% annually. 28

FIGURE STATISTICS

17.

DOMESTIC

VS.

INTERNATIONAL

CARGO

Source: Civil Aeronautics Board-Planning and research Division

C5. Connectivity With the implementation of the Airline Liberalization Act in the Philippines, there has been a significant improvement in the countrys connectivity. As stated in the Oxford Economics, in 2010, there were 56 routes connecting major airports in the Philippines to urban agglomerations around the world. On an average there were 4 outbound flights per day along these routes. Number of flights are higher to the most economical destinations such Cebu and Davao Domestic Airports and Hong Kong and Singapore International Airports. The increasing connectivity of Philippine cities with major destination around world has brought benefits to users of air transport services. Identified benefits include: reducing time spent in transit, shorter waiting time, increased frequency of service, improved quality of service in terms of reliability, punctuality and quality of the travel experience. Such contribution is felt as Philippine-based businesses are forced to continuously enhance their products and services to compete in an increasing market. With the improvements of connectivity, it gave domestic firms increased access to both domestic and international markets, it also brought in foreign competition, which forces firms to specialize in areas where they possess a comparative advantage. Given the increased competition, domestic customers enjoy more affordable prices and better quality of goods and services. Another economic benefit that can be attributed to the improvement in connectivity is the fact that it opens doors for both foreign and domestic investors to expand their market, making it easier for firms to invest outside their home country and opening opportunities for foreign companies to invest in the Philippines.

29

This is further supported by the studies conducted last 2005 and 2006 by Oxford Economic Forecasting, EUROCONTROL, and InterVISTAS Consulting Inc., which found (using the lowest estimate among the said studies) that, a 10% improvement in the Philippines connectivity (relative to GDP) would see a P 5.1 billion per annum increase in long-run GDP.

C6. The Geography of Freight Movement

Domestic As shown in figure 2, from 2006 to 2010, the main operation of the cargo industry is mainly concentrated in NCR. All major trade mostly occurs in NCR followed by Region 11 (Davao City) and Region 7 (Cebu City). Regions I, II, III, V, & XII are the non-performing areas in the country. These said areas were not performing as much as the other regions because there are limited goods for trade and these areas were not the identified major routes in the country. Major destinations in the country such as, NCR, Region IV, VI, VII, VIII, IX, X, and XI are where the most trading activities happen. NCR has been a major route for most international trade while regions VII and XI dominates domestic trade in the country.

30

FIGURE 18: DOMETIC FLIGHT MOVEMENT

Source: CAAP

International Against other modes of transport, air freight is said to be the fastest and the most reliable over great distances, used mostly to deliver goods that are light, compact, perishable and those that have a high unit value. Using Oxford Economics global data as of 2006, as illustrated in Figure 3, air transport only carries 0.5% of the total volume transported globally but of this given volume, it contributes 34.6% of the value of global trade.

31

Figure 19: PROPORTION OF GLOBAL TRADE BY AIR

Source: Oxford Economics 2006

Figure 20: REGIONAL DISTRIBUTION OF PHILIPPINE AIR FREIGHT(tonnes)

Source: Oxford Economics 2006

As illustrated in Figure 19, measured in terms of tonnage carried to and from the Philippines, 82% is linked to trade with its neighboring countries in Asia Pacific region, 10% of its trade were destined for North America, a total of 5% share for Middle East and Africa, and 4% share for Europe.

32

VI. DEFINITION OF AIR CARGO LOGISTICS HUB Before moving forward, however, it is likewise essential to define what cargo airline hubs are. A cargo hub is where cargo comes in to be sorted and dispatched to other countries from a central location. 41 Cargo planes fly-in and fly-out, but no aircraft is left on the ground for more than a day or a few hours. An airline hub, on the other hand, is somewhat like the motor pool of aircraft where an entire fleet is garaged and maintained when not being operated. In general, logistics centers or hubs are important in reducing transport and logistics costs for global manufacturing firms, as hubs can serve as transshipment points for semi-finished and finished goods of producers or as host facilities where production segments or assembly work and storage can be done. 42 Aside from the fact that manufacturing facilities can locate in these logistics hubs with excellent infrastructure, they can also outsource their logistics activities to logistics firms that locate in hubs where the facilities, easy connectivity and infrastructure provide timely and speedy access to inputs and finished goods markets. 43 Economies seeking to build hubs usually start with developing their major airport in order to attract airlines to locate therein. Indeed, the development of Asia's aviation infrastructure is remarkable, as can be manifested from the development of Asia's airports, which are setting world standards for efficiency and security. If Asian Countries want to continue in expanding their economy, they must complete the investment in the aviation port, which requires world-class air traffic infrastructure. As demonstrated by Asia's airlines and airports, this region has the capability to lead the world in air traffic infrastructure.

41 42

Raagas, 2004 Center for Research and Communication, 2007 43 Ibid. 33

VII. IDEAL AIR CARGO LOGISTICS HUB In the study of Senguttuvan, it was identified that there are 5 general factors that determine airport competitiveness, namely: (1) spatial factors or increasing of the regional development around the airport impact to create International Trade Zones, Logistic and Convention Centers, Economic Free Trade Zones, Aviation-related industrial complexes and other facilities, in order to enable the growth of an airport; (2) facility factors or the level of airport facilities and expandability of facilities at existing airports to augment the capacity in air cargo handling; (3) demand factors or the level of Origin-Destination demand of traffic volumes for Hub-Spoke network development; (4) service factors, which consist of level of services made available to users, types of airport operations and level of airport charges; and (5) managerial factors or economical considerations such as airport operating costs, productivity and revenue structure. McKinnon (2004), on the other hand, identified specific features pertaining to airport competitiveness, as follows: (1) location - airports located closer to shippers have cost and time advantages; (2) airport infrastructure, which includes runway capacity, terminal setup and transport connections; (3) airport charges; (4) customs rules and charges; (5) congestion and lack of slot availability; (6) choice and quality of freight forwarders; (7) environmental restrictions such as noise limits and night curfews; and (8) regulatory restrictions. Entities such as The International Air Cargo Association or TIACA, The International Civil Aviation Organization or ICAO, the United Nations Conference on Trade and Development or UNCTAD and the Organization for Economic Cooperation and Development or OECD are major international aviation associations and trade forums that stress the critical importance of aviation liberalization, customs reform and lower corruption for economic development. 44 In another study, Lee (2007) narrowed down and defined the factors for a cargo hub as follows: (1) Location geographical location B747-400 nonstop flight range, local logistics infrastructure; (2) Demand market size and growth potential, flag carriers, logistics service providers such as Fedex, UPS, DHL; (3) Cost - airport user charges, such as landing fee, parking charge, cargo service charge, labor cost and land price; (4) Facilities - runway capacity, expandability of terminal area, technology, labor quality and labor peace; and (5) Government - open skies agreement, free trade zone or FTZ, tax incentives and political stability. Out of the key features identified in all the studies presented, this study will use the version of Lee.

44

Mc Kinnon, 2004 34

The Centre for Asia Pacific Aviation & AAHK summarized the evolution of the worlds top 10 cargo airports in chart-form, from the year 2000 to 2010, as follows:
TABLE 6: TOP 10 CARGO AIRPORTS

These Cargo Airports are considered to be the most efficient and those which rated high in the criteria and factors mentioned above. It can be seen that only Hong Kong and Singapore are consistent as part of the top cargo Airports from the year 2000 until 2010. Hong Kong Cargo Airport was consistent at second place for the past 10 years but in 2010, it took the first slot from Memphis Cargo Airport.

This strategy paper will determine the current performance of the Philippine Air Cargo sector as well as how it is compared to its neighboring countries. This study will show what are the need tos or the to-dos of our local air cargo sector in order to be at par with the mentioned efficient and successful hubs. This study will also evaluate the sector and look into the different strategies on how it can regain its competitiveness of being an air cargo logistics hub in Asia.

In this study, it is important to take note of the leading cargo airports, as these facilities play an important role in attracting fast-growing, high value-added industries. Only Asian hubs plus that of Dubai, however, will be taken into consideration, in line with the said objectives of this study. Indeed, there is an ongoing competition among different airport hubs in the region and these hubs continue to improve their facilities to entice major developing logistics companies.

All air cargo hubs considered in this study belong to the Asian Region. These are that of (1) Hong Kong, (2) Shanghai, (3) Shenzhen, (4) Guangzhou, (5) Singapore, (6) Malaysia, (7) Thailand. In this study, Dubai will also be studied since it is one of the most promising and successful hubs that the Philippines can model herself to. These are the hubs that were considered in this study, since they are part of the worlds top 10 air cargo hubs except for Malaysia and Thailand. 35

Malaysia and Thailand were included since these are the two most realistic model hubs that the Philippines can pattern herself to given the numerous improvements it has to do before it can regain back its competitiveness in this sector.

Based on recorded figures from the Airport Councils International, the succeeding table shows a comparison of the 6 air cargo hubs taken into consideration in this study over a 5-year period, in terms of their world ranking and total cargo in metric tonnes:
TABLE 7: WORLD RANKING IN TERMS OF CARGO VOLUME

Source: Airports Council International

Above is the recent list compiled by the Airports Council International showing the top 50 airports in the world. Hong Kong last 2010 was at first place with 4.168,394 tons of cargo while Memphis went down with only 3,916,937 tons of cargo. It can be seen also from the above table that aside from Hong Kong, some of the airports that will be studied in this research is also part of the top 50. These are Shanghai, Dubai, Singapore, Bangkok, Guangzhou, Shenzhen and Shanghai. Manila is on the 49th place with 419, 659 tons of cargo.

36

TABLE 8: WORLD RANKING OF CHOSEN COUNTRIES IN TERMS OF CARGO VOLUME

YEAR HONGKONG SHANGH AI DUBAI SINGAPORE MALAYSIA THAILA ND PHILIPPI NES**

2011 2010 2009 2008 2007

3,968,397 (1) 4,168,394 (1) 3,385,313 (2) 3,660,901 (2) 3,773,964 (2)

3,103,030 2,270,000 1,898,850 (3) (6) (11) 3,227,914 2,270,498 1,841,004 (3) (8) (11) 2,543,394 1,927,520 1,660,724 (3) (8) (11) 2,602,916 1,824,992 1,883,894 (3) (11) (10) 2,559,310 1,688,505 1,918,159 (4) (13) (11)

N/A 697,015 (29) 601,620 (28) 667,495 (27) NA

N/A 1,310,146 (20) 1,045,194 (20) 1,173,084 (20) NA

282,497,937 295,139,893 280,712,657 296,793,211 310,230, 934

** CAB, in Kilograms Above is a compilation of six out of the eight airports to be studied with its cargo volume from 2007 until last year. Hong Kong was still reported to be the top airport in terms of cargo volume. Shanghai is at 3rd place as it is seen to be the center of trade in the coming years.

37

VIII. DIFFERENT AIR CARGO HUBS IN ASIA

A. Air Cargo in Hongkong Hong Kong retains its dominant role as an air cargo gateway, serving Southern China, with the Beijing gateway taking over air cargo that originates in Northern China and the Shanghai gateway handling cargo from Eastern and Central China. Considering the fact that Hong Kongs and Shanghais air cargo hubs are in China, it is noteworthy to consider a short historical background of air cargo operations in China. In the past, the industry has been fragmented, highly protected and regulated and also dominated by state-owned enterprises or SOEs, due to prevalent local protection, and rigid functional demarcations. 45 These became barriers to foreign participation in Chinas air cargo sector. A further constraint on the growth of foreign companies in the country is heavy government involvement. In spite of this, foreign companies remained attracted by the huge potential of Chinas air cargo logistics market. Chinas accession into the World Trade Organization after almost 15 years of negotiations, resulted in trade liberalization. The effect onto the industry was the liberalization of trading and distribution rights for foreign companies and relaxed ownership restrictions on logistics services providers, thus creating opportunities for foreign direct investment. In 1999 China and the U.S. implemented an expanded air services agreement, which included a fourth carrier from each side and an increase in weekly services from 27 to 54. Together with FedEx, the addition of UPS further stimulated competition in Chinas air cargo market. In 2002, foreign investors have been allowed to take stakes of up to 49% equity stakes, for as long as no single investor holds more than 25%, as compared with the maximum 35% allowed under the earlier regulation. In July 2004, China and the U.S. signed a far more liberal ASA, thereby resulting in five more carriers. 46

A1. Hong Kong International Airport (HKIA) The Hong Kong International Airport or HKIA is the worlds busiest international cargo airport responsible for more than a third of Hong Kongs external trade. Since it was opened in 1998, the number of aircraft takeoffs and landings have increased by 82% (McKinnon, 2011). HKIA continues to set new records for air freight and in 2010 became the worlds largest cargo airport, handling 4.17 million tonnes of air cargo (British Chamber of Commerce, 2011). In March 2011, the International Air Transport Association forecasted that Hong Kong will be the worlds fastestgrowing air cargo market, growing at 12.2% annually over the next two years such that cargo
45 46

Air Cargo Operations, Fung 2005 Ibid. 38

volumes will increase to 5.3 million tonnes in 2014 (British Chamber of Commerce, 2011). Furthermore, based on HKIA predictions on air cargo, tonnage is expected to reach 8.9 million tonnes a year by 2030, as compared to 4.17 million tonnes in 2010 (Air Cargo World, February 2012 Issue). HKIA currently enjoys a preferred status among freight forwarders, agents, logistics service providers, airlines and even other businesses because of the fact that it is a free trade port with a favorable tax regime 47 (McKinnon, 2011). Mc Kinnon adds that Hong Kongs pre-eminent position in world air cargo handled is also due to the success of its airport facilities. Four main cargo operators based in HKIA are: (1) Hong Kong Air Cargo Terminals Ltd; (2) Asia Airfreight Terminal Company Ltd; (3) DHLs Central Asia Hub; and (4) Hong Kong Posts Air Mail Centre. In order to maintain its number one position, key recommendations were given by the British Chamber of Commerce, with regard to the support that must be given from the government. These are: (1) support for immediate approval for construction of the third runway at HKIA; and (2) government involvement and support for further adoption of e-commerce in the air cargo sector. Consequently, a new cargo terminal is expected to open in 2013, boosting annual cargo handling capacity by 2.6 million tons. Another noteworthy investment is Cathay Pacific's dedicated cargo handling terminal, also due to open in 2013 and which will provide new facilities and increase total cargo handling capability at HKIA to 7.4 million tonnes per year, increasing healthy competition for the private sector and benefiting airport users with more choices (British Chamber of Commerce, 2011). In the 2011/2012 Budget Speech, the importance of HKIA and the air cargo industry to Hong Kongs prosperity was further highlighted, as follows: Further reinforcing Hong Kongs position as an international and regional transport hub is vital to our economic development ... In 2010, the passenger volume and cargo tonnage of the Hong Kong International Airport reached an all-time high of over 50 million and 4 million respectively. We will continue to invest in transport infrastructure projects and optimize our highly efficient multimodal transport services, with a view to promoting the development of air, sea and land transport and logistics. Much of the strong growth in air cargo in Hong Kong is due to the booming Pearl River Delta Region. The International Air Services Transit Agreement has not been ratified by China but applies to Hong Kong as a carry-over from British rule. It enables contracting States to agree to certain freedoms of the air including the privilege to fly across a territory without landing and the privilege to land for non-traffic purposes.

47

Mc Kinnon, 2004 39

In November of 2011, however, HKIA registered a 6.6% drop in throughput, owing largely to a 10% slump in exports (Air Cargo World, February 2012 Issue). Its total for the first 11 months of 2011 showed a drop of 3.4% in tonnage (Air Cargo World, February 2012 Issue). Then again, following a three-month public consultation on its Master Plan 2030, airport authority still confirmed its intention to push through with the construction of a third runway, as the existing two runways are projected to reach capacity by 2020 (Air Cargo World, February 2012 Issue). Air cargo throughput fell in December 2011 by 4.3% to 346,000 tonnes year-on-year

(http://www.eimportexport.com/). The Hong Kong Airport Authority attributed cargo decline in December to the 7% year-on-year drop in exports and 5% contraction in imports. Likewise, HKIA handled 3.9 million tonnes cargo, down 4.6% year-on-year in January, as mentioned in a Hong Kong Government statement. A2. Hongkong Air Cargo Terminals Ltd. (HACTL) In a study by Peterson in 2007, it was identified that the Hong Kong Air Cargo Terminals Ltd. or HACTL should be a model for how a cargo facility should operate, because of its technologicallyadvanced features. The Super-Terminal 1 at HACTL is the worlds largest stand-alone air cargo handling facility, with a land area of 170,000 square meters. Opened in 1976, the Super-Terminal 1 opened after an investment of more than $1 billion, with an annual capacity for 2.6 million tonnes of capacity. While many successful cargo facilities have implemented information technology in their operations, HACTLs system is still considered to be the model for major hub facilities (Peterson, 2007). According to the Air Cargo World February 2012 Issue, HACTL currently handles about 80% of the airports cargo throughput and shall boost its capabilities with the introduction of a new IT system valued at HK $240 million. Since the HACTL facility is considered as a model for how a cargo facility should operate, a deeper study of its operations are key in determining the important components of a world-class hub. The China Market was identified to have excellent connectivity and accessibility considering the Pearl River Delta Region, with sufficient cargo capacity of the Super-Terminal 1 and its automated cargo handling system as HKIAs strengths, and its geographical location drawback (B747400F:85-90% payload to Anchorage or Frankfurt), uncertain future after Chinas entry into WTO, China-Taiwan relations and low transit as its weaknesses.

40

B. Air Cargo in Shanghai As mentioned in the early part of this study, air cargo in China is shipped primarily in passenger aircraft, resulting in activities which are concentrated in major cities such as Beijing, Shanghai, and Hong Kong, where passenger demand is among the highest. It was also mentioned that the Shanghai gateway handles cargo from Eastern and Central China, as Hong Kong serves Southern China and Beijing serves Northern China. Air Cargo in Shanghai ranks 3rd among the worlds top airports in terms of Cargo volume. It was said that Shanghai is one of the best options to be a regional hub in Asia. B1. Shanghai Pudong International Airport Shanghai Pudong International Airport is the largest airport serving Shanghai. It was opened in 1999 and is a major hub for airlines including: (1) Air China; (2) China Eastern Airlines; and (3) Shanghai Airlines. Reports consider Shanghai to be a good bet in the race to build a regional hub in Asia, expecting 100 million air travelers to pass through its terminals each year by 2015. Just recently, the Civil Aviation Administration of China or CAAC signed a Strategic Cooperation Agreement with Shanghai municipal government, which aims to speed up Shanghai's Civil Aviation Development, by setting the goal of developing Shanghai Pudong International Airport to be the number one international cargo hub worldwide by 2015. Both entities have come to an agreement regarding the targets for the development of the civil aviation industry in Shanghai during the 12th Five-Year Plan period from 2011-2015, which includes: continued safety of air transportation, sustained enhancement of air transportation guarantee, an assembling development of air service, the shaping of a manufacturing and research center for jumbo jets, a sharp rise in its international competitiveness, as well as a quickened construction of Shanghai as an aviation hub center and an improvement in the quantity and quality of air service. By then, it is expected that the Shanghai Pudong International Airport will become a crucial linking airport in the global aviation network which can handle up to 100 million passengers, as well as 5.5 million tons of cargo and mail. The Airport has various facilities, namely: (1) Bulk Cargo Operation System - six stacker systems in two operation areas, which runs automatically for bulk cargo storage and retrieval, due to high-tech control and operating devices, the system; (2) ULD Operation System - operated by 2 elevated transfer vehicles or ETVs and used for storage, retrieval and transfer; (3) Area for Cargo Build-Up or Break-Down; (4) X-Ray Machines - a total of 16, operated by trained professionals of an independent security company; (5) Over 120 vehicles equipped for cargo operation and transportation; (6) Facilities for cargo cooling and freezing; (7) Dangerous goods 41

storage house; (8) Vulnerable and valuables room or Strong room; (9) Live animals room; (10) CCTV system; (11) Security Build Up Area - the terminal is the first to introduce dedicated warehouse space within its facilities to forwarding agents for palletising. The forwarding agent extension is equipped and supervised b PACTL, providing basically the same security, safety and handling equipment for cargo acceptance and build up, as used by PACTL itself. The advantage of this "shared use concept" lies in speed, as cut off times for BUPs are lowered to 120 minutes; and (12) T-Cargo Area, to speed up the import process. Shanghai Pudong International Airport has taken the following measures to reduce environmental impact, primarily to reduce energy consumption and CO2 emission: (1) designing of their warehouse with a very efficient aeration system which can bring fresh air into warehouse and take turbid air out continuously to make good environmental condition for our warehouse staff; (2) use of tail gas cleanup units for trucks and forklifts as the device is capable to reduce other harmful gas; (3) practice of other measures to use less resources. In January 2012, however, the Shanghai International Airport Co., Ltd. reported that the Shanghai Pudong International Airport experienced a sharp fall of 22.37% in air cargo volume to 199,900 tonnes. More particularly, freight volume on domestic services dropped 27.69% to 23,500 tonnes, while international cargo fell 19.83% to 150,400 tonnes. The strengths of Shanghai Pudong International Airport were identified to be its big market size and growth potential, FTZ in Pudong Area resulting in tax incentives and low labor cost and land price. On the other hand, government regulations such as protective trade policy, low labor quality and lack of logistics infrastructure were, on the otherhand identified as Shanghai Pudong International Airports weaknesses.

42

C. Air Cargo in Shenzhen Air Cargo in Shenzhen ranked 24th in the 2010 top airports with 809,363 tons of cargo. It is one of the busiest airport in China next to Shanghai and Guangzhou. C1. Shenzhen Baoan International Airport Shenzhen Bao'an International Airport formerly named Shenzhen Huangtian Airport is located near Huangtian and Fuyong villages in Bao'an District, Shenzhen, Guangdong, China. It is 32 km northwest of the city center. It is the hub forShenzhen Airlines, Shenzhen Donghai Airlines, SF Airlines, Jade Cargo International and a focus city for China Souther Airlines and Hainan Airlines. The airport also serves as an Asian-Pacific cargo hub for UPS Airlines. The airport is undergoing major expansion with a new terminal under construction. A second runway was also recently completed. It is one of the three largest airport hubs serving southern China, alongside Hong Kong International Airport and Guangzhou Baiyun International Airport. The airport was opened on 12 October 1991. It occupies an area of 10.8 kms. Its runway is 3400 m long and 45 m wide, and it has 53 parking spaces on its apron. The airport also has ferry routes to Hong Kong International Airport, where passengers can transit without going through immigration and custom checks, akin to transit between two flights. Its current terminal covers an area of 152,000 sq meters and consist of 24 jet-ways. Shenzhen airport handled 26,713,610 passengers in 2010, according to Civil Aviation Administration of China, making it the fifth busiest in China. The airport was also China's 4th busiest and world's 24th busiest airport in terms of cargo traffic, registering 809,363 tonnes of freight. In terms of traffic movements, Shenzhen airport was the 5th busiest airport in China in 2009. In comparison with Hong Kong International Airport, Shenzhen International Airport offers greater connectivity to domestic Chinese cities at a cheaper ticket price but is less convenient for Hong Kong residents. Also, international traveler suffers from, on comparative terms, low levels of spoken English. There are three main terminals at Bao'an Airport:

Terminal A - for domestic flights Terminal B - for domestic flights Terminal D - for international and Taiwan flights

43

Since the beginning of 2008 the 1.6 km long terminal 3 is being built. This new terminal will be between the current runway and another runway currently being built. A second runway running parallel to the west of the current runway will also be built. The new runway will be built on reclamation land extending out towards the Pearl River Delta, with a length of 3600 meters and 60 meters wide. The second runway was completed in June, 2011 and started operations in July 2011 but capacity will be restricted until the new terminal is opened since air movements will need to cross the existing runway to access the older terminals to the east.

