AVIATION + Lifting-The-Barriers Report Lifting-the-barriers REPORT: AVIATION

About CARI The CIMB ASEAN Research Institute (CARI) was established in 2011 as a member of CIMB Group. CARI prides itself on being the first independent, transnational research institute dedicated solely to the advancement and acceleration of the ASEAN integration agenda. CARI was designed to pursue research and to promote thought leadership in support of an integrated ASEAN Community. CARI seeks pragmatic solutions and policy recommendations to address challenges in ASEAN integration and connectivity. CARI’s headquarters is located in Kuala Lumpur but the institute has a regional presence.

About ASEAN Business Club A fully private sector driven initiative of ASEAN’s leading businesses coming together to support economic integration while providing a platform for networking. The ABC creates an avenue for ASEAN’s businesses to engage with global regional leaders. The club’s vision is ASEAN: Open for Business.

About The Centre for International Law (CIL) The Centre for International Law (CIL) is a university-level research institute at the National University of Singapore (NUS). It was established in 2009 in response to the growing need for thought leadership and capacity building in international law in the Asia-Pacific region. The present areas of focus are ASEAN law and policy, ocean law and policy, trade and investment law and policy, air law and policy, and international dispute settlement in these areas. CIL engages in research, training, counsel and consultancy on key international law and policy developments. It also organises conferences, workshops and seminars on international legal issues that have an impact on Southeast Asia and the Asia-Pacific region. CIL also collaborates closely with a network of partner and stakeholder organisations in Singapore and overseas to further the development of international law research and training in the region. ii Lifting-the-barriers REPORT: AVIATION

FOREWORD The Lifting-The-Barriers (LTB) Initiative was designed, in conjunction with the Network ASEAN Forum (NAF) 2013, with the theme ‘A Strategy for ASEAN’. The overall objective was to conduct sector based research with the purpose of identifying bottlenecks and barriers to trade in six targeted sectors within ASEAN member nations and to help realise the goal of the ASEAN Economic Community 2015.

The LTB Initiative has three phases, Phase I, II and III, each playing a unique role in helping achieving the wider objective.

Phase I: Phase I of NAF involves core research and seeks to identify the existing barriers in each sector to assist understanding of the challenges faced by the industry due to AEC obligations as well as making recommendations to mitigate these barriers to free trade.

Phase II: Phase II was convened around six sector-based “Lifting-The-Barriers Roundtables” at the NAF with vertical emphasis on issues specific to the selected sectors. The roundtables serve as a platform for different stakeholders to deliberate on the future of their sector and our ASEAN region as a whole.

Phase III: Phase III consists of the final outcome, the Lifting-The-Barriers (LTB) Report, as a white paper delivered to the relevant regulatory bodies to effect real changes and accelerate ASEAN integration efforts. This will be the consolidated materials from Phase I and Phase II.

This publication is the final Phase III LTB Report. The objective of which is to summarise the state of the sector within the ASEAN landscape as well as to summarise the ideas discussed during Phase II. These key takeaways will form basis of recommendations towards the wider goals of Lifting-The-Barriers to trade in the context of the ASEAN Economic Community 2015.

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Acknowledgements The CIMB ASEAN Research Institute (CARI) would first like to thank the esteemed Research Partner for the Aviation Sector, Centre for International Law (CIL) – National University of Singapore. As part of this research collaboration, the research partner has been instrumental in the execution of the wider LTB Initiative from its inception. CIL has provided the technical and research expertise throughout the entire process.

We would like to give special thanks to Dr. Alan Tan who has helmed this research collaboration.

We are also grateful to the Chair and Co-chair organisations who championed the Aviation Roundtable at the Network ASEAN Forum 2013. Tony Fernandes (AirAsia) and Emirsyah Satar (Garuda Indonesia) were influential in leading the discussion at the Roundtable as well as providing direction for the overall LTB Initiative.

We appreciate the valuable insights and contributions of all Network ASEAN Forum 2013 Roundtable participants.

Acknowledgement also goes to the CARI team, namely Sóley Ómarsdóttir, Bernard Law, Christina Chin and Gokul Radhakrishnan who have contributed to the editorial and creative production of this report.

CARI would finally like to recognise the ASEAN Business Club Advisory Council for their leadership, guidance and undivided support in making this project possible.

Jukhee Hong Director of Operations, CARI Project Supervisor Lifting-the-barriers REPORT: AVIATION

TABLE OF Contents EXECUTIVE SUMMARY 2 Overview 2 the Big Picture and changing Aviation Dynamics 2 the ASEAN Single Aviation Market (ASAM) 3 Conclusion 6 Summary of Recommendations to Lifting-The-Barriers 7 FULL REPORT 11 Introduction 11 i. The Big Picture: Changing Aviation Dynamics in ASEAN 11 Infrastructure Constraints 11 Slot Constraints 13 Human Capital Constraints 14 An ASEAN Regulator? 14 The Environment and Future Sustainability 15 A United Stand for External Relations 15 ii. Overview of the ASEAN Single Aviation Market (ASAM) 15 Market Access 15 Ownership and Control 17 iii. Benefits of Liberalisation 18 Malaysia and Thailand 18 Singapore 18 Indonesia 19 Vietnam 20 Malaysia, Thailand, Singapore and the Philippines 21 iV. Lifting the Barriers to Liberalisation 22 Barrier #1. Several Member States Have Not Yet Accepted the ASEAN Agreements and Protocols 22 Barrier #2. Seventh Freedom and Domestic Operations Remain Prohibited 27 Barrier #3: Ownership and Control Restrictions Remain 34 Barrier #4: The Competitive Threat from Non-­ASEAN Carriers 38 Conclusion 44 summary of Recommendations to Lifting-The-Barriers 46 Appendix 50 annex I: ASEAN Multilateral Agreements 50 annex II: Regional Profile of ASEAN Aviation 53 annex III: ASEAN Member State Profiles 56 Brunei 56 Cambodia 58 Indonesia 60 Lao People’s Democratic Republic (Lao PDR) 62 Malaysia 64 Myanmar 66 Philippines 68 Singapore 70 Thailand 72 Vietnam 74 Lifting-the-barriers REPORT: AVIATION

EXECUTIVE SUMMARY Overview 1. the ten member states of the Association of Southeast Asian Nations (ASEAN) have identified a 2015 deadline to establish an ASEAN Single Aviation Market (ASAM) for the liberalisation of air transport services in the region. Also referred to as the “ASEAN Open Skies” policy, the aim is to have the ASAM in place by the time the proposed ASEAN Economic Community (AEC) takes effect in 2015.

2. this Report analyses the barriers confronting the aviation sector in ASEAN, including but not limited to those raised by the ASAM. It identifies the strategies required to overcome or lift the relevant barriers, including the policy decisions that governments should make in the light of rapid changes to the aviation industry.

The Big Picture and Changing Aviation Dynamics 3. the profile of the aviation industry in ASEAN is changing rapidly. Low-cost carrier (LCC) operations now account for more than half of all airline capacity (international plus domestic) in Indonesia, the Philippines and Malaysia. The next highest LCC penetrations rates are in Singapore, Thailand and Vietnam, with emerging economies like Myanmar, Cambodia and Lao PDR growing strongly from relatively low bases. The vibrant economies in ASEAN and greater Asia mean that more passengers and cargo are being transported by air, and increasingly by LCCs. The tremendous growth in LCC capacity is expected to continue well into the next decade even as the relative market shares of full-service carriers (FSCs) decline.

4. Infrastructure. Yet, governments in ASEAN have not made adequate policy changes to accommodate the LCC phenomenon. In particular, infrastructure needs are not being met quickly enough. Airports or terminals dedicated to LCC operations remain the exception in ASEAN. Policies intended to spur LCC travel by making it more cost- efficient and accessible are also lacking, e.g. by reducing airport and user charges and passenger taxes. Existing airport terminals and runways are growing near or beyond capacity, leading to increasing congestion and longer delays.

5. several intra-ASEAN international routes are now the busiest LCC sectors in the world. This reflects the specific problem that there are few viable alternative airports in the region from which LCCs can operate. Diverting LCC traffic to smaller airports will significantly relieve the infrastructure and slot congestion issues at the ASEAN primary airports.

6. recent huge aircraft orders by LCCs are compounding the problem, as are the rapid establishment of new LCCs in the region. The LCCs’ standard operating model – using smaller planes that make more trips in a day – has the effect of increasing terminal and runway usage rates. With market access liberalisation being pursued within ASEAN, most of the new planes on order will end up being deployed in the region. This may have the effect of further compounding the congestion and infrastructural problems.

7. governments must thus pay more attention to airport capacity investments. A significant policy re-think is required on issues like secondary airports and budget terminals to relieve congestion at primary airports. Securing private sector financing for such secondary facilities should be a priority. At the same time, governments should look into lowering airport charges to incentivise airlines to relocate to these facilities.

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8. Slots. One infrastructure-related problem relates to slot constraints: the shortage of suitable and convenient landing and take-off slots throughout the day. The issue could be a function of lack of terminal space, runway congestion or air traffic restrictions. Slot problems require a whole array of solutions, ranging from employing technology to facilitate more landings and take-offs to using market-based slot allocation mechanisms. Within ASEAN, member states should begin discussions on whether and how a more coordinated response to the slot problem can be forged.

9. Human Capital. The projected growth in aviation will also impose tremendous pressure on the provision of human capital, particularly pilots and maintenance personnel. The provision of training facilities will thus have to be accelerated to meet this demand. The region will benefit from harmonised programmes for pilot training and licensing. Training centres should receive common accreditation to ensure harmonised standards and quality. Overall, the demand for aviation professionals should ideally be managed and met on a regional, rather than national basis. This way, manpower can be positioned anywhere in the region as market demand dictates. Commonly-agreed certification standards should be recognised by all ASEAN member states so that enforcement efforts need not be duplicated and costs can be reduced.

10. ASEAN Regulator. There is a need for ASEAN member states to consider establishing a common regional regulator. The ASAM project should thus take on the issue of creating an ASEAN regulator to oversee technical matters. Such a body could take the form of a Joint Aviation Committee comprising the respective member states’ civil aviation authorities. Eventually, it could become an independent administration altogether. The regulator could legislate harmonised technical standards relating to air traffic management (ATM), safety, security as well as customs, immigration and quarantine (CIQ) matters. Cross-border enforcement should be facilitated, so that an inspection conducted by one authority can be recognised as valid by the other authorities.

11. The Environment and Future Sustainability. The region could also benefit by moving toward harmonised requirements on aircraft carbon emissions. Issues relating to sustainable growth and the use of biofuels and environmentally-friendly construction materials also require a concerted regional stand.

12. A United Stand for External Relations. There is a critical need for an increasingly integrated ASEAN to craft a common external policy for aviation matters. This involves coordinating the individual member states’ positions to reach a united negotiating stand on issues ranging from climate change to traffic rights. This will strengthen the member states’ collective bargaining position when negotiating with bigger trading partners.

The ASEAN Single Aviation Market (ASAM) 13. the liberalisation of the ASEAN air transport sector in ASEAN is directed at both the provision of air passenger and air freight (cargo) services. Multilateral agreements have been adopted to replace the traditional bilateral air services agreements between states that often contain market restrictions. The multilateral agreements tackle the two key areas for liberalising the sector: (i) market access for carriers from

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other member states and (ii) ownership and control of carriers by nationals of other member states.

14. Market Access. For market access liberalisation, the ASEAN multilateral agreements do away with the so-called third, fourth and fifth freedom restrictions. Hence, Member State A’s carriers can conduct unlimited operations between A and Member State B (third freedom), between B and A (fourth freedom), and between A and Member State C through B (fifth freedom). These relaxations are fairly modest in that they do not involve the seventh freedom operations or domestic services within member states. Hence, A’s carriers cannot conduct stand-alone international operations between B and C (seventh freedom), or domestically within B or C (domestic carriage).

15. even so, the relatively modest third, fourth and fifth freedom relaxations have not been accepted by a number of ASEAN member states, particularly the biggest economy in the region, Indonesia. To protect their carriers’ market share, governments have traditionally restricted the capacity of foreign carriers operating into and out of their territories. Such protection takes place despite compelling economics-based evidence that liberalisation brings significant benefits to the overall economy. Such benefits include more competition among providers and greater choice for users, and with that, lower fares and freight rates for the travelling public and exporters. In addition, there are significant indirect benefits for tourism, travel- related businesses and inward foreign investment. While the local airlines are likely to lose some market share as a result of increased access for foreign carriers, they will also benefit on the whole from a significant increase in volumes carried and revenues generated.

16. that said, there have been recent positive signs in Indonesia that the government is prepared to liberalise further. In particular, significant capacity relaxations have been offered in bilateral agreements with some states. In addition, Indonesia’s own carriers are expanding their operations rapidly, leading to their own need for more liberal market access into other ASEAN states. At the same time, Indonesian carriers have begun to establish joint venture subsidiaries in other ASEAN states. Such expansion is only possible with greater reciprocal liberalisation among all ASEAN member states.

17. the ASEAN Secretariat, the other member states and their respective carriers should continue to engage the Indonesian government and its carriers to encourage them to accept the ASEAN agreements fully. Co-operative ventures with Indonesian carriers (e.g. in the form of joint ventures and code-sharing) should be encouraged to provide incentives for these carriers to support ASEAN’s liberalisation efforts. In time, as Indonesian carriers become more competitive and grow their own overseas operations, they will require greater reciprocal access into other ASEAN states as well. This will boost the ASAM project significantly, with benefits for all players.

18. the ASAM project currently stops with the third, fourth and fifth freedom relaxations. This is detrimental as it renders the Single Aviation Market incomplete and “single” only in name. The result is that airline operations remain restricted by artificial barriers erected by governments, despite the economic justifications for lifting such barriers. The true potential of airlines and the economic growth they can stimulate by carrying more passengers and cargo at more efficient cost remain unrealised. The ASEAN member states must thus go beyond the current liberalisation agenda to give each other’s airlines the seventh freedom and domestic operation rights. This way, they will have the full benefit of a common market to operate freely between any two points

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in the region. Hence, carriers from Member State A should eventually be allowed to mount flights between Member States B and C, or even within B or C, without the flight having to originate and terminate in A.

19. While such operations are controversial, they are needed in the long run to forge a truly liberalised common market in ASEAN. This Report recommends a phased timetable to allow the commencement of seventh freedom and domestic services by ASEAN carriers, beginning with points that are hitherto not connected by direct flights, points that are not capital cities, and eventually the capital cities. However, these are likely to attract some political opposition. As such, where domestic carriage is contentious and threatens to derail liberalisation of seventh freedom operations, the latter should take priority. In other words, domestic carriage relaxations can be left for a later period while seventh freedom should be freed up more urgently.

20. Ownership and Control. Apart from market access barriers, there are significant ownership and control restrictions in existence. In ASEAN member states, airlines must typically subscribe to the traditional “substantial ownership and effective control” rule. This means that all carriers must be majority-owned (i.e. beyond 50%) by the nationals of their own designating or home state. To liberalise this rule, the ASEAN member states should accelerate efforts to recognise “community carriers” that can be majority-owned by ASEAN nationals taken cumulatively. Hence, a Cambodian-registered carrier need not necessarily be majority-owned by Cambodian nationals; instead, it can be majority-owned by a mixture of ASEAN nationals. This will be a departure from the traditional concept of an airline having to be majority-owned by nationals of its home state.

21. the “community carrier” concept will enable airlines to raise capital from across the region rather than from their home states alone. This will especially help airlines in the less developed member states that need more foreign investments in their aviation sector. In addition, it will facilitate mergers among ASEAN airlines so that they can compete more effectively against airlines from outside the region. Presently, the “community carrier” concept exists only in theory under the ASEAN multilateral agreements, and no such carrier has actually been established to date. This is largely because the member states retain the discretion to deny such community carriers the rights to operate to their points. This creates uncertainty for any investor wishing to establish such a carrier.

22. One way to lift this barrier is for member states to retain the traditional ownership rule for their own carriers only, if they so wish. For other ASEAN carriers, the “community carrier” model should be allowed and welcomed, with no threat of market access being denied. Eventually, all restrictions on ownership and control by ASEAN nationals, even for member states’ own airlines, should be phased out. This can only be logical for a true “single” aviation market to appear. In sum, liberalisation of market access and of ownership/control rules must naturally be pursued as a package. It would be meaningless for ASEAN to recognise a community carrier (that is owned by a multitude of ASEAN interests) if this carrier’s market access to other member states can be constricted by these states at their discretion.

23. External Relations. Seventh freedom rights are also crucial for ASEAN carriers to operate from anywhere in the region to external points, e.g. in a third state like China. Without such rights, the ASEAN carriers could end up being disadvantaged as against carriers from third states with a unified home market. Hence, without seventh freedom liberalisation, a Philippine carrier can have unlimited operations to China but only from

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its own home points. In comparison, a Chinese airline can connect any point in China with any point in ASEAN. This creates a network imbalance that can only be rectified if the ASEAN member states start to treat their own backyard as a true common market. Hence, the Philippine carrier must be allowed seventh freedom rights to connect Vietnam, Thailand, Indonesia and indeed, all of ASEAN with China.

24. Such concerns highlight ASEAN’s lack of a united negotiating stand when it engages with third countries. The problem is complicated because ASEAN lacks a mechanism like that which exists in the European Union (E.U.) to compel member states to prioritise the regional interest over individual national interests. ASEAN needs its biggest economies (the natural leaders for negotiations with external trading partners), to embrace intra-ASEAN liberalisation and to lead the region. At its core, the problem has to do with the uneven level of development and competitiveness among member states’ airlines. Deeper intra-ASEAN liberalisation must thus be forged so that the region’s airlines do not end up becoming disadvantaged against airlines from outside the region. This is a risk that ASEAN member states and their airlines cannot continue to ignore.

