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ECN5020

3rd Term SY 2008-2009

The Philippine Airline Industry

Submitted by:

Eliel Daang
Harold Cruz
Melody Cua
Faye de Cadiz

Submitted to:

Prof. Rena O. Dela Cruz, Ph.D

Introduction
In Asia, one of the first countries to embrace air transport is the Philippines.
Founded in February 26, 1941, Philippine Airlines made Asias oldest carriers and oldest
operating under its current name. The airlines first flight was made on March 15, 1941
with a single Beech Model 18 NPC-54 aircraft, which started its daily services between
Manila and Baguio, later to expand with larger aircraft such as the DC-3 and Vickers
Viscount. Today, despite the numerous challenges faced, the Philippine Airline Industry
still survives with more than 50 destinations within the Philippines and around the
world.
This paper aims to show the Market Structure and Outlook of the Airline Industry
in the Philippines. Likewise, Porters 5 Forces as well as the Threats and Opportunities
for the Airline Industry are presented. The top 2 Airlines companies which are the
Philippine Airlines and Cebu Pacific, are illustrated to provide more insights as to the
strengths, challenges and competition in the industry. Recommendations for
improvement are also being given by the end of this paper.

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Market Structure
For 22 years, Philippines Airlines, being the first air transport company was able
to dominate the countrys domestic airline industry. The monopoly created control over
the domestic flight schedules, number of routes served, flight frequencies and fare.
Moreover, it also resulted inefficiency in the quality of service, since it was not tailored
to the demand. The airline was not concern to keep its service to certain standards to
keep and attract even more customers since it knows that passengers had no
alternatives. Left with no choice, travelers have to contend themselves of what PAL has
to offer.
Today, domestic air transport industry has
evolved
into
oligopolistic
structure.
The
liberalization under Executive Order 219 signaled
the entry of new airlines in the industry. The
bigger players, as defined by the size of their fleet
and aircrafts (Philippine Airlines, Cebu Pacific, and
Air Philippines) are concentrating on the major
trunklines where traffic demand is heavier while
smaller airlines (Zest Air and South East Asian
Airlines) are flying the secondary or tertiary/rural
routes where traffic demand is lighter.
In contrast, except for the number of sectors, much of the secondary and
tertiary routes were now slowly being penetrated by two of the major players (Cebu
Pacific and Philippine Airlines) with the launching of their new small fleet. The presence
of big carriers in secondary and tertiary routes could kill small carriers flying the said
routes. Competition comes in terms of comfort that a passenger obtains by flying bigger
airline and lower fare. Because the cost spread for bigger airlines is higher, they could
charge lower airfare than smaller airlines.
Cebu Pacific is providing PAL stiff competition in major trunklines. In 2007,
Gokongwei said Cebu Pacific had a 43 percent share of the domestic market while
Philippine Airlines had 39 percent and Air Philippines, 11 percent. Last year, CebuPac
had a load factor of 83 percent compared to PALs 79 percent and Air Philippines 73
percent.
The entry of new players resulted in intensive competition in the business.
Competition opens the air industry to travelers who previously could not afford to travel
by air by giving promotional and discounted fares. Furthermore, it provides passengers
a wide range of choices on departure schedules, facilities and service quality.

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The Industry: Porters 5 Forces


The growth in the domestic airline industry is fast but the competition has been
fierce for the last few years. The Porters 5 forces model is a good representation of our
analysis because it stresses the risks of entry by potential competitors, bargaining
power of buyers, threat of substitutes, bargaining power of suppliers, and the effects of
rivalry within the industry.

Threat of New Entrants


Regulatory Barriers

The Government does not allow foreign carrier to fly the countrys
domestic routes, thus limit the domestic market to domestic airlines.

Brand Loyalty

In the airline industry, passengers are concerned about safety, reliability,


service and punctuality.