44

D. Air Cargo in Guangzhou Guangzhou is ranked at 21st among the top airports in the world in terms of cargo volume. It was also said that Guangzhou is one of the busiest airports when it comes to cargo operations. This is also known to be the hub of FedEx.

D1. Guangzhou Baiyun International Airport Guangzhou Baiyun International Airport is the main airport of Guangzhou, the capital of Guangdong province, China. Both airport codes were inherited from the old airport, and the IATA code reflects Guangzhou's former romanization Canton. The airport is the main hub of China Southern Airlines and a focus city for Shenzhen Airlines and Hainan Airlines. In 2011, Guangzhou Baiyun International Airport was China's 2nd busiest and world's 19th busiest airport in terms of passenger traffic, with 45,040,340 people handled. As for cargo traffic, the airport was the 3rd busiest in China and the 21st busiest worldwide. Guangzhou airport is also the 2nd busiest airport in terms of traffic movements in China. The opening of the New Guangzhou Baiyun International Airport had relieved most of the controversies of the older and deteriorated airport because of the limited space, overcrowding and lack of expansions. Its opening allowed it to overcome curfews and restrictions and begin a 24 hour operation. This meant that China Southern Airlines could highly utilize their intercontinental routes by flying overnight. Other airlines have this benefit too. The airport is served by the Airport South Station on Line 3 of the Guangzhou Metro. In August 2008, the airport's new expansion plan was approved by the National Development and Reform Commission of China. The airport will build a third runway located 400 metres east of the existing east runway. The new runway will be 3800 metres long and 60 metres wide. Other elements of the expansion plan include a 531,000-square-metre Terminal 2, a new indoor car park and an outdoor car park, a transportation centre, and a metro station which will serve Terminal 2. The total cost of the project will be 14.036 billion. Construction of the third runway is estimated to start in 2011 and finish in the first half of 2013. When the whole project is finished by the end of 2015, the airport will be able to handle 75 million passengers and more than 2.17 million tonnes of cargo a year.

Runways: 23,800 metres (12,500 ft) and 3,600 metres (11,800 ft) Aircraft parking bays: 173 (passenger apron and cargo apron) Current passenger capacity: 45 million passengers per year Planned passenger capacity in 2020: 75 million passengers per year Current cargo capacity: 1 million tonnes Planned cargo capacity in 2010: 2 million tonnes Planned cargo capacity in 2020: over 2.17 million tonnes 45

E. Air Cargo in Dubai Dubai is firmly established as a regional center for re-export, retail, leisure, aviation, IT and finance. Moreover, Dubai has been a strategic trading post for more than 15 centuries, throughout which it was chiefly a unique location on the Persian Gulf that was recommended to shippers and manufacturers. Because of the United Arab Emirates or UAEs excellent infrastructure and probusiness environment, Dubai is an ideal gateway to the dynamic Middle Eastern, African and Southeast Asian markets. Unprecedented development of the region in the last 50 years, as well as its modern facilities, sunny weather, wide sandy beaches, luxurious hotels, top-ranked sporting events and liberal business climate, have underscored the importance of its location, not just to the UAE or the Middle East, but to Africa and the Orient as well. In his study, Kasarda (2006) pointed geographical accident as a major factor in Dubais success. As a result, both the Dubai International Airport and the Dubai World Center have emerged as intermediary hubs for the Asia-Europe trade. It was further enumerated that the advantages of Dubai in relation to its success in the industry, include: (1) Dubais location along the east-west Asia to Europe trade routes; (2) Dubais access to inexpensive, imported labor and capital to invest in facilities; and (3) Dubais stable government and liberal commercial environment, which played a role in its growth by deciding to modernize and expand the air cargo terminal at Dubai Airport and to grant open skies rights to passenger and cargo airlines. The open skies put air cargo in Dubai on a rapidly rising trajectory. (Air Cargo World, March 2012 Issue). Several multinational companies have chosen Dubai as an area to locate their headquarters, because of the creation of the Dubai Airport Free Zone or DAFZ, a 1.2 million sqm. area, developed to accommodate technology-driven industries and goods with high value-to-weight ratios. The DAFZ also offers companies the benefits of 100% foreign ownership, a tax-free status for up to 15 years, which is renewable for a second 15 years, the right to use other facilities such as the modern airport and the Dubai Cargo Village, both located outside the zone, freedom to move capital and no personal income tax. Other incentives of the DAFZ are a research center that will contain information on free-zone activities around the world, a Service Center that will handle paperwork and interface with the local government, an employment service for people looking for jobs within the DAFZ and other auxiliary services such as banks, pharmacies, restaurants, and shops. Often known as the gateway between East and West, Dubai is home to one of the fastest growing cargo hubs in the world.

46

The Oxford Economics Report (2011) defines the Dubais aviation sector as the airport operator, Dubai Airports, involving aircraft ground handling and the passenger and cargo services. Figure 21 shows how Dubais Aviation Model is structured:

FIGURE 21: DUBAI AVIATION OWNERSHIP STRUCTURE

Source: Department of Civil Aviation

E1. Cargo Mega Terminal In 2007, as a result of the Department of Civil Aviations restructure program, the Dubai Airports, an entity responsible for the development and management of Dubais airports and Dubais Civil Aviation Authority, was formed. Dubai Airports is serviced by over 130 airlines flying to more than 220 destinations across 6 continents. More than 35 cargo airlines have offices at the Dubai Airports Cargo with 17 air cargo parking slots for freighters. The cargo warehouse has a total of 56 truck docks for import, export and perishable cargo, and seven docks dedicated to sea-air traffic, the storage facility includes small warehouse pallets with 902 positions, regular 1,698 positions, large 1,126 positions and mini shipments 760 (single positions), as well as 18 positions for storing perishables. 47

Dubai Airports Cargo has won over 25 awards since 1991, including Air Cargo News UKs Best Cargo Airport in the Middle East, and the Asian Freight and Supply Chain Awards (AFSCA) for Best Airport for 15 consecutive years. Since opening its doors to the world in February 2008, Dubai Airports Cargo Mega Terminal, built on a 43,600 sqm. site and with a capacity of 1.2 million tonnes per year, handles all types of cargo from one central location. The Cargo Mega Terminal has fully-automated workstations and is one of the most technologically advanced cargo terminals in the world. At present, the Cargo Mega Terminal has increased its capacity to 2.5 million tones. For special cargo, general cargo and unit load devices, the facility accommodates: (1) special cargo such as perishables, live animals, valuables, human remains and dangerous goods including radioactive materials; (2) general cargo; (3) intact unit load devices; and (4) intact unit load devices with perishable cargo. The Cargo Mega Terminal has a state-of-the-art cargo commercial and terminal handling system called the skychain, which integrates all processes across network and global operations, in real-time. Here, information is transparent to both internal and external players across the global supply chain through industry-standard messaging or web interfacing. As Dubai rapidly transformed itself into one of the worlds key re-export hubs, DCGs terminals and sea-air cargo centre recorded consistent double-digit growth and facilities expanded to meet demands. Dubai Airports is currently the worlds fastest expanding airport. E2. Dubai International Airport (DIA) In 1959, The Dubai International Airport or DIA was established, consisting of a compacted runway, an apron area, a terminal building and a fire station within a 1,800m. area. The DIA is connected to over 220 destinations across six continents through some 130 scheduled airlines and is comprised of 3 terminals. A year after its establishment, the airport was opened, capable of handling aircraft up to the size of a DC-3, which can accommodate 9 airlines and serve a total of 20 destinations in 1969. In 2000, the opening of the Sheikh Rashid Terminal or Terminal 1 built as part of the first phase of the general expansion project, thereby increasing the Airports capacity from 10 Million to 25 Million. Two years after, the DIA was ranked the second fastest growing airport in the world according to the Airports Council Internationals traffic statistics. The facility handled around 18 million passengers in 2003 and was established as the aviation hub of the Middle East. In 2007, the Dubai International Terminal 3 was built exclusively for the Emirates Airline. The awardwinning Emirates Terminal 3 is acknowledged in the industry as the most successfully launched terminal of its size and expanded the DIAs capacity to 60 Million at that time . The opening of the worlds largest single terminal, the DIA was the fastest growing airport for international passengers in 2009 and continues to be one of the busiest airports in the world in terms of international passenger and cargo traffic. Because of this, UAEs leaders have already 48

constructed a second airport, the new Jebel Ali International Airport (Air Cargo World, March 2012 Issue), an example of the Airport City model. Consistent with Dubais liberalized aviation environment, the new airport allows airlines to self-handle cargo and manage their own terminal space within the DFZ (Air Cargo World, March 2012 Issue). An increase in air cargo volume in the DIA in February of 2012 continues to provide hope for the industry, as evidenced by an increase of 6.5% to 157,492 tonnes as compared to the previous years 147,937 tonnes. In March 2012 the airport handled 186,417 tonnes of cargo compared to 185,921 tonnes in March 2011, a year-on-year increase by 0.3%. With regard to the different carriers in the Middle East, industry players enjoyed a 9.4% rise in demand in 2011, much of it generated by Emirates Airline and Etihad Airways. According to David Kerr, Vice President of cargo for Ethiad, "Etihad Airways' cargo operations saw outstanding performance in 2011 and volumes are continuing to grow in 2012 in line with capacity increases and network expansion. Cargo operations accounted for 20% of Etihad Airways' overall revenues, with average monthly loads of 25,000 tonnes. In the first quarter of 2012, we have seen a comparably strong performance. We expect March volumes to be very good as operations into and out of China pick up. European and American demand has also been strong and we forecast strong performance into the second quarter." In support of his vision, Pradeep Kumar, Senior Vice President of cargo revenue at Emirates Airlines added, the recovery is being driven by high-end freight. We are seeing strong performances into Africa, South America, especially Brazil, and Asia, mainly in areas such as temperature-sensitive [pharmaceutical] cargoes and mobile phones. Other areas may remain under pressure until the second half, but then we see growth consolidating." The importance of DIA as a vital, regional and global cargo hub was again recognized at the annual Supply Chain and Transport Awards or SCATA held in Dubai on May 01, 2012, where it was named Air Cargo Hub of the Year, the same award it won the previous year. Dubai Airports, which is planning to launch the new concourse 3 at Dubai International in 2013, has embarked on an operational readiness and airport transition (ORAT) programme. Concourse 3 is expected to increase the airport's capacity to 75 Million passengers every year. Dubai Airports has also embarked on the first phase of the $7.8 Billion Strategic Plan 2020, which will increase Dubai International's annual capacity to 90 Million passengers by 2018. (Air Cargo World, May 2012 Issue).

49

E3. Dubai World Central Airport (DWC) Strengthening Dubais position as a leading aviation and logistics hub, the Dubai World Central or DWC is a strategic initiative of the Dubai Aviation City Corporation and the Government of Dubai and chaired by H.H. Sheik Ahmed bin Saeed Al Maktoum (http://www.dwc.ae/about-dwc/). The DWC is a multi-phased urban infrastructure development, designed to meet the present and future needs of aviation, air transport, commercial and logistics businesses. The DWC is a multiphase development of 6 clustered zones, namely: Dubai Logistics City or DLC, Commercial City, Residential City, Aviation City and Golf City Dubai Aviation City Corporation. Spanning 140 sqkm. and strategically located in the fast-growing logistics corridor of Dubai, the development is another tangible proof of Dubais ongoing commitment to the diversification and sustainable growth of its economy. Dubai Airports launched cargo operations at DWC on June 27, 2010 as part of the first phase of the project, which includes a single A380 compatible runway, a passenger terminal with capacity of 5 million passengers per annum (mppa) expandable to 7 million passengers per annum, a cargo terminal building with a capacity of 250,000 tonnes per annum expandable to 600,000 and a 92m. air traffic control tower. Once completed, the DWC will have up to 4 passenger terminals, which will accommodate up to 160 mppa; 5 parallel runways at 4.5km long, each separated by a minimum of 800m; an Automated People Mover connecting passengers to different terminals and moving staff to all key points in the development; and an internal road network for all key airport operations (http://www.dwc.ae/about-dwc/). Lastly, within the vicinity of the Jebel Ali Port and Free Zone, the DWC will make air-sea connectivity achievable in 4 hours. Emirates Airlines became the first carrier to land its aircraft on Dubai World Central-Al Maktoum International, as part of final preparations prior to the official launch of the airport. After the airlines test operation, an extensive array of system, process and documentation checks, tests and trials took place. The construction of the Dubai World Central-Al Maktoum International increased the airport capacity of Dubai to accommodate the expected 48% increase in cargo volumes from 1.9 Million to the 3 Million tonnes anticipated by 2015. It is also expected to serve as a multi-modal logistics hub for 12 Million tonnes of freight and a global gateway for the 150 million passengers per annum that are expected to pass through Dubai by 2030.

The newly constructed DWC handled 89,729 tonnes of air freight in 2011, with 36 airlines using the new facility for cargo charter operations. The DWC has reported a 382% rise in cargo volumes during the first quarter of 2012, as compared to the previous years 10,381 tonnes, according to the quarterly traffic report by Dubai Airports. Moreover, air traffic movements also rose 313.3% to 50

3,513 movements in the first quarter, up from 850 in the earlier period. In support of this, Dubai Airports CEO Paul Griffiths said that despite the fact the global cargo industry remains under pressure, DWC continues to ramp up as new operations are introduced. He adds, "increasingly airlines are recognizing that the DWC, although still in its infancy, has a unique value proposition, that is, its bonded link to the Jebel Ali port. Dubai Airports' total cargo volumes are expected to top 3 Million tonnes by 2015 and an increasing portion of that growth is expected to spill over to DWC." Overall, the global downturn in 2010-2011 was a historical event for the Middle East, as it experienced its very first decline in Asian exports, likewise resulting in the very first year-on-year decline in cargo volume at the DIA by 1.5% since the site pushed into the upper echelons of the Worlds Largest Freight Airports in the 1990s. The increase in volume year-over-year across the DIA and DWC could be attributed to the growth of sea-air traffic, under bond via the port of Jebel Ali, good working relations between truck feeders between the two Dubai Airports, as well as the introduction of additional charter and scheduled services over the previous year, according to Paul Griffiths, CEO of Dubai Airports (http://www.thenational.ae/thenationalconversation/industryinsights/aviation/dubai-international-airports-air-cargo-volume-soars). According to the Oxford Economics Report (2011), the success of Dubais aviation sector derives from a number of strengths, which are the product of strategic decisions that the government of Dubai and the aviation sector have taken in the past, including: (1) the governments demonstration of its awareness of the importance of aviation for enabling growth in key sectors of Dubais economy, as manifested in Dubais strategic plan and decision-making that is consensus based, timely and effective; (2) open competition among airlines, as reflected in over 150 airlines that operate out of Dubai International; (3) Dubais liberal aviation policy that has pushed for greater freedoms for all airlines to enable them to operate without undue restrictions on their commercial decisions and competitive airport charges; (4) a consensus-based approach to investment that has helped Dubai Airports and Emirates expand together, supporting each others growth; and (5) focus on growth and underserved markets that has enabled the airport to increase the number of passengers it handles from 12 Million to 47 Million over the past decade. To date, Dubais aviation sector continues to invest heavily in its infrastructure, aircraft fleet and staff. The UAE currently has a large order book for new aircraft, with published orders for 75 A380s, for 70 A350s and for 48 B777s in 2011, some of which will be to replace their existing fleet of aircraft as these are withdrawn from service. (Oxford Economics, 201). On this basis, Emirates fleet is projected to grow to 249 by 2020, while its cargo fleet expected to grow from 9 to 23 units of aircraft over the same period. In line with this, Andrew Walsh, Vice President of Cargo and Logistics at Dubai Airports, said at Dubai Airports, we continually strive to build on the 51

advantages of our geocentric location at both Dubai International and Dubai World Central which allows us to tap in to global trade flows by providing the best service possible to our customers,.

F. Air Cargo in Singapore Singapore according to the Airports Council International is top 11 out of the top 50 airports in terms of cargo volume. F1. Changi Airfreight Center (CAC) The Changi Airfreight Centre is a 46-hectare free trade zone developed in 1981, when the Changi Airport first came into operation. It has nine airfreight terminals, with a combined handling capacity of $3 million per annum. All niche forms of cargo are handled at the centre, including an airmail transit centre and a quarantine centre for the inspection of imported plants and animals. A 24-hour customs checkpoint is also available for cargo operations. The CAC is managed by the air cargo division of the Civil Aviation Authority of Singapore. As previously stated, last March 2011, the CAC ranked 11th largest by volume. To date, several developments have taken place in CAC, largely driven by market growth and changing industry needs. For instance, the Changi Megaplex, a multi-tenanted warehouse facility, was developed in the 1990s, following extensive consultation with the freight forwarding community, mainly to cater to the rapidly changing needs of the forwarding industry. The launch of the Airport Logistics Park of Singapore or ALPS in 2003 is another development and an example of how the Changi Airport has adapted to changing industry trends. ALPS is a 26-hectare logistics park, strategically located within the airports free trade zone, thereby enabling quick turnaround, value-added logistics and regional distribution activities. Some of the value-added logistics activities available at ALPS include postponement, configuration, sub-assembly, returns and repairs and vendor-managed inventory for time-sensitive products. These factors have attracted many global companies to establish regional distribution centers or RDCs in ALPS, in order to serve their growing Asia-Pacific clientele from Singapore. The development of TNTs Singapore Regional Hub in 2009 and the establishment of SATS Coolport at Changi in 2010 also exemplify how Changi Airport caters to the changing needs of the industry. Although land around the airport for Singapore is tight, Changi continues to take a proactive approach in the airport master planning process, taking into consideration long-term needs of its clients. As a response to environmental issues, Changi pursues initiatives to ensure sustainable growth of the airport and fulfills corporate social responsibility to the local community. As a 52

company, CAC has a clear environmental policy, with efforts focused on five major areas: emissions, energy efficiency, waste management, noise management and water management (http://www.evaint.com). Some of its key initiatives at the airport include: (1) facilitating the introduction of CNG tractors to be used by the ground handlers; (2) using energy-efficient lighting and installation of motion sensors at the airport; (3) promoting the use of recycled materials for construction; and (4) rainwater harvesting and the use of water efficiency tools

(http://www.evaint.com). As a result of its efforts, Changis Terminal 3 was awarded the Green Mark Gold in October 2009, which is a national green building rating system to evaluate a building for its environmental impact and performance. In addition, CAC has also supported the country in its development of its solar-powered mobile chillers -temperature-controlled infrastructure installed at the airports tarmac to keep perishables at the right temperature while in transit at Changi. For its green efforts, CAC has been awarded the Best Green Service Provider Airport at the Annual Asian Freight and Supply Chain Awards in 2010 and 2011 (http://www.evaint.com). CAC handled 1.81 million tonnes of air freight movements in 2010, recording an 11% year-onyear growth. Likewise, it also performed well for the first five months of 2011, growing by 3% year-on-year. As regards air freight performance in 2011 so far, CAC expects cargo volumes to recover back to pre-crisis levels. On average, air cargo generally grows at a rate which is about half that of GDP growth. With Singapores long term GDP growth projection at about 4-6% per year at a steady state, CAC expects long-term air freight growth in the range of about 2-3% per year (http://www.evaint.com). CAC is competing from a position of strength as a leading global logistics hub and international cargo airport. It is one of Singapores critical success factors as a leading global logistics hub in Asia. More importantly, the growth of North Asian markets, more particularly, China and Hongkong, signify Singapores role as a cargo hub. Based on The World Bank Logistics Performance Index (LPI) 2010 Study ranking 155 countries on logistics performance, Singapore was listed as the first in Asia and second globally after Germany. Singapore has consistently ranked well in key parameters such as efficiency of cargo clearance, quality of trade and transport infrastructure, timeliness of international shipments and competence of logistics service providers (http://www.evaint.com). According to the Air Cargo World May 2012 Issue, the Changi Airport Group has launched a S$15 million initiative to boost airfreight volumes in the region. The Changi Airport saw freight gains last year amounting to 1.87 million tonnes of cargo, translated to a 2.8%, year-over-year increase, a 53

figure only at par with 2008 figures (Air Cargo World, May 2012 Issue). In January, however, airfreight demand dropped to 7.1% compared to the same month a year earlier to 136,800 tonnes of cargo handled (http://www.eimportexport.com/).

G. Air Cargo in Malaysia Kuala Lumpur ranked 28th among the top 50 airports in terms of cargo volume according to the Airports Council International. Malaysia Airports Holdings Berhad or MAHB is a privatized entity that manages and operates all the airports in the country, with the exception of the Senai Airport in Johor and the Kerteh Airport in Terengganu. The MAHB was incorporated in 1991, when the Malaysian Parliament passed a bill to separate the Department of Civil Aviation or DCA into two entities with different responsibilities. To date, DCA remains as the regulatory body for the airports and aviation industry in Malaysia while MAHB focuses on the operation, management, and maintenance of airports. From 1991 until 2005, Malaysia spent a total of RM63 Billion for the development of transport infrastructure in the country, the total of which was divided into competing demands on infrastructure development, from rail, road and the development of the Kuala Lumpur International Airport. By 2007, Malaysia had 45 airports, including 6 international airports, 19 domestic airports and 20 STOLports. Today, the 5 largest airports in Malaysia Kuala Lumpur International Airport, Kota-Kinabalu International Airport, Kuching International Airport, Penang International Airport and Miri Airport, handle over 43 Million passengers a year and over 805 thousand tonnes of freight (Oxford Economics, 2011). Currently, there are 2 cargo complexes in Malaysia - one operated by the MAS and the other by the KLAS. G1. Kuala Lumpur International Airport (KLIA) Kuala Lumpur International Airport or KLIA is the main airport and gateway to Kuala Lumpur, Malaysia and one of the largest airports in Southeast Asia, operated by the MAHB. It is located at the top of the southern corridor of Peninsular Malaysia, bordering the states of Selangor and Negeri Sembilan. It is a unique airport because it has within its boundaries all that is needed for business, entertainment and relaxation. The airport is part and parcel of the Multimedia Super Corridor or MSC where placement of high technology industries are being actively pursued.

