Southeast Asia’s effort to establish an open skies policy is set to reshape the aviation sector as liberalisation significantly increases competition
By Jennifer Meszaros
The easing of market restrictions is already causing a ripple effect across Southeast Asia’s aviation sector. The adoption of continuously re-negotiated bilateral and multilateral agreements allows carriers to restructure both operationally and financially, generating growth and enhancing competitiveness. At the same time, carriers aggressively expand into new markets, launching subsidiaries and establishing partnerships with new alliances to expand operations. In response, government and airport authorities are rapidly enlarging their infrastructure in preparation to meet economic demand.
The ten-member Asean Single Aviation Market (ASAM) – dubbed the open skies policy – seeks to further liberalise air services under a single and unified air transport market in the region by the end of 2015. The open skies deadline is aligned with the proposed Asean Economic Community (AEC), also slated for the same timespan. Air travel is part of a larger discussion among member states to increase economic integration through the development of a single market and production base to enhance connectivity.
Connectivity amongst Asean member states will integrate “production networks, enhance intra-regional trade, attract investments, promote deeper ties among Asean people and foster shared cultural and historical bonds,” said Sundram Pushpanathan, the AEC’s former deputy secretary-general. The region’s Implementation Framework of The Asean Single Aviation Market noted that the open skies policy “will contribute towards a more competitive and resilient Asean, as it will bring people closer together and facilitate the efficient, safe and secure movement of goods, services, and capital.”
The policy is outlined in two agreements, which contain protocols that liberalise market restrictions among Southeast Asia’s capitals, so-called secondary cities and sub regions. The regulations address nine different air rights, so-called freedoms. Freedoms grant carriers specific privileges to overfly airspace and land while transporting passengers and cargo.
Several agreements already exist between member states, which grant carriers specific freedoms to operate. The proposed single aviation market seeks to unite all member states under the same traffic rights. However, the policy falls short of full liberalisation, said Alan Khee-Jin Tan, a Singapore-based aviation lawyer. “A true single or common aviation market such as that which exists in Europe liberalises such operations fully and opens the door for greater market competition throughout the region. The [open skies policy] is thus modest.”
Indeed, the easing of market access does not include more far-reaching measures, such as the right to fly between two foreign countries while not offering trips to the airline’s country of origin or the freedom to service routes inside a foreign country without going back to the home base. “Overall, the prospect for a truly single aviation market in Asean remains elusive,” Tan added.
The agreements have already come into effect with the acceptance of the minimum number of three member states. Still, some countries are reluctant to grant greater access to their capital cities or secondary regions, including Indonesia, the Philippines, Cambodia and Laos. As such, not all countries have agreed to a unified air transport market. “For the benefits of Asean open skies to be fully utilised it will be good to see all the air services agreements […] ratified and implemented by all member states,” Pushpanathan argued.
Indonesia’s decision to refrain from joining a true unified market is due to intense lobbying from local carriers, including Garuda, which aim to shield themselves from competitors, namely Singapore, Malaysia and Thailand. Indonesia potentially offers foreign carriers hundreds of unlimited access points. Unlimited access enables foreign airlines to bypass Jakarta and fly to secondary destinations without relying on Indonesian carriers.
By contrast, many other countries such as Singapore can only offer one point of access. Indonesian carriers rely heavily on connecting domestic traffic to secondary cities from Jakarta as their international operations are relatively limited. “This leads to a systematic imbalance for the exchange of traffic rights” and allows dominating foreign carriers to profit to a huge extent, Tan said.
Against this background only five Indonesian airports are up for consideration in 2015, allowing not more than a partial open skies policy. Moreover, airlines are restricted to negotiate bilaterally
The Philippines is also opposed to concede regional carriers greater access to its main destination, Manila’s Ninoy Aquino International Airport. The government cites runway congestion and a shortage of airport slots, preferring to liberalise access to Clark, an airport located about 100 kilometres northwest of the capital, which is already open to the region’s carriers.
“The single aviation market envisaged by the two agreements is thus an unfinished piece of work and at risk of being single only in name,” Tan stated. “In the long-term, this shortcoming will potentially create barriers for airlines’ competitiveness vis-à-vis airlines from outside the region.”
Network imbalances already exist due to Southeast Asia’s inability or unwillingness to create a true common market. The Asean-China Air Transport Agreement is a case in point. Under the agreement, Chinese carriers can effectively connect any airport in their backyard with any destination in the Asean region.
Even given the resistance in some countries against further liberalising the market, Southeast Asia has already become a battleground for airline competition. A rising middle class and higher discretionary income has led to an increase in air travel in the region.
This development translated into growth of about 20% in Asean’s international market over the last 18 months, increasing weekly seats from about 4.7 million to 5.6 million, according to the CAPA Centre for Aviation data.
Driven primarily by expansion in the region’s booming low-cost sector, “Southeast Asia continues to post some of the highest growth rates in the global aviation industry,” CAPA said. “Low Cost Carriers are better placed than full-service carriers to tap into Asia’s surging middle class as they are focused primarily on short-haul markets and their low fare make flying more affordable.”
Flag carriers such as Singapore Airways, Garuda, Thai Airways and Vietnam Airlines have already established LCC subsidiaries. Flag carriers are usually more expensive and run at higher operating costs. As such, airlines are launching overseas subsidiaries with local owners while settling for a minority stake to circumvent market restrictions on ownership control. Regional subsidiaries of flag carriers were among the fastest growing carriers in the Asean region last year, according to CAPA, including Thai Airways’ unit Thai Smile and Singapore Airlines’ subsidiary SilkAir.
At the moment, 23 LCCs are headquartered in Southeast Asia. The sector will continue to stimulate growth in 2014 with the emergence of at least three startups, including Thai AirAsiaX, Thai VietJet and NokScoot.
“Liberalisation in the marketplace is already happening and pressing forward relentlessly,” Tan said. “Despite all the problems and shortcomings faced, Asean’s hope is that member states will recognize in time that it is in their collective interest to forge a truly single aviation market and a common position for negotiating air services with other countries,” Tan added.
Until then many carriers will continue to meet economic demands, with or without an open skies policy in place for 2015. According to CAPA, ”Southeast Asia remains a dynamic and fast-growing market. The outlook for the [region] is bright.”