Economies of traffic density

This refers to the fall in average unit cost as the number of passengers
traveling on a particular route increases. This is achieved if an airline adds flights
in a route or seats on existing flights. If the incumbent airline is realizing
economies of density in a route, potential entrants are deterred from entry by
the choices available to them. That is, entry can be made either on a small scale
but with a significant cost disadvantage or on a large scale that is likely to
depress airfares significantly (Warren et. al., 1998).
Incumbent airlines possess some advantages that would prevent potential
entrants from achieving economies of density. One, incumbent airlines generally
have established interlining agreements1 with other airlines that could feed
connecting traffic into the route at issue. There are significant reductions in
transfer costs available for passengers who prefer interline travel. Potential
entrants would therefore have difficulty attracting this kind of passengers without
interlining arrangements. But making interlining arrangements could also prove
difficult and could put the potential entrants at a cost disadvantage. This would
require potential entrants to either duplicate the incumbents existing
arrangement or hire existing airlines who can provide feeder services. Most
likely, those who can provide feeder services are already committed to the

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incumbent airline and hence, would only be willing to shift loyalty if offered a
higher price (Warren, et. al., 1998).

Frequent Flyer Program

The existing frequent flyer program of the


major players in the airline industry (Philippine Airlines:
Mabuhay Miles) can also act as entry barrier to
potential entrants since these programs build
passengers loyalty to the airline offering them. Study
shows that travelers particularly business travelers
always chose their flights in order to accumulate FTP
mileage points. These FTP points can eventually be
converted into free airline tickets or seat upgrade.
Thus, potential entrants would have difficulty pulling the existing clients who are
already a member of the carriers FTP.

Use of CRS (Computer Reservation Systems)

The use of Computer Reservation Systems has also the potential to close
out potential players from the market of ticket sales. The CRS is a device that
can be used to save time and cost in handling the growing number of flight
reservations. With the existence of CSR, travel agencies can easily view the seat
allocation as well as the prices available of the certain airline. About 75 percent
of flights made through CRS are made from the first screen page of the CRS
(Hanlon, 1996). Thus, airlines displaying their seat availability on the first screen
of the page can be a vital source of competition.

Bargaining Power of Customers


Despite the Global crisis, the Airline Industry is trying to stay afloat and profitable.
The trend in the Domestic Airline industry has changed over the years. The consumers
demanded a more competitive industry by seeing lower prices. This cause the airline to
charge prices according to the current demand of the passengers.

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Threat of Substitute Products


The source of competition in the airline industry is coming not only in the
industry itself but also from the alternative modes of transportation such as water and
land. The shipping industry is one of the major competitors of the air transport industry
in providing transport services in the southern part of the country. Currently, shipping
companies are also offering discounted and promotional fare to remain competitive in
the growing market of the airline industry.

Another substitute for air travel in the business segment is teleconferencing. It


enables to establish meeting rooms wherein participants can sit in different geographic
locations. Thus, business travelers have an option not to travel.

Bargaining Power of Suppliers


Labor Costs
Labor is the largest single expense of the airline companies. The Airline workers
who belong to one of a dozen labor unions have strong power in negotiation with the
airlines since most of them belong to labor unions.

Fuel Costs
Next to Labor, fuel Cost is the second highest expense in the airline operations.
Prices of fuel tend to fluctuate on a monthly basis. The increase in the cost of jet fuel
will also increase the operating cost. Thus, monitoring the prices of fuel in the world
market is crucial.

Competitive Rivalry within an industry


The airline industry in the Philippines is highly competitive. Though there are
only few players, all are basically offering the same product. As a result, companies
generally earn low returns because the cost of competition is high.

Currently, major airline companies namely Philippine Airlines and Cebu Pacific are
slowly dominating the secondary and tertiary routes. Last year, the two airlines bought

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new smaller fleet to cater to the demand of the growing market in the cities with small
airports. The entry of these airlines can serve as a major threat to small players like
Zest Air and Seair who are previously capturing majority of the passengers. Moreover,
since CEB and PAL have larger aircrafts, the spread of cost is bigger. Hence, they have
more ability to charge lower airfare compared to the latter.