54

The KLIA is the result of a visionary strategy to meet the needs of new large aircraft and the traffic demand of the 21st century, as it has pioneered the use of state-of-the-art technology in airport management known as Total Airport Management Systems or TAMS, managed by Malaysia Airport (Technologies) Sdn. Bhd. Located in Sepang the KLIA hosts domestic, regional and international passenger and cargo services for over 40 airlines and is a hub for airlines including Malaysia Airlines, AirAsia and AirAsia X. For 3 consecutive years from 2005-2007, the KLIA won the Airport Service Quality (ACI-ASQ) Award for the Worlds Best Airport in the 1525 million ppa category. It was also voted the Best Airport Worldwide and Best Airport in the Asia Pacific region in the same award. Its Low-Cost Carrier Terminal-KLIA or LCCT-KIA, however, was named by the Center for Asia Pacific Aviation or CAPA as the Low Cost Airport of the Year in 2006. Cargo at KLIA is transported not only in the aircraft belly but also on freighters operated by airlines, without restrictions or ban on passenger and cargo flights at night nor any environmental issues, unlike some airports in the West. The KLIA was conceptualized in the early 1990s to be a world-class hub airport for the AsiaPacific region, as part of Malaysias national development strategy whereby sustained investment in infrastructure is made to ensure the timely and adequate supply of facilities that can meet the development requirements of the country. The construction of KLIA was needed as Subang

International Airport had experienced growth of 1415% per annum from 1990 to 1995, resulting in the airport reaching its designated capacity of 5,454 passenger movements per hour by the mid1990s. With 10,500 hectares of land, KLIAs development costed US$2.8 Billion. Its development spanned several phases: (1) the first phase was completed on June 30, 1998, resulting in the construction of 1 main terminal and 1 satellite building; (2) the second phase begun in 2008 and is expected to last until 2015, initially consisting of a temporary Low Cost Carrier Terminal or LCCT, located about 20 kilometers from the KLIA Main Terminal Building with the capacity of handling 10 Million passengers a year. The current facilities will be upgraded to handle up to 15 million passengers per year by 2015, increasing the total capacity at KLIA to 40 million passengers per year; (3) the third phase, programmed to run from 2010 to 2015, under the 10th Malaysia Plan, takes into account the construction of the new and permanent LCCT, to accommodate 25 Million passenger capacity and increase the overall capacity of main terminal and new LCCT to 50 Million passengers, as well as the construction of second satellite terminal which will also increase passenger capacity to possibly 75 Million; and (4) the construction of the second terminal that would increase capacity to 100 Million passengers. 55

The KLIA2 or the new terminal, is described as a showpiece of the next generation hub concept, expected to be completed by the end of 2012 or spring 2013. This project, which was built to cater to LLCs, particularly Malaysias AirAsia, has met with opposition from the airline which alleged that the project was considerably delayed and the costs had escalated. In spite of this, however, the KLIA has been trying aggressively to increase both passenger and cargo traffic at the airport, in order to strengthen its position in Southeast Asia and match the traffic of neighboring Singapores Changi International Airport of Singapore or Bangkoks Suvarnabhumi. In fact, according to Tan SriBashir Ahmad, Managing Director and Chief Executive of MAHB, Our tourism and business traffic may be lower than Singapore and Bangkok, but we have been recording good growth. Even as most regions of the world were mired in the economic crisis of 2009, we experienced strong growth, mainly, because of tourism and business traffic. KLIA is the flagship of a world-class airport system and it intends to maintain and elevate its status in the industry. In fact, during the World Cargo Symposium in Kuala Lumpur, Tony Tyler acknowledged Malaysia as a country which has always seen aviation as a strategic component of its development. The Air Cargo Makes it Happen campaign is one of the steps that Malaysia is currently taking in order to raise the profile. Another program launched in the industry in 2010 is the first IATA Secure Freight pilot initiative, which evaluates the strength of a nations aviation security infrastructure and works with the civil aviation authorities to ensure that cargo has come from either a known consignor or regulated agent and has been kept sterile until it is loaded. It identifies the gaps within a security regime, and helps to seal this process upstream which will prevent bottlenecks at the airport. According to the MAHB Annual Report (2006), an aggressive marketing strategy was launched for the period 2006 to 2010 to promote KLIA as part of its 5-Year Transformation Strategy, which included among others, the extension of the Airline Incentive Program to attract more foreign airlines to fly into KLIA as well as the other 4 international airports managed by MAHB. Incentives given under the Program include free landing and parking charges as well as free office rental space for 6 months and marketing support funds for new foreign airlines. As part of its promotional strategy, MAHB also attends major aviation-related forums all over the world in its marketing and promotional efforts. Aside from the different programs intended to maintain and elevate KLIAs status in the industry, the government invests in infrastructure and controls airline competition, and he government also implemented some specific policies to promote KLIA as a regional hub, such as the KLIA Hubbing Development Committee set up in December 2000, that meets once a year to: (1) examine 3 areas for the development of KLIA - traffic facilities, connectivity through MAS service, and 56

marketing; and (2) set performance and services standards for KLIA based on worlds best practices. A Free Commercial Zone was also set up to facilitate the handling of cargo at KLIA, which uses the paperless environment concept with value-added activities such as trading, break bulking, grading, sorting, re-packing and re-labeling. Lastly, a one-stop center was also provided to expedite the process of cargo clearance with additional support services such as multi-banking services, clinics, food and beverage and also postal services. Overall, the government invests highly in infrastructure to boost the competitiveness of airports, a similar strategy that is used by other major airports in ASEAN (Abu Bakar, 2009). In spite of the improvements in the performance of KLIA as an international airport, it is by no means a regional hub. Therefore, MAHB has focused the importance of KLIA as the regional hub due to the emergence of Changi Airport of Singapore and Bangkok. Nonetheless, since KLIA is increasingly becoming more competitive, the attainment of a hub status will enable the country to capture gains from airport services as well as improve the returns to its investment in the airport. To date, there is an emergence of new generation airlines or NGAs which include low cost carriers within and outside the country (Abu Baka, 2008). In 2010, the KLIA recorded 674,902 metric tons of cargo, up 15.5% from 584,559 tons the previous year. International cargo traffic accounted for 614,400 metric tons, while domestic cargo at KLIA amounted to 60,502 metric tons. 48 G2. Penang International Airport In 2009, government officials from the Malaysian island of Penang have urged MAHB to push for the federal government funding to build an integrated air cargo terminal to accommodate future air cargo growth on the island. Penangs Chief Minister Lim Guan Eng referred to the terminal as a worthwhile investment as it will bring in more cargo flights to Penang. He added, we really need an air cargo hub here so that we will be ready for a bigger market share of the cargo industry when the economy picks up. Penang was already a mini-hub owing to its position as a semi-conductor manufacturing center but needed a modern, state-of-the- art integrated air cargo terminal with the capacity to handle
48

http://www.logisticsdigest.com/inter-news/inter-corporates-news/item/7616-malaysian-airport-

holdingsgroup-builds-klia2-to-cater-to-lccs.html.

57

additional volumes of freight. For such reason, the Penang International Airport was expanded in 2001. Penang International Airports expansion is a component of the Northern Corridor Economic Region or NCER blueprint, which enables the airport in Bayan Lepas to become the premier air cargo hub within the Indonesia-Malaysia-Thailand Growth Triangle, supporting industrial parks and creating premium overseas markets for perishable high-value products. According to the blueprint, the planned expansion of the airport's facilities will include developing new passenger and cargo terminals and the addition of a new runway to cater for increased traffic. In line with this, Northern Corridor Implementation Authority or NCIAs Senior Vice President for manufacturing and industry, Chris Tan said, "We are very happy with this announcement since it helps us with efforts to transform Penang into a logistics hub. Once the project is completed, Penang will not only be able to boast of superior airport infrastructure to transport its high-technology exports, but also perishable food like high-value seafood items and agriculture products from the northern states. In expanding air links to bring in more international visitors into the NCER, the airport expansion can also accommodate the needs of low-cost carriers.

58

H. Air Cargo in Thailand According to the Airports Council International, Bangkok is at the 20th place in terms of cargo volume among the other top 50 airports. Thailand has international airports in 5 big cities which are Bangkok, Phuket, Chiang Mai, Hat Yai, and Chiang Rai (Center for Research and Communication, 2007. The 3 main airports are: Bangkok International Airport, Chiang Mai International Airport and Phuket International Airport, which accommodate the transport both of passenger traveling and air cargo. The Airports of Thailand Public Company Limited or the AOT is the agency that manages the countrys airports. As a member of ASEAN, Thailand joined the ASEAN Air Services Agreement that aims to support the Open Sky Policy on cargo and passenger air services which will be fully implemented by 2015, enabling airlines of ASEAN countries to operate air-cargo services with no restrictions on capacity, frequencies and international routes. Consistent with this policy, there is no limit to the volume of traffic and the airlines may avail themselves of this opportunity to serve any intermediate points en route as agreed upon. Moreover, Thailand also allows every state having more than one designated airline to operate air-cargo services into the country.

Thailand's economy rapidly expanded in the 1980s, largely due to the huge growth in the nation's import and export sectors (Center for Research and Communication, 2007). The products with the highest export value include the following: computers, parts and components, automobiles and auto parts and components, electrical-circuit boards, plastic granules, para-rubber, precious stones and ornaments, ready-to-wear garments, radio and television sets and components, chemical products and canned and processed seafood. Thailands major export markets are the ASEAN, the United States, Japan and the European Union, which account for 59.4% of all exports (Center for Research and Communication, 2007). On the contrary, following Thailands recovery from the economic crisis, the value of imports increased. Most imported products were capital goods, semi-processed raw material and fuel, all of which were essential for the countrys manufacturing sector (Center for Research and Communication, 2007). H1. Suvarnabhumi Airport On September 28, 2006, His Majesty the King Bhumipol Adulyadej, conferred the name Suvarnabhumi Airport, which means The Golden Land and presided over the foundation stone laying ceremony of the passenger terminal. It is also known as the New Bangkok International Airport or NBIA and Second Bangkok International Airport or SBIA. Designed by Helmut Jahn of 59

Murphy/Jahn Architects, this airport has the world's tallest control tower and the world's third largest single-building airport terminal. The Suvarnabhumi Airport replaced Don Muang Airport as the main Bangkok International Airport. It is currently the main hub for Thai Airways International, Bangkok Airways, Orient Thai Airlines and Thai Air Asia.

Don Muang was an important hub of Asia and the hub of Thai Airways International prior to its closure to commercial flights, as it served the most air traffic in Thailand, with 80 airlines operating 160,000 flights and handling over 37 million passengers and 1,130,000 tons of cargo in 2005 (Center for Research and Communication, 2007). At that time, it was then the 18th busiest airport in the world (Center for Research and Communication, 2007). Congestion and structural problems at the new Suvarnabhumi Airport have led to pressures to reopen Don Muang to allow for repairs to be conducted there, especially from low-cost airlines (Center for Research and Communication, 2007). Airports of Thailand resisted the move and the government's Department of Aviation initially rejected the plan but eventually, the government decided not only to reopen the airport to commercial flights, but also to do so permanently and to allow for international flights, allowing Bangkok to be served by two international airports (Center for Research and Communication, 2007). For that reason, Don Muang reopened on March 25, 2007 to serve domestic flights, low-cost carriers, small private jets, chartered flights, military aircraft and aircraft maintenance. According to Transport Minister Pongsak Ruktapongpisal, Don Muang would not be closed entirely. Instead, it will be used as a maintenance centre and at the same time, it would cater to charter flights and be a base for Royal Thai Air Force. After moving air cargo terminal from the congested old airport, Thailands air cargo capacity at the new airport has been increased from 1.2 Million tonnes per year to 3 million tones per year.

The Suvarnabhumi Airport has an area of 20,000 Rai or 8,000 acres and is situated in Racha Thewa, the Bang Phli district of Samut Prakan province along the Bangna-Trad Road, 25 km. from Bangkok. Its initial capacity was 45 Million passengers per year, 76 flights per hour and 3 Million tonnes of cargo per year. Supachai Kaewsiri, Director of the Information Technology Division of Thai Airport Ground Services or TAGS, reported that Suvarnabhumi Airports cargo warehouse has served about 10,000 business operators. It has two 60-meter-wide runways, one 4,000 meters (13,120 ft.) long and the other 3,700 meters, with parallel taxiways to accommodate simultaneous departures and arrivals.

In 2008, the Suvarnabhumi Airport was reported to move 6 Million tonnes of freight per year and is on its way to becoming Southeast Asias regional cargo hub. With one of the tallest air traffic 60

control towers in the world and one of the most automated Air Traffic Control Systems with the latest in safety equipment, the Suvarnabhumi Airport is poised for the kind of rapid traffic growth expected in Asia. The government focuses on infrastructure and services development at the airport, with the aim of Chiang Mai and Phuket Airport to serve as regional gateways and Suvarnabhumi Airport to be a global gateway (Center for Research and Communication, 2007). The government is keen in expanding the global route network of these airports and in becoming the Logistics Center for perishable goods, such as food, fruit, flower and fashion (Center for Research and Communication, 2007). Its policy to promote Suvarnabhumi Airport as a Center of Aviation, Passenger and Cargo Transportation paved way for the creation of the Duty Free Zone or DFZ, in order to facilitate the handling of inbound, outbound cargo and transit cargo with minimum customs procedure. The main buildings consist of: (1) Thai Airways International Public Company Limited and WFSPG Cargo Company Limited Cargo handling building; (2) 4 Warehouses; (3) 4 Freight Forwarding Agency Buildings; (4) Office Building for Customs Office and related government agencies; and (5) Free Trade Zone Administrator Building.

Leading executives are certain that Suvarnabhumi Airport will become Asias regional cargo hub, and as a result, promote trade in the region. The Airports ability to handle greater cargo capacity is seen as a crucial factor in realizing Thailands aspiration of Suvarnabhumi Airport becoming the regions cargo hub. Similarly, Mr. Serirat Prasutanond, the President of The Airports of Thailand Public Company Limited or AOT, revealed their vision for the Suvarnabhumi Airport to become Asias Leading Airport Business a world top 10 airport in Airports Council Internationals (ACI) Airport Service Quality ranking program. Recent reports show that the Suvarnabhumi Airport is requesting for funds for expansion, as passenger volumes have already reached its capacity limits after a mere 6 years. The AOT is equally conscious of the fact that in keeping with future demand, it will also need to add infrastructure to make its cargo-handling facilities more viable. According to the AOT, total cargo traffic at the six airports under its management amounted to 1.42 Million tonnes in 2011. Of this, Suvarnabhumi handled some 1.34 Million tonnes in 2011, with THAI Airways, the national carrier, as the major provider of cargo traffic. As shown in the July 2011 issue of the Suvarnabhumi Newsletter, the AOT Board of Directors, headed by Mr. Tirapoal Noparumpa, convened and endorsed the recommendations resulting from studies conducted by the ICAO and the IATA, regarding the Suvarnabhumi Airports plans to be the single airport for Bangkok. Development will take place in 3 phases: (1) from 2011 - 2025, construction of a Domestic Terminal, Domestic Terminal Car Park Building and new and improved connecting roads; (2) from 2025-2029, construction of a 4th runway, expansion of the Domestic Terminal and International Terminal, 61

increase in capacity of APRON, construction of a Midfield Satellite - 2nd and South Tunnel; and (3) from 2029 to 2033, construction of a 5th runway, South Terminal and expansion of APRON.

The global downturn which affected the global industry, resulted in year-on-year declines in volumes of cargo, as manifested in a review of the performances of the six air cargo hubs in this study. However, there is still an optimistic look among industry players, as these hubs are moving towards the position of becoming leading global logistics hubs and international cargo airports. In order to do so, each of them are taking steps towards their maintaining or attaining their status, by improving their airports facilities, as in the case of the Hongkong International Airport and Dubai International Airport, while Shanghai Pudong International Airport (ranked 3rd or 4th in throughout the 5-year period from 2007 to 2012 in the list of worlds busiest cargo hubs), has already made agreements with the CAAC and the municipal government, in order to speed up civil aviation development in the area. Government investment in infrastructure in order to boost the competitiveness of their airports is a strategy that is also used by the other major airports in ASEAN, such as the Kuala Lumpur International Airport, Changi Airfreight Centre and Suvarnabhumi Airport. All three are all departing from the traditional model of airport development, whereby the main revenue is derived from airlines through charges for landing and parking; instead, all three airports have increasingly tapped on non-aeronautical businesses such as retail outlets, restaurants, entertainment etc that can also cater for non- traveling visitors (Abu Bakar, 2009).

62

IX. Comparison of Air Cargo Hub Operations Out of the different factors identified in the studies of Senguttuvan, McKinnon, Lee and Raagas, this study shall focus on 5 factors, which are common in the studies mentioned and which shall be applied to available data concerning all eight hubs taken from the earlier portions of this study. In this way, it will be easier to compare and contrast the different hubs, their current status and their potential to become successful air cargo hubs, most especially since all cargo hubs mentioned in this study aim to become leading hubs in the industry. In achieving these, all cargo hubs are taking measures to satisfy the different factors, which are: (1) Location Factors; (2) Facility Factors; (3) Cost Factors; (4) Demand Factors; and (5) Government Regulations. The 5 factors discussed in this study are the same factors which were identified by Lee in his study. These would be the basis of being a competitive and an ideal hub. These factors will also be used as criteria for evaluating each countrys air cargo sector which in turn will show the gaps where the Philippines can improve on. This will determine how we can be at par with the successful air cargo hubs. (1) Location Factors refer to the geographical location of the hub, if it is within the 4-hour flight radius, if it is in the presence of a Free Port Zone and the presence of local logistics infrastructure. Strategic location paves way for operational efficiency, since air cargo is ideally picked up at the end of the production day and delivered at the start of the day, which takes about 2 hours on the ground to prepare and sort cargo at its final destination. (2) Facility Factors refer to the runway capability or capacity, terminal area, more particularly the number and expandability of terminals, operating system or technology, labor quality and presence of an Air Cargo Terminal or cargo village. (3) Cost Factors refer to labor cost and airport user charges, such as landing fees, parking charges, cargo service charges and taxes. (4) Demand Factors refer to the market size and growth potential, more particularly the number of flights and cargo handled in terms of metric tonnes, as well as the number of logistics service providers. (5) Government Regulations refer to the government policies concerning air cargo, such as the Open Skies Agreement, Free Trade Zones and tax incentives. Also taken into consideration here is the political stability of the country, presence of customs and government expansion or improvement plans.

63

A. Hong Kong Location: The route from Hong Kong is reported to have the shortest flight time to major markets in the Asia Pacific making it at the centerpoint and is is within the 4-hour flight radius. The

HKIA is the worlds busiest international cargo airport responsible for more than a third of Hongkongs external trade. It is located on the island of Chep Lap Kok by land reclamation and serves Southern China. Much of the strong growth in air cargo in Hongkong is due to the booming Pearl River Delta Region. It was identified in an Air Cargo Study by Lee in 2007 that the China Market, excellent connectivity and accessibility considering the Pearl River Delta Region as its strengths, whereas geographical location drawback (B747-400F:85-90% payload to Anchorage or Frankfurt), as one of its weaknesses. It is also located within a Free Trade Port. Facility: In terms of facilitie, Hong Kongs preeminent position in world air cargo handled is due to the success of its airport facilities. The HKIA has 2 runways, 2 terminals and is capable of handling 63 flights per hour. HKIAs new cargo terminal has a state-of-the-art material handling system. In total, it has 7 cargo handling areas, divided into 1st and 2nd tier cargo handling, with 3 air cargo terminals adjacent to the cargo apron and 34 freighter parking stands. In terms of 1st Tier Cargo Handling, the Asia Airfreight Terminal Ltd. or AAT has state-of-the-art fully automated cargo handling system, special cargo handling facilities such as strong/cold room, freezer, dangerous goods room and radioactive room, as well as a Chinalink, which is a one-stop cargo service to and from PRD. Still in terms of 1st Tier Cargo Handling, the HACTL also has state-of-the-art fully automated cargo handling system, with special cargo handling facilities for perishable, livestock, horse, cargo handling, refrigerated and dangerous goods as well as express items. Because of this, it was awarded with Technology Asset Protection Association Certification or TAPA. It also has a Superlink China Direct, a one-stop cargo service to and from PRD. In terms of 2nd Tier Cargo Handling, the Marine Cargo Terminal or MCT has round-the-clock operations, providing one-stop multimodal service linking with 17 PRD ports. The Airport Freight Forwarding Center or AFFC, on the other hand, provides cargo warehousing and logistics operations, enabling freight forwarders to undertake consolidation and distribution at the airport. Still in terms of 2nd Tier Cargo handling, the Tradeport Logistics Centre provides a wide range and custom-designed logistics services, such as inventory management, order processing and postponement assembly. In terms of the facilitys operating system or technology, it makes use of RFID Technology, the Gentrack Software and E-Freight Project. To date, the socalled E-Freight project is being implemented in Hongkong, which involves extensive IT application thereby reducing paperwork and ensures high safety and security as well. There is also sufficient cargo capacity of the SuperTerminal 1 and its automated cargo handling system as its 64

strengths. The HACTL currently handles about 80% of the airports cargo throughput and is often seen a model for how a cargo facility should operate, because of its technologically-advanced features. Airport authority confirmed its intention to push through with the construction of a third runway, as the existing two runways are projected to reach capacity by 2020 (Air Cargo World, February 2012 Issue). Sufficient cargo capacity, efficient cargo operation and competitive total cost are the strengths of the HKIA. In terms of labor, the HKIA is committed to nurturing young people who aspire to work in the aviation industry. Cost: Hong Kong is not only competitive in terms of standards and reliability but also in terms of airport charges. Its charges are the lowest compared to Bangkok, Singapore, Guangzhou and Shanghai. It is the second with lowest charges compared to Taipei and Kula Lumpur. In terms of charges it is 46th among the top 50 airports. Considering cost factors, it is the Employment Ordinance in Hongkong that sets minimum entitlements for its employees. Additional incentives vary depending on the company they are employed with. As for airport user charges, HKIA used to offer high landing fees but these have been lowered in the past years. In terms of taxes, it has favorable tax regimes. Demand: Moving on to demand factors, HKIA is capable of handling 63 flights per hour. In 2011, it handled 3,968,397 metric tonnes of cargo. The HKIA is a hub for Air Hongkong, Cathay Pacific, Dragonair, Evergreen International Airlines, Hongkong Airlinres, Hongkong Express Airways and UPS Airlines. It has 95 airlines with 4 main cargo operators therein. It is also the hub of DHL. Government Support and Regulations: In terms of government regulations, the Open Skies Agreement has already been ratified in Hong Kong. The government continues to invest in transport infrastructure projects and optimize highly efficient multimodal transport services, with a view to promoting the development of air, sea, land transport and logistics. Although the International Air Services Transit Agreement has not been ratified by China, it already applies to Hong Kong as a carry-over from British rule. This enables contracting States to agree to certain freedoms of the air including the privilege to fly across a territory without landing and the privilege to land for non-traffic purposes. In terms of customs procedures, there are streamlined and efficient customs procedures which expedite clearance by providing integrated EDI linkage between the Customs and Excise Department and the air cargo operators and integrators. Their customs procedures also allow pre-arrival customs clearance covering all types of cargo down to house away bill level, provide priority consignments facility, assign default constraint code

65

automatically and facilitate authorized providers to provide cross-boundary bonded truck services to Mainland China.