Conclusion 25. Policy-makers in the region must seize the opportunity to re-think their strategies for ASEAN aviation. In the face of the rapidly-changing dynamics of the airline industry, the following priorities should guide policy-making for the future:

• Facilitating cost reduction and efficiencies for all airline operations, FSC and LCC • Committing to overcome infrastructural, slot and human capital constraints • Continuing to liberalise market access and ownership/control rules for a true ASAM • Establishing an ASEAN regulator to oversee and enforce harmonised standards • Fostering a united ASEAN negotiating stand as against other countries and regions

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Summary of Recommendations to Lifting-The-Barriers

Barriers Recommendations Target Date

Infrastructural, Slot, ASEAN member state governments to pay Immediate Human Capital urgent attention to providing: Constraints • Airport terminal capacity, including runways and slots, particularly to cater to LCCs; includes the provision of secondary airports to take the load off primary airports; • Adequate human capital and training as well as harmonised standards of accreditation so that manpower demands can be met regionally as opposed to nationally.

A Common ASEAN Civil aviation authorities to consider harmonising Immediate Regulator technical standards for eventual oversight by a common ASEAN regulator. This will have the advantages of:

• Introducing harmonised standards that can be inspected or enforced by one authority and accepted by other authorities as adequate/ valid for a period of time; • Increasing reliability of monitoring and compliance; • Reducing duplication and costs; • Enhancing regional co-operation and the overall effectiveness and integrity of the system.

Non-Acceptance of Engaging stakeholders in the relevant member Immediate ASEAN Agreements states to facilitate acceptance of the ASEAN multilateral agreements by:

• Providing incentives to Indonesian carriers and improving their market access into other ASEAN states; facilitating requests for joint ventures, code-sharing, technical assistance, airport slots, co-operation etc.; • Engaging Indonesian provincial governments and business and tourism stakeholders to emphasise benefits of liberalisation; • Engaging the remaining member states that have yet to accept the ASEAN agreements to do so expeditiously, while providing incentives like technical assistance and joint operations.

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Market Access Passenger and Cargo Fifth Freedom. Liberal Immediate Restrictions: Seventh interpretation of fifth freedom regime in current Freedom and Domestic ASEAN multilateral agreements to allow Carriage “backtracking” operations. However, there is a risk of some member states recoiling further from the ASEAN agreements.

Cargo Seventh Freedom. Unlimited seventh Immediate/2014 freedom cargo rights.

Passenger Seventh Freedom. Seventh freedom 2018 rights for passenger services on routes not hitherto connected directly by scheduled flights. Capacity may have to be restricted in the first instance to a daily flight, with a fixed timetable to move to unlimited capacity within a certain date (e.g. two years). Operations may be code-shared with local carriers.

Passenger Seventh Freedom. Seventh freedom 2018 rights to connect any two non-capital cities within ASEAN (with capacity or city-list limits that are phased out within two years).

Passenger Seventh Freedom. Seventh freedom 2020 rights to connect any two cities within ASEAN, one or both of which are capitals (with capacity limits that are phased out within two years).

Cargo Eighth and Ninth freedoms. Rights to Immediate/2015 connect all cities.

Passenger Eighth Freedom. Eighth freedom 2020 passenger rights on routes not hitherto connected directly by scheduled flights (with capacity restrictions that are phased out within two years).

Passenger Eighth Freedom. Eighth freedom 2022 passenger rights to connect all cities (with restrictions e.g. capacity limits, minimum pricing rule, that are phased out within two years).

Passenger Ninth Freedom. Ninth freedom 2025 passenger rights on routes not hitherto connected directly by scheduled flights (with capacity restrictions that are phased out within two years).

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Passenger Ninth Freedom. Passenger Ninth freedom. Ninth freedom passenger rights to connect all cities (possibly with opt-out exemption for capital cities, to be phased out within two years).

Note: if seventh freedom relaxations risk being derailed by domestic carriage, the former should be prioritised. Alternatively, domestic operations should be left to joint venture operations with local carriers.

States should move away from “substantial Ownership and Immediate Control Restrictions ownership and effective control” to “principal place of business and incorporation” criterion.

ASEAN Community Carrier to be embraced, Immediate with “opt-out” for states’ own carriers to retain substantial ownership and effective control; or

ASEAN Community Carrier to be embraced, with ownership spread out among ASEAN interests but effective economic and regulatory control with designating state.

ASEAN Community Carrier fully recognised; 2025 “opt-out” phased out.

Majority ownership and effective control resides with ASEAN nationals in aggregate. Effective regulatory control, principal place of business and incorporation remain with designating state.

External Relations Seventh freedom rights with China (requires Immediate/2015 with Other intra-ASEAN seventh freedom regime first), to Countries; Need begin with cargo services. for United Regional Position Seventh freedom passenger rights with China, Following covering non-capital cities. intra-ASEAN

Seventh freedom passenger rights with China, Following covering capital cities. intra-ASEAN

Fifth freedom passenger rights with China, to Immediate press for inclusion of Beijing, Shanghai and Guangzhou.

Note: none of the fifth freedom routes negotiated with China makes economic sense; the better strategy for ASEAN may be to delay adopting the agreement.

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Fifth freedom rights with Korea, Japan, India, Immediate Hong Kong and other trading partners (through multilateral agreements).

Note: ASEAN should not offer third/fourth freedom rights without receiving fifth freedom rights from these trading partners.

A common negotiating position for external Post-2015 relations.

Further issues: Post-2015 • Safety and security standards • Competition/antitrust law • Consumer welfare • Environmental standards • Air traffic management

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FULL REPORT Introduction The ten member states of the Association of Southeast Asian Nations (ASEAN) have identified a 2015 deadline to establish an ASEAN Single Aviation Market (ASAM) to liberalise the provision of air transport services in the region. Also referred to as the ASEAN “Open Skies” policy, the aim is to have the ASAM arrangement in place by the time the proposed ASEAN Economic Community (AEC) takes effect in 2015.

This Report analyses the barriers facing the aviation sector in ASEAN, including but not limited to those raised by the ASAM. It identifies the strategies required to overcome or lift the relevant barriers, particularly the policy changes that governments should undertake in response to the rapidly evolving aviation industry.

I. The Big Picture: Changing Aviation Dynamics in ASEAN

A. Infrastructure Constraints The face of ASEAN aviation is changing rapidly and significantly. Low-cost carrier (LCC) operations now account for more than half of all airline capacity (international plus domestic) in Indonesia (56%), the Philippines (51%) and Malaysia (50%). The next highest LCC penetrations rates are 31% in Singapore, 30% in Thailand and 24% in Vietnam (see Table 1).

Table 1. ASEAN member states: overall aviation market size (international and domestic) and LCC penetration - data from October 2013

Rank Country System-wide weekly System-wide LCC Domestic LCC International capacity (millions of penetration rate penetration rate LCC penetration seats, all carriers local rate and foreign) 1. Indonesia 2.8 56% 60% 46% 2. Thailand 1.9 30% 56% 20% 3. Malaysia 1.6 50% 53% 48% 4. Singapore 1.4 31% Not Applicable 31% 5. Philippines 1.0 51% 67% 29% 6. Vietnam 0.7 24% 37% 13% 7. Myanmar 0.2 16% 3% 27% 8. Cambodia 0.1 12% 0% 13% 9. Lao PDR 0.04 5% 0% 7% 10. Brunei 0.04 16% Not Applicable 16%

Source: CAPA - Centre for Aviation & Innovation

The LCCs’ share of capacity is expected to increase even more dramatically in the next decade. For sure, there is still ample room for growth in populous markets like Indonesia, Vietnam and Thailand. On their part, the emerging economies of Myanmar, Cambodia and Lao PDR can be expected to grow strongly, albeit from relatively low bases. Compared to the lacklustre situation in the developed economies, the vibrant economic growth in ASEAN and greater Asia has also meant increasing travel and exports within the region. A large proportion of such growth is being captured by the LCCs, and increasingly on long- haul sectors too.

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In fact, LCC operations have proven to be consistent, all-weather growth generators for airports in ASEAN. In 2009, recognised as a tough year for aviation worldwide, growing LCC traffic was a resilient feature at all leading ASEAN airports. For instance, Singapore Changi Airport saw passenger traffic and aircraft movements grow robustly in that year on the back of LCC operations, even as the shares contributed by long-haul flights and full-service carriers (FSCs) slipped. In 2009 alone, LCC passenger traffic and aircraft movements at Changi increased a dramatic 50% over the previous year. Across ASEAN, such momentum has continued well into the present and is expected to hold steady for the future.

Yet, ASEAN governments on the whole do not appear to have made adequate policy changes to accommodate the LCC phenomenon. In particular, the LCCs’ infrastructure needs are not being addressed quickly enough. Airports or terminals dedicated to LCC operations remain the exception in ASEAN. Only Bangkok Don Mueang counts as a dedicated LCC airport, while the soon-to-be-opened Kuala Lumpur International Airport 2 (KLIA2) fashions itself as a “hybrid” terminal for both LCCs and FSCs. Some governments are spending large amounts of money to build new airports or terminals mainly for traditional FSCs. This is often borne out of their belief that the “hub” status of major airports must be protected by reinforcing the operations of FSCs, particularly the national carriers. Policies intended to encourage or spur LCC travel by making it more cost-efficient and accessible are also lacking, e.g. by reducing airport and user charges and passenger taxes.

Other governments are not investing adequately in general airport infrastructure, be this for FSCs or LCCs. Major airports like Jakarta Soekarno-Hatta, Manila Ninoy Aquino and Bangkok Suvarnabhumi have reached saturation point and even exceeded their intended capacity. This has naturally resulted in increasing congestion and ever longer delays. The re-opening of Bangkok Don Mueang to cater to LCC operations is a reminder of the infrastructural constraints posed by the LCCs’ spectacular continuing growth. Such constraints will become even more of a challenge in the near future as the LCC “boom” continues. This is made more acute by the fact that LCCs typically use smaller planes that make more take-off and landing frequencies in a day.

Recent huge aircraft orders by LCCs compound the problem. The Lion Air and AirAsia groups alone have more than 1,000 aircraft on order between them. Other LCCs like Cebu Pacific, Tigerair, Nok Air and Jetstar are expanding as well. Newer LCCs like Malindo, Philippines AirAsia, Tiger Mandala and VietJet Air have also started operations. With increasing market access liberalisation within ASEAN, most of the new planes on order will end up servicing ASEAN skies. Quite apart from whether the skies are truly open, there is now a significant gap between aircraft orders and infrastructure expansion efforts.

Governments must thus pay more attention to airport capacity investments, particularly those relevant to LCC operations. Airport competition and connectivity issues require forward planning, and not just with FSC considerations in mind. A significant re- think is required on issues like secondary airports (e.g. Bangkok Don Mueang, Manila Clark, Jakarta Halim Perdanakusuma) and hybrid terminals (e.g. KLIA2) to relieve the congestion at primary airports. Securing private sector financing for such facilities should be a priority. At the same time, governments should provide for lowered airport charges to incentivise airlines to relocate to these facilities.

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B. Slot Constraints A particularly acute infrastructure-related problem relates to the availability of suitable landing and take-off slots. “Slots” refer to the facility for an aircraft to land and take off within a desired time period, and to have access to the usual services such as aerobridges, ramps and ground-handling. In this regard, busy airports like Jakarta Soekarno-Hatta and Manila Ninoy Aquino are already stretched near or beyond capacity. Airlines already face difficulties mounting new flights to and from these airports because of congestion and the unavailability of convenient landing and take-off slots.

At some airports, the problem is a function of lack of terminal space (e.g. aerobridges for aircraft to park and handle passengers). Elsewhere, the problem could be due to runway congestion and the need for additional runways, such as at Singapore Changi. Airspace restrictions that affect the efficiency of aircraft landings and take-offs can also contribute to slot problems. The situation is particularly serious during the desired peak periods in the day, and some airlines have been forced to arrive and take off at unfavourable hours such as after midnight. This raises new problems such as the unavailability of customs, immigration and quarantine (CIQ) personnel and land transport options to and from the city centre during non-peak hours.

Slot issues are complicated and require holistic policies that balance user (i.e. airline) and provider (i.e. airport) needs. In the short term, employing more sophisticated air traffic and runway control technology could provide for more landing and take-off slots per hour without compromising safety. At the same time, market-based slot allocation mechanisms such as exchanges and auctions have been used in congested airports such as London Heathrow, often with some controversy. At some airports, airlines with unused slots have been forced to return them to the common pool, while antitrust/competition law authorities have been known to force co-operating airlines to surrender slots to prevent them from becoming too dominant at particular airports.

The LCC “boom” has naturally contributed to these slots problem and associated congestion at major airports in ASEAN. The fact is that six intra-ASEAN routes are now among the ten busiest international LCC sectors in the world. This is testimony to the LCCs’ spectacular growth in ASEAN (see Table 2). At the same time, it reflects the specific problem in ASEAN of there being few viable alternative airports from which LCCs can operate. In other words, a high level of LCC traffic in ASEAN still operates from the primary airports. Diverting LCC traffic to smaller airports (as has been done with Bangkok Don Mueang) will significantly relieve the infrastructure and slot congestion issues at the ASEAN primary airports.

Table 2. Top 10 international LCC routes based on weekly return capacity (seats) – October 2013 (with intra-ASEAN routes highlighted)

Rank Origin Airport Destination Airport Total Seats 1. Singapore Changi Jakarta Soekarno-Hatta 59,280 2. Singapore Changi Kuala Lumpur International 57,600 3. Singapore Changi Bangkok Suvarnabhumi 33,708 4. Kuala Lumpur International Jakarta Soekarno-Hatta 31,626 5. Dubai International Kuwait International 30,270 6. Kuala Lumpur International Bangkok Don Mueang 27,720 7. Barcelona El Prat London Gatwick 23,804 8. Singapore Changi Manila Ninoy Aquino 23,708 9. Dubai International Doha International 23,058 10. Dublin London Stansted 20,412 Source: CAPA - Centre for Aviation & Innovation

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Within ASEAN, member states should begin discussions on how a more coordinated response to the slot problem can be forged. The ASEAN Single Aviation Market (ASAM) project has thus far focused on liberalising air traffic rights, with little discussion on slots. Yet, with rights being progressively freed up, the extra flights mounted by airlines capitalising on “open skies” liberalisation could end up causing even more congestion and imposing more stress on slots.

C. Human Capital Constraints The projected growth in aviation will also impose tremendous pressure on the provision of human capital, particularly pilots and maintenance personnel. The airline industry projects that the Asia-Pacific region alone will require 185,000 more pilots and 243,500 maintenance personnel for the next 20 years. The provision of training facilities will thus have to be accelerated in the coming years to meet this demand.

The region will thus benefit tremendously from a harmonised programme for pilot training and licensing. Training centres should receive common accreditation to ensure harmonised standards and quality. The ASAM project should look into such issues in a manner similar to, though not necessarily identical with how the European Union (E.U.) has addressed them. Overall, the demand for aviation professionals should be managed and met on a regional, rather than national basis. This way, manpower can be positioned anywhere in the region as market demand dictates, with commonly-agreed certification standards recognised by all ASEAN member states. This reduces costs for airlines, governments and the individuals concerned (e.g. trainee pilots) and increases efficiencies all around.

D. An ASEAN Regulator? Some of the above issues raise the need for a common regional regulator. Moving forward, the ASAM project should steer the region toward creating an ASEAN regulator to oversee technical matters. Initially, such a body might take the form of a Joint Aviation Committee comprising the member states’ respective civil aviation authorities. Eventually, it could mature into an independent administration with a regional mandate.

The regulator would be in charge of legislating and enforcing harmonised standards relating to air traffic management (ATM), safety, security and other technical matters in line with the requirements of the International Civil Aviation Organisation (ICAO). As a first step, the standards need not be uniform, but harmonised to a sufficient degree so as afford co-operation in cross-border enforcement. For example, a harmonised set of safety rules for aircraft inspections can be applied to airlines by all member states’ national authorities, and an inspection conducted by one authority should be accepted by the others as adequate or valid for a period of time. This will save resources and avoid duplication in enforcement. At the same time, regional co-operation in customs, immigration and quarantine (CIQ) procedures can be enhanced to combat problems like human trafficking.

Harmonised standards, particularly if overseen by a common regulator, have the advantages of increasing the reliability of monitoring and compliance, reducing duplication and costs, and enhancing the overall effectiveness of the system. Of course, such harmonisation requires the necessary “levelling-up” of resources and capabilities across all ASEAN member states. This is a significant challenge, given the varying levels of development across member states. Technical training would have to be provided by the more advanced member states, as well as by states and aid agencies from outside the region.

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E. The Environment and Future Sustainability The region could also benefit by forging harmonised requirements on contemporary issues such as aircraft carbon emissions. The linkage between aviation and climate change has already emerged as a controversial issue with the E.U. unilaterally subjecting aviation to its Emission Trading Scheme (ETS). Issues relating to the sustainable growth of the industry also require a concerted regional stand or strategy. Moving forward, such issues include the use of biofuels and alternative construction material for aircraft and aircraft parts.