Aside from the domestic routes, Cebu Pacific and Philippine Airlines are
competing head to head in the international destinations. Cebu Pacific is increasing its
passenger traffic in the international scene with the launching of new routes and buying
more aircrafts.

The potential merger of Zest Air and Seair can strengthen the competition within
the industry. They plan to purchase additional aircraft to enter into the international
market and to streamline the redundant domestic destinations to cut down the costs.

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External Threats and Market


Opportunities
External Threats
Fuel Price
The current threat in the airline industry is the fuel price. The increase in
the jet fuel cost makes the airline cut in the domestic passenger fares. At
Present, the fuel surcharge being imposed to the travelers is a temporary
relief granted to the airlines to help them recover losses they incur from
higher jet fuel prices.

Government Intervention
The implementation of open skies policy can have an adverse effect on the
operations of local airline companies. Under the open skies policy, national
carrier would have the right to fly over a country without landing, to stop in
a country for refueling or maintenance without transferring passengers or
cargo, and to carry it from one country to another and vice-versa. There
was no limitation on airline designation,that even non-flag carriers can fly
there from multiple designations. (www.fingad.com).
Granting access
rights to foreign airlines has no clear guarantee that governments of the
participating foreign carriers would also grant the same concessions to
Philippine carriers.

Market Opportunities
Low Fare Concept
The Domestic Airline industry faces imminent
competition and price wars among the domestic
players.
Passengers are slowly accepting the
concept of the low cost carriers. To adapt to the
demand of the traveling public which is low cost and
high quality airline, the industry players are continuously reducing its
regular fares. Passengers can now enjoy all year round discounted fare by
planning and buying their tickets ahead of time. The advance booking is a

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major boost for any airline as it allows them to better forecast passenger
volume and maximize revenues on a per flight concept. More importantly,
the new low fare concept will able to capture a good fraction of the
alternative sea transportation market, therefore, further growing their base
market.

Tourism as a complimentary Industry

Complimentary industry like tourism will increase the demand for airline
service. A high volume of tourist arrivals means a high probability of
tourists taking the air as a mode of transportation to explore the available
tourist spots in the country. The increasing passenger traffic in cities like
Busuanga and Caticlan can be attributed to the growing number of tourists.
Airline companies locally are starting to build partnership with hotels and
resorts creating tour packages to cater to the demand of both local and
foreign tourists.

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Philippines Airline Companies


Philippine Airlines
Company Background
Philippine Airlines (PAL) is the flag carrier of the Philippines. Founded in 1941 by a
group of businessmen led by Andres Soriano, it became the first airline in Asia. With a
long and distinguished history spanning over sixty years, PAL deeply involved itself in
shaping the course of historic events and nation building. With its every takeoff and
touchdown, PAL planted the seed of growth.
PAL has become one of the most respected airlines around the world with a young and
modern fleet of 47 diverse aircraft and a route network that spans 31 foreign cities and
30 domestic points.
Strengths and Challenges
Experience
With more than 60 years of industry experience, PAL has the capability to adapt to any
situation or circumstances that they may face.
Market Leadership
Philippine Airlines has long been the market leader of the industry. However, since the
deregulation of the industry, it has lost its leadership in the domestic market but it has
remained to be the countrys leader in international flights. This might be short-lived as
its local competitors are now eyeing the international routes.
Fare and Quality of Service
Fierce competition has left PAL to improve on its services and slash fares to keep up
with other local airlines. It began to embrace the electronic business by improving its
website and adding new features such as online booking.
Mabuhay Miles
Mabuhay Miles is the Philippine Airlines frequent flyer program. It was established in
2002 by merging all existing PAL frequent flyer programs namely, PALsmiles, the
Mabuhay Club and the Flying Sportsman. In line with this, Mabuhay Miles members
earn miles that can be redeemed at face value on most Philippine Airlines-operated
flights, as well as on code-shared routes of partner airlines. With this Mabuhay Miles
program, members can enjoy free trips, travel award ticket or service class upgrade
award.