B. Shanghai Location: The Shanghai Pudong International Airport is located on the coast of Pudong, about 30km or 19mi east of the city center. It handles cargo from Eastern and Central China and is the busiest international hub of mainland China. It is forecasted to be the number 1 international air cargo hub worldwide by 2015. It can be said that it is also within the 4-hour flight radius that is why China is also a attractive hub for air cargo. However, currently it has a low local logistics infrastructure but it is said to improve as it moves towards its position of being the busiest and number 1 hub. Its Free Trade Zone is located in Pudong area. Facility: With regard to its facilities the Shanghai Pudong International Airport handles an average aircraft movement of 400 times per day. It currently has 3 runways and 2 terminals. Plans of expansion include increasing its runways to add 2 more runways. The Shanghai Pudong International Airport is equipped with the following: (1) Bulk Cargo Operation System - six stacker systems in two operation areas, which run automatically for bulk cargo storage and retrieval, due to high-tech control and operating devices; (2) ULD Operation System - operated by 2 elevated transfer vehicles or ETVs and used for storage, retrieval and transfer; (3) Area for Cargo Build-Up or Break-Down; (4) X-Ray Machines - a total of 16, operated by trained professionals of an independent security company; (5) Over 120 vehicles equipped for cargo operation and transportation; (6) Facilities for cargo cooling and freezing; (7) Dangerous goods storage house; (8) Vulnerable and valuables room or Strong room; (9) Live animals room; (10) CCTV system; (11) Security Build Up Area - the terminal is the first to introduce dedicated warehouse space within its facilities to forwarding agents for palletising. The forwarding agent extension is equipped and supervised by the Shanghai Pudong International Airport, providing basically the same security, safety and handling equipment for cargo acceptance and build up, as used by the airport, as well. The advantage of this "shared use concept" lies in speed, as cut off times for BUPs (Build-Up Areas) are lowered to 120 minutes; and (12) T-Cargo Area, to speed up the import process. The facilitys operating system or technology include SITAs common use baggage system, IBMs Netfinity servers, 366 intelligent workstations and an OS/2 operating system. Several measures have also been done to reduce environmental impact, primarily to reduce energy consumption and CO2 emission: (1) designing of their warehouse with a very efficient aeration system which can bring fresh air into warehouse and take turbid air out continuously to make good environmental

66

condition for our warehouse staff; (2) use of tail gas cleanup units for trucks and forklifts as the device is capable to reduce other harmful gas; (3) practice of other measures to use less resources. Cost: Recent reports show that per capita labor cost in Shanghai is much higher than that in surrounding areas however it is believed to still be low. The land price are also low and there I the presence of tax incentives. As for airport user charges, these fees are utilized by the central government of China. Airport Charges in Shanghai are said to be higher than that of Hong Kong, the leader in airport operations and efficiency. Demand: With regard to demand factors, the Shanghai Pudong International Airport has an average aircraft movement of 400 times per day. In 2011, it handled 3,103,030 metric tonnes of cargo. In his study, Lee (2007) identified its big market size and growth potential as one of Shanghai Pudong International Airports strengths. To date, it serves as the hub for Air China, China Eastern Airlines, Juneyao Airlines, Shanghai Airlines, Spring Airlines and UPS Airlines. Government Support Regulations: The Open Skies Agreement has already been ratified in Shanghai. Moreover, the Civil Aviation Administration of China or CAAC signed a Strategic Cooperation Agreement with Shanghais municipal government, which aims to speed up Shanghai's Civil Aviation Development, by setting the goal of developing Shanghai Pudong International Airport to be the number one international cargo hub worldwide by 2015. Both entities have come to an agreement regarding the targets for the development of the civil aviation industry in Shanghai during the 12th Five-Year Plan period from 2011-2015, which includes: continued safety of air transportation, sustained enhancement of air transportation guarantee, an assembling development of air service, the shaping of a manufacturing and research center for jumbo jets, a sharp rise in its international competitiveness, as well as a quickened construction of Shanghai as an aviation hub center and an improvement in the quantity and quality of air service (http://www.wcarn.com). The FTZ in Pudong Area, resulting in tax incentives and low labor cost and land price, is also identified by Lee (2007) as one of its strengths. Government regulations such as protective trade policy, low labor quality and lack of logistics infrastructure, on the other hand, were identified by Lee (2007) as Shanghai Pudong International Airports weaknesses.

67

C. Shenzhen Location: Shenzhen Bao'an International Airport formerly named Shenzhen Huangtian Airport is located near Huangtian and Fuyong villages in Bao'an District, Shenzhen, Guangdong, China. It is 32 km northwest of the city center. It is one of the three largest airport hubs serving southern China, alongside Hong Kong International Airport and Guangzhou Baiyun International Airport. The airport was opened on 12 October 1991. It occupies an area of 10.8 kms. Its runway is 3400 m long and 45 m wide, and it has 53 parking spaces on its apron. The airport also has ferry routes to Hong Kong International Airport, where passengers can transit without going through immigration and custom checks, akin to transit between two flights. Its current terminal covers an area of 152,000 sq meters and consist of 24 jet-ways. It is known to have a greater connectivity to domestic Chinese cities and it is also within the 4 hour radius making it also attractive as a cargo hub. Special Economic Zones or Free Trade Zones were set up to encourage investments.

Facility: There are three main terminals at Bao'an Airport:

Terminal A - for domestic flights Terminal B - for domestic flights Terminal D - for international and Taiwan flights

It also has a major expansion wherein there is a plan of putting up a new terminal. It has plans of putting up a 2nd runway and it has ferry routes to Hong Kong making it a good location for trade

Cost: Some of the Low Cost Carriers fly to Shenzhen because it has lower landing fees than Hong Kong or Guangzhou. It also has a low labor cost and low land price.

Demand: It is the hub for Shenzhen Airline, Shenzhen Donghai Airlines, SF Airlines, Jade Cargo International and a focus city for China Souther Airlines and Hainan Airlines. The airport also serves as an Asian-Pacific cargo hub for UPS Airlines. Shenzhen airport handled 26,713,610 passengers in 2010, according to Civil Aviation Administration of China, making it the fifth busiest in China. The airport was also China's 4th 68

busiest and world's 24th busiest airport in terms of cargo traffic, registering 809,363 tonnes of freight. In terms of traffic movements, Shenzhen airport was the 5th busiest airport in China in 2009. Government Support and Regulations: The airport is undergoing major expansion with a new terminal under construction as part of government initiatives. A second runway was also recently completed. Since the beginning of 2008, the 1.6 km long terminal 3 is being built. This new terminal will be between the current runway and another runway currently being built. A second runway running parallel to the west of the current runway will also be built. The new runway will be built on reclamation land extending out towards the Pearl River Delta, with a length of 3600 meters and 60 meters wide. The second runway was completed in June, 2011 and started operations in July, 2011. However, there are low protective trade policies.

D. Guangzhou Location: Guangzhou Baiyun International Airport is the main airport of Guangzhou, the capital of Guangdong province, China. The airport is the main hub of China Southern Airlines and a focus city for Shenzhen Airlines and Hainan Airlines. It is also within a Free trade Zone.

Facility: It has 2 Runways with 3,800 metres (12,500 ft) and 3,600 metres (11,800 ft) It has 173 (passenger apron and cargo apron) aircraft parking bays. It has a 531,000 square meterTerminal 2 with new indoor carpark, outdoor carpark, transportation center and metro stateion.

Cost: Per capita labor cost in Guangzhou is low as well as the land price. As for airport user charges, these fees are utilized by the central government of China. Demand: In 2011, Guangzhou Baiyun International Airport was China's 2nd busiest and world's 19th busiest airport in terms of passenger traffic, with 45,040,340 people handled. As for cargo traffic, the airport was the 3rd busiest in China and the 21st busiest worldwide. Guangzhou airport is also the 2nd busiest airport in terms of traffic movements in China capturing a big market size and making it a hub with a growth potential. It has a current passenger capacity of 45 million passengers per year and a planned passenger capacity in 2020 of 75 million passengers per year. In terms of current cargo capacity, it can accommodate 1 million tonnes. Its planned cargo capacity in 2010 is 2 million tonnes and planned cargo capacity in 2020 is over 2.17 million tones. It is also the hub for Fed Ex.

69

Government Support and Regulations: The government supported the opening of the New Guangzhou Baiyun International Airport. Its opening had relieved most of the controversies of the older and deteriorated airport because of the limited space, overcrowding and lack of expansions. Its opening also allowed it to overcome curfews and restrictions and began a 24 hour operation. This meant that China Southern Airlines could highly utilize their intercontinental routes by flying overnight. Other airlines have this benefit too. In August 2008, the airport's new expansion plan was approved by the National Development and Reform Commission of China. The airport will build a third runway located 400 metres east of the existing east runway. The new runway will be 3800 metres long and 60 metres wide. Other elements of the expansion plan include a 531,000-square-metre Terminal 2, a new indoor car park and an outdoor car park, a transportation centre, and a metro station which will serve Terminal 2. The total cost of the project will be 14.036 billion. Construction of the third runway is estimated to start in 2011 and finish in the first half of 2013. When the whole project is finished by the end of 2015, the airport will be able to handle 75 million passengers and more than 2.17 million tonnes of cargo a year.

E. Dubai Location: Dubai has been a strategic trading post for more than 15 centuries, throughout which it was chiefly a unique location on the Persian Gulf that was recommended to shippers and manufacturers. It is often known as the gateway between East and West. Dubais location along the east-west Asia to Europe trade routes was identified as one of its advantages in relation to its success in the industry. As a result, both the Dubai International Airport and the Dubai World Center have emerged as intermediary hubs for the Asia-Europe trade. Because of the United Arab Emirates or UAEs central position on the world map, excellent infrastructure and pro-business environment, Dubai is considered as an ideal gateway to the dynamic Middle Eastern, African and Southeast Asian markets. It serves Dubai and the United Arab Emirates. Unprecedented development of the region in the last 50 years, as well as its modern facilities, sunny weather, wide sandy beaches, luxurious hotels, top-ranked sporting events and liberal business climate, have underscored the importance of its location, not just to the UAE or the Middle East, but to Africa and the Orient as well. Similarly, Kasarda (2006) pointed geographical accident as a major factor in Dubais success. The DIA Cargo Gateway is strategically located adjacent to DIA in the UAE. Its Free Port Zone is known as the Dubai Airports Free Zone or DAFZ.

Facilty: The DIA is capable of handling over 6,000 weekly flights. It has 2 runways, 3 terminals and plans to increase its runways to a total of 5. Dubais investments in facilities was identified by Kasarda as one of its advantages contributing to its success in the industry. The DIA has state-of70

the-art equipment for each level and is one of the most technologically-advanced cargo handling facilities. It is the Middle Easts first cargo handling facility to be awarded with an ISO 9002 Certificate by Lloyds Register of Quality Assurance in 1998. There are 17 air cargo parking slots for freighters at the Dubai Airports Cargo, a cargo warehouse with a total of 56 truck docks for import, export and perishable cargo, and 7 docks dedicated to sea-air traffic, the storage facility includes small warehouse pallets with 902 positions, regular 1,698 positions, large 1,126 positions and 760 mini shipments (single positions), as well as 18 positions for storing perishables. Also located in the DIA is an express mail center, new facilities for administrative and agents offices, a multi-storey carpark, elevated roadway, a new central utility plant, a mosque and other amenities. The Dubai Airports Cargo Mega Terminal handles all types of cargo from one central location, with fully-automated workstations. For special cargo, general cargo and unit load devices, the facility accommodates: (1) special cargo such as perishables, live animals, valuables, human remains and dangerous goods including radioactive materials; (2) general cargo; (3) intact unit load devices; and (4) intact unit load devices with perishable cargo. The Cargo Mega Terminal has a state-of-the-art cargo commercial and terminal handling system called the Skychain, which integrates all processes across network and global operations, in real-time. Here, information is transparent to both internal and external players across the global supply chain through industrystandard messaging or web interfacing. Strengthening Dubais position as a leading aviation and logistics hub, the Dubai World Central or DWC is a strategic initiative of the Dubai Aviation City Corporation and the Government of Dubai and chaired by H.H. Sheik Ahmed bin Saeed Al Maktoum, bringing together transport and logistics corridor, thereby linking sea, land and air for the first time in the Middle East. The DWC is a multi-phased urban infrastructure development, designed to meet the present and future needs of aviation, air transport, commercial and logistics businesses. It is a multiphase development of 6 clustered zones, namely: Dubai Logistics City or DLC, Commercial City, Residential City, Aviation City and Golf City Dubai Aviation City Corporation. Once completed, the DWC will have up to 4 passenger terminals, which will accommodate up to 160 million passengers, 5 parallel runways at 4.5km long, each separated by a minimum of 800m; an Automated People Mover connecting passengers to different terminals and moving staff to all key points in the development; and an internal road network for all key airport operations. Lastly, within the vicinity of the Jebel Ali Port and Free Zone, the DWC will make airsea connectivity achievable in 4 hours. The operating systems and technology being used at the DIA are: SAAB Sensis Multilateration System and the CEM AC2000 Security Management System. Aside from its superb facilities, the DIA aims to be equally recognized for the service quality of its workforce.

71

Cost: Considering cost factors, Dubai is reported to have high labor costs for foreign workers. As for its airport user charges, exemptions are given to royal, diplomatic and state-owned aircrafts. It has competitive airport charges. Demand: the DIA handles over 6,000 weekly flights and was reported to handle 2,270,000 metric tonnes of cargo in 2011. More than 35 cargo airlines have offices at the Dubai Airports Cargo. The newly constructed DWC has 36 airlines using the new facility for cargo charter operations. It serves as a hub for Al Rais Cargo, Cargo Plus Aviation, Dubai Royal Air Wing, Emirates, Falcon Express Cargo Airlines and Flydubai. With regard to the different carriers in the Middle East, industry players enjoyed a 9.4% rise in demand in 2011, much of it generated by Emirates Airline and Etihad Airways. With only a few years of Dubai Cargo Gateways founding, cargo activity at the Village outgrew available capacity and the need arose to accommodate rapidly increasing demand. This increase resulted from: (1) Dubais phenomenal growth; (2) determined expansion of Emirates Airlines; (3) increased popularity of air cargo transportation; and (4) UAEs central position on the world map. Government Support and Regulations: The Open Skies agreement has been ratified in Dubai, which put air cargo in Dubai on a rapidly rising trajectory. The government is known for its ongoing commitment to the diversification and sustainable growth of its economy. Dubais stable government and liberal commercial environment has continually played an important role in its growth. Its decision to modernize and expand the air cargo terminal at Dubai Airport and to grant open skies rights to passenger and cargo airlines was one of the advantages identified by Kasarda contributing to its success in the industry. Several multinational companies have also chosen Dubai as an area to locate their headquarters because of the creation of the Dubai Airport Free Zone or DAFZ to accommodate technology-driven industries and goods with high value-toweight ratios. The DAFZ also offers companies the benefits of 100% foreign ownership, a tax-free status for up to 15 years, which is renewable for a second 15 years, the right to use other facilities such as the modern airport and the Dubai Cargo Village, both located outside the zone, freedom to move capital and no personal income tax. Other incentives of the DAFZ are: a research center that will contain information on free-zone activities around the world; a service center that will handle paperwork and interface with the local government; and an employment service for people looking for jobs within the DAFZ and other auxiliary services such as banks, pharmacies, restaurants, and shops. According to the Oxford Economics Report (2011), the success of Dubais aviation sector derives from a number of strengths including the governments demonstration of its awareness of the importance of aviation for enabling growth in key sectors of Dubais economy, as manifested 72

in Dubais strategic plan and decision-making that is consensus based, timely and effective; open competition among airlines, as reflected in over 150 airlines that operate out of Dubai International; Dubais liberal aviation policy that has pushed for greater freedoms for all airlines to enable them to operate without undue restrictions on their commercial decisions and competitive airport charges; and a consensus-based approach to investment that has helped Dubai Airports and Emirates expand together, supporting each others growth. As Dubai rapidly transformed itself into one of the worlds key re-export hubs, DCGs terminals and sea-air cargo centre recorded consistent double-digit growth and facilities expanded to meet demands. Dubai Airports is currently the worlds fastest expanding airport.

F. Singapore Location: At present, the growth of North Asian markets, more particularly, China and Hongkong, signify Singapores role as a cargo hub. The CAC is a major hub in Southeast Asia , located in the East Region. CAC is close to the Port of Singapore and the Jurong Port. The Port of Singapore is located at the southern part of Singapore, while the Jurong Port is located at the western end of Singapore. It has a 24-hour Free Trade Zone. Facility: The CAC has more than 210 flights per week. It has 2 runways, 9 airfreight terminals and a development policy of always building capacity ahead. All niche forms of cargo are handled at the centre, including an airmail transit centre and a quarantine centre for the inspection of imported plants and animals. A 24-hour customs checkpoint is also available for cargo operations. The Airport Logistics Park has several competitive advantages, such as its location within the FTZ, direct access to the airfreight center, reduced double handling and recycle time and allows for 3PL providers. Its Freeport, on the other hand, has integrated services to handle shipping, storage, display and trade of valuables. Also located in CAC is a business park has an excellent location and is also accessible via rail and road. To date, several developments have taken place in CAC, largely driven by market growth and changing industry needs. The Changi Megaplex, a multi-tenanted warehouse facility, was developed to cater to the rapidly changing needs of the forwarding industry. The launch of the Airport Logistics Park of Singapore or ALPS in 2003 is another development and an example of how the Changi Airport has adapted to changing industry trends. ALPS is a 26-hectare logistics park, strategically located within the airports FTZ, thereby enabling quick turnaround, value-added logistics and regional distribution activities. Some of the value-added logistics activities available at ALPS include postponement, configuration, sub-assembly, returns and repairs and vendor-managed inventory for 73

time-sensitive products. These factors have attracted many global companies to establish regional distribution centers or RDCs in ALPS, in order to serve their growing Asia-Pacific clientele from Singapore. The development of TNTs Singapore Regional Hub in 2009 and the establishment of SATS Coolport at Changi in 2010 also exemplify how Changi Airport caters to the changing needs of the industry. The Coolport is the first dedicated facility to handle terminal and transit perishable cargo within the FTZ. It also has a facility to handle urgent medical cargo. It is important to note that as Changi continues to take a proactive approach in the airport master planning process, it considers long-term needs of its clients. As a response to environmental issues, Changi pursues initiatives to ensure sustainable growth of the airport and fulfills corporate social responsibility to the local community. CAC has a clear environmental policy, with efforts focused on five major areas: emissions, energy efficiency, waste management, noise management and water management. Some of its key initiatives at the airport include: (1) facilitating the introduction of CNG tractors to be used by the ground handlers; (2) using energy-efficient lighting and installation of motion sensors at the airport; (3) promoting the use of recycled materials for construction; and (4) rainwater harvesting and the use of water efficiency tools. As a result of its efforts, Changis Terminal 3 was awarded the Green Mark Gold in October 2009, which is a national green building rating system to evaluate a building for its environmental impact and performance. In addition, CAC has also supported the country in its development of its solar-powered mobile chillers temperature-controlled infrastructure installed at the airports tarmac to keep perishables at the right temperature while in transit at Changi. For its green efforts, CAC has been awarded the Best Green Service Provider Airport at the Annual Asian Freight and Supply Chain Awards in 2010 and 2011. Similar to HKIA, the E-Freight Project has also been implemented in Singapore, replacing paper with electronic messages to reduce costs, improve transit time, accuracy and competitiveness of airfreight. In the same manner, the CAC gives importance to its workforce, as it has implemented the Quality Management Service Program. Cost: Rising labor costs have been recently reported in Singapore. On the other hand, considering airport user charges, rental rebates and cash payouts to air cargo agents have been given by CAC. Demand: The CAC has more than 210 flights per week and has handled 1,898,850 metric tonnes of cargo in 2011. It serves over 90 airlines, operating 4,500 weekly scheduled flights linking Singapore to 200 cities in 60 countries. The CAC serves as a hub for Jetstar Asia Airways, Jett8 Airlines, Qantas, Scoot, Silkair, Singapore AirAsia, Singapore Airlines, Singapore Airlines Cargo, Tiger Airways and Valuair. 74

Government Support and Regulations: The Open Skies Agreement has already been ratified in Singapore. Just like its 24-FTZ, CAC has round-the-clock customs clearance, but with minimal customs formalities. Singapore also provided an Air Hub Development Fund. The Civil Aviation Authority of Singapore or CAAS also provided rental rebate and cash payout to air cargo agents. Free trade agreements, avoidance of Double Taxation Agreements and Investment Guarantee Agreements, as well as comprehensive air, sea and IT infrastructure are some of the initiatives identified as beneficial to the industry.

G. Malaysia Location: The KLIA is located at the top of the southern corridor of Peninsular Malaysia, bordering the states of Selangor and Negeri Sembilan. It is a unique airport because it has within its boundaries all that is needed for business, entertainment and relaxation. It is also considered as Malaysias main international airport and one of the major airports in Southeast Asia, serving Kuala Lumpur and West Malaysia. KLIAs Free Trade Zone is known as the Port Klang Free Zone. It has an increasing infrastructure develoment and is said to be onw of the largest irports in South East Asia.

Facility: Cargo at KLIA is transported not only in the aircraft belly but also on freighters operated by airlines, without restrictions or ban on passenger and cargo flights at night nor any environmental issues, unlike some airports in the West. KLIAs operating system or technology consists of an Air Traffic Control Tower, CAT II Precision Landing ILS, RFID Baggage Handling System, Airport Management Information System , as well as the KLIA Community System and DagangNET System by MASKargo. Its workforce is composed of local and foreign workers. Lastly, the KLIA has a Cargo Village within the vicinity. KLIA is a result of a visionary strategy to meet the needs of new, large aircraft and the traffic demand of the 21st century, as it has pioneered the use of state-of-the-art technology in airport management known as Total Airport Management Systems or TAMS, managed by Malaysia Airport (Technologies) Sdn. Bhd. Its conceptualization was part of Malaysias national development strategy whereby sustained investment in infrastructure is made to ensure the timely and adequate supply of facilities that can meet the development requirements of the country. Malaysia focused on the development of transport infrastructure in the country, the total budget of which was divided into competing demands on infrastructure development, from rail, road and the development of the KLIA.

75

Cost: The minimum wage law has been recently introduced in Malaysia. In terms of airport user charges, landing fees continue to be competitive for KLIA. The MAHB Annual Report (2006) expounded on an aggressive marketing strategy that was launched for the period 2006 to 2010 to promote KLIA as part of its 5-Year Transformation Strategy, which included among others, the extension of the Airline Incentive Program to attract more foreign airlines to fly into KLIA as well as the other 4 international airports managed by MAHB. Incentives given under the program include free landing and parking charges as well as free office rental space for 6 months and marketing support funds for new foreign airlines. As part of its promotional strategy, MAHB also attends major aviation-related forums all over the world in its marketing and promotional efforts.

Demand: KLIA hosts domestic, regional and international passenger and cargo services for over 40 airlines and is a hub for Malaysia Airlines, MASkargo, AirAsia and AirAsia X. To date, there is an emergence of NGAs or new generation airlines which include low cost carriers within and outside the country (Abu Bakar, 2009). It handles more than 72 flights per hour, has 2 runways, 3 terminals and has expansion plans for a new runway and new satellite building.

