Local airlines take risks in moving to Naia 3

Posted at 07/23/2008 3:25 PM | Updated as of 01/22/2011 11:43 PM

After six years of non-use, the Ninoy Aquino International Airport Terminal 3 (Naia 3) would not have opened partially if the two local airlines did not take some risks.
 
Cebu Pacific Air commenced operations in Naia 3 on July 22 with five domestic flights, and Philippine Airlines (PAL), which controls domestic carriers, PAL Express and Air Philippines will kick off departures and arrivals at Naia 3 in a few days.
 
For agreeing to a Memorandum of Agreement that does not assure them of a long term lease at the newly opened terminal, Cebu Pacific and PAL's affiliates are betting that their lessor, Manila International Airport Authority (MIAA), will eventually overcome legal and structural hurdles.
 
MIAA currently has court-approved possession of Naia 3 after it paid a down payment of P3 billion in 2006 to Piatco, the private concessionaire accused of engaging in illegal acts to bag some contracts.
 
But since the Supreme Court ruled that MIAA could expropriate the privately financed terminal building, MIAA still has no right to exercise full ownership over the property since it has not fully paid the balance yet.
 
So far, legal issues have kept MIAA from fully claiming the terminal as its own. A lower court-appointed engineering firm was supposed to verify the building's value, which could then become the basis for the "just compensation" due to Piatco. But when the Supreme Court found the P1.9 billion cost of the valuation exercise too expensive, there has yet to be another round of negotiations on who will assess the expropriated property and how to go about it.
 
In other words, as long as Piatco is not reimbursed—either after going through the valuation process or through a compromise agreement—MIAA's identity as a legitimate lessor is still uncertain. (Read: Task Force NAIA 3 to compromise with PIATCO)
 
Legitimate lessor
 
The foreign airlines have raised the importance of addressing Naia 3's structural and safety issues in some areas of the 10-section building before moving their operations to Naia 3.   
 
But it seems that entering into commercial lease agreements with a party that could not yet fully assert itself in awarding concessions and renting parts of the terminal facility is one of the major risks that the foreign international airlines operating in the dilapidated Terminal 1 (Naia 1) are not keen to take.
 
Besides, transferring ground operations from the dilapidated Naia 1 to Naia 3 will cost the airlines.
 
In the late 1990's, when the foreign international airlines were invited to temporarily transfer their operations to Naia 2, also known as Centennial Terminal, they declined.
 
The foreign airlines told MIAA then that they would rather wait out the construction period of Naia 3, which was originally scheduled to be up and operational to accommodate international flights by December 2002. Otherwise, it would have cost them an estimated P5 million each to temporarily move from Naia 1 to Naia 2, then another sum to move again to Naia 3.
 
But then, the Supreme Court nullified Piatco's contract with the government, and the rest is a six-year long history.
 
Yet, while at least 25 airlines are crammed at the aged Naia 1, which is about six kilometers from the spanking Naia 3, inking a deal now with MIAA requires the foreign international airlines to risk some millions of pesos worth of investments for the transfer.
 
Risk and rewards
 
But that's a risk that the local airlines seem to find tolerable. In effect, for agreeing to enter into a temporary—and non-binding—deal with MIAA, the local airlines showed they have a higher risk appetite and an appreciation of the dynamics that come to play in a project as high profile as this, than their foreign counterparts.
 
Risks, after all, have some rewards.
 
Take the case of Cebu Pacific. For at least 12 years, it has been languishing in the terribly outdated Domestic Terminal, which has long been bursting at the seams. What used to be a private hangar-turned-domestic terminal big enough for 2.5 million passengers a year is now accommodating 5.5 million passengers every year. Tourists en route to island destinations, like popular Boracay, have to endure the long queues since the retrograde building only has one passenger entrance, two security machines, and no flightways.
 
During the inaugural domestic flights of Cebu Pacific at Naia 3 last July 22, the budget airline's president, Lance Gokongwei, could not contain his relief.  Referring to the newly opened terminal that sits on a 65-hectare lot with a 13-million passenger capacity per year, Gokongwei said, "Naia 3 is heaven for us."
 