F. A United Stand for External Relations The above issues highlight a critical need for an increasingly integrated ASEAN to craft a common external policy for aviation matters. This involves coordinating the individual member states’ positions to reach a united negotiating stand. Such a move will strengthen the member states’ collective bargaining position when negotiating with bigger trading partners such as China, India, the E.U. and the U.S. As noted above, one issue requiring a common stand is aircraft carbon emissions. Another critical area is negotiating market access rights with other countries (see below).

II. Overview of the ASEAN Single Aviation Market (ASAM) The liberalisation of the air transport sector in ASEAN is directed at both the provision of air passenger and air freight (cargo) services. In this regard, the concept of progressive liberalisation of air transport services had been laid out by an Action Plan for ASEAN Air Transport Integration and Liberalisation 2005-2015. This Action Plan, together with an accompanying document known as the Roadmap for Integration of Air Travel Sector (RIATS), had identified the target date of 2015 for achieving an effective “open skies” regime for the region.

To this end, three multilateral agreements have been adopted to formalise the intra- ASEAN liberalisation of aviation in the following key areas:

i. market access by foreign carriers (i.e. carriers from other ASEAN member states); and

ii. ownership and control of local carriers by foreign nationals (i.e. from other ASEAN member states)

A. Market Access Pursuant to the ASAM objective, the ASEAN member states have adopted several multilateral agreements designed to provide unlimited third, fourth and fifth freedom operations within the region. Hence, member states that are contracting parties to these agreements agree to liberalise the following operations such that they become unlimited in terms of frequency and capacity of operations and aircraft type used: i. “Third freedom” – this refers to the right of a carrier designated by Member State A to carry passengers, cargo and baggage for profit from a point in Member State A to a point in Member State B.

Example: Thai Airways’ (TG) operation from Bangkok to Singapore, or Phuket to Bali, or Chiang Mai to Hanoi.

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ii. “Fourth freedom” – this is the same airline’s corresponding right in the reverse direction.

Example: The same TG flight returning from Singapore to Bangkok, or Bali to Phuket, or Hanoi to Chiang Mai.

iii. “Fifth freedom” - the same right but with an additional right in both directions to make a stopover in Member State C to discharge and take on traffic for profit.

Example: TG operation between Bangkok and Singapore, but with a stopover in Kuala Lumpur in both directions to discharge and take on traffic.

The specific multilateral agreements, their scope and the current member state parties are detailed in the following table:

Table3. ASEAN Multilateral Agreements on Liberalisation of Air Services

Multilateral Agreement Scope Member State Parties 2009 Multilateral Agreement on Air Services (MAAS)

All except Indonesia and the Protocol 5 Unlimited third & fourth freedom between Philippines capital cities (A’s carriers between A’s capi- tal and another capital) E.g. Thai Airways’ (TG) Bangkok-Hanoi & vice versa All except Indonesia and the Protocol 6 Unlimited fifth freedom between capital Philippines cities (A’s carriers from A’s capital to C’s capital via B’s capital) E.g. TG’s Bangkok-Kuala Lumpur-Singapore & vice versa) All 10 member states Protocol 1 to 4 Limited impact: providing for unlimited third, fourth and fifth freedom relaxations between and among secondary cities in “sub-regions” (growth areas) straddling the borders of neighbouring states. E.g. the Cambodia, Laos, Myanmar and Vietnam (CLMV) Agreement and the Brunei, Indonesia, Malaysia and Philippines East ASEAN Growth Area (BIMP-EAGA)

2010 Multilateral Agreement for the Full Liberalisation of Passenger Air Services (MAFLPAS)

Protocol 1 Unlimited third & fourth freedom between all All except Indonesia and cities (A’s carriers from A’s non-capital to B’s Lao PDR capital, A’s capital to B’s non-capital & A’s non-capital to B’s non-capital) E.g. TG Phuket-Manila, Bangkok-Cebu, Phuket-Cebu

Protocol 2 Unlimited fifth freedom between all cities All except Indonesia and (except capital-capital-capital) Lao PDR E.g. TG Phuket-Ho Chi Minh-Cebu, Phuket- Ho Chi Minh-Manila, Phuket-Hanoi-Cebu, Phuket-Hanoi-Manila, Bangkok-Hanoi-Cebu, Bangkok-Ho Chi Minh-Manila, Bangkok-Ho Chi Minh-Cebu

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Multilateral Agreement Scope Member State Parties 2009 Multilateral Agreement for the Full Liberalisation of Air Freight Services (MAFLAFS)

Protocol 1 Unlimited third, fourth and fifth freedom All except Indonesia between designated points E.g. THAI Cargo’s Bangkok-Clark, Bangkok- Vientiane-Hanoi routes

Protocol 2 Unlimited third, fourth and fifth freedom All except Indonesia between all points with international airports E.g. THAI Cargo’s Bangkok-Singapore, Bangkok-Singapore-Manila routes

B. Ownership and Control The traditional bilateral air services agreements between states typically require airlines designated by either state to be “substantially owned and effectively controlled” by that state and/or its nationals. The effect of such a requirement is to prevent foreign majority shareholding and control of an airline, as well as to prohibit the cross-border merger of airlines (see discussion below on Barriers). The ASEAN multilateral agreements described above attempt to relax this requirement by providing member states with the following three options on ownership and control (these are listed from least to most liberal):

Table 4. Ownership and Control Options under the ASEAN Multilateral Agreements on Liberalisation of Air Services

Ownership and Control Options Remarks

i Substantial ownership and effective control in Least liberal - no change to traditional formulation in designating state bilateral air services agreements.

Typically no more than 49% foreign shareholding (some member states have more stringent rules, e.g. no more than 40% foreign shareholding in the Philippines).

ii Place of incorporation, principal place of Allows for new ASEAN Community Carrier concept. business and effective regulatory control in designating state; and Substantial ownership and effective economic control can reside with ASEAN nationals taken in Substantial ownership and effective economic the aggregate (i.e. cumulatively). Hence, majority control in one or more member state and/or its interest can be spread out among ASEAN nationals. nationals E.g. Cambodian-designated airline with 21% But subject to consent of each member state to Vietnamese, 20% Malaysian, 10% Thai and 49% non- which airline wishes to operate ASEAN interests; or Myanmar-designated airline with 20% Myanmar and 80% Malaysian interests.

Potential problem: each ASEAN member state to which airline wishes to operate must agree to accept that airline.

iii Place of incorporation, principal place of Most liberal - no requirement of majority ownership business and effective regulatory control in or effective economic control in national or ASEAN designating state; and hands.

No substantial ownership or effective economic E.g. Cambodian-designated airline with 100% control requirement, provided arrangement Japanese ownership and effective economic control, does not allow foreign airlines access to rights as long as incorporated in and has its principal place not otherwise available to them of business in Cambodia. Also, effective regulatory control to lie with Cambodia (e.g. for safety and But subject to consent of each member state to security). which airline wishes to operate Potential problem: each ASEAN member state to which airline wishes to operate must agree to accept that airline

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III. Benefits of Liberalisation Before analysing the specific barriers that confront the liberalisation of the airline industry in ASEAN, it is important to highlight the numerous comprehensive studies that have detailed the benefits of air services liberalisation for ASEAN economies. In general, most studies are in unanimous agreement as to the overall benefits, including increased choice, more competition, lower fares and lower freight rates for passengers and exporters; increased tourism and foreign investment revenue; increased employment in airline-related jobs, and positive growth for all kinds of related ancillary services. At the same time, the studies acknowledge that incumbent local carriers are generally expected to lose market share to foreign competitors, although this is made up for by increased volumes and revenue as liberalisation stimulates overall traffic growth for all sides.

A. Malaysia and Thailand An Intervistas Consulting report1 released in 2006 concluded that the liberalisation of air services between Thailand and Malaysia brought substantial benefits to both countries in 2005. The liberalisation covered unlimited third and fourth freedom rights, entailing no restrictions on points served in either country, multiple designation of airlines and open code-sharing rights. The following benefits were estimated to accrue to each country:

No. of passengers travelling between the two countries 1.5 million

No. of passengers travelling as a result of the liberalised arrangement 370,000

Additional full-time jobs (per country) 4,300 (est.)

Additional GDP (per country) US$114 million

B. Singapore An Intervistas Consulting report released in 20092 concluded the following benefits for Singapore arising from liberalised air services agreements:

Summary of the Impacts of Liberalisation on Singapore Increase in International Traffic 5.5 Million (+21%) (Passengers and % increase)

Reduction in Average Fare 15%

Increase in Consumer Surplus 834 Million (US Dollars, adjusted for purchasing power parity)

Employment (FTEs) Aviation Sector (including indirect impacts) 8,800 Tourism (including indirect impacts) 22,000 Catalytic Impacts 13,100 Total Employment Impact 43,900

Gross Domestic Product 875 Million (US Dollars, adjusted for purchasing power parity) Impact on Home Carriers: Liberalisation may lead to a loss of market share by the home carriers; however, this may be offset by high traffic growth as liberalisation stimulates the market. While increased competition has the potential to weaken the viability and profitability of home carriers in some instances, liberalisation also offers the means to protect profitability by expanding into new markets, accessing a wider pool of investment and through consolidation.

Note: FTE - Full-Time Equivalent Job. All financial figures are in 2008 prices. Source: InterVISTAS-EU, July 2009

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C. Indonesia The most recent comprehensive study for Indonesia was released in June 2011 by the Indonesia Infrastructure Initiative (IndII), an Australian-funded aid programme.3 The study sought to quantify the benefits for Indonesia in the year 2025 of implementing an “Open Skies” policy. “Open Skies” was understood as the liberalisation of air services between the ten ASEAN member states in the following areas: relaxation of existing bilateral agreements between member states, existing restrictions on airline designation, market entry/access, frequency, capacity, schedules, products, code-sharing, tariffs and ownership and control . The study quantifies the following substantial benefits of an “open skies” policy for Indonesia by 2025:

7 trillion Rupiah (US$679 million) Additional GDP [6% increase from 2010 levels] 32,000 Additional jobs created [7% increase from 2010 levels]

Decrease in real air fares 2.5% per annum

16.3 million per year by 2025 Additional international passenger traffic [24.5% of total additional international traffic over attributable to ASEAN Open Skies 2010 levels] 290,000 tonnes per year by 2025 Additional international air freight traffic [21.6% of total additional international air freight attributable to ASEAN Open Skies traffic over 2010 levels]

Impact on Home Carriers: Airline benefits account for around 267 billion Rupiah (US$26 million) by 2025, showing that Indonesian airlines in aggregate stand to benefit from Open Skies. While there are net gains for Indonesian carriers on the whole, some will benefit more than others (e.g. Indonesia AirAsia with its focus on ASEAN routes). However, the data was inadequate to identify specific winners and losers.

The base assumption is that Indonesian airlines may only be able to take up around 25% of the growth opportunity offered by Open Skies given their current readiness and appetite for liberalisation. Also, the net present value of Open Skies for Indonesian carriers is reduced as initial investment in aircraft capacity required falls more heavily on Indonesian carriers.

There will be an increase in absolute passenger numbers and revenues for Indonesian carriers, although a substantial erosion of their market share in ASEAN markets can be expected over time. This study did not capture the opportunity for additional onward connecting domestic traffic arising from Open Skies that can be captured by Indonesian carriers.

Note: Two-thirds of the additional direct impact is expected to be realised in Jakarta alone

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D. Vietnam An Intervistas Consulting report released in 20094 concluded the following benefits for air services liberalisation for Vietnam:

Summary of the Impacts of Liberalisation on Vietnam

Ownership Market Access Combined and Control Liberalisation Liberalisation Liberalisation Increase in International Traffic 3.1 Million +38% 2.4 Million +29% 5.5 Million +67% (Passengers and % increase)

Reduction in Average Fare 27% 22% 49%

Increase in Consumer Surplus (US Dollars) 616 Million 409 Million 1,025 Million

Employment (FTEs) Aviation Sector (including indirect impacts) 23,700 18,300 42,000 Tourism (including indirect impacts) 73,300 58,600 131,900 Catalytic Impacts 14,300 11,100 25,400 Total Employment Impact 111,300 88,000 199,300

Gross Domestic Product (US Dollars) 1,670 Million 1,311 Million 2,981 Million

Liberalisation may lead to a loss of market share by the home carriers; however, this may be offset by high traffic growth as liberalisation stimulates the market. While increased competition has the potential to weaken the Impact on Home Carriers viability and profitability of home carriers in some instances, liberalisation also offers the means to protect profitability by expanding into new markets, accessing a wider pool of investment and through consolidation.

Note: FTE - Full-Time Equivalent Job. All financial figures are in 2008 prices. Source: InterVISTAS-EU, July 2009

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E. Malaysia, Thailand, Singapore and the Philippines The following summary provides information on the contribution of aviation to the economies of four ASEAN member states. The figures reflect absolute contributions, as opposed to incremental benefits arising from liberalisation.

GDP contribution from aviation Malaysia Thailand Singapore Philippines (in US Dollars, billions)

Direct 0.99 2.06 6.90 0.41

Indirect 0.81 1.42 2.46 0.22

Spending of aviation 0.50 1.00 1.90 0.19 employees and its supply chain Contribution to tourism 5.33 21.81 7.37 3.63

Total Contribution 7.63 26.29 18.63 4.45

% of total GDP 4% 9% 9% 2%

Taxation from aviation Malaysia Thailand Singapore Philippines (in US Dollars, billions) Income tax receipts from employees, social security 0.17 0.15 1.19 0.16 contributions and corporation taxes from aviation firms

Tax on aviation supply chain 0.19 0.23 0.36 0.03

Tax on spending of aviation 0.11 0.16 0.27 0.03 employees and employees of aviation supply chain

Total tax contribution 0.48 0.55 1.82 0.22

Employment in aviation Malaysia Thailand Singapore Philippines (in number of individuals)

Direct 35,000 79,000 58,000 44,000

Indirect 42,000 185,000 35,000 42,000

Spending of aviation 25,000 130,000 27,000 36,000 employees and its supply chain

Contribution from aviation 102,000 394,000 120,000 122,000

Contribution to tourism 243,000 1,802,000 78,000 751,000

Note: Based on 2009 data. Source: Compiled from Aviation Benefits Beyond Borders (2011), at http://www.aviationbenefitsbeyondborders. org/around-the-world/asia-pacific (last accessed 30 September 2013)

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IV. Lifting the Barriers to Liberalisation

A. Barrier #1. Several Member States Have Not Yet Accepted the ASEAN Agreements and Protocols From Table 3 above, it can be seen that several ASEAN member states have yet to accept (or in legal language, to “ratify” or to become “contracting parties” to) the relevant Protocols of the ASEAN multilateral agreements. The Protocols contain the actual substantive commitments for market access and ownership and control relaxations. All the Protocols have now entered into force and are binding, though only for those member states which have ratified them. Hence, if all ten ASEAN member states were to ratify all the Protocols, an unlimited third, fourth and fifth freedom regime between and among all international points in ASEAN will come into full effect.

As noted in Table 3, the member states’ ratification status is as follows:

2009 Multilateral Agreement on Air Services (MAAS)

Protocols 1 to 4 for the liberalisation of flights between and among sub-regions Ratified by all 10 member states

Protocol 5 for the liberalisation of third and fourth freedom flights between the capital cities Ratified by all member states except for Indonesia and the Philippines

Protocol 6 for the liberalisation of fifth freedom flights among the capital cities Ratified by all member states except for Indonesia and the Philippines

2010 Multilateral Agreement for the Full Liberalisation of Air Passenger Services (MAFLPAS)

Protocol 1 for the liberalisation of third and fourth freedom flights among all cities Ratified by all member states except for Indonesia and Lao PDR

Protocol 2 for the liberalisation of fifth freedom flights among all cities Ratified by all member states except for Indonesia and Lao PDR

2009 Multilateral Agreement for the Full Liberalisation of Air Freight Services (MAFLAFS)

Protocol 1 for the liberalisation of flights among designated points Ratified by all member states except for Indonesia

Protocol 2 for the liberalisation of flights among all points with international airports Ratified by all member states except for Indonesia

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The individual states’ motivations require elaboration. The main non-contracting party is Indonesia. Spanning 17,000 islands and home to nearly half the entire ASEAN population, Indonesia has the region’s largest land area, population, economy and air travel market. Its capital, Jakarta, is ASEAN’s biggest city by population and also the headquarters of the ASEAN Secretariat. Given its size and influence, Indonesia’s non-acceptance of the ASEAN agreements substantially affects the entire ASAM project.

One explanation for Indonesia’s position is its carriers’ lobbying of their government to continue protecting their international operations against those of competitor airlines from neighbouring ASEAN states. Through the Indonesian National Air Carriers Association (INACA), the local carriers have (particularly in the recent past) opposed efforts to open up the ASEAN air travel market entirely. As explained below, the situation could be different today.

INACA’s traditional concern lies with the stronger airline competitors from the other ASEAN member states, principally Singapore and Malaysia, whom they fear will dominate the international market between Indonesia and these countries. The Indonesian position is that as a huge archipelago, it has hundreds of points to offer international aviation, whereas the other states have relatively fewer to offer (indeed, Singapore has all of one!). In INACA’s view, this represents a systemic imbalance for exchanging traffic rights.

In recent years, such dynamics have led the Indonesian government to propose only five points for an “open skies” policy with its neighbours - the major cities of Jakarta, Surabaya, Medan, Makassar and Bali. At the same time, there have been calls by INACA to implement a selective or “partial” open skies policy with some ASEAN neighbours, even if full “open skies” can be accepted and implemented with others. This suggests that access into the five cities can be fully or partially open, depending on where the foreign carrier is from. Naturally, such a “pick and choose” policy is inconsistent with the ASEAN multilateral agreements and the overall integration aims of ASAM and the ASEAN Economic Community (AEC).