Government Support and Regulations: The Open Skies Agreement has already been ratified in herein. Malaysia Airports Holdings Berhad or MAHB was incorporated when the Malaysian Parliament passed a bill to separate the Department of Civil Aviation or DCA into two entities with different responsibilities. The Air Cargo Makes it Happen campaign is one of the steps that Malaysia is currently taking in order to raise the profile. Another program launched in the industry in 2010 is the first IATA Secure Freight Pilot Initiative, which evaluates the strength of a nations aviation security infrastructure and works with the civil aviation authorities to ensure that cargo has come from either a known consignor or regulated agent and has been kept sterile until it is loaded. It identifies the gaps within a security regime, and helps to seal this process upstream which will prevent bottlenecks at the airport. Aside from the different programs intended to maintain and elevate KLIAs status in the industry, the government invested in infrastructure and control airline competition, and the government also implemented some specific policies to promote KLIA as a regional hub. The KLIA Hubbing Development Committee set up in December 2000, meets once a year to: (1) examine 3 areas for the development of KLIA - traffic facilities, connectivity through MAS service, and marketing; and (2) set performance and services standards for KLIA based on worlds best practices. A Free Commercial Zone was also set up to facilitate the handling of cargo at KLIA, which uses the paperless environment concept with value-added activities such as trading, break bulking, grading, sorting, re-packing and re76

labeling. Lastly, a one-stop center was also provided to expedite the process of cargo clearance with additional support services such as multi-banking services, clinics, food and beverage and also postal services. Overall, the government invests highly in infrastructure to boost the competitiveness of airports, a similar strategy that is used by other major airports in ASEAN.

H. Thailand Location: The Suvarnabhumi Airport is located at Bang Phli, Samut Prakan, east of downtown Bangkok. It serves Bangkok and Thailand. According to the Centre for Logistics Research (2007), Thailand has developed an extensive air transport network that encompasses 28 commercial airports, meaning that all Thailands regions are about an hours flight from Bangkok. Suvarnabhumis Free Trade Zone is known as the Suvarnabhumi Airport Free Zone or SAFZ.

Facilty: The Suvarnabhumi Airport was designed by Helmut Jahn of Murphy/Jahn Architects, capable of handling 76 flight operations per hour. It has 2 60-meter-wide runways, one 4,000 meters or 13,120ft. long and the other 3,700 meters, with parallel taxiways to accommodate simultaneous departures and arrivals, as well as 1 terminal. Expansion plans of building a new terminal were reported. Recent reports show that the Suvarnabhumi Airport is requesting for funds for expansion, as the AOT is equally conscious of the fact that in keeping with future demand, it will also need to add infrastructure to make its cargo-handling facilities more viable. The AOT Board of Directors, headed by Mr. Tirapoal Noparumpa, convened and endorsed the recommendations resulting from studies conducted by the ICAO and the IATA, regarding the Suvarnabhumi Airports plans to be the single airport for Bangkok. Development will take place in 3 phases: (1) from 2011 - 2025, construction of a Domestic Terminal, Domestic Terminal Car Park Building and new and improved connecting roads; (2) from 2025-2029, construction of a 4th runway, expansion of the Domestic Terminal and International Terminal, increase in capacity of APRON, construction of a Midfield Satellite - 2nd and South Tunnel; and (3) from 2029 to 2033, construction of a 5th runway, South Terminal and expansion of APRON. The Suvarnabhumi has the world's tallest control tower and the world's third largest single-building airport terminal. It also has one of the most automated Air Traffic Control Systems with the latest in safety equipment and makes use of Airprot Management Information System, Airport Cargo Community System and Electronic Data Interchange as its operating systems or technology. With these, the Suvarnabhumi Airport is poised for the kind of rapid traffic growth expected in

77

Asia. Likewise, continuous and thorough development and distribution of knowledge and abilities of employees at all levels are being maintained at the Suvarnabhumi Airport.

Cost: Thailand has lower monthly wages as compared to China. In terms of airport user charges, the Suvarnabhumi Airport has cut a big portion of its landing fees.

Demand: The Suvarnabhumi Airport handles 76 flight operations per hour. In 2011, it was reported to handle 593,494 metric tonnes of cargo. The Suvarnabhumi Airport is currently the main hub for Bangkok Airways, Orient Thai Airlines, Thai Air Asia and Thai AIrways International. It replaced Don Muang as an important hub of Asia, with 80 airlines and 4 cargo operators. Congestion and structural problems at the new Suvarnabhumi Airport, however, have led to pressures to reopen Don Muang to allow for repairs to be conducted there, especially from lowcost airlines.

Government Support and Regulations: As a member of ASEAN, Thailand joined the ASEAN Air Services Agreement that aims to support the Open Sky Policy on cargo and passenger air services which will be fully implemented by 2015, enabling airlines of both countries to operate air-cargo services with no restrictions on capacity, frequencies and international routes. Consistent with this policy, there is no limit to the volume of traffic and the airlines may avail themselves of this opportunity to serve any intermediate points en route as agreed upon. Air transport, both international and domestic, has played an important role in the economic development of Thailand for many years, especially with the export industry which has the active support of Government. Thailand allows every state having more than one designated airline to operate air cargo services into the country. The government focuses on infrastructure and services development at the airport, focusing on developing Suvarnabhumi Airport to be a global gateway. It is keen in expanding the global route network of these airports and in becoming the Logistics Center for perishable goods, such as food, fruit, flower and fashion. Its policy to promote Suvarnabhumi Airport as a Center of Aviation, Passenger and Cargo Transportation paved the way for the creation of the Duty Free Zone or DFZ, in order to facilitate the handling of inbound, outbound cargo and transit cargo with minimum customs procedure. The main buildings consist of: (1) Thai Airways International Public Company Limited and WFSPG Cargo Company Limited Cargo handling building; (2) 4 Warehouses; (3) 4 Freight Forwarding Agency Buildings; (4) Office Building for Customs Office and related government agencies; and (5) Free Trade Zone Administrator Building. 78

For all the Hubs that were mentioned in the study, the typical airport charges are as follows: Those that are paid by the airlines are (1) Landing Fee which is approximately $2,000-$6,000; (2) Lighting Fee, most of which have none except for Guangzhou, Shenzhen and Shanghai which is $600; (3) Parking Fee, which costs around $1,200, although in Malaysia, Parking and Landing Fees are free on the 1st six months); (4) Terminal Navigation Fee, which is approximately $1,800$4,000, although Shanghai, Guangzhou and Shenzhen has a $4,000 terminal navigation fee while Thailand has around $3,800; (5) Noise Fee, none of the hubs has this but it costs around$250; (6) Passenger Fee, Hong Kong has this fee of $2,500; (7) Security Fee; (8) Aerobridge Fee, which is $700-$1000; (9) Baggage Handling Fee, which is $400-$1,600 but none of the hubs mentioned have this; and (10) Terminal Building Services Fee, none of the hubs has this too but for some countries like Taiwan this is around $400.

79

X. Summary / Matrix of the Different Hubs Based on the substantiations above, the following matrix is a summary of the status of the different air cargo hubs in Hongkong, Shanghai,Shenzhen, Guangzhou, Dubai, Singapore, Malaysia and Thailand, pertaining to location factors, facility factors, cost factors, demand factors and government regulations and its sub sectors. TABLE 9: MATRIX OF THE DIFFERENT HUBS
THAILAN D PHILIPPIN ES (NAIA) It has a strategic location and it is within the 4-hour radius, although Hong Kong is said to be at the centerpoint as compared to the Philippines. It is located along the border between Pasay and Paranaque

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

LOCATION AREAS SERVED

It is within the 4-hour radius; center point of trade in Asia; Serves Southern China; It is a Cargo Hub for DHL

Handles Cargo from Eastern and Central China; has a strategic location

Hub for Shenzhen Airlines, Shenzhen Donghai Airlines, SF Airlines , and Jade Cargo International ; It serves as an Asia Pacific Cargo Hub of UPS

Main Hub for China Southern Airlines and a focus city for Shenzhen Airlines and Hainan Airlines; It also has a strategic location for trade; It is a Cargo Hub for Fed Ex.

Major hub in the Middle East that serves Dubai and UAE; It is a regional center and has a unique location in the Persian Gulf; Gateway between East and West

Major Hub in Southeast Asia

One of the major airports in South East Asia serving KL and West Malaysia

Serves Bangkok

LOCATION FREE PORT ZONE

Free Port Zone

Free Trade Zone in the Pudong Area

Free Trade Zone

Guangzhou Free Port Zone

Dubai Airport Free Zone (DAFZ)

Free Trade Zone

Port Klang Free Zone

Suvarnabhu mi Airport Free Zone

Not within a Free Port Zone

80

FACTOR

HONGKONG

SHANGHAI Average aircraft movements of 400 times per day and has 3 runways

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPI NES (NAIA)

FACILITY (RUNWAY CAPABILITY; NUMBER OF FLIGHTS)

63 Flights per hour

Handles 26,713,610 passengers, 809,363 tonnes of cargo

It has 173 parking bays

Over 6,000 flights weekly

More than 210 flights per day

More than 72 flights per hour

76 flights per hour

45 take off and landings per hour

81

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPINES (NAIA) It has 4 terminals; Nayong Pilipino Foundation recently turned over 22.3 hectares to support the growth and needs of terminals 2 and 3 however there is no finalization yet about this plan. Currently, NAIA area itself has no more space for expansion

FACILITY TERMINAL AREA (NUMBER OF TERMINALS & EXPANDABILITY OF TERMINALS

2 Terminals and Expansion for a 3rd Terminal, 2 Runways; It has a 1st tier Cargo Handling Terminal and a 2nd tier Marine Cargo Terminal

2 Terminals and 3 Runways; Expansion to add 2 more Runways

3 Main Terminals; Major Expanison with a New Terminal, It has 2 Runways and a Ferry Route to Hong Kong

It has 2 Runways and 173 parking bays; Expansion includes a 3rd Runway, a 531,000 square meter Terminal 2 with indoor and outdoor Carparks, a Transporatation Center and a Metro Station

It has 3 Terminals; Expansion includes an additional runways to make it 5.

It has 9 air freight Terminals; Continuous Improvement of Airport facilties

It has 3 Terminals and Expansion of a new runway and a new satellite building. It also plans to have KLIA 2 or the new terminal which is a "showpiece" of the next generation hub

It has 1 Terminal and an Expansion of a new Terminal. Construction of a 4th Runway on 2025-2029 and a 5th runway on 2029-2033

82

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPINES (NAIA)

FACILITY OPERATING SYSTEM / TECHNOLOGY

RFID Technology, Gentrack Software, EFreight Project

SITA's Common Use Baggage System, Bulk Cargo Operating System, ULD Operating System IBM's Netfinity Servers, 366 Intelligent Workstations and an OS/2 Operating System

Info Talk This is the world's trilingual Enquiry System

Most technologically advanced airport with its state-of-the-art Operational Database and Integration System; It has the Central Integrated Information Management Systems (CIIMS)

Fully Automated Cargo terminal. It uses "Sky Chain which is a state-of theart cargo and terminal handling system. It uses SAAB or the Sensis and the Multilateration Sytem and the AC2000 Security Management System.

E-Freight Project

Air Traffic Control Tower, CAT II Precision Landing ILS, RFID Baggage Handling System, KLIA Community System, and Dagang NET System by Maskargo and Airport Management Information System

It has the world's talles Control Tower, one of the worl's most automated Air Traffic Control Systems, Airport Management Information System, Airpprt cargo Community System and Electronic Data Interchnage

FIDs (Flight Information Displays), Fiber Optic IT Cabling, LCD Monitors, XRay Machines

83

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND It has a continuous and thorough development and distribution of knowledge and abilities of all emaployees at all levels

PHILIPPINES (NAIA)

FACILITY LABOR QUALITY

HKIA is committed to nurturing young people who aspire to work in the aviation industry

Low Labor Quality

Low Labor Quality

Low Labor Quality

Recognixed globally for labor service quality

It has the Quality Management Service Program

Promotes multicultural Lavor force and provides high labor quality

Presence of Labor Disputes and Unions

FACILITY PRESENCE OF A SINGLE CARGO TERMINAL

Super Terminal 1

T-Cargo Area, Area for Cargo Build Up and Build Down

Cargo Mega Terminal

Changi Megaplex

KLIA Cargo Village

Cargo Village

No Single Cargo Terminal Building

84

FACTOR

HONGKONG

SHANGHAI Per Capita Labor Cost in Shanghai is much higher than in the surrounding areas; although compared to other countries it still has low labor cost.

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPINES (NAIA)

COST LABOR COST

Employment Ordinance in Hong Kong sets minimum entitlements for employees such as stautory holidays and long service payments

Low Labor Cost

Low Labor Cost

High labor Cost for Foreign Workers

High Labor Cost

Minimum Wage in Malaysia is being practiced

Lower monthly wages as compared to China

Low Labor Cost

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPINES (NAIA)

COST AIRPORT USER CHARGES + TAXES

High Landing Fees but it was lowered in the past years. Lower than that of Singapore

Fees are utilized by the central government; Higher than that of Hong Kong

Fees are utilized by the governement

Fees are utilized by the governement

Has Exemptions for Royal / Diplomatic and StateOwned Aircrafts

High Landing Fees, Rental, Rebates and Cash Payouts to Air Cargo Agents

Competitive Landing Fees; First 6 months of landing, parking and office rental fees are free

Has high landing fees

Excessive taxes (Common Carriers Tax, Gross Philippine Billings), found discriminatory by foreign carriers

85

FACTOR

HONGKONG

SHANGHAI Average Aircraft Movements of 400 times per day; 3,103,030 volume handled in 2011

SHENZHEN It is the 4th busiest airport in China and the world's 24th busiest in terms of cargo traffic with 809, 363 volume handled,

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPINES (NAIA)

DEMAND MARKET SIZE AND GROWTH POTENTIAL (NUMBER OF FLIGHTS AND CARGO HANDLED)

63 flights per hour; 3,968,397 volume handled in 2011

In terms of cargo capacity , it can accommodate 1 million tonnes and 2.17 million tonnes on 2020

It has over 6,000 weekly flights and 2,270,000 volume handled in 20122

It has more than 210 flights per day amd 1, 898,850 volume handled in 2011

It has more than 72 flights per hour. It handled 669, 840 in volume last 20122

It has 76 flights per hour ; It handled 593,494 volume handled in 2011

It has 45 flight movements per day and has 355,149 metric tonnes of cargo handled in 2009

FACTOR

HONGKONG Hub for DHL; Hub for Air Hong Kong, Cathay pacific, Dragon Air, Evergreen International Airlines, Hong Kong Airlines, Hong Kong Express Airways, UPS Airlines

SHANGHAI Hub for Air China, China Eastern Airlines, Juneyao Airlines , Shanghai Airlines, Spring Airlines and UPS Airlines

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE Hub for Jet Star Asia Airways, Jett8 Airlines, Qantas, Scoot, Silkair, Air Asia, Singapore Airlines Cargo, Tiger Airways and Value Air

MALAYSIA

THAILAND

PHILIPPINES (NAIA)

DEMAND NUMBER OF LOGISTICS SERVICE PROVIDERS

Hub for UPS; Hub for Shenzhen Airlines; Shenzhen Donghai Airlines, SF Airlines a,d Jade Cargo International

Hub for Fed Ex; Main hub of China Souther Airlines

Hub for A1 Rais Cargo, Cargo Plus Aviation, Dubai Royal Air Wing Emirates, Falcon Express Cargo Airlines

Hub for Malaysia Airlines, MASKargo,Air Asia and Air Asia X

Hub for Bangkok Airways, Orient Thai Airlines, Thair Air Asia and Thai Airways International

hub for Airphil Express, Cebu Pacific, Philippine Airlines, Southeast Asian Airlines, Zest Airways

86

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPINES (NAIA) Aquino administration signed an Executive Order authorizing the Civil Aeronautics Board (CAB) and the Philippine Air Agreement negotiating panels to pursue Open Skies policy EO 619 Tax and Duty incentives are provided to

GOVERNMENT REGULATIONS OPEN SKIES AGREEMENT

Granted Open Skies Rights to Airlines

Granted Open Skies Rights to Airlines

Granted Open Skies Rights to Airlines

Granted Open Skies Rights to Airlines

Granted Open Skies Rights to Airlines

Granted Open Skies Rights to Airlines

Granted Open Skies Rights to Airlines

Granted Open Skies Rights to Airlines

GOVERNMENT REGULATIONS TAX INCENTIVES

Presence of Tax Incentives

Presence of Tax Incentives

Presence of Tax Incentives

Presence of Tax Incentives

Excellent Tax and Incvestment Incentives

Avoidance of Double Taxation Agreements

Low Cost Carrier Terminal (LCCT)allows for lower airport taxes

duly registered Customs Tax Regulation Incentive businesses that locate to special economic zones in the Philippines.

87

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

PHILIPPINES (NAIA)

GOVERNMENT REGULATIONS PRESENCE OF CUSTOMS

Stremlines and Efficient Customs Procedures

Presence of Customs Warehouse

Presence of Customs Warehouse

Presence of Customs Warehouse

Dubai International Airport Customs

Round-theClock Customs Clearance but with Minimal Customs Formalities

Governed by Customs Regulations

Suvarnabhumi Airport Cargo Clearance Customs Bureau

The industry is governed by the Tariff and Customs Code of the Philippines; Airline companies want misplaced customs personnel at airports reassigned to revenue-related positions for efficiency

88

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND ASEAN Air Services Agreement; The government allows every state having more than one designated airline to operate air cargo services into the country

PHILIPPINES (NAIA)

GOVERNMENT REGULATIONS POLITICAL STABILITY

International Air Services Transit Agreement

Strategic Cooperation Agreement between the Civil Administration of China and Civil Aviation Devt.

Strategic Cooperation Agreement between the Civil Administration of China and Civil Aviation Development

Strategic Cooperation Agreement between the Civil Administration of China and Civil Aviation Development

Stable government and Liberal Commercial Environment

Investment Guarantee Agreements

Investment in infrastructure and Control of Airline Competition

Anti-Open Skies stance by lobbyists

89

FACTOR

HONGKONG

SHANGHAI

SHENZHEN

GUANGZHOU

DUBAI

SINGAPORE

MALAYSIA

THAILAND

GOVERNMENT REGULATIONS EXPANSION PLANS

Continuous investment in infrastructure projects and highly efficient multimodal transport services

12th Five Year Plan (2011-2015)

Continuous Investment in Infrastructure

Continuous Investment in Infrastructure

Modernized and Expanded the Air Cargo Terminal; It is the worlds fastest expanding airport. It invests heavily on Infrastructure, Aircraft fleet and staff

Air Hub Development Fund

Presence of programs and polciies intended to maintain and elevate KLIAs status in the industry, invest in infrastructure and control airline competition

Focus on infrastructure and services development; Airport Improvement Plan until 2033

PHILIPPINES (NAIA) Ongoing renovation of NAIA 1 to include maintenance of toilets, availability of sanitation facilities, installation of misting machines and walkalators, setting up of additional immigration booths, improvement of metal, eletrical, plumbing and fire systems. NAIA Expressway Project is the third project lined up for bidding under the PublicPrivate Partnership (PPP) Program

90

TABLE 10: CRITERIA CHECKLIST FOR THE DIFFERENT HUBS

FACTORS HONG SHANGHAI SHENZHEN GUANGZHOU DUBAI SINGAPORE MALAYSIA THAILAND PHILIPPINES KONG LOCATION Strategic Location FACILITY Runway Capability FACILITY Number Terminals FACILITY Operating Systems FACILITY E-Freight FACILITY Cargo Terminal COST Airport Charges DEMAND Demand Cargo High High High High High High High High RFID SITAs Info Talk CIIMS SAAB RFID CAT RFID II / AMIS FIDS of 2 2 3 2 3 9 3 1 2 3 2 3 2 2 2 2 (NAIA)

X X

Not Enough to be a Hub in Asia

91

DEMAND Considered as a Hub GOVERNMENT SUPPORT Open Skies Policy GOVERNMENT SUPPORT LOCATION Free Port Zone GOVERNMENT SUPPORT Tax Incentives GOVERNMENT SUPPORT Efficient Customs Operations GOVERNMENT SUPPORT Continuous Expansion /

92

XI. Possible Air Cargo Hub in The Philippines;

The Ninoy Aquino International Airport (NAIA) is congested and that there is not much room for growth and expansion anymore, the question now is, What is the next potential location for an air Cargo Logistics Hub in the Philippines? From the interviews that were conducted there were suggestions that a possible international airport / logistics hub could be in Davao, Mactan in Cebu or Clark in Pampanga. These areas were suggested mainly because of the massive land area it has that can accommodate 747 aircrafts. However having a strategic location should also be considered. The distance of the hub should not be very far from that of NAIA where the primary airport is. Below would be features of each of the International Airports in the Philippines. From which, an Air Cargo Logistics Hub can be developed to increase connectivity and trade with the rest of the world.

XIA. Ninoy Aquino International Airport (NAIA) - Manila With the current operations at NAIA, we can say that until now the Philippines lacks a modern international gateway airport. In the interviews that were conducted with Key Players of the Air Cargo Sector, in the duration of this study it was mentioned by one of the stakeholders that we should just follow the exact airport model in Thailand or Malaysia. That of Hong Kong and Singapore are already too advanced for us to replicate.

According to the 2010 Airport Roadmap (Rodolfo, 2010) the first impressions of foreign visitors arriving at the leading international gateways in Manila, Cebu and Clark are that terminal facilities are modest (NAIA T-2 and T-3 and Mactan), small, or dilapidated (Clark and NAIA T-1 and domestic).

It was also mentioned at the roadmap 2010 report that at NAIA, the airport master plan of the early 90s for three new terminals has not been followed. The cargo terminal has yet to be built, while new domestic (T-2) and international (T-3) terminals were built but have not been used for their original purposes. The new GOJ-financed domestic terminal that opened in 1999 has been used exclusively for domestic and international flights of Philippine Airlines despite not being designed for requirements of international aviation (customs, immigration and lounges).

Full operation of T-3 will require the present taxiway to be closed so that only one runway will be available to all domestic, international and general aviation flights. A fuel depot and lines must also be in place. Expansion of NAIA beyond its current area of 600-hectares would require extensive demolition of business and residential areas. 93

Currently, the Ninoy Aquino International Airport (NAIA) is experiencing a slotting problem in terms of flights. All airlines would want to be in the day time slot due to lack of night capacity in the airport, this is known as the sunset limitation. NAIA should invest in equipment that would ensure safety of the flights. This was also mentioned by Captain Ben Solis. He said that NAIA is already beyond its capacity, In the study that he conducted recently it was seen that NAIA can only handle 36 fights, 40 flight movements per day at a maximum or 44 movements maximum with sophisticated system to be able to eliminate flight delays. Currently it is doing 47-50 flight movements. Given this, there is no choice but to lower flight movements per day in NAIA for security and safety operations. According to Cebu Pacific, this was not anticipated by the government. This is because of the growth in the number of aircrafts, there would be a number of flights that would add up to the current aircrafts fighting for a slot during the day time. NAIA airport also lacks a modern navigation system. It was reported that Air Asia of Malaysia was said to been having difficulty in slotting their flights due to the renovation of the runway. As a result there would be a lot of delay in flights. A PAL representative even suggested that small planes or general aviation be transferred to Sangli Point Aiport in Cavite to reduce air traffic in NAIA.