What more, unlike Philippine Airlines, which, since 1999, was able to bag the exclusive use of Naia 2 for both its domestic and international operations, Cebu Pacific is currently hopping between Naia 1 for its international flights, and Domestic Terminal, for its local flights.
 
For operating in separate terminals, Cebu Pacific misses out on operational efficiencies that PAL enjoys in Naia 2. It deploys two sets of ground service systems and crew, provides and times the transfers between the two terminals for passengers with connecting flights, among others.
 
PAL, on the other hand, is fast filling the 7.5 million-a-year capacity of Naia 2 for both domestic and international passengers. Extra space is needed, especially for its profitable international flights. In 2007, it handled more than three million international passengers on its North wing, which could only accommodate 2.5 million passengers.
 
With the imminent transfer of the domestic budget flights of subsidiaries, Air Philippines and PAL Express, which covers secondary routes, to Naia 3, the vacated space means more room to accommodate PAL's increasing number of international passengers.
  Related StoryTask Force NAIA 3 to compromise with PIATCO

Location options
 
For being the first locators in Naia 3, Cebu Pacific and PAL's subsidiaries may have some bargaining chips while MIAA is finalizing how it will eventually assign Naia 1, 2, 3 and the Domestic Terminal to the local and foreign airlines.
 
According to MIAA general manager Alfonso Cusi, they are currently studying which airline will be assigned where in their "strategic airline accommodation mix" project.
 
Tirso Serrano, MIAA assistant general manager for airport development and corporate affairs, told abs-cbnnews.com/Newsbreak that the options include leasing Naia 3 to one airline with combined domestic and international operations, plus several of the foreign airlines that will relocate from Naia 1. Another local airline, PAL or Cebu Pacific, can either operate their merged domestic and international operations in either Naia 1 or 2.
 
For those catering to passengers and cargo bound or coming from local destinations, MIAA is considering to put up a new terminal for budget domestic carriers, so that the current Domestic Terminal could be converted to a corporate hangar.
 
First-entrant advantage
 
Whatever the outcome of the study, Gokongwei said he's well aware of his advantages as the first locator in Naia 3. He prefers not to move elsewhere anymore, especially when Cebu Pacific's international flights are eventually transferred from Naia 1 to Naia 3.
 
"It's not even the cost [of transferring] that I'm concerned about," he explained to abs-cbnnews.com/Newsbreak. "Moving to a different terminal is like moving house but a thousand times more difficult and tedious. Besides, we don't want to inconvenience our passengers anymore."
 
While the airline accommodation mix project involves consultations with all the stakeholders—of which the airlines are considered one of, if not the, most important—the cooperation and the confidence displayed by Cebu Pacific and PAL are expected to be rewarded.
 
After all, Naia 3 is one of the flagship infrastructure projects that President Gloria Arroyo wanted to see fully operational before she steps down after nine years in power in 2010. (Read: NAIA 3 opens for Arroyo, but obstacles remain for commercial operations)
 
In fact, the July 22 commencement of the commercial flights in Naia 3 comes at the heel of the president's State of the Nation Address on July 28. Government officials, however, downplayed the rush and the timing.
 
Big challenge
 
Nevertheless, politics and pressure did play a role in the run up to the July inaugural flights. Quezon Rep. Danilo Suarez, chairman of the House oversight committee, told those who attended the formal event that same day, "We forced [transportation secretary Leandro Mendoza] to make sure [Naia 3 is] open by December [2008], or else we will revamp MIAA."
 
Suarez said that since Naia 3 opened six months earlier, "This work between the legislative and executive will be a model in setting targets for other projects." Suarez belonged to the transportation committee in Congress that helped finance the cost of an engineering study, which became the basis for claiming that a portion of Naia 3 is safe for partial commercial operations, while the repair and remediation are going on in the defective parts of the terminal.  
 
The transportation secretary said that finally opening Naia 3 for commercial operations is a major feat.

The Naia 3 terminal went through three administrations, required thousands of hours of technical negotiations on the terminal building's repair and remediation, involved over 60 resolved and ongoing court cases filed here and abroad, endangered or lost lives of at least three people who were involved in some of the legal proceedings, and two botched soft openings.
 
Hopefully, the euphoria among those who pushed for Naia 3's commercial opening will make sure the lessons are learned from what was an ill-fated privatization project.