In itself, the offer of the five major cities is to be welcomed, as long as it applies equally to all ASEAN member states and their airlines. Even if falling short of full relaxations, it will effectively open up a sizeable amount of the international market into and out of Indonesia. This is because the five cities (particularly the capital, Jakarta) account for the bulk of international traffic into and out of the country.

However, the reality is that some interests in Indonesia remain opposed to full and unlimited access into Indonesia for foreign carriers, especially those from Singapore and Malaysia. This is consistent with the “partial” or selective open skies policy advocated by INACA. In large part, the concern revolves around the sixth freedom operations of certain foreign airlines. The “sixth freedom” is actually a simple combination of a “fourth freedom” (e.g. a Singapore carrier’s Jakarta-Singapore operation) with a connecting “third freedom” operation (from Singapore to anywhere else). This is the familiar operating model of major “sixth freedom” carriers worldwide such as Singapore Airlines, Emirates, Etihad, KLM, Korean Air, Turkish Airlines and Qatar Airways.

In essence, “sixth freedom” hub operations depend simply on two factors – a geographically strategic “hub” airport in the centre of airline routes to serve as a transit stop, and unlimited third and fourth freedom rights to operate to numerous “spoke” points. Due to the Indonesian carriers’ relatively limited international operations, most travellers from Europe, North America and Northeast Asia travel into and out of Indonesia on foreign carriers’ sixth freedom operations. The major operator in this regard is

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Singapore Airlines, which channels these travellers through its hub at Singapore Changi Airport. In recent years, the highly successful Malaysian LCC, AirAsia, has also begun to transport the budget-minded segment of travellers in this same manner through its hub at Kuala Lumpur International Airport.

The discomfort with such sixth freedom operations accounts in part for Indonesia’s cool reception toward the ASEAN multilateral agreements. This extends to MAAS Protocol 5 that opens up unlimited third and fourth freedom access into and out of Jakarta (although, as flagged below, such reluctance may be dissipating as Indonesian carriers themselves expand their operations across the region). Since third and fourth freedom flights form the backbone of sixth freedom operations, staying out of MAAS Protocol 5 could be seen as a strategy to restrict rival carriers’ sixth freedom operations into and out of Jakarta, and with that, the rest of the country.

For the Indonesian carriers, Jakarta itself may be too big a prize to give up even if it constitutes only one point in the sprawling archipelago. Indeed, Jakarta accounts for the bulk of the Indonesian economy and is the principal gateway into the country. At the same time, opening up the other points will allow foreign carriers to bypass the main hub at Jakarta and to carry unlimited traffic directly into secondary points such as Bali, Surabaya, Medan and Lombok. This will affect the business of local airlines that thrive on domestic connecting traffic. This has long been a concern of Indonesian carriers, and it explains their resistance to MAFLPAS, the agreement that opens up the non-capital cities.

Such considerations shape the Indonesian government’s traditional preference for bilateral, instead of multilateral agreements. In turn, this has had the effect of restricting the other ASEAN carriers’ operations into Indonesia, subjecting them to finite capacity that has to be negotiated bilaterally. At the same time, the Indonesian position affects the ASAM liberalisation project significantly. In the process, the travelling public misses out on concrete benefits such as increased competition and lower fares. In addition, Indonesia’s connectivity to the region and the outside world remains relatively low.

The airlines’ lobbying influence has to be contrasted with the position of other stakeholders in the Indonesian economy. As might be expected, sectors such as the tourism industry greatly welcome the economic advantages that air services liberalisation might bring. Indeed, the benefits of such liberalisation for the overall Indonesian economy are obvious – greater choice and lower fares for the travelling public and cargo exporters, increased business and tourist arrivals, and positive overall effects for export-oriented businesses, inward foreign investment, airport and ancillary services and indeed, the entire economy (see Part III above on Benefits of Liberalisation).

In recent years, several provincial governments in Indonesia have also emerged as keen lobbyists to champion direct flights by foreign airlines into their cities. These provincial authorities recognise that tourism and foreign investment could grow faster if there were greater direct connectivity to key regional cities such as Singapore, Bangkok and Kuala Lumpur. Indeed, a recent economic study commissioned by the Indonesian central government and published by the Indonesia Infrastructure Initiative (IndII) (see Part III above) had identified benefits of around 6 trillion Rupiah (US$650 million) in additional GDP that could potentially accrue to the overall economy if an “open skies” policy were adopted by 2025.

As indicated above, the neighbouring states’ efforts to relax market access into Indonesia have had to be pursued bilaterally. For instance, up till early 2013, the Singapore carriers’ passenger capacity entitlement between Singapore and Indonesia (especially

24 Lifting-the-barriers REPORT: AVIATION

Jakarta) was close to being exhausted. However, in January 2013, both sides came to an agreement to increase capacity substantially on the routes between Singapore and Jakarta as well as other points such as Surabaya, Bali and Medan.

The Indonesian government had agreed to such reciprocal but incremental additions only after capacity on the Indonesian side had itself come close to being reached. This followed the requests by several Indonesian carriers, particularly LCCs such as Lion Air and Indonesia AirAsia, to expand their operations into Singapore from various Indonesian points. In turn, the reciprocal adjustments allowed Singapore Airlines and Singapore-based LCCs such as Tigerair and Jetstar Asia to increase their own operations into Indonesia, including Jakarta. While capacity has now been significantly increased between Indonesia and Singapore, there are still overall limits that remain controlled by the bilateral agreement between both sides.

Overall, despite Indonesia’s traditional stance toward liberalisation, the recent capacity revision with Singapore indicates some positive signs. It shows that the Indonesian carriers are likely to support (or not object to) capacity increases for foreign carriers when they themselves come close to exhausting their own capacity limits to fly to other states. Indeed, the Indonesian carriers are expanding their services rapidly across the region, showing a capability and willingness to compete with their regional rivals. Lion Air has even established a subsidiary, Malindo, in Malaysia, taking the challenge to the doorstep of its rival, AirAsia. In essence, Lion Air is seeking to penetrate AirAsia’s home market the same way the latter has entered Indonesia, its own market. Another subsidiary, Thai Lion Air, is scheduled to commence operations in Thailand in late 2013. Lion Air is thus seeking to replicate AirAsia’s success with Indonesia AirAsia and its other joint venture subsidiaries in the region.

Such expansions – particularly in light of the huge aircraft orders that airlines like Lion have made – can only be made possible through greater reciprocal liberalisation of market access rights among ASEAN member states. In other words, the Indonesian carriers will themselves need and benefit from greater ASEAN liberalisation. In the light of such developments, there are encouraging signals that Indonesia’s policy on the ASEAN agreements could be evolving. Indeed, the Indonesian government is reportedly considering the ratification of MAAS Protocols 5 and 6. When this happens, it will be a huge boost for the ASAM project and the entire region.

Meanwhile, the Philippine government has embraced MAFLPAS Protocols 1 and 2 to open up access to its secondary cities. At the same time, it has kept its capital Manila restricted and has not accepted MAAS Protocols 5 and 6. The government justifies its decision by reference to the shortage of landing and take-off slots and overall runway congestion at central Manila’s Ninoy Aquino International Airport. In this regard, the government’s preference is to liberalise access into the alternative airport at Clark, the former U.S. airbase that is some 80 kilometres northwest of downtown Manila. Indeed, access into Clark has been fully open to carriers from other ASEAN states for some years now.

While the Philippine government’s concern over congestion at Ninoy Aquino International is understandable, its attempt to link traffic rights and airport slots is problematic. Indeed, these are separate matters that should be kept distinct. In particular, the lack of slots at an airport should not prevent member states from ratifying the ASEAN agreements to liberalise market access rights and to signal support for ASEAN’s market integration commitments. Linking slots to access rights is also a negative precedent in that it encourages air rights negotiators to use congestion and lack of airport slots (which may be within the competence of other government agencies) as reasons to delay their commitment to regional agreements. 25 Lifting-the-barriers REPORT: AVIATION

On its part, it is unclear why Lao PDR has not ratified MAFLPAS and its Protocols 1 and 2. It is likely that internal consultations are still ongoing within the Lao government and that ratification will happen soon. It should be noted that Cambodia has very recently in 2013 submitted instruments of ratification for MAFLPAS and Protocols 1 and 2, becoming the latest member state to accept these agreements.

As for the liberalisation of air freight (cargo) services, this is considered an equally critical component of the regional economic integration effort, given the export-oriented nature of ASEAN economies. It is generally the case that states are less sensitive to foreign carriers’ air freight operations compared to passenger services. For one thing, governments tend to care less about how their exports arrive at destinations, as long as the cargo is transported efficiently and at reasonable cost. At the same time, there is much less political or sentimental attachment associated with the transport of cargo. Typically, air freight services can also be conducted during off-peak hours (indeed, usually at night), thereby relieving airport and slot congestion problems.

Yet, this does not mean that all states readily grant unlimited market access for foreign cargo carriers. As with air passenger transport, the nature and dynamics of airline competition are hugely relevant. It must be noted that the relevant ASEAN multilateral agreements - the MAFLAFS and its Protocols - apply to all-cargo transportation only, i.e. carriage on dedicated cargo aircraft or freighters. Like with passenger services, the third, fourth and fifth freedom relaxations apply to carriage wholly within ASEAN only, and not to points outside the region or domestic carriage within a member state.

MAFLAFS Protocol 1 provides for unlimited third, fourth and fifth freedom all-cargo traffic rights between specific points designated by member states. Protocol 2 frees up similar rights for all points in ASEAN with international airports. Consistent with the less controversial nature of cargo transport, MAFLAFS grants unlimited fifth freedom rights along with third and fourth freedom rights. This contemplates the reality of air freight services - cargo flights typically operate from Points A to B, and onwards to C, D, E and so on, without strict requirements on returning to the carrier’s home states (unlike passenger operations). At each point along the route, there are typically minimal or no capacity restrictions on discharging and picking up cargo.

In ASEAN, there are only several all-cargo carriers that operate dedicated freighters. These include the cargo arms of Singapore Airlines, Malaysia Airlines and Thai Airways, as well as specialised cargo carriers that can be found in several member states. Both types of specialised all-cargo operators provide competition to the regular airlines that carry cargo in the holds of their passenger aircraft (the so-called “combination carriers”). The fact that Indonesia has not accepted the MAFLAFS Protocols reflects its carriers’ concerns that the extensive all-cargo operations of neighbouring countries’ carriers affect their own cargo business. These Indonesian carriers include regular airlines like Garuda (operating combination carriers) as well as specialised cargo airlines such as Cardigair, Tri MG and Republic Express.

Recommendations to Lifting-The-Barriers Lifting the barriers here is relatively straightforward. The ASEAN Secretariat, the member states’ governments as well as the region’s airlines must continue to engage the Indonesian government and its carriers to encourage them to accept all the ASEAN agreements and the associated Protocols. The following steps can be taken:

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i. asean member states and their airlines should facilitate Indonesian carriers to grow operations into their points. As far as possible, member states’ carriers should assist Indonesian carriers in technical and other forms of assistance, and accede to reasonable requests for code-sharing, joint operations and any other form of co-operation. In particular, efforts by Indonesian carriers to establish joint venture subsidiaries in other ASEAN member states should be welcomed. Overall, it is only when Indonesian carriers come close to exhausting their own capacity limits to other states that they are likely to support foreign carriers’ capacity increases into Indonesia. In this regard, there are encouraging signs that Indonesia is considering whether to accept MAAS Protocols 5 and 6 that provide for unlimited third, fourth and fifth freedom capacity between the capital cities. ii. the region’s airlines should also directly engage the provincial governments in Indonesia to convince them that their economies will benefit if they have greater direct connectivity to key regional cities. To this end, technical development studies funded by overseas aid agencies should emphasise local benefits more, instead of concentrating only on benefits for the entire national economy. iii. asean member states, their airlines and their business leaders should step up efforts to engage other sectors of the Indonesian economy (apart from airlines) such as the tourism, foreign investment and commodity export sectors. This is to impress on these stakeholders the benefits of a liberalised policy affording unlimited third, fourth and fifth freedom international access for foreign carriers. iv. steps should also be taken to engage the Philippine and Lao PDR governments to find out what obstacles they face in ratifying the relevant protocols to the multilateral agreements, and to extend assistance if required. In particular, the Philippine government and airline industry should be encouraged to drop any linkage between market access rights and airport slot capacity as the two matters should be left distinct.

B. Barrier #2. Seventh Freedom and Domestic Operations Remain Prohibited If the relatively modest third/fourth and fifth freedom relaxations analysed above do not even enjoy full acceptance from all ASEAN member states, prospects are even bleaker for any further relaxations to “seventh freedom” and cabotage restrictions. The seventh freedom refers to the right of a carrier to connect two international points outside of its home country (e.g. Thai Airways to connect Manila and Jakarta without the flight having to begin or end in Thailand).

A true single or common aviation market such as that which exists in Europe liberalises such seventh freedom operations fully and opens the door for greater market competition throughout the region. For instance, British Airways can now base a stand- alone plane or fleet to operate between Paris and Frankfurt if it wants to, without the flight having to begin or end in the U.K. (unlike fifth freedom flights which still have to). Of course, such operations will provide competition to the third and fourth freedom operations of the French and German airlines on that route, but it is the precise objective of a common market to allow such competition. The fact that British Airways has not chosen to mount such flights is because the Paris-Frankfurt market is too competitive, and not because governments prohibit that operation. Hence, the aim is to let the market, not governments, act as a control.

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With ASEAN, however, the multilateral agreements do not even address such seventh freedom operations explicitly since the member states have not achieved consensus on the issue. Similarly, the ASEAN agreements do not tackle the domestic or “cabotage” operations. These are also known in the industry as the “eighth freedom” (if the flight originates in the carrier’s home country, e.g. a Singapore carrier operating Singapore- Jakarta-Bali as a continuing flight) and the “ninth freedom” (the Singapore carrier operating stand-alone flights between Jakarta and Bali without starting or ending in Singapore).

Cabotage remains highly sensitive for countries with large domestic populations. Typically, such operations are reserved exclusively for local airlines. Hence, in the ASEAN countries, no foreign airline - not even from friendly fellow ASEAN member states - can perform domestic flights, and most governments prefer to maintain that status quo. In contrast, the E.U. single or common market allows any E.U. carrier to operate what were previously considered cabotage flights. Hence, Air France can operate between Frankfurt and Berlin (both domestic points within Germany) if it wishes to.

As a result of the prevailing restrictions, the ASAM objectives are fairly modest: market access relaxations stop with the third, fourth and fifth freedoms, and do not extend to the seventh, eighth and ninth freedoms. Consequently, AirAsia (as a Malaysian carrier) cannot base a fleet in Singapore to ply routes between Singapore and third countries as these would be seventh freedom operations that compete head-on with the Singapore carriers. Neither can AirAsia operate between two domestic points in Indonesia. How does this explain AirAsia’s well-known operations in Thailand, Indonesia and the Philippines that allow it to operate from and even within these countries?

What happens in reality is that AirAsia has incorporated subsidiaries in those countries that are technically local airlines. Each subsidiary carries a different airline code and is majority-owned and effectively controlled by local interests (at least on paper). Thus, AirAsia owns only minority stakes - less than 50% - in each of these entities. The result is that Indonesia AirAsia flies as an Indonesian carrier between Jakarta and Singapore, exercising simple third and fourth freedom rights belonging to Indonesia, and not as a Malaysian carrier (if it were, it would be operating a seventh freedom flight).

This is one operating model that industry players have effectively used to get around the governmental prohibitions. In substance, the model allows the AirAsia group to circumvent the seventh freedom prohibition (such operations are not allowed under the bilateral or multilateral agreements) and to effectively operate such flights out of their Bangkok, Jakarta and Manila hubs under a well-known common brand. For the travelling public that does not appreciate legal distinctions, all the AirAsia subsidiaries’ flights are run by a single airline company, particularly since ticket sales are conducted through a common and integrated internet platform. In addition, this operating model allows circumvention of domestic cabotage prohibitions as well - Indonesia AirAsia would be entirely within its right to operate domestic flights between Jakarta and Bali simply because it is an Indonesian carrier.

Recommendations to Lift the Barriers Seventh freedom and domestic operations are inherently controversial. Yet, the region’s liberalising momentum cannot stop with third, fourth and fifth freedom access alone as this will make the ASAM incomplete and ineffective (see Barrier #4 below for

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elaboration). Yet, securing agreement on seventh freedom and domestic carriage will be hugely difficult, given the member states’ instincts to protect their own carriers.