NAIA at present is renovating one of its runways. Airlines are revising some of their flight schedules to adjust to the seven-month partial closure of the airport. With the said partial closure of NAIA from January until August of this year, one (1) domestic and twelve (12) international flights of PAL departing or arriving at NAIA will be adjusted.

In the US, there is a Communication Navigation and Surveillance System which the Philippines can adopt. The Philippines can likewise make use of an Air Traffic Management System which can monitor worldwide air traffic.

Moreover, the idea of a Twin Airport can also help the current state of the aviation industry. There was a suggestion from one of the key players that the Philippines should consider operating a Twin Airport like the other successful countries. All airports should be outside the city since Manila is so congested already. The trend now is having an Aerotropolis, twin airports, with the 2nd airport becoming the predominant one. NAIA can be a regional airport while Clark can be an International Gateway. In this way we can segregate Domestic Cargo operations from International Cargo operations. One strategy according to CEB is that NAIA can handle all domestic cargoes and Clark will handle all International Cargoes.

94

Another improvement could be the engagement of NAIA of e-frieght or paperless operations. This can minimize a lot of steps and operations will be faster.

All interviewed stakeholders such as the government agencies and key players are all stating that NAIA is beyond its capacity. The current airport is so congested and that there is no room for growth and improvement anymore. Manila International Airport Authority mentioned that they are currently renovating the runway in NAIA and that there is a plan to put up a cargo terminal within Terminal 3. However the key players still find the area of terminal 3 too small and that there is no available warehouse in the area. It would then takes 30-45 minutes for a cargo to reach a warehouse since the warehouses are scattered in the area and all warehouses are managed by different owners resulting to having different policies.

It then becomes a problem in NAIA in terms of cargo, that it does not have a Cargo Terminal or what we call a Cargo Village. Upon arrival of the cargo, it is brought to warehouses which are located not within the airport but in areas near the airport that most of the time would take another 30-45 minutes just for its transfer. NAIA does not have a cargo facility wherein all cargo related activities are housed in one terminal. In summary, according to the stakeholders NAIA is too congested and has no single cargo terminal. Aside from this it only has a single operational runway for international traffic, is land locked and is unable to expand. NAIA according to them is not large enough to accommodate larger aircrafts such as Airbus 380. It is believed to have been already operating at its full capacity, leaving no space or room for growth and expansion.

FIGURE 22: NAIA INTERNATIONAL AIRPORT

95

FIGURE 23: VIEW OF THE NAIA AREA SHOWING IY IS LAND LOCKED AND UNABLE TO EXPAND

Following the criteria that was used for the other hubs, below are the analysis for NAIA: Location: In terms of location, the Philippines is said to be in a strategic point. NAIA is specifically located along the border of Pasay and Paranaque. It is the main international gateway for travelers to the Philppines. It is a hub for Air Phil Express, Cebu Pacific, Philippine Airlines, Seaair and Zest Air. It is the airport serving the general area of Manila and its surrounding metropolitan area. Facility: Terminal 1 has consistently ranked at the bottom due to limited and outdated facilities, poor passenger comfort and crowding. With this transport authorities plan to give Terminal 1 a makeover. It will include expansion of the arrival area, addition of parking spaces and As soon as Terminal 3 becomes fully operational,

improvement of other terminal facilities.

Terminal 1 would be rehabilitated into an Airport City with the intention of Cebu Pacific Airways to convert Terminal 1 into an exclusive terminal for their aircraft. The 2nd terminal NAIA2 in the old MIA road is a 75,000 square meter terminal. It was designed to be a domestic terminal but it later accommodated international flights. It has a capacity of 2.5 million passengers per year. It was exclusively used by Philippine Airlines for both its domestic and international flights. Terminal 3 or NAIA 3 is the newest and biggest terminal in the NAIA complex. The ultra-modern $640million, 189,000 square meter facility has a 13 million passengers per year capacity. It has a four level shopping mall which connects the terminal to the parking buildings. Terminal 4 is the

96

Manila Domestic Passenger Terminal. It hosts all domestic flights within the Philippines operated by Zest Air and Seaair. There are also MRO Facilities in NAIA such as that of Lufthansa Technik Philippines. It offers a wide range of aircraft maintenance, repair and overhaul services to customers worldwide. Demand: In 2010, NAIA terminal carried 27.1 million passengers making it to the top 50 of the worlds busiest airports. In 2011, all terminals in NAIA handled 29,552,264 passengers, 217,743 movements and 355,149 tonnes of cargo. Cost: NAIA has a landing fee, parking fee and CIQ or the overtime charges of $100 per aircraft that foreign airlines are burdened with. Government Support and Regulations: In 1995 by executive order, The Philippines domestic and international aviation sectors were liberalized. This set the stage for a series of bilateral agreements that resulted in a dramatic expansion of air connectivity and cargo volumes between the Philippines and major markets around the world. In terms of expansion, NAIA is said to be at its full capacity. Airport operations and the structure can be improved but expanding the current airport is not an option anymore. That is why the Philippine government is looking at other potential areas to be alternative international gateways.

XIB. Clark International Airport (CIA) / Diosdado Macapagal International Airport (DMIA) Clark, Pampanga Location: Clark International Airport formerly known as the Diosdado Macapagal International Airport. is located at the Free Port Zone in Angeles Pampanga. It serves Angeles City and Manila. It is a hub for Air Asia Philippines, Air Phil Express, Cebu Pacific and Seaair. It is the main airport serving the immediate vicinity of the Clark Free Port Zone and the general area of Angeles City. It also serves the northern and central regions of Luzon, being 85kms from the Ninoy Aquino International Airport that serves Manila. Facility: The two parallel runways of DMIA are capable of NASA Space Shuttle landings. It has a Terminal Radar Approach Control System (TRACON) worth $9.3 million that translates to investment in the future of air travel in Clark. The TRACON can track aircraft in a radius pattern up to 220 nautical miles from Clark. With this system in place, it places the airport alongside other major airports around the region. This system adds significant safety advantages, speeds up arrivals and departures and ensures a greater level of airline pilots confidence. This system answers the needs and opens the doors to major air carriers to establish service at Clark and it also makes the airport compliant to ICAO. In addition to this, there are also various state- of- the- art electronic communication, radar navigation, approach lighting and fire/safety systems which include Instrument Landing System Doppler, Very High Frequency Omnidirectional Range, VHF/UHF Transmitters, modern meteorological equipment, Precision Approach Path Indicator, Airfield Ground Lighting Systems and an advanced Category 9 Crash, Fire and Rescue Equipment. 97

There are also new MRO facilities in Clark. SIA Engineering Company (SIAEC) has a $45 billion investment to set up a world-class aircraft maintenance, repair and overhaul facility at Clark. Cost: Clark International Airport charges landing and parking fees. Below are the landing and parking charges at the NAIA.

Source: CIAC

Demand: Clark has an increasing passenger volume. In 2010 it had 654,229 passengers and last year it had 725,023 passengers. An increase in passenger volume was said to increase cargo volume as well. Government Support and Regulations: The P130 million current expanded Terminal 1, is designed to accommodate at least one million to 2 million passengers annually to serve the growing passenger volume due to the entry of foreign and local budget carriers at the airport. CIAC has embarked in a $12 million expansion plan to attract more carriers and became the second international gateway into the Philippines. Completed last 2010, the expansion adds a second floor, arrival and departure lounges, and 2 aerobridges to the terminal building. Once terminal 2 is completed, Terminal 1 will take over all domestic routes. The terminal 2 of Clark comes in 2 phases, once completed, it will be dedicated to international traffic. Total investment for the 1st phase involves: (1) Construction of an Airport Plaza, (2) Construction of a Transport Plaza, (3) Construction of a Covered Parking Area and (4) Construction of new taxiways and aprons, 98

(5) Expansion of existing apron facilities, (6) Widening, Improvement and Construction of access roads with interchanges, (7)Demolition of Existing buildings, (8) Development of new identity and signature and site and utilities development. The second phase involves: (1) Expansion of the eastern runway to 4000 meters, (2) Construction of a new runway, (3) Construction of a shopping center, (4) Construction of new taxiways and aprons, (5) Construction of a new Cargo Terminal Complex and (6) a Construction of a new Control Tower. For Terminal 3, ALMAL Investment Company of Kuwait has offered to develop it, making DMIA handle 80 million passengers a year. When Clark International Airport is completed it will have the following: (1) 3 parallel runways, (2) a High Speed Train, (3) Accommodation of 80 million passengers annually, (4) Facility can accommodate A380, and (5) It will be one of the largest airports in the world. Other proposed projects are: (1) Airport Runways will be further improved to accommodate bigger aircrafts, hotels and commercial buildings and other aviation facilities, (2) Construction of two new railway lines, one for the Airport Railway and another for the North Rail commuter and high speed rail line serving Metro Manila and several northern Luzon provinces, (3) Construction of 2 interchanges on the Subic-Clark-Tarlac Expressway to Clark Airport, which will then connect to North Luzon Expressway. Another initiative of the government is to support the Global Gateway Logistics City Project which complements the airport operations. This will cover aviation-related and dependent businesses including but not limited to warehousing, distribution, multi-nodal logistics, light manufacturing alongside complementary business operations, and facilities to support aviation related activities within the Civil Aviation Complex of Clark. Below is a comparison between NAIA Airport and Clark International Airport. 49 FIGURE 24: NAIA VS CIA Source: GGLC

49

Global Gateway Logistics City (GGLC) 99

XIC. Mactan International Airport - Cebu Location: Mactan International Airport in Cebu is located in Lapu-Lapu City. It is a hub for Airphil Express Cebu Pacific and Philippine Airlines. This is a major international airport in the Visayas region and it is the countrys second primary gateway. The area covers 797 hectares and has a single 3,300 meter runway that is complemented by a full-length taxiway. It is a major trade center in the south for domestic and international traffic. Facility: The terminal building has a capacity of handling 4.5 million passengers annually on two wings: the domestic and the international wing Demand: In 2010, it accommodated 5,791,387 passengers, 46,206 aircraft movements and 45,403 metric tonnes of cargo. This airport is currently served by thirteen passenger airlines and five cargo airlines. It is one of the major cargo airports in the Philippines. Air Cargo Volume increases at an average growth rate of 47% annually while domestic cargo grew 4% annually. There are five cargo airlines currently operating in the Mactan Airport : (1) 2GO, (2) Fed Ex, (3) Pacific East Asia Cargo Airlines, (4) Tri-MG Intra Asia Airplines and (5) Transglobal Airways. Cost: The Mactan International Airport also requires landing fee and parking fees from the foreign airlines. Government Support and Regulations: There are plans for the expansion of the existing terminal building and the construction of two more boarding bridges or jetways to complement the existing four. A new cargo terminal is also being planned. There is also a proposal to have a Bus Rapid Transit (BRT) Line to transport airport passengers to and from the airport from different parts of Cebu.

XID. Davao International Airport / Francisco Bangoy International Airport - Davao Location: Davao International Airport is located in Baranggay Sasa, Buhangin, Davao City. It is a hub for Air Phil Express and Cebu Pacific. This is the main airport serving Davao City. It has a single 3,000-meter precision runway. Facility: The modern facility is designed to handle 2 million passengers annually and 84,600 metric tons of cargo annually. The added capacity baggage handling equipment. The modernization and upgrading of the airport facilities aims to cement Davao as the hub for tourism and foreign investment in the region. Demand: In 2010, it handled 2,664,210 passengers, 19,198 aircraft movements and 34,257 metric tones of cargo. It is the busiest airport in the island of Mindanao. Government Support and Regulations: The Philippine Tourism Development Plan includes the Upgrading of the Davao International Airport. The plan includes improvement of city-side access road, parking and air operations and ground transportation support services, immediate decongestion of the passenger-handling

100

capacity in the existing departure area, expansion of the CIQS facilities, expansion of parking aprons for terminal expansion and conversion to Airport Authority that includes marketing of the airport to carriers. Below is a table showing the matrix of the different possible hubs in the Philippines.
TABLE: 10: COMPARISON AMONG THE DIFFERENT POSSIBLE HUBS IN THE PHILIPPINES

101

COMPARISON AMONG THE DIFFERENT POSSIBLE HUBS IN THE PHILIPPINES

Name of Facilty Date Established Rank In the World Ninoy Aquino International Airport 1981 48th Clark International Airport 1995 NA LOCATION Clark Pampanga Pampanga and Manila Yes FACILITIES 2 parallel runways with plans of adding one more 1 None Yes DEMAND Air cargo volume In 2010 it has in 2007 is 654,229 53,472,924 kg. In 2011, all passengers and last International terminals in NAIA year it had cargo volume handled 725,023 increased at an 29,552,264 passengers. An average growth passengers, increase in rate of 47% In 2010, it has 2,664,210 217,743 passenger volume annually while the passengers, 19,198 movements and was said to domestic cargo aircraft movements and 355,149 tonnes of increase cargo grew 4% 34,257 metric tones of cargo. volume as well. annually. cargo. It is a hub for Air It is a hub for Asia Philippines, Airphil Express Air Phil Express, Cebu Pacific and Cebu Pacific and Philippine Seaair. It is the Airlines. This is a main airport serving major the immediate international It is a hub for Air vicinity of the Clark airport in the It is a hub for Air Phil Phil Express, Cebu Free Port Zone Visayas region Express and Cebu Pacific, Philippine and the general and it is the Pacific. This is the main Airlines, Seaair and area of Angeles countrys second airport serving Davao Zest Air. City. primary gateway. City. GOVERNMENT SUPPORT Yes Yes Yes Yes No Yes No No No Yes No No In terms of expansion, NAIA is said to be at its full capacity. Airport operations The P130 million and the structure current expanded will be improved in Terminal 1; Airport terms of aesthetics City Development but expanding the (GGLC) ; current airport is Improvement of not an option Runways; Creation anymore. of Railways Mactan International Airport 1960 NA Cebu City (Visayas) Davao International Airport 1940 NA

Geographical Location Areas Served Free Port Zone

Metro Manila Metro Manila No

Davao City (Mindanao)

Cebu and Manila Davao and Manila No No

Runway Capability Number of Terminals Cargo Terminal Advanced Operating Systems

2 intersecting runways 4 None No

single 3000meter runway 1 None No

single 3000-meter runway 1 1 Yes

Market Size

Hub Open Skies Policy Within a Free Trade Zone Incentives

Expansion

Terminal Expansion; 2 more boarding bridges and a new Cargo terminal, Busr rapid Transit

The Philippine Tourism Development Plan includes the Upgrading of the Davao International Airport.

102

XII. PHILIPPINE POTENTIAL AS A LOGISTICS GAPS THAT NEED TO BE BRIDGED Given the features of the different hubs in the different countries mentioned, we can say that the Philippines has quite a number of improvements to do. Among the five (5) factors that were identified to be an ideal and competitive hub, it has been found in the study that there are gaps that the Philippines need to fill in. The Philippines as a Logistics hub is a plan that we can definitely achieve. It may not be in the short term but eventually the Philippines has a big potential of becoming one because of its strategic location. Our neighboring countries such as Hong Kong and Singapore are very successful in maintaining a logistics hub. Even Malaysia and Thailand are doing their best to improve their logistics and trade system. Based on comparisons with the other countries identified in this study, there are gaps or need tos that the Philippines may want to focus on in order for the country to be truly a competitive air cargo logistics hub. Below are the gaps that resulted in the study: (1) In terms of Location, the Philippines is already strategic, although it is not the centerpoint like China and Hong Kong, its location is still very attractive for air cargo operations. It can be said that the country is still within the 4-hour radius which can be very advantageous for air trade. The Philippines should bank on this strength to be an efficient air cargo hub in Asia. The Philippines also have to have airports within a Free Port Zone. (2) Second, in terms of Facilities, the Philippines has to improve its airport and it operations and invest in proper infrastructure that could complement the air cargo sector. Airports should follow at least the minimum requirements of ICAO. Improvements such as having a night capacity and precision approach for safety are among those that should be implemented. It should also work seriously on regaining category 1 status given by FAA. Roads, railways and networks should be prepared as well in supporting the said industry sector. Another important improvement can be in terms of automation. The operations and processes should improve in terms of technology for faster and easier processing of documents. In terms of expandability, NAIA has no more room for growth and expansion. There is no space for additional Runways and no area for a Cargo Village. (3) In terms of Demand, we should create cargo traffic and increase the volume in terms of cargo. The government should provide incentives to both local and foreign investors to attract them to do business in the Philippines. If incentives are provided, then a lot of local and foreign companies would operate their businesses in the country, then definitely cargo traffic volume would increase. There is a need for critical volume and one example is to have a strong electronic sector (high value, low volume) to be able to increase cargo volume. The Philippines through its Subic and Clark Airports used to be the hub for Fed ex and UPS, however due to a low traffic volume these two companies transferred their operations to China. (4) In terms of the Cost factor, the Philippines can minimize the cost to the airlines by eliminating the practice of red tape and overcharging. We are the only country that has an overtime charge shouldered by the airlines, which makes our country unattractive to foreign airlines. The Philippines charges a Common Carriers Tax and 103

the Gross Billings of 3% and 2.5 % respectively to Foreign Airlines which makes it difficult to encourage them to operate in the country. (5) Lastly in terms of Government Regulations and Support, the Philippine government should start with he improvement of infrastructure and craft policies that supports the industry. There should be a strong political will to improve the air cargo system in the country, thus making us a potential air cargo hub in Asia. The government should start prioritizing and reviewing its policies and continuously make the country attractive to investors. It would be better if there is the presence of an airport city or an aerotropolis which supports cargo and passenger services as well as businesses. According to the interviews with the cargo key players, the Philippines still lack infrastructure, policies and systems. Before we can actually become a hub there is a need to regain our category 1 status to be able to reach a wider market and attract foreign investors and to make the Philippines the centerpoint of trade. Being an Air Cargo Terminal will bring economic benefits to the country by providing a vehicle for manufacturers, producers and suppliers to expand their markets. Cargo Hub operations also bring in opportunities for direct employment. It can range from manual jobs such as cargo handling and sorting to highly technical jobs such as managers. Cargo hubs also act as industrial magnets drawing big industry players thereby creating a cluster of industries near the hub. As mentioned in the previous section of this paper, it was said that having a strategic location is a plus in terms of cargo hub operations. A strategic location would allow operational efficiency. According to a study made by Raagas in 2004, which was validated by an interview with Captain Ben Solis, Air Cargo is ideally picked up at the end of the production day and delivered at the start of the following day to allow efficient operations and practice of the JIT system. It was also said that there is only a six to eight hour window for cargo to get from Point A to its final destination. It takes two hours on the ground to prepare and sort the cargo at the point of origin prior to flight and another two hours to prepare and sort the cargo for final destination. This leaves only four hours of flight time. With this we can say that the farthest spoke cannot be more than 4 hours flying time from the hub location. This was also validated through the observation of UPS operations in Clark done by the researcher . The Philippines is considered as an ideal cargo hub because it is equidistant from all major Southeast Asian countries such as Thailand, Korea, Japan, Guam, Vietnam, Hong Kong, Singapore, Brunei, Malaysia, Shanghai and Xiamen in China and Taiwan.50 It was mentioned by FedEx Managing Director, that Hong Kong is a natural choice for a hub operations given the top intra-Asia cargo routes, but given the 4-hour flying time constraint, the Japan-Singapore route maybe more efficiently served by the Philippines. Aside from location, another factor to put into consideration is capacity. There must be enough runways and enough area for several cargo airlines to operate. For intra-Asia hub operations in the Philippines, the best time
50

Raagas, 2004 104

to dispatch is from 12 midnight to 4am as what the researcher observed during the operations of UPS in Clark. This would ensure that the cargo will get to its destination before the first working hour. Another factor to consider is aircraft parking capacities to allow aircraft to load and unload and park simultaneously. Given all these, the Philippines has a strong chance to be a cargo hub of choice especially for Non-China based cargo airlines because of its strategic location, relatively affordable airport fees, and open skies policy for cargo.

XIII. WHY CLARK IS THE BEST OPTION AMONG THE FOUR AIRPORTS IN THE PHILIPPINES TO BE THE NEXT AIR CARGO LOGISTICS HUB

Looking into the gaps that need to be solved in order for us to be a potential air cargo hub in Asia, there is a need to look into another airport aside from NAIA. NAIA as it is can be improved in terms of Facilities and Costs as stated above, However to be a fully operational competitive air cargo hub there is a need to look into another international airport.

From the interviews that the researcher conducted, it appears that among the three other options presented in this study, Clark in Pampanga is the best choice to be the next main international gateway. A Philippine Airlines representative suggested that NAIA can handle the domestic cargo and Clark can handle all international cargo or at least run two international airports that could serve the growing needs of the aviation and tourism industries in the Philippines. This is the concept of having a twin airport model. For this to materialize, proper infrastructure (creating and maintaining roads, railways and networks) should be built. LOCATION: Why is Clark the best option? Clarks strategic location makes it a natural gateway to the Asia Pacific Region. The Freeport Zone, which is only 80 kilometers north of Manila is an ideal place for investment as it already has the infrastructure and it offers a lot of incentives. Clark is also said to be positioned a few hours away from the tourist sites in Central Luzon. The Philippines specifically Clark is said to be an ideal logistics hub for cargo because it is equidistant from all major South East Asian countries such as Hong Kong, Thailand, Korea, Japan, Guam, Vietnam, Singapore, Brunei, Malaysia and China. In the researchers interview with FedEx Managing Director, Hong Kong was said to be the centerpoint of all the cities, making it the perfect hub. Hong Kong would always be the natural choice for hub operations given the cargo routes, but given the 4-hour flying time constraint we can say that Clark can be the best option because some of the routes if Hong Kong is used as a hub will take more than 4 hours. Another reason why Clark can be the best option as a hub is that the US Airforce clearly recognized the Philippines strategic location when they put up in Clark a military installation outside the US. Another positive aspect about the Philippines is the weather. Since there is no winter season in the 105

Philippines, there is no need for a de-icing procedure which would take up a lot of time

DEMAND: Known as a former US airport facility, Clark International Airport is said to be the fastest growing airport in the country with an average growth of 28% in passenger traffic for the past five years, according to the data from Global Gate Logistics Center (GGLC). It positions itself as the countrys major low cost airport and is being prepared to be the next international gateway. In terms of its airport operations, CIA has expanded its services. From an average of one flight per day in 2003, the airport now accommodates 21 flights daily on an average. Last year there were 7,581 flights carrying 767,109 passengers. The Carriers servicing international routes are the following: Air Asia, Air Phil Express, Asiana Airlines, Cebu Pacific, Jin Air, Seair,Dragon Air, and Tiger. UPS also operates out of Clark. FedEx stopped its operations in Subic after 15 years, and transferred to China but there are news that it is thinking of bringing back some of its cargo operations back to the Philippines, specifically in Clark.

The Subic-Clark Corridor is responsible for 8% of the Philippines total export by air. In 2010, the corridor exported $2.3 billion worth of high value products, up by 91% from the previous year. The destination of the corridors air cargo products includes much of east Asia, which collectively accounts for 56% of Subic-Clarks total exports by air. Other parts of Luzon also form part of Clarks catchment for cargo. Economic Zones located in the south of Luzon which is 117

kilometers away from Clark, contribute 12% to the Philippines total air cargo exports.