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Cebu Pacific
Company Background
Cebu Pacific (CEB), a subsidiary of the Gokongweis JG Summit Holdings, is the low fare
leader in the Philippines. Launched in 1996, it became the countrys leading domestic
carrier with the most number of flights and routes. It now flies to more than 30
domestic points and 15 Asian Cities.
CEB now operates the youngest fleet in the country with 21 Airbus and seven ATR 72500 aircrafts.

Strengths and Challenges


Lowest Fares
CEB offers the lowest year round fare for all its domestic and international destinations.
Even in difficult economic condition, it continuous to be the pioneer in creative pricing
strategies as it manages to offer the lowest fare in every route it operates.
Innovation & Creativity
Considered as a young airline company, it was able to propel itself to be the countrys
leading domestic carrier through its innovation and creativity. Customers are treated
with a unique upbeat flying experience with CEB, as this is the only domestic carrier
that offers fun in the skies with its games on board popularly known as FunFlights
together with its entertaining in-flight magazine - Smile.
Electronic Services
By taking advantage of electronic commerce, CEB was the first to introduce the Eticketing service, prepaid excess baggage, and seat selection in the country. It has also
used email alerts to announce low fare promos to customers.
Partnerships
CEB has partnered with various destination hotels, car rental
service, travel insurance, and entertainment ticketing service, to
provide its passengers a more convenient travel experience.

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Market Outlook
Throughout the world, the air transport industry experienced radical changes
since the 1980s to meet the emergence of air traffic as a result of the ever-increasing
integration of economies. From government owned or
supported to independent, for-profit public companies,
has been the pattern of ownership. To increase the
efficiency of the industry, reforms were made through
deregulation and liberalization towards decreasing
restrictions on competition.

The overall trend of demand to the Airline Industry has been consistently
increasing. It can be seen that there would be more competition and greater pricing
freedom. This will result in lower fares and sometimes dramatic spurts in traffic growth.
The industry has been observed to be repeating in its financial performance. Four or
five years of poor earnings proceed five or six years of improvement. But profitability
even in the good years is generally low. In times of profit, the airlines will lease new
generations of airplanes and upgrade services in response to higher demand.

The entry of five new players in the industry, namely, Cebu Pacific Air, Air
Philippines, Asian Spirit, Mindanao Express and Grand International Airways resulted to
a strong and tough competition in the domestic flights. As the new airlines grow, PAL
suffered a significant decline in market shares. Air Philippines and Cebu Pacific are
currently PALs stiff competition in terms of the domestic flights.

However, even with the increased competition in the domestic air industry, this
gave travellers lower airfares. The outcome is the rapid growth in domestic travel. PAL,
however, still charges the highest fare. This picture shows that competition in the
industry enables the more efficient, low-cost airlines to operate at fares lower than precompetition days and yet continued to be profitable.

There would be only a small number of big efficient airlines in the long run to
survive, should a financial problem in the industry occurs. The Airlines with continued

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losses could force them to withdraw or exit from the industry or merge with those
profitable.

When it comes to flying international, PAL has remained recognized as the


countrys flag carrier. Nevertheless, the absence of competition results to poor
performance and growth. This could be seen in the lack of ability of PAL to take
advantage of the opportunities in the countrys air services agreements (ASAs). Based
on the Philippine APEC study centre network (PASCN), during 1996, PAL used only 61
percent of the countrys traffic rights per week compared to 81 percent for the foreign
airlines flying in the country. The unused entitlements is an indication that there are
opportunities for PAL and other Philippine-based carriers to operate additional
international services without the government requesting for greater capacity under
existing ASAs.

Merger and acquisition is also an area for competition in the Airline Industry.
Though domestic traffic in the country is relatively minute, there is a limit to the
number of airlines that would make an efficient domestic airline industry. Considering
that only two of the airlines are currently profitable, the intense competition in the
industry could lead the airlines into merger and consolidation. Similarly, merger and
consolidation could be a fast solution to the problem of local ownership requirement
and huge capital requirement of the new entrants to be able to fly international routes.
Still, a defined policy on mergers and consolidation should be established so as not to
result in reduced service, less competition and decreased efficiency. It should always
keep in mind that these mergers and consolidation are done for the interests of the
travelling public.