It must be remembered that ASEAN is unlike the European Union (E.U.), where there is an institutional mechanism for the European Commission to compel member states to adhere to Community law. There is no such mechanism in ASEAN, and it is probably unrealistic to conceive of one in the near future. Consequently, seventh freedom and domestic relaxations will have to be pursued in a gradual, phased manner using the traditional method of state agreements. i. Adopting a liberalised attitude toward fifth freedom operations

Seventh freedom operations need not entail stationing an entire, free-standing fleet in another state’s airport (e.g. Singapore Airlines placing a fleet in Kuala Lumpur to operate between that city and points in Thailand). While that would be a “pure” seventh freedom right, it is presently unrealistic to expect ASEAN member states to allow each other’s carriers that right. Moreover, such rights are not presently permitted under the terms of the ASEAN multilateral agreements.

however, within the present wording of MAAS Protocol 6 is the right of carriers to conduct fifth freedom operations linking capital cities in the region (there is similar wording in MAFLPAS Protocol 2 for linking the other cities). Consider the following operation by AirAsia (Malaysia) from Kuala Lumpur, Malaysia to Yangon, Myanmar via Singapore:

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RGN

KUL SIN

going by the terms of MAAS Protocol 6, the flight would be a legitimate capital- capital-capital fifth freedom operation among three contracting states, with discharge and pick-up rights in Singapore. Yet, because of the geography of the three cities involved, the aircraft would have to “backtrack” to Yangon after Singapore. The result is that it is highly unlikely for there to be many “through traffic” passengers who board in Kuala Lumpur, and who are actually bound for Yangon. The reality is that most, if not the entire planeload of passengers boarding in Kuala Lumpur, are bound for Singapore and will disembark there. A fresh planeload of passengers will thus get on board in Singapore, bound for Yangon.

the flight thus becomes an effective seventh freedom operation for AirAsia from Singapore to Yangon (and vice versa). Yet, nothing in MAAS and its Protocol 6 forbids this operation. In fact, there is even express language to the effect that designated airlines can fly between any of the permitted points (in this case, the three capitals) in any combination or order, without directional or geographic limitation, provided the service serves a point in the territory of the Contracting Party designating the airline (in this case, that point is Kuala Lumpur as Malaysia is the designating state). Neither is there any language to curtail the number of passengers that can be disembarked or picked up at the mid-point fifth freedom stop (i.e. Singapore).

hence, as long as the flight begins in Kuala Lumpur, the Singapore-Yangon sector can be characterised as a continuation of the service from Kuala Lumpur. There is even language in MAAS Protocol 6 that allows for a “change-of-gauge” (i.e. change of aircraft type) in Singapore and Yangon, although the capacity of both aircraft must be the same and the flight on the new aircraft must be a continuing service from or to the carrier’s home state.

as things stand, AirAsia has reportedly sought the authorisation of the Myanmar and Singapore governments to conduct the above operation. The governments are still undecided on authorising it because there are misgivings about the seventh freedom nature of the operation (seventh freedom not being allowed in the ASEAN agreements). The matter is now scheduled for formal discussion at the inter-governmental ASEAN Transport Working Group (ATWG) and the ASEAN Air Transport Economic Cooperation Sub-Working Group (ATEC). There is a prospect that the member states will deliver an interpretation of the agreements that effectively deems such flights as legitimate. If this eventuates, it will be a significant

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liberalising move that will herald in more flexible operations region-wide that are unconstrained by capacity, aircraft type and geographic directionality.

however, there is some risk to securing such a liberal interpretation of fifth freedom flights. It could make states like Indonesia and the Philippines become even more wary of becoming party to the ASEAN agreements. This is particularly because these states are geographically located at the periphery of ASEAN. Their cities will thus become natural markets for “back-tracking” operations, e.g. Singapore-Jakarta-Hanoi, Kuala Lumpur-Manila-Phuket or Bangkok-Surabaya-Yangon. Of course, this could be off-set by the prospect of carriers like Garuda and Lion Air performing similar operations throughout the region, although their scale would be much less significant.

Yet another example of an imaginative interpretation of fifth freedom rights is the following “triangular” operation that involves two aircraft:

HAN

BKK

SIN

taking a Thai carrier’s operations as the example, the first aircraft (route in red) departs Bangkok for Hanoi and then proceeds to Singapore, with fifth freedom pick-up rights in Hanoi. The second aircraft (route in black) departs Bangkok for Singapore and then Hanoi, with fifth freedom pick-up rights in Singapore. In effect, the Bangkok-Hanoi-Singapore sector is carried out by the first aircraft (in red) while the return journey on this very sector, i.e. Singapore-Hanoi-Bangkok is performed by the other aircraft (in black). This is a simple example where the change-of-aircraft flexibility allows the carrier to have more efficient aircraft utilisation. Hence, instead of eight individual return sectors (A-B, B-C, C-B, B-A, A-C, C-B, B-C, C-A), there are only six (A-B, B-C, C-A, A-C, C-B, B-A). Again, effective seventh freedom flights would arguably have been performed between Hanoi and Singapore. There are numerous other examples of such flexible operations being possible.

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ii. Gradual move toward allowing seventh freedom operations Moving forward, the next logical step is to plan for seventh freedom operations to be recognised explicitly. This should take the form of a subsequent and new ASEAN multilateral agreement to lay out this right clearly. Amending the current agreements might be too cumbersome. Consistent with ASEAN’s incremental approach, the following gradual and phased introductions can be considered:

a. First, by 2014 (as an immediate priority), for unlimited seventh freedom cargo rights within ASEAN

recognising the less sensitive nature of air freight services, ASEAN should move to provide unlimited seventh freedom rights for all-cargo services. Hence, an all- cargo carrier from Member State A should be able to mount services between a point in Member State B and a point in Member State C.

b. Second, by 2016, for seventh freedom rights to connect two hitherto unserved cities within ASEAN

the next step should be to provide for seventh freedom passenger services, but on a restricted basis. A carrier from Member State A should be able to mount a flight between a point in Member State B and a point in Member State C, as long as no scheduled carrier currently connects those two points. This will serve to allay the local carriers’ concerns. The relevant foreign carrier should have the flexibility of either placing an aircraft/fleet in either B or C (or both), and/or to serve the route as an extension from A (in the manner described above in the Kuala Lumpur- Singapore-Yangon operation). This is more likely to be the preferred operating model, since it is very costly to establish an entire fleet or hub in foreign points.

the benefit for Member States B and C would be that an otherwise “thin” or unserved route between them will be serviced without any costs falling on them or their carriers. Capacity should preferably be unlimited, but realistically, it may have to be restricted in the first instance to a daily flight, with a fixed timetable to move to unlimited capacity within a certain date (e.g. two years). To provide an incentive for local carriers, a code-share operation between the foreign carrier and local carriers in B and C should be instituted so that they can benefit from the arrangement.

c. Third, by 2018, for seventh freedom rights to connect any two non-capital cities within ASEAN

in a reversal from the usual practice of relaxing capital cities first, seventh freedom passenger operations should initially be extended to the non-capital cities. This is likely to be less controversial for member states. The same flexibility as in (b) above should be afforded to the foreign carrier, along with initial capacity restrictions moving to unlimited capacity ultimately. If an unrestricted list of cities is politically unacceptable, a possible compromise might be for each member state to list a number of cities for which such operations would be allowed (see the example of MAAS Protocols 1 to 4 and MAFLAFS Protocol 1).

d. Fourth, by 2020, for seventh freedom rights to connect any two cities within ASEAN, one or both of which are capitals

the final step would be to free up seventh freedom operations between a capital

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city and another, or between a capital and a non-capital city. The same flexibility as in (b) and (c) above should be afforded to the carrier, along with initial capacity restrictions moving ultimately to unlimited capacity. iii. Gradual move toward domestic carriage operations The most controversial move will involve the eighth and ninth freedoms, i.e. domestic cabotage operations. Here, some states may find liberalising these rights so politically contentious that agreement may not be possible. Yet, many domestic routes are thin and unprofitable for their incumbent operators. Indeed, some of these routes are “public service obligations” imposed upon carriers by their governments. If a foreign carrier can mount these flights at their own financial risk, there could be benefits for all parties concerned.

it may be tempting to avoid the issue of domestic carriage altogether. Indeed, this could be an option if it threatens to derail the seventh freedom negotiations altogether. At the same time, ASEAN must press on to foster some agreement on domestic carriage, for no true single aviation market can exist with domestic restrictions still in place. A gradual or phased approach can still be employed as follows:

a. First, by 2015, for eighth and ninth freedom cargo rights to connect all cities

Consistent with the earlier approach, a more liberal stance can be taken toward all- cargo operations first.

b. Second, by 2020, for eighth freedom passenger rights to connect two hitherto unserved cities

this approach will allow a carrier from a member state to serve two hitherto unserved cities within another member state, possibly with initial capacity restrictions. For instance, AirAsia (a Malaysian carrier) could be allowed to mount a flight from Kuala Lumpur to Pontianak in Indonesia and onward to Ambon (in eastern Indonesia) on a restricted eighth freedom basis, provided that the two cities are not already directly served by existing carriers on a scheduled basis.

c. Third, by 2022, for eighth freedom passenger rights to connect all cities.

this will allow eighth freedom for all routes, but with possible conditions attached. Some of these may relate to capacity (e.g. one flight a day), or to the pricing (the minimum economy fare charged by the foreign carrier on the domestic leg of the sector to be no less than the lowest available rate in the market). Such pricing regulations may be necessary to protect the relevant member states’ incumbent domestic airlines from under-cutting by the foreign carrier.

d. Fourth, by 2025, for ninth freedom passenger rights to connect two hitherto unserved cities

this would be true cabotage, the ability to connect two internal points. The relaxation could start with two cities hitherto unconnected by a direct scheduled flight. Even then, this may be too contentious for states like Indonesia, the Philippines and Vietnam, and may have to be pursued at a much later stage. Again, if it threatens to derail negotiations for seventh freedom rights, an “opt- out” provision could possibly be provided for states to exclude ninth freedom

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operations, at least for a period of time. Alternatively, such operations could be pursued as a joint venture with local airlines or partners offering shareholding stakes (as has been done by Indonesia AirAsia and Thai AirAsia). As such, the sensitive issue of cabotage may be best left to joint venture “ownership and control” rules to handle (see below).

e. Fifth, by 2030 for ninth freedom passenger rights to connect all cities

by 2030, the cabotage restrictions should be lifted for all cities. Before then, member states may be given the discretion to exclude capital cities, but the exclusion should last only for a fixed period like two years.

C. Barrier #3: Ownership and Control Restrictions Remain The previous sections have analysed how airlines like AirAsia have circumvented (to some extent) the seventh freedom prohibition by establishing joint venture subsidiaries with minority stakes in other ASEAN member states. Such strategies remain less than ideal as AirAsia has had to accept a minority shareholding in each subsidiary instead of operating in its own name and right. In other words, the vehicle of setting up joint venture subsidiaries with minority shareholding is an imperfect “stop-gap” measure.

In this respect, it is clear that market access issues are closely related to ownership and control restrictions. On top of prohibiting seventh freedom and domestic operations by foreign carriers, the current restrictions in ASEAN also prohibit carriers like AirAsia from going into other member states either to establish a wholly-owned subsidiary or to buy over an existing local airline fully. In comparison, these moves are permitted in the E.U. common aviation market: any E.U. airline or individual can move into another E.U. country to establish a fully-owned airline there, and to fly it between any two points within the E.U., including domestic points within the same country. In essence, both market access and ownership and control are wholly freed up, forming the hallmarks of a true single or common aviation market.

In most bilateral air services agreements between the individual ASEAN states, it is a common condition that carriers designated by the respective governments to enjoy the relevant market access rights must be “substantially owned and effectively controlled” by the designating state and/or its nationals. This typically means that foreign interests’ stakes in local carriers cannot exceed 49% of shareholding. In some states like the Philippines, the foreign ownership component is even stricter – no foreign interest can own more than 40% of shareholding in a Philippine carrier.

As a result of such restrictions, airlines such as AirAsia have had no choice but to establish local subsidiaries - Thai AirAsia, Indonesia AirAsia and Philippines AirAsia - that are technically separate from the parent carrier. Other airline groups have set up subsidiaries using the same model: these include Jetstar Asia in Singapore, Jetstar Pacific (Vietnam), Tiger Mandala (Indonesia), Tiger Philippines (Philippines), Cambodia Angkor Air (Cambodia) and Malindo (Malaysia). All are majority-owned by their respective local owners with the parent airline groups holding only minority stakes. In this sense, they have all scrupulously copied the pioneering AirAsia model and are wholly faithful to the requirement of majority local ownership. These carriers also utilise the operating rights found in the relevant home country’s bilateral agreements with other countries.

At the same time, the requirement of “effective control” is less clear. On the one hand, the CEOs of these subsidiary carriers are individuals with local nationality, and their

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respective boards have majority local representation. Yet, there is little doubt that managing expertise and strategic decisions do emanate from the parent foreign airline that is the minority owner. This is particularly because the local majority shareholders typically have no aviation experience. In terms of branding, the overseas subsidiaries share the same logo and branding identity as their parent carriers’. For instance, the entities in the AirAsia and Jetstar groups are effectively marketed to the traveling public as single airlines through advertisements and on common internet booking platforms. As analysed earlier, this effectively gives the parent airlines seventh freedom rights and multiple hubs in several countries. However, the drawback is that the parent airlines have to be content with minority ownership in the subsidiaries.

How have the two ASEAN multilateral agreements sought to deal with these ownership and control restrictions? Notably, MAAS, MAFLPAS and MAFLAFS all provide alternatives to the traditional “substantial ownership and effective control” rule. Specifically, they provide that contracting state parties have the right to designate an unlimited number of carriers to enjoy the relevant market access rights, provided they fulfill the following criteria on ownership and control:

(a) substantial ownership and effective control of the airlines are vested in the designating state, its nationals or both [Article 3(2)(a)(i) of MAAS, MAFLPAS, MAFLAFS]; or

(b) subject to the acceptance of the contracting party receiving the application of a designated airline, the airline is incorporated in and has its principal place of business in the designating state, and is (and remains) substantially owned and effectively controlled by one or more member state and/or its nationals, and the designating state has and maintains effective regulatory control [Article 3(2)(a)(ii) of MAAS, MAFLPAS, MAFLAFS]; or

(c) subject to the acceptance of the contracting party receiving the application of a designated airline, the airline is incorporated in and has its principal place of business in the designating state, and the designating state has and maintains effective regulatory control of that airline, provided that such arrangements will not be equivalent to allowing airline(s) or its subsidiaries access to traffic rights not otherwise available to that airline(s) (Article 3(2)(a)(iii) of MAAS, MAFLPAS, MAFLAFS).

The first alternative is the traditional “substantial ownership and effective control” formula that adds nothing new to the existing bilateral agreements’ status quo. The second formula (Article 3(2)(a)(ii)) retains the substantial ownership and effective control requirement but provides that this can be met by “one or more member state and/ or its nationals”. This establishes the framework for what can be termed the “ASEAN community carrier”, whereby an airline can be substantially owned and effectively controlled by ASEAN interests, taken cumulatively or in the aggregate. This concept will allow carriers to attract capital infusions and management expertise from more sources across ASEAN, and will provide greater incentives for ASEAN investors to establish new airlines or recapitalise existing ones across the region. In theory, it will benefit the less developed ASEAN countries that face challenges in raising sufficient domestic capital for their carriers.

Following the concept, a carrier registered in and designated by Myanmar could have 20% of its shares owned by Singapore interests, 20% by Thai interests, 11% by local Myanmar interests, with the remaining shares owned by investors of any nationality

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whatsoever (even non-ASEAN). In fact, there need not even be any Myanmar interests, as long as the majority shareholding is in ASEAN hands. The carrier can thus be recognised under the ASEAN agreements if it is incorporated in and has its principal place of business in Myanmar and is also effectively controlled by the ASEAN interests in the aggregate. In addition, it must explicitly come under the effective regulatory control of the Myanmar aeronautical authorities for safety, security and other regulatory matters.

The concept thus distinguishes between “effective economic control” and “effective regulatory control”. While the latter must remain solely with the designating state to ensure optimal compliance with safety, security and other important regulatory matters, effective economic control, along with substantial ownership, may reside with non- nationals as long as they are from ASEAN. Hence, what the ASEAN agreements have done is to allow substantial ownership and effective economic control to be spread out regionally among one or more member state and/or its nationals. This takes the liberalisation process one step forward in that it allows for community majority ownership and control.

What is problematic, though, is the qualification in the agreements that a contracting party receiving the application of such a designated carrier must accept or approve before the carrier can operate to that party (i.e. to exercise market access rights). This means that a carrier established following the community ownership and control model does not possess the certainty that it can fly into all member states in the region. This will be a great disincentive for any investor thinking of constituting an airline as such, unless a number of ASEAN member states with major markets first declare their unequivocal approval for such a model.

On its part, the third alternative formulation in Article 3(2)(a)(iii) envisages that a carrier need not even have substantial ownership and effective economic control reposed within the region (nor by implication, its designating state), as long as it is incorporated in and has its principal place of business in the designating state. That state must also have and maintain effective regulatory control over the airline. Hence, this is the most progressive or liberal of the three options. It opens up the intriguing possibility that an airline in ASEAN could be owned and economically controlled by interests from even outside the region.

However, this possibility comes with two major qualifications. One is that each contracting party receiving the airline’s application must approve its operations. This is similar to the condition applicable to the “community carrier” discussed above. The other condition relates to the requirement that the arrangement will not be equivalent to allowing airlines or its subsidiaries access to traffic rights not otherwise available to them. This appears to reflect a concern that foreign airlines from outside the region must not be allowed to buy into an ASEAN carrier and begin using it to access intra-ASEAN routes for which they (the foreign airlines) have no underlying rights. It is likely that this formulation will effectively end up facilitating investment by foreign non-airline interests only.