The Catchment Basin for Clark is said to be 25 million. It has a broader geographical catchment compared to other possible airport hubs in the country. Its geographical catchment includes Central Luzon, Northern Philippines and the Northernpart of Metro Manila (Quezon City). There is indeed a big opportunity for Clark to be the next air cargo logistics hub with potential clients coming from Region 3, which has a highly educated populace and with high per capita density; not to mention its legacy of the military and its major businesses in the area. With SCTEX then, it would be closer for passengers from Northern Manila, and Regions 1,2,3 to go to Clark than to NAIA.

Recent news also revealed the presence of MROs for commercial aircrafts which can also increase employment in Clark. Hong Kongs Metro Jet, which handles corporate jets, has invested in Clark. There are news that there will be more to come. There is also the increase in the number of Budget Airlines coming into Clark such Air Phil Express, Seair, Dragon Air, Cebu Pac, Tiger, Jet Star and Malaysian Air. These budget airlines are believed to bring in 10-

106

12million passengers thus making Clark very attractive to tourists and thus can also increase cargo traffic. Now is the right time to increase passenger volume with the entrance of these budget airlines.

FACILITY: Another factor in hub operation is the airport capacity. Clark is said to have to existing parallel runways and there is a plan to add one more. This is enough area for several cargo airlines to operate. With 2 runways in DMIA, 48 aircrafts, 24 on each runway can be dispatched within the 4-hour window. UPS used to have seven flights per night at the DMIA and Fed Ex used to have 12 flights per night at Subic. This just shows that DMIA has the capacity to operate as a cargo hub. However, UPS at present only has 1 flight per night in Clark while Fed Ex transferred its hub to China after 15 years of operation in Subic. The reason for this is that China and Hong Kong are believed to be in the centerpoint in Asia. In cargo operations, there is no room for delay in aircraft dispatch because cargo flights connect to other further destinations. Aircraft parking capacities is also important to allow for the simultaneous loading, unloading and parking of aircrafts. This is the problem that NAIA is experiencing now. There is a need for proper time slotting of flights to avoid delays.

FIGURE 25: DMIA AREA

DMIA fees is another consideration. It was found to be much less than that of NAIA.

A major problem with Clark is its distance from Manila. However, if roads and highways are fixed such that say, NLEX and SLEX are connected, then it would be easier to choose Clark as the next hub. Further developments of inter-modal transportation access to Clark that will ferry passengers from Manila to Pampanga, such as the use of a big speed and conventional rail link to connect Manila with Clark and CIA will 107

be developed. It was reported that San Miguel Corporation and MPC are the two Philippine conglomerates showed interest in developing the high speed rail link between Manila and Clark and other cities in the North.. COST: In terms of cost, Clark will have the following Aeronautical Fees and Charges. CCT of 3% and GBT of 2.5% and the CIQ charges are already being solved by the government.

GOVERNMENT SUPPORT: With all the developments happening in Clark now especially the Global Gateway Logistics Development, which according to GGLC Developer, would happen in 2-3 years, Clark would be in the best position to become the air cargo logistics hub in the region. However, we cannot transfer outright from NAIA to Clark as there is a need for a paradigm shift, where it becomes imperative for the government to be a catalyst. The GGLC Project will be bringing in a lot of developments in Clark. It will bring in businesses and employment. All its investors and locators are said to be aligned with the airport operations. There is a great chance of creating a Cargo Village in the said area since most of the businesses to be attracted as locators complement the airport operation. This will definitely attract investors and tourists which will bring in more passenger and cargo volume that will make Clark as the next potential air cargo logistics hub in Asia.

108

FIGURE 26: GLOBAL GATEWAY LOGISTICS CITY

Source: GGLC

FIGURE 27: INVESTMENTS IN CLARK

Source: GGLC

109

XIV. CHALLENGES AND CONCERNS (ISSUES) Part of the challenge for the Philippines now is to increase air cargo traffic, given that there is liberalization and that taxes are being lifted from the international air carriers. To give us a better perspective, let us re-visit what has happened in the air cargo industry in the past.

In 1995, the Philippines domestic and international aviation sectors were liberalized. This order led to a series of bilateral agreements that resulted in an expansion of air connectivity and increase in cargo volumes between the Philippines and major markets around the world. One of the most significant events, was the 1995 Philippine-U.S. air transport agreement that led to FedExs Asia hub at Subic Bay followed by UPSs hub at the former Clark Air Force Base. This agreement not only substantially increased the number of all-cargo routes that could be operated by U.S. carriers to and from the Philippines, but it also gave unrestricted rights to these carriers to: (1) serve other countries from the Philippines; (2) determine capacity on these routes; and, (3) change gauge, allowing the carriers to utilize wide body aircraft on long-haul, high-volume routes and shift to smaller aircraft on shorter, lower-volume ones 51

With the signing of the agreement, FedEx established its Asian hub at Subic Bay. Within months, heavy foreign investment in time- sensitive industries began flowing into industrial parks at and around the air express hub. These included, among numerous others, South Koreas Anam Group, one of the worlds largest producers of computer memory chips. Anam was reported to have invested US $400 million in its Subic Bay plant that turns out 50 million chips per month, equivalent to nearly half the production in South Korea. There were a lot of companies from other countries that also came into the country and were attracted to have their business operations in the Philippines. It was also reported that between 1995 and 2000, 150 firms located around the airport, constituting US $2.5 billion in commercial real estate investments. During the same period, exports increased from US $24 million annually to over US $1 billion annually. However, in late 1999, due to heavy pressure from Philippines Airlines (PAL), The Philippine government retreated from its highly liberalized aviation environment.52 Due to this reason, foreign airline access (aside from FedExs at Subic which had been locked in) was cut back significantly, and for some foreign airlines (such as that of Taiwans) , terminated entirely.

An example is the experience of Acer, which used a combination of FedEx services at Subic Bay and those of PALs and Eva Airs (Taiwan) wide-body belly cargo from Manila to Taipei. It is because of the pressure of PAL on foreign airline access, Acer was forced to cut back its Subic Bay production by half and reduce
51

Clark Air Base has been renamed Diosdado Macapagal International Airport
52

Bowen, T. Leinbach & D. Mabazza, Air Cargo Services, the State and Industrialization Strategies in The Philippines: The Redevelopment of Subic Bay (2002) 36 Regional Studies 5, 451.

110

employment of its facility there by 1,000 employees. Taiwan, which at that time was the largest country investor in the Philippines, essentially stopped all new investments and began to shift investments out of the Philippines.53 By 2001, the liberalization retreat to protect the national carrier was costing the countrys net inward investment, and as such the policy was eventually reversed. With a liberal aviation policy restored, both foreign direct investments and job growth again surged around Subic Bay and Clark Air Base.

Given the past state of the sector, this study points out that given the proper support and guidance the air cargo sector can again regain back its glory. But prior to attaining success, below are several critical issues that should be dealt with in order for the Philippines to truly become an air cargo logistics hub in Asia. These are results of the interviews conducted with the stakeholders. These issues only validated the gaps that were found out earlier in the study.

1. COGESTION IN NAIA (In relation to the Location Factor Gap) Many players in the industry complain about the congestion of operations in NAIA during peak hours. As much as the industry would like to cater to increase frequency of routes and add more destinations, the current capacities of NAIA can no longer service additional flights. There is also the problem on slotting. There have been flight delays due to the fact that NAIA can no longer operate beyond its capacity. According to Captain Ben Solis , there is already a directive to lessen flight movements. It was said that NAIA can only have 36 movements, 40 at the most and 44 if there are sophisticated systems. However currently NAIA has 47-50 movements per day which should be drastically lessened in order for it to operate efficiently and safely.

2. CARGO OPERATIONS IN NAIA (In relation to the Facilitiy Factor Gap) Another issue is the scattered warehouses in NAIA. It is because of this problem, there are issues of pilferage and loss of cargo, which leaves importers disappointed.

3. AIRPORT CATEGORY DOWNGRADE (In relation to the Facility Factor Gap and Demand Factor Gap)

Five years ago the Philippines had a status of Category 1 which means that the Civil Aviation Authority of the Philippines (CAAP) was in compliance with the requirements and standards set by the International Civil Aviation Organization (ICAO) regarding aviation safety and security standards.

53

Bowen, T. Leinbach & D. Mabazza, Air Cargo Services, the State and Industrialization Strategies in The Philippines: The Redevelopment of Subic Bay (2002) 36 Regional Studies 5, 451.

111

In 2008, the US Federal Aviation Administration (FAA) downgraded the Philippines from Category 1 status to Category 2. This means that CAAP was found not providing the safety oversight of its air-carrier operators, in accordance with the minimum safety oversight standards provided by ICAO. The FAA found 23 issues that need to be solved. It included the following: (1) Lack of laws and regulations necessary to support the certification and oversight of air carriers in accordance with minimum international standards; (2) CAAPs lack of technical expertise, resources and organization to oversee and license air carrier operations; (3) CAAP does not have adequate and trained and qualified technical personnel; (4) CAAP does not provide adequate inspector guidance to ensure enforcement of and compliance with minimum international standards; (5) CAAP has insufficient documentation and records of certification; (6) Inadequate continuing oversight and surveillance of air carrier operations.

It was also reported that a team from CAAP led by Director General Ramon Gutierrez, has just returned from a visit to the US where it presented what the country has done to resolve the problems that led to the category downgrade. The prospects was said to be still uncertain. The only assurance that was given by FAA is that they will review the report submitted by CAAP. In a report by ABS-CBN news, some sources said that what could help convince the FAA to give a positive grade for the Philippines is if the countrys flag carrier, Philippine Airlines, pushes through with its plan of buying Boeing planes and the Department of Transportation and Communications would announce its plan to source the $13 billion radar equipment needed by NAIA in the US. At present, CAAP is taking the lead in bringing back the Philippiness former status. It is trying to convince FAA that the country is addressing the problems that were seen in the inspection report that was submitted five years ago. According to CAAP, the issues that were identified were just minor. It just includes fine tuning the civil air regulations, changing the safety and oversight structure, updating its database storing system and standardizing certification of safety inspectors and revalidating airline carriers. CAAP also mentioned that there are only 2 which were left unresolved and according to them it was more of a political issue that is why it is taking a while to solve it. However, they are trying to meet the issues raised by FAA and that they are doing their best to make flying as safe as possible.

Another one of the issues is the limitation in the heights of structure within NAIA so that aircraft flying on instruments are assured they would not hit the tall buildings that are on the path of the landing pattern. This was also the concern of former AFPI chairman, who mentioned that there are also houses that were built very near to NAIAs runway which can hamper the safety of those living within the area. Some of the buildings were reduced in size but some owners had to pay since they were sued by the government and had to settle with the aviation authorities a huge penalty amount rather than having their buildings reduced. CAAP had

112

ruled that these buildings within a five mile radius from the end of Runway 13 could only build structures not higher than 150 feet. This downgrade has really affected the growth of the Philippine Aviation Industry. It resulted to making the Philippines part of the European Aviation Blacklist which will result to a limited reach in market. With this downgrade, the current aviation status prevents the country from effectively promoting the tourism industry as one of the growth sectors. The aviation authority noted that the category downgrade does not mean that the Philippine Carriers are banned from flying to the US, but it definitely prevents new services to be added to the US route until all issues are solved. According to President Noynoy Aquino, once these are solved there would be an influx of tourists in the country. He is hoping that the current number of tourists will increase to 10 million by 2016. In an interview with PAL representatives, PAL is doing their part. They already bought new aircrafts, however, since the country is still in category 2, PAL cannot use these aircrafts and increase their flights to a wider market, such as having new routes to the US and Europe. If this is the case, we will have a difficult time increasing cargo capacity

4. TAXES (In relation to the Cost Factor Gap) Burden of Taxes and charges imposed by various government agencies the industry is already suffering from the volatility of jet fuel prices and it was even made worse by the additional burden of taxes imposed like the Common Carriers Tax (CCT) and Gross Philippine Billings (GPB). According to the IATA study, removing those taxes would provide a potential gain of US$38-78 million for the Philippine economy resulting from increased tourism. This would also lower cargo transport cost thereby boosting export earnings to almost US$ 1billion.

Foreign airlines are burdened with discriminatory taxes such as the following: a. 3% Common Carriers Tax (CCT) Revenue Regulations No 11-2011 entitled, Revenue Regulations Defining Gross Receipts for Common Carriers Tax for International Carriers pursuant to Section 118 of the Tax Code amending Section 10 of Revenue Regulations No 15-2011 finally came up with a formal definition of Gross Receipts for International Carriers under Section 118 of the Tax Code as follows: Gross receipts shall include, but not limited to, the total amount of money or its equivalent representing the contract or ticket prize, excess baggage fees, freight / cargo fees, mail fees, rental, penalties, deposit applied as payments, advance payments and other service charges and fees actually or constructively received during the taxable quarter from the passage of persons, excess baggage, cargo and / or mail, originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the passage documents. 113

Provided further, that for a flight, which originates from the Philippines, but where transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the Gross Receipts. Said definition amended Section 10 of Revenue Regulations No 15-2002. Notable Section 118 of the Tax Code simply provides as follows: Section 118 Percentage Tax on International Carriers International air carriers doing business in the Philippines shall pay a tax of 3% of their quarterly gross receipts. Thus the above definition under Revenue Regulations No 11-2011 amending Section 10 of Revenue Regulations 15-2002 would serve as a guide for international carriers in determining their Gross Receipts for percentage tax purposes. This is a direct tax where the airline company is the one directly liable. It s not like Value Added Tax (VAT) that could be passed on to the buyer.54

b. 2.5% Gross Philippine Billings Tax (GPB) An international carrier doing business in the Philippines shall pay a tax of 2.5% on its Gross Philippine Billings. It refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. In Singapore and Malaysia, they are liberalized already thats why they are attracting a number of investors. In the Philippines, these investors are pulling away due to these taxes.

The Board of Airline Representatives (BAR) as well as the International Air Transport Association (IATA) have repeatedly communicated their strong disagreement to the CCT and the GPB imposed on foreign airlines operating in the Philippines. Malaysia, Thailand and Vietnam are said to be enjoying its tourism growth and connectivity due to the fact that they do not impose these taxes. If international carriers are exempted from these taxes, the Philippines will be more attractive to foreign investors and tourists and it will also attract foreign airlines to make the country a destination of choice. This view was shared as well by the Key Players that were interviewed by the researcher. These two taxes are considered as a burden to the carriers which pushes them away to operate in the country.

According to the American Chamber of Commerce, In the highly competitive international aviation industry, foreign airlines connecting the Philippines to foreign airports operate at a very low margins. The termination of flights of European airlines, including that of Air France-KLMs direct service to Manila marks the end of any
54

Philtaxation.blogspot.com 114

direct flights from Europe to the Philippines. The recent decision also of Qatar Airways to end flights between Doha and Cebu is another example of connectivity reduction. It was reported that the Philippines should look at what its neighboring countries are doing. Malaysia, Thailand and even Vietnam is experiencing gains from increased connectivity and tourism. These countries are more business-freindly to the foreign airlines. We should then strive to bring back these lost opportunities and make it a point to start attracting the foreign airlines again to do business here.

Early this year the House of Representatives approved a bill that would rationalize the taxes, particularly the Common Carriers Tax (CCT) and Gross Philippine Billings (GPB) tax imposed on international air carriers. It was reported that House Bill 6022, a substitute measure to House Bills 3298 and 4444 and House Resolution 1949 seeks to amend Sections 28, 108 and 118 of the National Internal Revenue Code of 1997. If enacted into law, international air carriers will be exempted from CCT which is said to be 3% of the airlines gross turnover and GPB which is 2.5% of the gross turnover.

In the article of Iloilo representative Jerry Trenas, author of HB 4444, he said that the countrys tax regime is driving away tourists from the country. The said measure seeks to advance the countrys tourism, trade, employment and economic integration with the rest of the world, eliminating the negative impact of CCT and GPB on the countrys connectivity and competitiveness as an international investment destination. The moves objectives are: (1) to recognize, honor and respect the principle reciprocity with regard to other countries in relation to tax treaties and international agreements embodied in diplomatic notes involving international carriers; (2) to enhance the countrys competitiveness through tax incentives. This will facilitate movement of goods and services and people since it will improve tourism in the country, attract foreign investors and encourage international airlines that stopped its operations and direct flights to the Philippines to restore its operations in the country. It was said that carriers with extensive global networks left the country and transferred to other neighboring countries which do not burden them with such taxes.55

Another Act that is being supported by Representative Ralph Recto is the Customs Modernization Tariff Act (CMTA). This Act decreases the fees and charges that the companies pay for certain products. Companies are said to pay more taxes and other charges that the actual value of the product, making the companies lose revenues. This is another step that the government should really push since this can greatly have an impact on the decision of the companies to invest in the country.

55

The Daily Tribune, March 23, 2012 115

5. CUSTOMS, IMMIGRATION, QUARANTINE (CIQ) / OVERTIME CHARGES (In relation to the Cost Factor Gap)

One of the most pressing issues that the industry is facing now is the imposition of Customs, Immigration and Quarantine (CIQ) Fees which include the $100 overtime fee per aircraft and the meal and transportation allowance of the airport personnel. In the interviews that were made, not only the representatives of the foreign airlines, but even other stakeholders believe that overtime charges of the airports personnel should be covered by the government. There should be shifting in terms of its operations so that foreign airlines will not have extra costs, which makes them uncompetitive and therefore discourages them to have flights in the country. The government should be persuaded to shoulder overtime charges of its personnel and to implement a system of shifting of personnel to cover its 24/7 operations.

The Board of Airline Representatives (BAR), an organization of executives of international airlines operating in the Philippines, said that their members mentioned that they have been paying the CIQ fees for the overtime services rendered by customs personnel since 1990. For these international airline companies this is a very abusive act of Customs. In a report, they pointed out that If four flights come in, Customs charge us four times for the same hour they were rendering their overtime charges. Foreign airlines were forced to pay these CIQ / overtime charges including meal and transportation allowances because Customs in the Philippines are said to be so powerful at the airport. BAR representatives even mentioned that the customs have the power to delay flights making it very inconvenient to the passengers as well. They also mentioned that customs officials wanted to adopt the $1 = P50 exchange rate which started in 2005. BAR said that NAIA is the only airport in the world that charges CIQ fees for foreign airlines. KLM Royal Dutch Airlines was reported to have stopped its flights to Manila due to the fact that the Philippine government is imposing a lot of taxes. It was also reported that Lufthansa stopped its Manila to Europe route in 2008. According to Business Mirror dated August 20, 2012, Malacanang backed up the decision of Secretary Manuel Roxas III to cease payment of overtime pay for customs, immigration and quarantine officials at the countrys international airports. Roxas in coordination with the Department of Finance directed government agencies performing services in international airports to field sufficient number of personnel in shifts to address the operational requirements and avoid rendering overtime.

6. FUEL AND SECURITY SURCHARGE (In relation to the Cost Factor Gap) This is not just an issue here in the Philippines but worldwide. With the increasing cost of fuel prices, the industrys competitiveness against other means of transport is lessened because consumers tend to be price sensitive. Another issue related to fuel prices is the challenge among industry operators to keep operation costs low, of which 40% of total cost goes to fuel expenses. 116

In an interview with domestic cargo key player, Cebu Pacific, an increase in fuel prices has a huge effect on the travelers because there will be an increase in surcharge fees exacted to them, which in turn will discourage traveling and will impact on the number of flights. In a report in The Daily Tribune last June 26, 2012, Cebu Pacific has lowered fuel surcharges to much as 20% on all domestic flights to further bring down prices for passengers. This will take effect on flights from Manila to Visayas, Mindanao and selected Luzon routes (less P100), from Manila to selected Luzon routes (less P50), from Visayas to Luzon and Mindanao and within Visayas (less P50) and from Mindanao to Visayas and within Mindanao (less P50). Cathay Pacific, the number two key player in international cargo, on the other hand, and its subsidiary Hong Kong Dragon Airlines petitioned the Civil Aeronautics Board (CAB) for the adoption of fuel surcharge increase to recover costs related to increasing fuel prices. It is seeking a 6.6 % increase in fuel surcharge from $129.20 to $137.80 for flights between Hong Kong and South West Pacific, North America, Europe, Middle east, Africa and the Sub Asia continent. Fuel surcharges are said to be added to air fares. This is to help airlines worldwide to offset the rising cost of fuel, which as what was said by CEB representative is 40% of their cost. However, if this continues to rise, it will have an effect on the financial performance of the airlines. It would be difficult for them to balance the cost with the quality of their service.

7. OPEN SKIES POLICY (In relation to the Government Support Factor Gap and the Facility Factor Gap) Open Skies is a policy concept that calls for the liberalization of the rules and regulations of the international aviation industryespecially commercial aviation--- in order to create a free market environment for the airline industry. The objectives of the policy is (1) to liberalize the rules for international aviation markets and minimize government intervention as it applies to passenger, all cargo, and combination air transportation as well as scheduled and charter services; and (2) to adjust the regime under which military and other state-based flights may be permitted. For open skies to be effective, a bilateral Air Transport Agreement must be concluded between two or more nations.56 Last year the Philippine Civil Aeronautics Board (CAB) approved rules allowing foreign carriers to fly in the Philippines under the Aquino administrations pocket open skies policy. President Benigno Aquino III signed Executive Order 29 (Liberalizing the Philippine aviation by easing restrictions on foreign airlines in selected international airports outside Metro Manila) to foreign airlines specifically to airports other than the NAIA. This was said to increase tourist arrivals and air traffic. The policy is also designed to facilitate access to secondary airports. This is construed to favor the grant of additional frequencies capacities and rights. According to the policy, any foreign carrier intending to engage in international air transportation to any
56

Wikipedia 117

secondary gateway or to increase its frequencies or capacities or route rights should file a petition for grant of an increase of traffic rights over and above the limitations. It also states that CAB, in case of failure to reach mutual agreement to grant reciprocal rights to Philippine carriers within 12 months from the grant, may revoke the said grant. CAB may continue to allow operations of traffic rights granted under EO 29 if the Board deems it to promote mutual interest or mutual benefit. Open Skies Policy can open the country to other markets, however the Philippines has to be prepared as well. It should improve its airports and its operations and invest more on infrastructure. Philippine Airlines, the countrys flag carrier strongly disapproves on this. Other carriers are said to get more than our own domestic airlines. For these key players, there is no reciprocity. The government is giving too much to other foreign airlines.