Overall, the market outlook for the Airline industry is one of


strong growth. Forecasts suggest that passenger numbers will double
up by 2010. For airline companies, the future will confront many
challenges. Those companies that would be successful are those that
continuously manage their costs and improve their products, hence
protecting their strong presence & reputation in the aviation market.

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Recommendations
Though is it apparent that the Airline industry is
continually growing, the Philippine Airline companies
as well as the government should always think of
ways to improve and sustain the industry.
Philippines as we all know is an archipelago and
the most efficient way to travel would be by Air,
domestically and especially internationally. They
may benchmark this with other countries with the
same archipelagic setting. Improving the Airline
industry would entail growth to other economic
areas, more importantly on Tourism.

On the domestic side, there are areas in the Philippines where travel by Air is still
not viable, though necessary. Airline companies do not venture to these locations due
to financial constraints. The government should act upon this to enable growth to that
location. They may provide incentives to encourage these companies to fly to that
location, like reduced taxes. However, if the government will provide incentives, the
policy of that should be designed not to reduce competition and efficiency. Again, the
policies should always be for the benefit of the Travellers.

Competition
between
the
Airline
companies is also a way to make improvements
to the industry in which the government has the
major role to facilitate competition. Of course, if
there is competition, these companies would not
be complacent and would constantly think of
ways to improve their service in order to continue
being profitable. Airlines could invest heavily in
the quality of service that they offer, both on the
ground and in the air. They can enhance their
Ticketless travel, new interactive entertainment

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systems, and more comfortable seating. When these Airline companies are able to
make outstanding services and product enhancements, these will attract foreign
investments, trade and tourism.

On the International setting, improvements to the Airline industry could be in


way of tourism, since it is only by air transportation that foreigners can come efficiently
to the Philippines. The government should advertise well the country in order to catch
attention of tourists.

Additional aircrafts and routes is also a


medium in the improvement of the industry.
Given that there are increased demands for air
transportation currently, these additions would
definitely enhance traffic, to facilitate more
destinations and passengers.
Though
acquiring additional assets involves a lot of
money, these acquisitions will be for the
benefit of the company in the long term.
New aircraft entails improved technology
where enhanced safety comes along with it.
For that reason, customer satisfaction and retention
can be achieved.

Improving the airports could help tremendously in the progress of the Airline
industry. Though this will take a lot of effort, time and money, this improvement would
definitely contribute so much to the advancement of the industry. With a much efficient
airport, there would be fewer delays in flight and much less congestion on the air
traffic. This would provide more flights as well as create more jobs not only to the
Airplane staff, but also to the ground operations including
those in construction and maintenance.

Air fares have a major effect on the Airline Industry.


Definitely, lower airfares would encourage more people to
take the opportunity to travel, especially to visit their love

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ones. So the more passengers there are, demand will increase as well, creating more
transactions and business to these airline companies. But then, the Airline companies
should retain the airworthiness of the aircraft so people would not be frightened of
travelling by air. Sustaining the integrity and reliability of the aircraft, at the same time
having a reasonably low fare would certainly drive up the market for the airline
industry.

In general, whats still important for the Airline


Industry is to maintain its principles of providing quality
service to travellers. As the definition goes, Airline Industry
is composed of Organizations providing aviation services to
cargo and passengers.