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Recommendations to Lift the Barriers The traditional “substantial ownership and effective control” requirement presents two clear barriers: (i) ASEAN nationals can only establish an airline in another member state if they are prepared to accept minority shareholding using the joint venture model; and (ii) ASEAN airlines cannot take over each other or merge across borders the way E.U. airlines like Air France-KLM and Lufthansa-Swiss have been able to. The obvious way forward is for ASEAN member states to accept the ASEAN community carrier concept fully. The following recommendations can be made to lift the ownership and control barriers:

i. ASEAN community carrier to be embraced; states can opt-out for own carriers

The ASEAN community carrier concept will enable national ownership and control requirements to be abolished, and allow full ownership and control of airlines by all ASEAN nationals. At the same time, this means that ASEAN airlines can take over and merge with each other, as long as the resulting majority ownership and control still reside in ASEAN hands. However, in several ASEAN member states, the idea of local carriers becoming owned and controlled by foreign interests (even if these are from within ASEAN) is politically unacceptable. The solution to this is straightforward: if some ASEAN member states are uncomfortable with the ASEAN community carrier, they should be able to opt out of the concept for their own carriers, without affecting carriers from other ASEAN member states that wish to adopt this model.

as things stand under the three ASEAN multilateral agreements, any investor who wishes to have certainty would be wise to “play safe” and comply with the traditional substantial ownership and effective control rule. This is because the investor has no certainty that any community carrier will be allowed to fly to other member states. Indeed, it is telling that no carrier has thus far been established in ASEAN using a community carrier model. All the established joint venture subsidiaries (e.g. Philippines AirAsia, Malindo, Tiger Mandala, Tiger Philippines, Jetstar Pacific and Cambodia Angkor Air) have foreign airline groups holding only minority stakes. Similarly, the new airlines that have been recently announced also have airlines from other member states owning only minority stakes, e.g. Thai Vietjet Air (minority-owned by Vietnam’s Vietjet Air), Thai Lion Air (Indonesia’s Lion Air) and Cambodian Airlines (Philippine Airlines). In practice, the liberalising vision of the “community carrier” model has not been achieved.

an “opt-out” regime would mean that member states can continue to apply the traditional ownership and control rule to their own carriers, while recognising that airlines from other member states can be set up as community carriers. In other words, the individual member states’ discretion to deny access rights to other member states’ community carriers should be removed. Although far from ideal, such compromises reflect the political realities and challenges in ASEAN. In the longer term, the “opt-out” provision should be phased out as it is fundamentally contrary to the objectives of an ASAM. A true single aviation market (similar to the E.U.’s) should have common ownership and control requirements applicable to all carriers across the region and treating all ASEAN nationals equally. The recommended timeline for establishing such common requirements would be the year 2025.

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ii. Effective economic control with nationals of designating state

Another possible compromise could be to allow majority ownership to be constituted in a community carrier manner, but to retain effective economic control with the designating state’s nationals. This can be achieved by having these nationals form the majority of the carrier’s Board. In addition, it can be stipulated that the Chairman and CEO must be nationals of the designating state. Such requirements will provide the assurance of close and continuing economic links between the carrier and its designating state, even as majority ownership is spread out among ASEAN interests. Again, this arrangement should only be temporary and should end by 2025, when effective economic control should be allowed to be reposed in the hands of ASEAN nationals taken cumulatively.

D. Barrier #4: The Competitive Threat from Non-ASEAN Carriers For now, the three multilateral agreements - MAAS, MAFLPAS and MAFLAFS - form the “high points” of ASAM liberalisation in the region. In light of the above market access and ownership/control barriers, the “single” aviation market envisaged by ASEAN is clearly an unfinished piece of work. In fact, it risks being “single” only in name. In the long term, this shortcoming can potentially create disadvantages for ASEAN carriers’ competitiveness vis-à-vis those from outside the region. In particular, the effect of failing to achieve complete intra-regional liberalisation becomes evident when ASEAN, as a group, enters into deals with countries outside the group.

Such disadvantages have already arisen in the landmark ASEAN-China Air Transport Agreement (ATA) that was adopted in 2010 between the ASEAN states, on the one hand, and China, on the other. In essence, the problem is that the ASEAN member states concluded the ATA with China before they achieved internal liberalisation of their own air services market. The ATA and its Protocol 1 provide for unlimited third and fourth freedom access for airlines from both sides, effectively superseding the relevant bilateral agreements that exist between the individual ASEAN state parties and China. Hence, all airlines from the ASEAN state parties - currently Singapore, Malaysia, Thailand, Myanmar and Vietnam - now have unlimited third and fourth freedom access and capacity into points in China, with the exception of Hong Kong, Macao and Taiwan (points excluded by the Chinese side). Reciprocally, the Chinese airlines have similar unlimited third and fourth freedom access between China and points in the relevant ASEAN states that are parties to the ATA and Protocol 1.

Table 5. Ratification Status of the 2010 ASEAN-China Air Transport Agreement Protocol 1: Third ASEAN-China ATA Protocol 2: Fifth Freedom & fourth freedom (Parent Agreement) between selected cities between all cities Brunei [ X ] [ X ] Cambodia [ X ] [ X ] Indonesia [ X ] [ X ] Lao PDR [ X ] [ X ] Malaysia a a Myanmar a a Pending adoption (possibly December 2013) Philippines [ X ] [ X ] Singapore a a Thailand a a Vietnam a a China a a

Source: ASEAN Secretariat.a denotes state party, [ X ] denotes non-state party 38 Lifting-the-barriers REPORT: AVIATION

As shown in Table 5, the ASEAN-China ATA and its Protocol 1 are today already in force among China, Singapore, Malaysia, Thailand, Myanmar and Vietnam. The remaining five ASEAN countries have the option to accept the ATA whenever they feel ready. The near-term advantage for the ASEAN state parties’ airlines is significant. They now have unlimited penetration into all of China, with the exception of the three excluded points. Following from this new agreement, the Singapore, Malaysian and Thai carriers have lost little time in launching flights to new Chinese destinations. Examples include Silkair (Wuhan, Changsha), Scoot (Tianjin, Shenyang, Qingdao), Thai AirAsia (Wuhan), AirAsia (Beijing, Kunming, Nanning) and most recently, AirAsia X to Shanghai Pudong. The only limitation now relates to slot restrictions, prevalent at major Chinese airports such as Beijing Capital.

However, the reality is that there will be long-term systemic disadvantages for the ASEAN carriers. This is because under the ATA’s third and fourth freedom regime, these ASEAN carriers can only operate to the Chinese points from points in their own territory. Hence, the Singapore carriers can only operate to China from Singapore, and not from other points in ASEAN. Similarly, the Thai carriers have unlimited access into China, but only from points in Thailand. To connect China from other ASEAN points outside the airline’s home country requires the grant of seventh freedom rights among the ASEAN member states themselves, something they have not yet contemplated. On their part, the Chinese carriers can effectively connect any point in their backyard (which is, after all, a unified market) with any point in the ASEAN member states that accept the ATA and Protocol 1. Hence, if all ten ASEAN states eventually accept these agreements, the Chinese airlines will still remain the only carriers that can truly connect any point in China with any point in ASEAN.

This presents a serious network imbalance, one that ultimately stems from the ASEAN member states’ own inability or unwillingness to treat themselves as a true single or common market. The dilemma is symptomatic of the broader trading dynamics between any group of smaller states and a larger, unified market. In this regard, smaller states will always find themselves disadvantaged in their trading relations with bigger partners unless they forge a unified, common position to balance the other’s weight. Politically, this will not be straightforward as it entails states having to place the region’s long-term interest above their own individual interests. Within the group of smaller states, there will naturally be “winners” and “losers” among their carriers. However, in the face of bigger challenges from without, there is little other choice but to accept this reality.

These were exactly the same dynamics that the Europeans countries faced in their aviation relationship with the United States. Indeed, that was the reason why the European Commission brought the E.U. member states before the European Court of Justice in the 1990s to compel them to establish a common aviation market. The Commission eventually prevailed, and the result today is a new E.U.-U.S. Air Transport Agreement that allows all E.U. airlines to operate from any E.U. point to any U.S. point if they want to. Thus, Air France can fly between London Heathrow and the U.S. if it wishes to (and if it can find slots at Heathrow, a separate matter altogether). This had previously been regarded as a prohibited “seventh freedom” operation but it is now possible with the E.U. treating itself as a common market. At the same time, the E.U. carriers can now take over each other or merge among themselves as they have secured the U.S.’s recognition of all E.U. majority-owned carriers.

For ASEAN, the E.U. lesson is wholly relevant and applicable. The member states must similarly band together before they can take on the likes of bigger, unified markets such as China. In fact, there are now talks between ASEAN and India, Japan and Korea,

39 Lifting-the-barriers REPORT: AVIATION

all of whom desire agreements similar to the ASEAN-China ATA. Yet, without having forged a true single market in their own backyard first, the ASEAN member states risk disadvantaging their own carriers in the long term, particularly as the Chinese and Indian airlines improve their networks, service standards and competitiveness.

A true single market in this regard must thus include seventh freedom rights, that basic market-enlarging feature that would enable the ASEAN carriers to treat their entire region as a common market. The reality, however, is that there is no body in ASEAN similar to the European Commission that can compel member states to place the collective regional interest above their own individual interests. For that reason, there is a real risk that the ASEAN carriers will end up seriously disadvantaged against their fast-growing competitors.

Meanwhile, ASEAN and China have concluded talks to adopt a second protocol to their ATA that grants unlimited fifth freedom rights. However, the lack of a united stand among the ASEAN member states and China’s own wariness of opening up its major cities for fifth freedom operations have resulted in a deal that is likely to be commercially insignificant. In particular, China’s discomfort with ASEAN carriers (particularly Singapore Airlines) conducting fifth freedom operations via China to external points such as in the United States or Europe has led it to exclude the three metropolitan centres of Beijing, Shanghai and Guangzhou from the so-called “external fifth freedom” deal.

With that, the draft Protocol 2 includes only 10 Chinese cities (mainly secondary ones) for the exercise of such fifth freedom rights (see Table 6 below). Even then, there is an upper limit or cap of 14 such weekly flights per country. In turn, the ASEAN countries, apart from Singapore and Brunei, have responded by offering their own secondary points for the deal, subject to the same weekly cap. The small markets between these ASEAN and Chinese secondary points mean that it is highly unlikely for any significant fifth freedom operations to be started in the near future. For instance, it is doubtful if there is sufficient traffic for Thai Airways to mount a Chiang Mai - Kunming - Los Angeles operation profitably, or for a Chinese airline to operate Chengdu - Lombok - Sydney.

Similarly, fifth freedom operations are restricted via an ASEAN intermediate point to China or beyond to another ASEAN point. This is the “internal fifth freedom” part of the deal, i.e. ASEAN- ASEAN-China or ASEAN-China-ASEAN operations. Such operations by an ASEAN carrier must begin from the relevant ASEAN secondary city, and may route through another named ASEAN secondary city, to a list of 28 Chinese secondary cities, and may go beyond China to yet another named ASEAN secondary city. Here, China has offered 28 points for the internal deal, beyond the 10 identified for external fifth freedom. There is also no weekly cap. Even then, the list of 28 cities excludes Beijing, Shanghai and Guangzhou. Again, there is probably not enough of a market to justify linking these cities to the ASEAN secondary cities. In short, Protocol 2 is unlikely to be commercially significant, and is reminiscent of the early ASEAN sub-regional arrangements (MAAS Protocols 1 to 4) that involve mainly secondary cities.

40 Lifting-the-barriers REPORT: AVIATION

Table 6. Points Offered for the ASEAN-China ATA’s Draft Protocol 2 on Fifth Freedom Rights

“External” Fifth Freedom “Internal” Fifth Freedom (e.g. ASEAN – China – Third Country (e.g. ASEAN – ASEAN – China or or ASEAN – China – ASEAN) China – ASEAN – Third Country) Example: Malaysian carrier operating Example: Malaysian carrier operating Kota Kinabalu - Chiang Mai - Kunming or Kota Kinabalu - Kunming – Delhi Kota Kinabalu - Haikou - Chiang Mai

[Weekly limit of 14 per country] [No weekly limit] Brunei Bandar Seri Begawan Cambodia Preah Sihanouk (Sihanoukville) Indonesia Mataram (Lombok) Lao PDR Luang Phabang Malaysia Kota Kinabalu Myanmar Any point except Yangon Philippines Any point except Manila Singapore Singapore Thailand Chiang Mai

Vietnam Any point except Hanoi and Ho Chi Minh City

Nanning Nanning China Guilin Guilin Kunming Kunming Chengdu Chengdu Chongqing Chongqing Urumqi Urumqi Xian Xian Changsha Changsha Zhengzhou Zhengzhou Either Xiamen or Fuzhou Xiamen (Total: 10) Fuzhou Xishuangbanna Wuhan Shenyang Dalian Haikou Sanya Guiyang Lanzhou Xining Yinchuan Lhasa Kashgar Hohhot Harbin Changchun Ningbo Yanji (Total: 28)

Recommendations to Lift the Barriers i. Seventh freedom rights with China

Revising the ASEAN-China ATA to include seventh freedom rights will be highly complex. To begin with, the ASEAN member states must agree to accord one another seventh freedom rights to China first. They must then come to an agreement to negotiate the same with China. In the short term, a likely first step could be for air freight (cargo) transport. This can then be followed gradually by passenger air services, starting possibly with non-capital cities, and later taking in the capitals.

41 Lifting-the-barriers REPORT: AVIATION

for example, ASEAN should negotiate for the following non-capital to non-capital seventh freedom operations to be included in any future deal with China:

• Singapore carriers from Phuket to Shanghai • Malaysian carriers from Cebu to Guangzhou • Vietnamese carriers from Siem Reap to Kunming • Chinese carriers from Ho Chi Minh City to Manila

Instead of stationing stand-alone fleets at these cities, what is more practicable is for the carriers (particularly the LCCs) to service these points with a continuing fifth freedom service from their home points (see the above discussion on “back-tracking” routes). ASEAN must thus work toward approving (or not disapproving) such operations within the region first.

ii. Fifth freedom rights with China

There is a need to continue pressing for fifth freedom rights through the major Chinese cities of Beijing, Shanghai and Guangzhou. Settling for less will lead to ASEAN carriers losing out on the lucrative routes out of these Chinese cities. At the same time, the ASEAN member states must be prepared to offer their main cities for exchange with the Chinese (though, of course, there is no guarantee that China will find this an attractive proposition). What this means is that the impending Protocol 2 is already weighted against ASEAN interests, and there is much logic in delaying its adoption until the three major Chinese cities are included. After all, none of the current routes on offer make economic sense, so the better strategy may be to delay adopting Protocol 2.

iii. Fifth freedom rights with Korea, Japan, India, Hong Kong and other trading partners

With these other trading partners, the ASEAN states should again be wary of exchanging unlimited third/fourth freedom rights without accompanying fifth freedom rights. With Korea and Hong Kong, in particular, ASEAN should insist on fifth freedom rights out of Korea and Hong Kong to various other points, particularly in the United States. Any deal with unlimited third/fourth freedom rights will allow the Korean and Hong Kong carriers to carry unlimited sixth freedom traffic out of the ASEAN states through their hubs at Seoul-Incheon and Hong Kong Airports respectively. To balance this, the ASEAN states must insist on fifth freedom rights that will allow their carriers to use Seoul and Hong Kong as mid-point stops with traffic pick-up rights for onward operations to the U.S.

iv. A common negotiating stance for external relations

Overall, the above recommendations hinge on one critical factor: the ten ASEAN member states must stand united so that they can enhance their bargaining position. For this to happen, the member states must agree on a common negotiating stand. This must be a continuing priority for the ASAM project beyond its 2015 stipulated deadline. Indeed, along with intra-ASEAN seventh freedom rights, the ability to negotiate on a common platform constitutes the biggest priority for ASEAN member states in dealing with their external trading partners. This will be a huge challenge for the ASAM as it enters its post-2015 stage.

42 Lifting-the-barriers REPORT: AVIATION

v. Further issues for the post-2015 ASAM

Apart from the above major issues, there are various other important matters for the ASEAN member states to work toward harmonisation and integration. A comprehensive single aviation market should include harmonised provisions on the following matters as well:

• Safety and security standards (consistent with the provisions of the Chicago Convention on International Civil Aviation 1944 and the standards and recommended practices issued by the International Civil Aviation Organisation (ICAO)) • Rules on competition/antitrust law • Rules on protecting consumer welfare (e.g. rules on compensating passengers for injury, delays, cancellations, etc.) • Environmental standards (e.g. on aircraft carbon emissions) • Air traffic management

43 Lifting-the-barriers REPORT: AVIATION

Conclusion The aviation industry in ASEAN is changing at a rapid pace, particularly with the advent of the low-cost carriers (LCCs). LCC penetration has already exceeded half of all seat capacity in several ASEAN member states. Six of the top ten international LCC routes in the world are to be found within ASEAN. Governments in the region will thus have to respond quickly to the associated infrastructural, slot and manpower constraints that now confront the aviation industry.

The region is also pursuing liberalisation of the airline sector through the establishment of an ASEAN “Single Aviation Market” (ASAM). Ironically, the prospect of more “open skies”, increased capacity and continuing LCC growth may create even more congestion and infrastructural bottlenecks at primary airports. At the same time, the ASAM’s goals fall far short of complete and effective liberalisation. Market access relaxations currently stop with third, fourth and fifth freedoms operations, and do not extend to the critical seventh freedom and domestic carriage operations.

On their part, ownership and control relaxations come with too many conditions. In essence, they do not go far enough to encourage the pooling of capital to set up pan- ASEAN “community carriers” or to facilitate airlines to merge across ASEAN borders. This means that the region’s carriers will continue to be limited in network scale and scope compared to their bigger competitors from outside the region. Even the relatively modest relaxations such as unlimited third, fourth and fifth freedom operations have not been fully accepted by several key ASEAN member states. This deprives the relevant multilateral agreements of their intended liberalising effect. The ASEAN “single” aviation market thus risks becoming single only in name. At the same time, the 2015 deadline seems overly optimistic.

