Air France-KLM decides to halt Philippines’ last direct flight to Europe

By April next year, the country will lose its last direct link to Europe as Air France-KLM halts flights between Manila and Amsterdam, citing high taxes and other excessive fees linked to operating in the Philippines.

The Department of Transportation and Communications (DoTC) has expressed alarm over the announcement and vowed to find a solution that could convince the airline to change its mind.

But any move by the government at this point may be too little, too late.

Talking to reporters last week, Air France-KLM said the company was “absolutely not happy” with the country’s regulatory environment.

In a report published in March 2010, the International Air Transport Association (IATA) cited the heavy toll the 2.5 percent common carriers tax (CCT) and 3 percent gross Philippine billings (GBP), which were charged on foreign airlines, had on the country’s economy.

These taxes, the poor state of the country’s infrastructure and the stiff competition from heavily subsidized Middle Eastern carriers have forced European airlines to leave the Philippine market over the past decade.

“The imposition of these taxes affects the economic benefits commercial aviation brings to the Philippine economy in several ways,” IATA said in the report.

“Philippine consumers pay higher prices for outbound air transport, reducing their welfare. Tourists paying the tax on the return leg of their journeys are discouraged from choosing the Philippines as a destination,” it said.

Punishing new investors

These taxes also lead to higher freight costs and slow down the growth of the country’s air travel industry.

While other Southeast Asian countries give incentives to foreign airlines, IATA said the Philippine government punish new investors.

“The number and quality of air transport connections have direct impact on a country’s long-term economic growth potential and higher costs due to taxation may make some international routes unprofitable for airlines, putting connectivity and long-term economic growth at risk,” the group said.

The European Chamber of Commerce of the Philippines (ECCP), in a letter to the President in July, which was endorsed by foreign airline representatives making up the Board of Airline Representatives (BAR), said the CCT and GBP payments cost carriers a total of P3 billion a year.

The letter said the taxes were also discriminatory since they were imposed only on foreign airlines.

The taxes are also imposed whether a company’s routes to the Philippines are profitable or not.

“Philippine air carriers are not subject to the same practice in international routes where they operate and compete with foreign carriers,” BAR said.

Several bills have already been filed before Congress to exempt local carriers from the CCT and GBP taxes.

The House ways and means committee in a report last February approved for plenary discussions House Bill 3928 exempting international air carriers from paying the said taxes. However, the measure has not moved in Congress since then.

Administrative matter

The BAR said exempting foreign airlines from the discriminatory taxes should be a mere administrative matter that the government could have easily addressed if it really wanted to.

The BAR said the Bureau of Internal Revenue (BIR) could allow foreign airlines, through an administrative order, to have VAT zero ratings—the same classification local carriers enjoy—that would remove CCTs.

The groups noted that by continuing to burden foreign airlines, the government was refusing to pick low-hanging fruit that can quickly result in massive economic gains such as thousands of jobs and billions of pesos in tourist spending.

“What we’ve been saying is that the government can make more money than it will lose by removing CCTs and GBPs” ECCP executive vice-president Henry Schumacher said in an interview.

He said the group never received a reply from the President, who merely handed the letter down to Finance Secretary Cesar Purisima.

“But it seems that their thinking is that the government needs taxes and it needs it now,” Schumacher said.

Based on IATA’s 2010 report, the government can earn as much as $78 million (P3.4 billion) a year in tourism revenues with the removal of the taxes. Tourist arrivals can grow by as much as 230,000 a year, which would help the government reach its goal of getting six million tourists by 2016.

Lower cargo costs can also increase export revenues by as much as $1 billion, the industry group said.

“Employment related to the travel and tourism economy is also seen to have fallen last year to 3.6 million jobs. Change in taxation policy could help ameliorate the negative effects of this last recession and strengthen the recovery ahead,” IATA said.

Small cost cut big impact

The group stressed that with the airline industry’s slim margins today, even a 2.5-percent reduction in its cost by removing these taxes could be enough to shift some currently unprofitable routes connecting the Philippines to the rest of the world into profit.

“This could make them more attractive to airline operators, facilitating an increase in connectivity and better long-term economic growth prospects for the country,” IATA said.

These are numbers that the country needs badly. The tourism industry’s direct contribution to the Philippines’ gross domestic product (GDP) is expected to land at around 3.41 percent this year, well below the world average of 5.12 percent, data from the World Travel and Tourism Council showed.

Another sticky issue for industry players is the government’s insistence on making foreign carriers pay for the overtime salaries and other allowances of Bureau of Quarantine employees who work for the state.

In a Sept. 14, 2011, decision, the Supreme Court ruled in favor of allowing the government to charge foreign airlines fees to be paid to Customs, Immigration and Quarantine employees.

These fees include meal and travel allowances for people the airlines do not employ.

Foreign airlines, through the BAR, said they would appeal the decision.

At this point, ECCP’s Schumacher said the government’s message was clear: “It is not taking this seriously.”