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Tables and Graphs


Tables of Top 5 Domestic Flight Passengers, 2003-2007

Manila Cebu
Airline
PAL

2003

2004

2005

2006

2007

751,276

881,596

981,781

987,963

994,961

464,559

512,601

500,973

679,303

845,574

99,571

45,224

51,005

29,170

47,065

1,315,406

1,439,421

1,533,759

1,696,436

1,887,600

CEB
Others
Total
Passengers

Manila Davao
Airline
PAL

2003

2004

2005

2006

2007

437,383

521,023

529,575

570,705

585,082

260,739

302,691

306,526

361,960

448,821

65,148

61,279

58,024

86,279

104,359

763,270

884,993

894,125

1,018,944

1,138,262

CEB
Others
Total
Passengers

Manila Iloilo
Airline
PAL

2003

2004

2005

2006

2007

243,242

264,495

288,768

306,854

332,888

173,267

191,402

155,045

238,336

323,685

151,982

161,620

154,862

181,365

193,008

568,491

617,517

598,675

726,555

849,581

CEB
Others
Total
Passengers

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Manila Cagayan
Airline

2003

2004

2005

2006

2007

PAL
276,227

315,052

321,870

301,531

316,414

133,068

145,359

119,296

205,477

320,677

41,566

55,771

46,821

77,325

105,672

450,861

516,182

487,987

584,333

742,763

2005

2006

2007

CEB
Others
Total
Passengers

Manila Bacolod
Airline
PAL

2003

2004

227,704

249,169

269,584

282,417

294,066

164,738

187,390

153,716

243,860

307,164

38,340

46,348

47,628

58,142

68,893

430,782

482,907

470,928

584,419

670,123

CEB
Others
Total
Passengers

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Graphs of Top 5 Domestic Flight Passengers, 2003-2007

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Tables of Top 5 International (Regional) Flight Passengers, 2003-2007

Singapore
Airline
PAL

2003

2004

110,606
CEB
Total
Passengers

2005

170,932
-

110,606

246,658
-

2006

2007

233,877

257,129

39,810

173,182

273,687

430,311

170,932

246,658

Hong Kong
Airline
PAL

2003

2004

2005

2006

2007

411,304

514,539

594,426

584,846

690,574

130,164

123,103

134,451

259,612

377,877

541,468

637,642

728,877

844,458

1,068,451

CEB
Total
Passengers

Seoul
Airline
PAL

2003

2004

2005

2006

2007

161,817

190,875

222,667

233,877

236,051

37,658

61,511

81,769

93,963

190,482

199,475

252,386

304,436

327,840

426,533

2006

2007

153,554

172,304

2,749

79,287

156,303

251,591

CEB
Total
Passengers

Bangkok
Airline
PAL

2003

2004

84,725
CEB
Total
Passengers

2005

109,049
-

84,725

152,985
-

109,049

152,985

Taipei
Airline
PAL

2003
46,440

CEB

2004
74,602

2005
81,436

2006
84,157

2007
90,529

44,971

Total Passengers
46,440

74,602

81,436

84,157

135,500

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Graphs of Top 5 International (Regional) Flight Passengers, 2003-2007

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Top 8 PAL International Flight Passengers, 2003-2007

Top 8 PAL International Destination


Destination
Bangkok

2003

2004

2005

2006

2007

84,725

109,049

152,985

153,554

172,304

411,304

514,539

594,426

584,846

690,574

218,618

310,323

282,887

284,026

306,671

200,195

244,577

270,003

228,582

253,815

161,817

190,875

222,667

212,871

236,051

110,606

234,347

246,658

233,877

257,129

217,981

261,168

265,166

254,986

254,030

50,131

72,265

84,785

74,130

101,945

Hong Kong
Los Angeles
San
Francisco
Seoul
Singapore
Tokyo
Shanghai

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References
Austria M S. The state of competition and market structure of the Philippine air
transport industry. PASCN Discussion Paper No. 2000-12. PASCN Discussion Paper
Series 2000. Philippine Institute for Development Studies.
Department of Transportation and Communications, Civil Aeronautics Board, 2009. Data
& Statistics of Airlines International and Domestic Pax.
Hanlon, Pat, 1996. Global Airlines, Competition in a Transnational Industry,
Butterworth-Heinemann, Great Britain.
Warren,Tony, Tamms, Vanessa and Findlay, Christopher, 1999. Beyond the Bilateral
System: Competition Policy and Trade in International Aviation Services, PECC Trade
Policy Forum, Auckland.
www.philippineairlines.com
www.cebupacificair.com
www.wikipedia.org

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