In these respects, the one huge policy barrier that confronts the aviation industry in ASEAN is government protectionism for airlines. This is caused largely by the huge disparity in the relative sizes and competitiveness of the region’s airlines. At the same time, there is pervasive suspicion toward successful airlines from smaller countries such as Singapore and Malaysia. Such dynamics breed the instinct for protectionism and a “winners vs. losers” mindset, even as challenges loom in the form of competition from airlines outside the region. In such a climate, the prospects for further liberalisation (of seventh freedom and domestic operations and ownership and control rules) seem uncertain.

Overall, the goal of a truly single aviation market in ASEAN remains elusive. In the meantime, there are several factors that could hopefully provide the momentum for change beyond 2015 and that might strengthen aviation’s contribution toward the ASEAN Economic Community. First is the growing confidence of Indonesian carriers such as Garuda and Lion Air. As these airlines expand their services and improve their competitiveness and appeal to passengers, there will come a time when they feel more secure and see less of a need to resist liberalisation. In particular, they will themselves come up against limited market access rights that constrain their overseas expansion. This was what happened recently when Indonesian carriers wishing to increase operations to Singapore came up against their government’s own finite limits, leading to a re- negotiation of bilateral capacity for both sides. In time, Indonesia may find that keeping to limits may no longer make economic sense, and that an unlimited “open skies” regime would be more beneficial for its overall economy.

Second, there is the pressure created by the Indonesian provincial governments, tourism authorities and business community to forge better connectivity between their cities

44 Lifting-the-barriers REPORT: AVIATION

and key regional centres in ASEAN. This may help to increase the momentum for more relaxations, particularly if the central government can be convinced that there are bigger benefits for the overall economy with greater liberalisation. In time, the Indonesian government may come around to recognising that the national interest of the country is more than the sum of its airlines’ interests, and that there are greater benefits for the provinces and the other sectors of the economy that may outweigh other interests.

Third, as identified above, there is the pressure created by the agreements with larger countries outside the region. The continued absence of a true intra-ASEAN single market introduces problems when the region starts to engage larger and unified trading partners such as China, India and Japan. In particular, the ASEAN carriers could end up being disadvantaged as against their larger rivals which have the rights to connect points in their territories and points in ASEAN in a more flexible way. The lack of a common negotiating position among ASEAN member states will also introduce fragmentation and disunity.

In this regard, there will conceivably be a “tipping point” when the ASEAN states realise that the collective regional interest risks being compromised by their failure to forge a united stand against their external trading partners. The mid- to long-term imbalance affecting their own carriers’ competitiveness may well force the ASEAN states to jumpstart the sputtering intra-ASEAN liberalisation process. In this regard, the region also needs its biggest economies to embrace intra-ASEAN liberalisation and to lead ASEAN in championing the regional interest when negotiating with external trading partners.

Fourth, industry response is critical and should not be under-estimated. The region has now seen how governments are not prepared to dismantle the restrictions in place among themselves in order to meet the competitive challenges posed by external forces. Yet, innovative airlines have lost no time in crafting imaginative responses that seek to short-circuit or get around governmental restrictions, including those that are cast in the bilateral and multilateral agreements. One example is how AirAsia has pioneered the cross-border joint venture subsidiary model – while still imperfect, it allows airlines to get around the “seventh freedom” prohibition and to operate region-wide from multiple hubs using a common, well-recognised brand. In this way, AirAsia has come as close as it can presently get to being an ASEAN “community carrier”.

Overall, the barriers to be lifted for ASEAN aviation relate to infrastructural constraints as well as policy and political restrictions. In both these areas, it is clear that just as cross- border ventures have helped to circumvent ownership and control limits, market forces will inevitably force changes as new national and pan-Asian airlines - particularly LCCs - emerge and expand their markets. The reality is that liberalisation in the marketplace is already happening and pressing forward relentlessly - at times because of, but at other times, in spite of, governments and the agreements they adopt. It is high time that the governments sit up, take notice and attempt meaningfully to lift both the infrastructure- and policy-related barriers.

Despite all the problems and shortcomings, ASEAN’s hope is that member states will in time recognise that it is in their collective interest to forge a truly single aviation market and a common negotiating position. This will be entirely in line with the broader ambition to achieve an ASEAN Economic Community. This Report has proposed several policy recommendations on how the impediments or barriers confronting the air services sector in ASEAN can be lifted. The following table provides a summary of these recommendations:

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Summary of Recommendations to Lift the Barriers

Barriers Recommendations Target Date

Infrastructural, Slot, ASEAN member state governments to pay Immediate Human Capital urgent attention to the provision of: Constraints • Airport terminal capacity, including runways and slots, particularly to cater to LCCs; includes the provision of secondary airports to take the load off primary airports; • Adequate human capital and training as well as harmonised standards of accreditation so that manpower demands can be met regionally as opposed to nationally.

A Common ASEAN Civil aviation authorities to consider harmonising Immediate Regulator technical standards for eventual oversight by a common ASEAN regulator. This will have the advantages of:

• Introducing harmonised standards that can be inspected or enforced by one authority and accepted by other authorities as adequate/ valid for a period of time; • Increasing reliability of monitoring and compliance; • Reducing duplication and costs; • Enhancing regional co-operation and the overall effectiveness and integrity of the system.

Non-Acceptance of Engaging stakeholders in the relevant member Immediate ASEAN Agreements states to facilitate acceptance of the ASEAN multilateral agreements by:

• Providing incentives to Indonesian carriers and improving their market access into other ASEAN states; facilitating requests for joint ventures, code-sharing, technical assistance, airport slots, co-operation etc.; • Engaging Indonesian provincial governments and business and tourism stakeholders to emphasise benefits of liberalisation; • Engaging the remaining member states that have yet to accept the ASEAN agreements to do so expeditiously, while providing incentives like technical assistance and joint operations.

46 Lifting-the-barriers REPORT: AVIATION

Market Access Passenger and Cargo Fifth Freedom. Liberal Immediate Restrictions: Seventh interpretation of fifth freedom regime in current Freedom and Domestic ASEAN multilateral agreements to allow Carriage “backtracking” operations. However, there is a risk of some member states recoiling further from the ASEAN agreements.

Cargo Seventh Freedom. Unlimited seventh Immediate/2014 freedom cargo rights.

Passenger Seventh Freedom. Seventh freedom 2016 rights for passenger services on routes not hitherto connected directly by scheduled flights. Capacity may have to be restricted in the first instance to a daily flight, with a fixed timetable to move to unlimited capacity within a certain date (e.g. two years). Operations may be code-shared with local carriers.

Passenger Seventh Freedom. Seventh freedom 2018 rights to connect any two non-capital cities within ASEAN (with capacity or city-list limits that are phased out within two years).

Passenger Seventh Freedom. Seventh freedom 2020 rights to connect any two cities within ASEAN, one or both of which are capitals (with capacity limits that are phased out within two years).

Cargo Eighth and Ninth freedoms. Rights to Immediate/2015 connect all cities.

Passenger Eighth Freedom. Eighth freedom 2020 passenger rights on routes not hitherto connected directly by scheduled flights (with capacity restrictions that are phased out within two years).

Passenger Eighth Freedom. . Eighth freedom 2022 passenger rights to connect all cities (with restrictions e.g. capacity limits, minimum pricing rule, that are phased out within two years).

Passenger Ninth Freedom. Ninth freedom 2025 passenger rights on routes not hitherto connected directly by scheduled flights (with capacity restrictions that are phased out within two years).

47 Lifting-the-barriers REPORT: AVIATION

Market Access Passenger Ninth Freedom. Ninth freedom 2030 Restrictions: Seventh passenger rights to connect all cities (possibly Freedom and Domestic with opt-out exemption for capital cities, to be Carriage phased out within two years).

Note: if seventh freedom relaxations risk being derailed by domestic carriage, the former should be prioritised. Alternatively, domestic operations should be left to joint venture operations with local carriers.

Ownership and States should move away from “substantial Immediate Control Restrictions ownership and effective control” to “principal place of business and incorporation” criterion.

ASEAN Community Carrier to be embraced, Immediate with “opt-out” for states’ own carriers to retain substantial ownership and effective control; or

ASEAN Community Carrier to be embraced, Immediate with ownership spread out among ASEAN interests but effective economic and regulatory control with designating state.

ASEAN Community Carrier fully recognised; 2025 “opt-out” phased out.

Majority ownership and effective control resides with ASEAN nationals in aggregate. Effective regulatory control, principal place of business and incorporation remain with designating state.

External Relations Seventh freedom rights with China (requires Immediate/2015 with Other intra-ASEAN seventh freedom regime first), to Countries; Need begin with cargo services. for United Regional Position Seventh freedom passenger rights with China, Following covering non-capital cities. intra-ASEAN

Seventh freedom passenger rights with China, Following covering capital cities. intra-ASEAN

Fifth freedom passenger rights with China, to Immediate press for inclusion of Beijing, Shanghai and Guangzhou.

Note: none of the fifth freedom routes negotiated with China makes economic sense; the better strategy for ASEAN may be to delay adopting the agreement.

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Fifth freedom rights with Korea, Japan, India, Immediate Hong Kong and other trading partners (through multilateral agreements).

Note: ASEAN should not offer third/fourth freedom rights without receiving fifth freedom rights from these trading partners.

A common negotiating position for external Post-2015 relations.

Further issues: Post-2015 • Safety and security standards • Competition/antitrust law • Consumer welfare • Environmental standards • Air traffic management

49 Lifting-the-barriers REPORT: AVIATION

Appendix Annex I: ASEAN Multilateral Agreements

2009 Multilateral Agreement on Air Services (MAAS) - Protocols 1 to 4 and Designated Points

Sub-region Member States Protocol 1: Protocol 2: Protocol 3: Protocol 4: Third & Fourth Fifth Freedom Third & Fourth Fifth Freedom Freedom Within Within Sub-region Freedom Between Between Sub- Sub-region Sub-regions regions Brunei Bandar Seri Bandar Seri Bandar Seri Bandar Seri Begawan Begawan Begawan Begawan Indonesia Balikpapan Balikpapan Balikpapan Balikpapan Manado Manado Manado Manado Pontianak Pontianak Tarakan Tarakan

BIMP-EAGA Malaysia Kota Kinabalu Kota Kinabalu Labuan Labuan Labuan Labuan Miri Miri Kuching Kuching Miri Miri Philippines Davao Davao Davao Davao General Santos General Santos General Santos Zamboanga Puerto Princesa Puerto Princesa Puerto Princesa Zamboanga Zamboanga Zamboanga Cambodia Phnom Penh Phnom Penh Phnom Penh Phnom Penh

Lao PDR Vientiane Vientiane Vientiane Vientiane Luang Phabang Luang Phabang Luang Phabang Luang Phabang Pakse Pakse Pakse Pakse Myanmar Yangon Yangon Yangon Yangon Mandalay Mandalay Mandalay Mandalay CLMV Vietnam Ha Noi Ha Noi Ha Noi Ha Noi Ho Chi Minh City Ho Chi Minh City Da Nang Da Nang Da Nang Da Nang Dien Bien Phu Dien Bien Phu Dien Bien Phu Dien Bien Phu Phu Bai Phu Bai Phu Bai Phu Bai Cat Bi Cat Bi Cat Bi Cat Bi Lien Khuong Lien Khuong Lien Khuong Lien Khuong Indonesia

IMS-GT Malaysia NOT APPLICABLE

Singapore

Indonesia Medan Medan Medan Medan Padang Padang Padang Padang Banda Aceh Banda Aceh Nias Nias Malaysia Penang Penang Alor Star Alor Star Langkawi Langkawi Ipoh Ipoh Alor Star Alor Star IMT-GT Ipoh Ipoh Kota Bharu Kota Bharu Thailand Hat Yai Hat Yai Hat Yai Hat Yai Narathiwat Narathiwat Narathiwat Narathiwat Pattani Pattani Pattani Pattani Trang Trang Trang Trang Nakon Si Thammarat Nakon Si Thammarat Nakon Si Thammarat Nakon Si Thammarat

Note: MAAS Implementing Protocols 1 to 4 Source: All 10 ASEAN Member States are contracting parties to the above MAAS Protocols 1 to 4.

50 Lifting-the-barriers REPORT: AVIATION

2009 Multilateral Agreement on Air Services (MAAS) - Protocols 5 and 6 and Designated Capital Cities

Protocol 5: Third & Fourth Freedom Protocol 6: Fifth Freedom Member States Between ASEAN Capital Cities Between ASEAN Capital Cities Brunei Bandar Seri Begawan Cambodia Phnom Penh Indonesia (non-party) Jakarta Lao PDR Vientiane Malaysia Kuala Lumpur Myanmar Yangon Philippines (non-party) Manila Singapore Singapore Thailand Bangkok

Vietnam Ha Noi

Note: MAAS Implementing Protocols 5 and 6 Source: All ASEAN member states, except Indonesia and the Philippines, are contracting parties to MAAS Protocols 5 and 6.

2010 Multilateral Agreement on the Full Liberalisation of Passenger Air Services (MAFLPAS) - Protocols 1 and 2

Protocol 1: Third & Fourth Freedom Protocol 2: Fifth Freedom Member States Between All Cities Between All Cities Brunei

Cambodia (non-party)

Indonesia (non-party)

Lao PDR (non-party)

Malaysia Applies to all flights except Applies to all flights except capital to capital (these are capital-capital-capital (these are Myanmar governed by MAAS Protocol 5) governed by MAAS Protocol 6) Philippines

Singapore

Thailand

Vietnam

Note: MAFLPAS Implementing Protocols 1 and 2 Source: All ASEAN member states, except Cambodia, Indonesia and Lao PDR, are contracting parties to MAFLPAS Protocols 1 and 2.

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Multilateral Agreement on the Full Liberalisation of Air Freight Services (MAFLAFS) – Protocols 1 and 2 and Designated Points

Member States Protocol 1: Third, Fourth & Fifth Freedom Protocol 2: Third, Fourth & Fifth Between Designated Points Freedom Between All International Points within ASEAN

Brunei Bandar Seri Begawan

Cambodia Phnom Penh

Batam Balikpapan Biak Indonesia Makassar (non-party) Manado Palembang Pontianak Vientiane Lao PDR Luang Phabang Pakse Malaysia Kuala Lumpur Yangon Myanmar Mandalay

Clark All Points with International Airports Subic Cebu Philippines Davao Iloilo Laoag

Singapore Singapore

Bangkok Chiang Mai Hat Yai Thailand Khon Kaen Phuket U-Tapao Ubon Ratchathani Ha Noi (Hanoi) Da Nang Vietnam Ho Chi Minh City Chu Lai

Note: MAFLAFS Implementing Protocols 1 and 2 Source: All ASEAN member states, except Indonesia, are contracting parties to MAFLAFS Protocols 1 and 2.

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Annex II: Regional Profile of ASEAN Aviation

ASEAN member states: population and international market size (by weekly seat capacity involving all international points and all carriers)

Member State Population (in millions) Seats per week Singapore 5.5 1,407,505 Thailand 64.7 1,353,086 Malaysia 30 1,035,999 Indonesia 248 738,971 Philippines 97.5 441,344 Vietnam 91.5 386,298 Cambodia 15.4 119,792 Myanmar 65 85,647 Brunei 0.4 41,218 Lao PDR 6 18,691 Total 624 5,628,551

Note: Capacity data based on seats for October 2013. Domestic capacity excluded. Population from World Bank estimate (2012)

Source: CAPA – Centre for Aviation, Innovata & World Bank

ASEAN member states: overall aviation market size (international and domestic) and LCC penetration - data from week of 7 - 13 January 2013

Rank Country System-wide weekly System-wide LCC Domestic LCC International LCC capacity (millions of penetration rate penetration rate penetration rate seats, all carriers local and foreign) 1. Indonesia 2.8 56% 60% 46% 2. Thailand 1.9 30% 56% 20% 3. Malaysia 1.6 50% 53% 48% 4. Singapore 1.4 31% Not Applicable 31% 5. Philippines 1.0 51% 67% 29% 6. Vietnam 0.7 24% 37% 13% 7. Myanmar 0.2 16% 3% 27% 8. Cambodia 0.1 12% 0% 13% 9. Lao PDR 0.04 5% 0% 7% 10. Brunei 0.04 16% Not Applicable 16%

Source: CAPA – Centre for Aviation & Innovata

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ASEAN flag carriers: total weekly seat capacity, fleet size and home market share (includes full- service regional subsidiaries) - as of 1 October 2013

Rank Country Weekly seats Number of aircraft % of international seat capacity in home market

1. Singapore Airlines 592,000 128 33% 2. Malaysia Airlines 568,000 127 26% 3. Thai Airways Int’l 553,000 97 29% 4. Garuda Indonesia 512,000 102 14% 5. Vietnam Airlines 366,000 83 40% 6. Philippine Airlines 307,000 68 26% 7. Royal Brunei Airlines 35,000 10 74% 8. Lao Airlines 31,000 21 44% 9. Cambodia Angkor Air 25,000 5 16% 10. Myanmar Airways Int’l 10,000 5 12%

Note: Seats includes domestic and international. All full-service regional subsidiaries are included: SilkAir (Singapore Airlines), Firefly and MASWings (Malaysia Airlines), Thai Smile (THAI) and PAL Express (Philippine Airlines). Budget/LCC airline subsidiaries are excluded. Weekly seats rounded to nearest 1,000.