8. BUREAU OF CUSTOMS (In relation to the Government Support Factor Gap) The Bureau of Customs in NAIA is the number one complaint of the stakeholders. From the results of the interviews, the Customs Bureau is reported to have different policies. For instance, in the cargo delivery, the length of how long the release of cargo differ, For some, it takes very long for them to release a particular Given this there is a big effect on the cargo delivery because of time and speed. Every hour that the cargo is late, there is a huge implication on the cost. In an example given by PAL, during a transshipment from HK going to Cebu passing through Manila, the processing of all documents in Manila are being done by the forwarders, they are the ones engaging in red tape. In a flight Tokyo-Cebu-Manila, from Cebu to Manila, goods are being guarded, this means that would entail more costs. Customs should engage in paperless systems, so that documentation and other activities are all automated. In this case, cargo and its activities will be monitored and red tape can be diminished. In terms of the Customs Bureau in Clark, in can be said that the performance of Clark is better than that of NAIA in terms of customs operations. Most of the interviewees mentioned that NAIA Customs is a pain and they still continue engaging in red tape. However, when BOC in Clark was interviewed it was learned that their operations are clear and synergized. They are currently looking into the practice of E2M or the Electronic to Mobile System. It is a system that has a tie up with the bank for easier payment and processing. For enhancement of BOC operations, there was a request to upgrade X-ray machines for non-intrusive examination. BOC Clark also recommends the following: For Trade Facilitation, make Clark a tourist hub (Clark-SG; Clark to Korea and Vice Versa) and train BOC Personnel in the Korean language 1. For automation of operations such as the initiatives in E2M and the Automated Export Documentation System (AEDS), these should be customized to Clark situation as a Freeport.

118

2. As for the Single Window initiative, BOC is already linked. Operations are already paperless and queueless. BOC is however the one blamed for the delays and not the other agencies since BOC is the last to issue a permit.

9. SYNERGY IN THE GOVERNMENT (In relation to the Government Support Factor Gap)

The aviation / air cargo logistics industry has a lot of room for growth, improvement and opportunities to catch up with its successful neighboring countries. However to be able to make this happen, the government will play a big role in leading this quest for success.

The government must make all the necessary policies and regulations to implement a smooth operation of the industry. For instance the government should set a good example to all its employees. Each agency should implement and follow their rules and make sure that everyone else will follow. The problem with the policies is that those on top are giving instructions for those policies but those at the bottom are continuously doing their old system which consist of doing red tape or the lagayan system. It was said in the FGDs and Interviews that the actions of the rank and file in the government agencies specifically that of Customs cannot be controlled. The government also was said t have no standards. Each agency is doing and implementing its own policies. There is no presence of a regulatory board. Plans and programs should have proper coordination among agencies in the government and simulation and this will definitely take time. What the government lack is a sense of urgency in implementing its policies and projects. There is a Lack of Long term Urban Planning as well. There is still hope for the government to do its part. Aside from these, the government should provide incentives to enable business and trade in the country. The government should provide the environment, provide better airports. This is more of a political will. Government should help business, protect investors and continue maintain a good partnership with those who has already investments in the country.

119

TABLE 12: Summary of Imperatives for the Air Cargo Logistics Sector (in support of the vision to make Clark the Primary International Gateway / Logistics Hub ISSUES DESIRED RESULT CONCERNED GOVERNMENT AGENCIES CCT of 3% and GPB of 2.5% to Foreign Airlines 1. Removal of these taxes 2. Amendment of 1. Congress 2. Senate 3. DOTC (CAB / CAAP) 4. DOF (BOC / BIR) 5. DOT 1. House Bill 4444 and Senate Bill 3065. The bills seek to amend and eliminate the taxes imposed foreign airlines 2. There was an HB committee hearing held on March 13, 2012 3. HB 6022 4444 being to UPDATES

NIR Code Sec 28.

removes the 3% CCT and the 2,5% GPB

imposed on all cargo passenger revenues. 4. DTI-BOI is and

support drafted comments for

both House and Senate Bills Open Skies Policy 1. More liberalized DOTC / CAB 1. EO 29 (March 14, 2011) was issued directing 120

aviation policy. 2. Increased

International carrier Services through

the CAB and negotiating panels t persue more aggressively the international civil aviation

reduction of cost.

liberalization policy. 2. Malaysias Air

Asia establishing a hub in Clark DMIA.

CIQ, overtime, meal and charges transportation

1. 24/7 operations at all international and

1. DOF / BOC 2. DOJ / BI 3. DOT 4. DOH 5. DA 6. SBMA 7. CDC/CIAC

1. Supported senior government officials.

by

airports

government should shoulder overtime payments personnel for

BOC

has ordered staff services by shifts without overtime payemployees but are

not in favor of this and they took legal action. 2. DOF Secretary ordered officials CIQ to

discontinue the one shift practice and have 3 shifts for operations 121 24/7

effective 2012. FAA 2007 Audit: 1. Upgrade category 1 2. Implementation of the DOTC Air to 1. DOTC (CAB / CAAP) 2. NCC 1. CAAP

May

still

Category from 1 to 2

Downgrade

awaiting recent audit of the

technical review conducted by the team of ramon Gutierrez in the US> 1. DOF 2. NCC

Traffic Management Project fueled by Japan Fuel and Security Removal or reduction in its fuel and security surcharges

Surcharges

implementation made cargo cost expensive Customs BOC satellite office / 1. DOF / BOC 2. Eco BOC in Clark said they

personnel to be stationed outside the perimeter of the free port zones Increase Traffic Air Cargo 1. New market

Zones are inside the airport just for monitoring and Operators checking. 1. Continuous promotion Clark 2. SCADC vision for Clark / of

1. CDC / CIAC

Opportunities 2. High Value Added Products from

Mindanao (crops) 3. Operationalized Distribution Center / warehouse

DMIA to be an international gateway airport in of Philippines 3. Global gateway Logistics Development the

Facility in Clark 4. Completion

DMIA Expansion

122

XV. VISION, GOALS AND TARGETS I. SHORT TERM GOALS: (2016) a. Increase in the Number of Free Trade Zones in the Country. (LOCATION FACTOR) Acording to Captain Ben Solis, the government should decide how many free trade zones it still wants to have. This will definitely attract foreign investors to have their business operations in the Philippines. b. Improvement of the NAIA Airport. (FACILITY FACTOR)Expansion is no longer possible but at least improve the operations in NAIA especially the operational aspect. Paperless or the E-Freight System should be implemented and practiced. In line with this CAAP should work on regaining Category 1 classification of the Philippines. New equipment and systems should be installed for more efficient operations. c. Increase in the Number of Foreign Investors. (DEMAND FACTOR) The number of Investors in Central Luzon and in Northern Luzon should be increased. This will definitely create the need for air cargo thereby increasing cargo volume in the country. d. Elimination of Taxes such as CCT and Gross Philippine Billings. (COST FACTOR) This can definitely attract foreign airlines to operate efficiently and competitively. e. Elimination of CIQ Charges / Overtime Charges. (COST FACTOR) Foreign Airlines should not be burdened by these charges. The Philippine Government must implement the 3shift operations of customs f. Provide more incentives to investors. (GOVERNMENT SUPPORT FACTOR) This are taxes such as Preferential Tax on Free Port Zones (Businesses which are registered are entitled to a preferential tax of Gross Income Earned in lieu of the customary national and local taxes), Foreign Investment Incentives such as Board of Investment Incentives (Any enterprise registered with BOI is entitled to incentives), Fiscal Incentives (Income Tax Holiday for pioneer firms and non pioneer firms, Tax credit on raw materials, additional deduction from taxable income for labor expense cannot be enjoyed with ITH, Duty Free importation of capital equipment, spare parts and supplies for both export and domestic-oriented enterprises) and NonFiscal Incentives (Employment of foreign nationals, Guaranteed 100% repatriation of foreign investments and earnings and Importation of consigned equipment for an unlimited period

123

g. Position Clark as the Low Cost Carrier Airport and a Primary International Gateway. (GOVERNMENT SUPPORT FACTOR, DEMAND FACTOR and FACILITY FACTOR) Since NAIA is already congested, by 2016 Clark should already be positioned to be the next international gateway and an air cargo logistics hub in Asia. Start investments in Clark and pursue completion of GGLC. Improve airport operations and facilities and have the best automated systems and processes available for airport operations. Invite more Low Cost Carriers. Have a robust marketing campaign promoting Clark as the next Air Cargo Hub. . II. MEDIUM TERM GOALS: (2022) a. Clark as the Primary International Gateway and an Air Cargo Logistics Hub In Asia. Support marketing strategies that would promote Clark as a hub in Asia. (LOCATION FACTOR) b. The Philippine Aviation back to Category 1. (FACILITY FACTOR) c. Development of Provincial Airports. (FACILITY FACTOR)

d. Aerotropolis Vision for Clark. (FACILITY FACTOR) e. Having Railways and Improvement of Roads that would connect NAIA to DMIA both for passengers and cargo. (FACILITY FACTOR) f. Fully-Automated Cargo Terminal or Cargo Village in Clark. (FACILITY FACTOR) g. Full Implementation of the E-Freight System. (FACILITY FACTOR) h. More incentives for Investors and more policies supporting Air Cargo Sector. (GOVERNMENT SUPPORT FACTOR)

III. LONG TERM GOALS: (2030) a. Cargo Terminal comparable to Hong Kong and Singapore with state-of- the- art and fully automated facilities. (FACILITY FACTOR) b. Air Cargo as an enabler for more trade as it promotes more connectivity with other markets. (DEMAND FACTOR) 124

c. Philippines to be the center of trade and a hub to a lot of cargo carriers. (DEMAND FACTOR) d. Continuous Improvement of Airports, Roads and Networks. (FACILITY FACTOR) e. To be one of the Top 10 Cargo Hubs in the World.

XIV. STRATEGIES AND ACTION A. TAXES AND INCENTIVES: 1. EO 619 was signed by President Gloria Macapagal Arroyo last April 16, 2007. It states that Tax and Duty incentives are provided to duly registered businesses that locate to special economic zones in the Philippines. 2. RA 7916 supports that companies that opt to relocate with in a Free Port Zone are granted generous tax breaks by the government. Corporate Income Tax is equivalent to only 5% of their gross income and the Capital Equipment and Raw Materials can be imported Duty Free. 3. Modified and Liberalized Foreign Investment Law states that foreign Investors of any Nationality are permitted to maintain 100% foreign equity in all areas of investment set up in the Philippines. Foreigners are permitted to lease privately owned land from Filipino owners for 50 years with an extension of 25 years, thereby having a total of 75 years.

STRATEGIES: (DEMAND FACTOR & GOVERNMENT SUPPORT FACTOR) 1. Provide more tax and duty incentives to both local and foreign investors that would allow and attract them to expand and extend their business operations in the Philippines. 2. Government should be deciding on how many free ports they would want to establish in the country. Government to identify and increase the number of free port zones. 3. The government should develop more PEZA zones

B. FOREIGN INVESTMENTS: 1. Texas Instrument (TI) built its $1billion manufacturing plant in Clark. According to its Vice President Kevin Ritchie they chose the Philippines instead of its other neighboring countries such as Vietnam, Thailand and China mainly because of two reasons: (1) The Philippines has highly skilled and quality labor force, and (2) The willingness of the Philippine Government to offer favorable and attractive tax and tariff incentives. 125

STRATEGIES: (GOVERNMENT SUPPORT FACTOR) 1. The Philippine Government should create educational programs that would train and hone the skills of Filipino Workers. This could be a continuous education program where the objective also is to enhance the technical skills and knowledge of Filipinos. This is one of the factors that attracts foreign companies to invest in the Philippines, our skills and talents are among the best in the world, thus providing quality labor to these businesses. 2. Promote to the Foreign Investors the advantages of operating in the Philippines. This should be part of the government initiative to attract these businesses to have their operations in the country. This in effect will increase our export growth. 3. The Philippines to be the enabler for trade and connectivity. By attracting investors to locate their businesses in the country, there would be more movement in terms of cargo volume. If these investors would have their manufacturing plants in the country, there are more opportunities for trade and cargo movement. The Philippines can reach a wider market through exporting these raw materials to other countries. But the country has to first be an attractive location and environment to these locators. The effort has to come first from the government to attract these investors through tax incentives and an efficient system in terms of airport operations and efficient transport of goods. 4. Develop companies such as BerthaPhil Business Park in Clark. It definitely will attract investors who are not sure where to relocate their business. BerthaPhil is an integrated IT, Housing and Commercial Camus which provides office, warehouse space and customized IT facilties to different local and foreign companies. 5. Government agencies supports and extends help to investors. In Clark, CDC devoted 30 hectares in the Freeport zone to accommodate presence of support industries and suppliers of companies such as Texas Instruments.

C. IMPROVEMENT OF ROADS AND HIGHWAYS 1. The completion of the key transportation link, Subic-Cark-Tarlac Expressway (SCTex). This superhighway directly interconnects Subic Bay and Clark and it further extends to the Central Techno Park in Tarlac to the north of Clark. 2. Aside from the SCTex there was the opening of a 3.5 kms North Interchange via Panday Pira connecting Road and the opening of the Clark South Internchange which is located near the Yokohama Tire Facility and the Clark Airport. These initiatives were made possible because most of the locators in Clark has been requesting for an exit and entrance point to and from the Clark Freeport.

126

3. Part of the government plan as well is to connect the North Luzon Expressway and the South Luzon Expressway via metrorail. This however is part of the Long Term Plan which can connect Clark to Manila. The improvement of roads and highways will help Clark and Subic and the nearby provinces to become important participants in the governments Global Gateways Development Program.

STRATEGIES: (GOVERNMENT SUPPORT FACTOR AND FACILITY FACTOR) 1. More highways such as the SCTex should be develop. The plan of putting a metrorail to connect NLEX and SLEX can be an advantage for the passengers, however in terms of cargo it would be better to create sky ways for easier transport of cargo. 2. Government should create transport means in the free port zones. These transport means should be available in the region.

D. IMPROVEMENT OF AIRPORTS / TERMINALS 1. The Ninoy Aquino International Airport is said to be beyond its capacity to operate. The plan of improving the airport and faciltiies are still ongoing. However, there are a lot of issues and problems that need to be resolved for NAIA to operate efficiently. Even if problems within the NAIA are solved it is still operating beyond its capacity. It will only solve its current operations but expanding the airport is not an option anymore. 2. NAIA has no cargo terminal or a single building cargo terminal where all processes and operations related to cargo are done.

STRATEGIES: (FACILITY FACTOR AND LOCATION FACTOR) 1. To solve the capacity to expand of NAIA, taxiways should be developed for a free flow of the aircrafts. The taxiway can be created as an alternative route to solve issues on flight delays. This is very similar to the U-Turn concept of MMDA to solve traffic in Metro Manila. 2. Look for the next international gateway for Commercial Aviation Sevices in the Philippines. 3. Look into the different areas in the Philippines, which could serve as a potential international airport which can also be positioned as a cargo logistics hub in Asia. The potential area or location for another international airport should (a) operate within the requirements by the ICAO, (2) it should have access to the different modes of transportation, (3) it within a freeport zone, (4)It should have a logistics supply facilities.

127

4.

There should be a creation of a Logistics Infrastructure, Inventory Management Facilities contained in an area near the seaport and an airport.

5. Creation of an Aerotropolis wherein a Cargo Village can be located. 6. Develop areas like Clark. (GGLC. Berthaphil Business Park

E. GOVERNMENT: 1. The government might have no synergy when it comes to implementing and prioritizing projects. 2. CAAP is still working on the Category Upgrade. 3. The government lacks political will in implementing policies in the air cargo sector.

STRATEGIES: (GOVERNMENT SUPPORT FACTOR) 1. Re-structure or Re-organize the CAAP. The responsibility of CAAP, being both an operator and a regulator should be thoroughly thought about. In other countries, an airport operator is different from a regulator. This is to have a more efficient operations in the airport. The government can remove one of these responsibilities from CAAP so it can focus and concentrate more on its assigned duty. In this way, the quality of CAAP will also be improved. In the new CAAP law, the Airport Transpostation Office was changed to CAAP, it was only the name that was believed to be changed, the structure was still the same. 2. There should be no presence of customs within the free port zone. The BOC should be relocated near the exit of the Freeport zone so as to monitor cargo going out of the zone. This would create ease in the cargo movement. 4. Presence of Political Will. The government must take the lead in creating policies and implementing these policies. The Philippines has the capacity to compete with its neighboring countries specifically in being a logistics hub in Asia. The leaders just have to set mind to it. They should start creating the need for cargo volume by improving all the systems, improving all infrastructure and facilities, then making sure policies are in place and are implemented. Once all these have taken place it would be very easy to attract and invite investors to do business in the country. 5. In terms of supporting Marketing Strategies and Promoting Clark as the Next Air Cargo Hub, there should be a focus on negotiations for express cargo flights, Organize a one-stopaction center specifically catered to aviation industry needs, Focus overall marketing efforts of CDC on aviation-related and aviation-dependent industries, Maintain airport fees which are lower or comparable.

128

6. For the government to release an Information Campaign Strategy. Continue to advocate for open skies in order to increase cargo operations. 7. For the government to have an Infrastructure Development Strategy. It should look into targeting big players who have financial resources to have their own cargo handling and sorting facilities, Use political ties that could provide help in negotiations with cargo liners, Negotiate for Bank Loans or finance continuous airport improvements.

129

References Abu Bakar, D. A strategic business transformation: Malaysia Airports Holdings Berhad. [PDF document]. Retrieved from http//dspace.fsktm.um.edu.my/bitstream/1812/608/1/Thesis_A%20Strategic%20Business%20Transfor mation%20V1.pdf Black, D. (2012, 03 28). Dubai International Airport air cargo volume soars. The National. Retrieved from http://www.thenational.ae/thenationalconversation/industry-insights/aviation/dubaiinternational-airports-air-cargo-volume-soars/ British Chamber of Commerce. The air freight industry in Hongkong. [PDF document]. Retrieved from http//www.britcham.com/sites/britcham/files/British%20Chamber%20Logistics%20Position%20Paper %20-%20FINAL.pdf CAPA. (2012, 03 16). Bangkok Suvarnabhumi Airport announces 15% increase in Feb-2012. Centre for Aviation. Retrieved from http://www.centreforaviation.com/news/bangkoksuvarnabhumi-airport-announces-15-increase-in-feb-2012-pax-146234/ Fung, M., Zhang A., Leung L. and Law, J. The air cargo industry in China: Implications of globalization and WTO accession. Retrieved from http://www.baf.cuhk.edu.hk/research/aprc/activities/files/ChinaAirCargoJuly05.pdf Hoppin, D. Air cargo industry supply issues [PDF document]. Retrieved from Merge Global Online Website: http://www.mergeglobal.com Kasarda, J., S. Appold and M. Mori. [PDF document]. The impact of the air cargo industry on the global economy. Retrieved from http-//www.aerotropolis.com/files/2006_09_AirCargoGlobalEcon King, M. (2012). Dubai air freight slides 1.5 percent. Businessweek. Retrieved from http://www.businessweek.com/adsections/country/dubai/aircargo.htm Lee, H. Air cargo hub competition in Northeast Asia. [PDF document]. Retrieved from http//ardent.mit.edu/airports/ASP_exercises/ASP%20matl%20for%20posting%202007/Airport_Project _Presentation(HanbongLee)071206 Luft, G. The oil crisis and impact on the air cargo industry. [PDF document]. Retrieved from http//www.iags.org/aircargo406.pdf McKinnon, A. The air cargo industry and transhipment in Hongkong: Challenges, opportunities and global competitiveness. [PDF document]. Retrieved from http//www.cityu.edu.hk/slw/HKCMT/Doc/Working_Paper_5_-_Hong_Kong_Air_Cargo_-_Final_(v4) Mehta, M. (2012, 02 15). Malaysian Airport Holdings group builds KLIA2 to cater to LCCs. Logistics Digest. Retrieved from http://www.logisticsdigest.com/inter-news/inter-corporatesnews/item/7616-malaysian-airport-holdingsgroup-builds-klia2-to-cater-to-lccs.html/ Oxford Economics. Explaining Dubais aviation model. [PDF document]. Retrieved from http//www.dubaiairports.ae/en/mediacentre/Documents/Oxford%20Economics_Explaining%20Dubai's%20Aviation%20Model_June%2 02011

130

Oxford Economics. Economic benefits from air transport in the Philippines. [PDF document]. Retrieved from http-//www.benefitsofaviation.aero/Documents/Benefits-of-Aviation-Philippines2011.pdf Petersen, J. Air freight industry - White paper. [PDF document]. Retrieved from http//www.efiko.org/material/Air%20Freight%20Industry%20Whitepaper%20by%20J.%20Petersen.pd f Unknown Author. (2011). Suvarnabhumi Newsletter, http://www.suvarnabhumiairport.com/pdf/Newsletter_No5_ENG.pdf volume 5. Retrieved

Senguttuvan, P. Air cargo: Engine for economic growth and development - A case study of Asian Regions. [PDF document]. Retrieved from http-//www.metrans.org/nuf/documents/Senguttuvan/ Tham, S. ASEAN open skies and the implications for airport development strategy in Malaysia. [PDF document]. Retrieved from http//www.adbi.org/files/2008.11.04.wp119.asean.open.skies.airport.development.strategy.malaysia.pdf Unknown Author. Don Muang AIrport. Retrieved from http://www.donmuangairportonline.com/ Unknown Author. Dubai World Central. Retrieved from http://www.dwc.ae/about-dwc/timeline/ Unknown Author. Dubai AIrports. Retrieved http://www.dubaiairports.ae/en/cargo/Pages/Cargo_mega_terminal.aspx/ Unknown Author. Kuala Lumpur International AIrport. Retrieved from http://kli.com/ Unknown Author. Shanghai Pudong International Airport Cargo Terminal Co., Ltd.. Retrieved from http://pactl.com/ Unknown Author. Suvarnabuhmi http://www.suvarnabhumiairport.com/index_en.php/ AIrport. Retrieved from from

Unknown Author (2010, 03 18). Suvarnabhumi unveils its new logo. Airports Suvarnabhumi. Retrieved from http://www.suvarnabhumiairport.com/index_en.php Unknown Author. (2010, 06 21). Dubai World Central - Al Maktoum Airport set to make history. Ameifo.com. Retrieved from http://www.ameinfo.com/235897.html Unknown Author. (2012, 05 04). Dubai World Central cargo volume rises 382.2% in Q1. AirportTechnology.com. Retrieved from http://www.airport-technology.com/news/newsdubai-worldcentral-cargo-volume-rises/ Unknown Author. The Dubai air cargo terminal is one of the most modern and efficient in the world. Businessweek. Retrieved from http://www.businessweek.com/adsections/country/dubai/aircargo.htm Unknown Author (2009, 06 01). Malaysia: Penang pushing for air cargo hub. Payload Asia. Retrieved from http://www.payloadasia.com/article/malaysia-penang-pushing-for-air-cargohub/3798 Unknown Author (2007, 05 01). TAFA: Thai wants Suvarnabhumi to become Asias new air cargo hub. Payload Asia. Retrieved from http://www.payloadasia.com/article/tafa-thai-wantssuvarnabhumi-to-become-asia-s-new-air-cargo-hub/77 131

Unknown Author (2012, 03 13). Remarks of Tony Tyler at the world cargo symposium in Kuala Lumpur. IATA. Retrieved from http://www.iata.org/pressroom/speeches/pages/2012-03-13-01.aspx WAM (2012, 05 02). Dubai International named air cargo hub of the year. Khaleej Times. Retrieved from http://www.khaleejtimes.com/biz/inside.asp?section=companies&xfile=/data/companies/2012/May/ companies_May3.xml Vilet, V. Air cargo alliances: Walking on a thin line. [PDF document]. Retrieved from http//dspace.ou.nl/bitstream/1820/3705/1/MWNSCvVlietmei2010.pdf.

132