Source: CAPA – Centre for Aviation, Innovata and CAPA Fleet Database

ASEAN Low-Cost Carriers (LCCs): weekly seat capacity within Southeast Asia and capacity share by LCC group - data from October 2013

Rank Carrier Weekly seats Capacity share (as % of total LCC seats) 1. Lion Air 1,116,000 37% 2. AirAsia 964,000 32% 3. Cebu Pacific 305,000 10% 4. Tigerair 163,000 6% 5. Nok (THAI) 140,000 5% 6. Citilink (Garuda) 123,000 5% 7. Jetstar 119,000 4% 8. VietJet 81,000 3% 9. Golden Myanmar 8,000 <1% 10. Orient Thai 7,000 <1% 11. Scoot (Singapore Airlines) 6,000 <1%

Note: Only LCC subsidiaries and affiliates included. Full-service subsidiaries (i.e. Batik Air) excluded from Lion Air figures. AirAsia capacity includes AirAsia Berhad (Malaysia), Thai AirAsia, Indonesia AirAsia, Philippines AirAsia and Zest Air. Weekly seats rounded to nearest 1,000.

Source: CAPA – Centre for Aviation, Innovata

54 Lifting-the-barriers REPORT: AVIATION

Top 10 international LCC routes based on weekly return capacity (seats) – October 2013 (with intra-ASEAN routes highlighted)

Rank Origin Airport Destination Airport Total Seats 1. Singapore Changi Jakarta Soekarno-Hatta 59,280 2. Singapore Changi Kuala Lumpur International 57,600 3. Singapore Changi Bangkok Suvarnabhumi 33,708 4. Kuala Lumpur International Jakarta Soekarno-Hatta 31,626 5. Dubai International Kuwait International 30,270 6. Kuala Lumpur International Bangkok Don Mueang 27,720 7. Barcelona El Prat London Gatwick 23,804 8. Singapore Changi Manila Ninoy Aquino 23,708 9. Dubai International Doha International 23,058 10. Dublin London Stansted 20,412

Source: CAPA – Centre for Aviation & Innovata

ASEAN LCC’s: Projected fleet growth for 2013 by individual carrier

Rank Carrier Country End 2012 Projected end Remarks fleet 2013 fleet 1. Lion Air Indonesia 91 100 Lion Group has 600 on order beyond 2013 2. AirAsia Berhad Malaysia 64 70 AirAsia Group has over 350 on order beyond 2013 (in- cludes AirAsia X) 3. Cebu Pacific Philippines 41 48 4. Wings Air (Lion) Indonesia 28 27 5. Thai AirAsia Thailand 27 35 6. Indonesia AirAsia Indonesia 22 29 7. Citilink (Garuda) Indonesia 21 29 8. Tigerair Singapore 21 26 9. Nok (Thai Airways) Thailand 20 23 10. Jetstar Asia Singapore 16 19 11. AirAsia Zest Philippines 15 13 12. AirAsia X Malaysia 11 18 13. VietJet Vietnam 5 10 14. Jetstar Pacific Vietnam 5 6 15. Tigerair Mandala Indonesia 5 12 16. Tigerair Philippines Philippines 5 5 17. Orient Thai Thailand 4 4 18. Scoot (Singapore Singapore 4 6 Airlines) 19. Valuair (Jetstar) Singapore 2 0 20. Philippines AirAsia Philippines 2 3 21. Golden Myanmar Myanmar 0 2 22. Malindo (Lion) Malaysia 0 10 TOTAL 409 495

Note: Wings Air reduction caused by phase-out of MD-80s and Dash 8s. Tigerair aircraft figure is for fiscal year ending 31-Mar-2014. Nok Air figures include Saab 340s operated by regional partner. AirAsia Zest reduction caused by phase-out of MA-60 turboprops. Orient Thai figures only include domestic LCC operation. Valuair aircraft were returned in first half of 2013. Valuair flights are now operated using A320s under the Jetstar Asia AOC. AirPhil/PAL Express, which transitioned from LCC to FSC in early 2013, has been removed entirely for comparison purposes.

Source: CAPA – Centre for Aviation fleet database and company reports

55 Lifting-the-barriers REPORT: AVIATION

Annex III: ASEAN Member State Profiles

Brunei

Key Air Transport Characteristics

Major Airlines Aviation Features Position on Market Access Position on Foreign Ownership/ Control Royal Brunei International point: Bandar Seri Liberal. Party to MAAS, Liberal. “Substantial ownership Airlines Begawan. MAFLPAS, MAFLAFS. and effective control” as default, but supports “principal No domestic market. Together with Singapore, place of business / effective party to APEC’s MALIAT control”. Major international markets: Agreement and its Protocol Malaysia, Singapore, Philippines. that accords seventh freedom Welcomes options in ASEAN to states parties. Likely to multilateral agreements, support seventh freedom including ASEAN Community within ASEAN. Carrier.

Brunei international capacity share (% of seats) by carrier

Source: CAPA – Centre for Aviation & Innovata

Analysis Brunei is the smallest ASEAN member state by population and has the region’s smallest aviation market. It effectively has only one international point, the capital Bandar Seri Begawan, and has negligible domestic traffic. The national carrier is Royal Brunei Airlines, which has a 74.4% share of the international market in terms of weekly seat capacity into and out of Brunei. The biggest foreign airlines operating into Brunei are AirAsia (Malaysia), Singapore Airlines and Malaysia Airlines.

Brunei has consistently taken a liberal position for liberalising air transport. Together with Singapore, it is party to the APEC-sponsored agreement known as the Multilateral Agreement for the Liberalisation of International Air Transport (MALIAT) which provides for unlimited fifth freedom rights for carriers from state parties. Like Singapore, Brunei is also a party to MALIAT’s accompanying Protocol that provides for seventh freedom passenger rights. None of the other ASEAN member states are party to MALIAT.

56 Lifting-the-barriers REPORT: AVIATION

The benefits of the ASAM for Brunei are likely to be derived from an increase in connectivity to other parts of ASEAN. This will help build the tourism sector and improve business prospects in support of economic diversification beyond the economy’s current reliance on oil and gas. Diversified growth will come from further opportunities for airlines (including Royal Brunei) to increase the number of routes as well as the capacity of existing services.

Brunei can be expected to be a strong supporter for implementing the ASAM. As a small state, it supports the whole slate of market liberalisation measures in ASEAN, including fifth and seventh freedom rights and even eighth and ninth freedom (domestic cabotage) rights. Protection for its sole carrier - Royal Brunei - is not a major issue as the country is committed toward increasing Brunei’s connectivity to other countries and welcomes more foreign airlines to operate services to its sole international airport at Bandar Seri Begawan. The government will also likely support the relaxation of ownership and control rules for carriers, including the possible establishment of an ASEAN “community carrier” that can be majority-owned by ASEAN nationals.

57 Lifting-the-barriers REPORT: AVIATION

Cambodia

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Cambodia International points: Phnom Liberal. Party to MAAS and Fairly liberal. “Substantial Angkor Air Penh, Siem Reap (for access to MAFLAFS and submitted ownership and effective Angkor Wat) and Sihanoukville. instrument of ratification for control” as default, with foreign Cambodia MAFLPAS in 2013. investment allowed using this Airlines Small domestic market. model (e.g. Cambodia Angkor Together with Lao PDR, Air). Tonlesap Major international markets: Myanmar and Vietnam, Airlines Vietnam, Thailand, Singapore, party to the sub-regional Position toward other options, (ceased Malaysia. CLMV Agreement that is including ASEAN Community operations) incorporated within MAAS Carrier, unclear but likely to be Protocols 1 to 4. favourable subject to reciprocal treatment for its own carriers. Foreign Ownership in Local Carriers

Cambodia Angkor Air (49% Vietnam Airlines).

Pending: Cambodia Airlines (49% Philippine Airlines) - planned launch in late 2013.

Cambodia international capacity share (% of seats) by carrier: 29 April - 5 May 2013

Source: CAPA – Centre for Aviation & Innovata

Analysis Cambodia has two major international airports in Phnom Penh and Siem Reap, with a third point Sihanoukville being touted as having potential for international flights. Due to the history of failed airlines in Cambodia and the lack of domestic capital and expertise for airline management, the government welcomes foreign investment in airlines.

There is currently one major international carrier, Cambodia Angkor Air, which is 51% owned by the government and 49% by Vietnam Airlines. Another airline - Cambodia Airlines - is reportedly being launched in late 2013 with Philippine Airlines holding a minority 49% stake. Initial reports had linked the San Miguel group – which owns a stake

58 Lifting-the-barriers REPORT: AVIATION

in Philippine Airlines – to Cambodia Airlines. The majority stake in Cambodia Airlines is to be held by the Royal Group, a Cambodian conglomerate with diversified business interests.

At present, Cambodia Angkor Air has 15.6% of international market share. Vietnam Airlines has a slightly larger 16.6% share, making Cambodia among the few ASEAN states that see a foreign carrier controlling the largest single market share. As flagged above, Vietnam Airlines also has a stake in Cambodia Angkor Air. The other major foreign airlines operating into Cambodia are Bangkok Airways, AirAsia Berhad (Malaysia) and Thai AirAsia.

Cambodia is a party to the 2003 Cambodia, Laos, Myanmar and Vietnam (CLMV) Multilateral Agreement on Air Services that permits unlimited third, fourth and fifth freedom services between the four countries. This accounts for Vietnam Airlines’ strong market share into and out of Cambodia, including fifth freedom operations linking Vietnam and Cambodia with Lao PDR. Cambodia is also a party to the MAAS Protocols that set out unlimited third, fourth and fifth freedom market access between ASEAN capital cities. Cambodia has also very recently in 2013 submitted instruments of ratification for MAFLPAS and its Protocols 1 and 2 that allow for unlimited access between non-capital cities.

Cambodia’s fairly liberal stance toward market access by foreign carriers has assisted in developing its inbound tourism sector. In the past, the government had also been relatively liberal in granting foreign carriers rights to fly into Phnom Penh and Siem Reap even when its designated carriers were not operating.

One continuing priority for Cambodia is to attract foreign capital to set up new domestic and international airlines and to develop other aviation and tourism infrastructure. As such, Cambodia will benefit from a relaxation of the ownership and control regime for air carriers, including the establishment of an ASEAN “community carrier” that can be majority owned and effectively controlled by ASEAN nationals in the aggregate. With tourism a major priority, liberalisation should also help focus investment in the infrastructural projects necessary to sustain the overall tourism industry. A continuing challenge will be to provide adequate infrastructure, including airport capacity, as well as human resources to maintain effective regulatory (e.g. safety) control over new carriers.

59 Lifting-the-barriers REPORT: AVIATION

Indonesia

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Garuda Indonesia International points: Jakarta, Not liberal. Party to MAAS Fairly liberal. “Substantial (includes CitiLink) Bali, Surabaya, Medan, Protocols 1 to 4. ownership and effective Makassar and numerous control” as default, with foreign Lion Air (includes secondary points. Not party to MAAS Protocols investment allowed using this Wings, Batik Air) 5 and 6, MAFLPAS Protocols model (e.g. Indonesia AirAsia and Massive domestic market. 1 and 2 and MAFLAFS Tiger Mandala). Lion Air has set Indonesia AirAsia Protocols 1 and 2. up Malindo in Malaysia along the Major international markets: same lines and has similar plans in Sriwijaya Air Singapore, Malaysia, Hong Unlikely to support seventh Thailand and Myanmar. Kong, Thailand. freedom and domestic Merpati Air carriage by foreign carriers. Position toward other options, including ASEAN Community Tiger Mandala Carrier, unclear but likely to be favourable subject to reciprocal Batavia Air treatment for its own carriers. (ceased Foreign Ownership in Local operations) Carriers

Indonesia AirAsia (48.9% AirAsia)

Tiger Mandala (30% Tigerair)

Indonesia international capacity share (% of seats) by carrier

Source: CAPA – Centre for Aviation & Innovata

Analysis Indonesia is ASEAN’s biggest aviation market with a population of 270 million people, nearly half of ASEAN’s entire population. An archipelago of some 17,000 islands, Indonesia depends heavily on aviation for connectivity and economic development. The major points for international traffic are Jakarta, Surabaya, Bali, Medan and Makassar, with numerous other secondary points. With an increasingly affluent middle class, domestic air travel within Indonesia is growing rapidly, as is international air travel into and out of the country.

60 Lifting-the-barriers REPORT: AVIATION

The AirAsia group (comprising Indonesia AirAsia and AirAsia) has the biggest international seat capacity, followed by the national carrier, Garuda. In the highly competitive domestic sector, capacity is dominated by the Lion Air Group, comprising Lion Air, Batik Air and Wings Air. On its part, Indonesia AirAsia has a limited domestic network. In 2012, it attempted to take over Batavia Air, a move that would have expanded its domestic capacity dramatically. However, the deal was aborted due to the high risks involved. Batavia Air has since ceased operations.

The Indonesian government has traditionally been protective of its carriers. Through the Indonesian National Air Carriers’ Association (INACA), the local carriers have lobbied to protect their markets and interests. For instance, the government used to limit foreign carriers’ direct flights into holiday destinations such as Bali. This forced many foreign tourists to fly into Jakarta and switch to local carriers for domestic connections. This policy has since been relaxed with the development of Denpasar in Bali as an alternative international hub. Access into Jakarta has also been progressively relaxed for foreign airlines, although capacity limits remain. As in other countries, the carriage of domestic traffic by foreign carriers is prohibited.

The attitude toward foreign LCCs also started out as cautious. In 2005, Indonesia closed off four major cities (Jakarta, Surabaya, Bali and Medan) to new foreign LCCs to protect its carriers. This has now been relaxed, although foreign LCCs like Tigerair must still serve refreshments on board to qualify as a “boutique” carrier and avoid the technical restriction. There is also talk of opening up only five international points for “open skies” - Jakarta, Surabaya, Bali, Medan and Makassar. In addition, there have been suggestions to implement “partial” open skies with countries that have strong airlines (notably Singapore and Malaysia).

However, there are now signs that Indonesia’s policy is evolving toward greater liberalisation. Bilateral capacity restrictions with Singapore have been significantly relaxed. The attitude toward the ASEAN multilateral agreements could also be re- assessed as Indonesia’s own airlines expand their operations and require more liberal access into other countries. For instance, Lion Air has nearly 600 aircraft on order for both domestic and international expansion, and has established subsidiaries in Malaysia (Malindo) and Thailand (Thai Lion Air). As a result, the policy toward the ASEAN agreements, particularly MAAS Protocols 5 and 6, could well change.

Meanwhile, the government’s policy on joint ventures like Indonesia AirAsia and Tiger Mandala is already quite progressive. It might thus accept the “community carrier” concept, although it would naturally expect reciprocal treatment for Indonesian carriers that are similarly constituted. Indeed, Lion Air will benefit most as it will no longer be constrained by minority stakes (as it is now with Malindo and Thai Lion Air) when establishing subsidiaries in other ASEAN states.

At the same time, aviation infrastructure faces capacity and quality issues. For instance, Jakarta’s Soekarno-Hatta Airport is running well over capacity. The government is expected to announce plans to resolve such problems, including re-opening the old Halim Perdanakusuma Airport for some flights. This is expected to relieve the congestion at Soekarno-Hatta to some extent.

61 Lifting-the-barriers REPORT: AVIATION

Lao People’s Democratic Republic (Lao PDR)

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Lao Airlines International points: Vienti- Fairly liberal. Party to MAAS Fairly liberal. “Substantial ane, Luang Phabang. and MAFLAFS but not yet ownership and effective control” Lao Central MAFLPAS. as default, but supports “principal Airlines (formerly Small domestic market. place of business / effective Phongsavanh control”. Airlines) Major international markets: Thailand, Vietnam. Position toward other options, including ASEAN Community Carrier, unclear but likely to be favourable subject to reciprocal treatment for its own carriers.

Lao PDR international capacity share (% of seats) by carrier

Note: Figures for Lao Airlines and Lao Central Airlines include both domestic and international capacity Source: CAPA – Centre for Aviation & Innovata

Analysis Lao PDR has ASEAN’s second smallest aviation market after Brunei. Its international points are the capital, Vientiane, and its second city, Luang Phabang. The country has two small airlines, the government-owned Lao Airlines and the privately-owned Lao Central Airlines (formerly Phongsavanh Airlines) that both have limited international operations to neighbouring countries. The largest international markets are to neighbouring Thailand and Vietnam. Lao Airlines holds a fairly sizeable market share for international operations into and out of the country, although several of its flights are operated on a code-share basis with bigger carriers such as Vietnam Airlines.

Lao PDR is expected to benefit significantly from air services liberalisation and greater connectivity as its economy becomes more integrated with the rest of ASEAN. Like Cambodia and Myanmar, there will likely be positive impacts on inward foreign investment for airport, tourism and human resources infrastructure. To support tourism and foreign investment, the government has been liberal in opening up market access for foreign carriers. Lao PDR is party to the CLMV Agreement along with Cambodia, Myanmar and Vietnam. It is also a party to the MAAS Agreement that opens up unlimited

62 Lifting-the-barriers REPORT: AVIATION

third, fourth and fifth freedom access into its capital, Vientiane.

Despite this unlimited access, however, foreign countries’ carriers report difficulties in obtaining landing slots in Vientiane. This is surprising given the light traffic into the airport, and whether this is an attempt to protect local carriers from foreign competition is unclear. Lao PDR is not yet party to the MAFLPAS Agreement that opens up market access into the non-capital cities.

Like the other less developed countries in ASEAN, it would also be in Lao PDR’s interest to support foreign investment in Lao airlines. In particular, these airlines would benefit from the ASEAN “community carrier” concept that would provide incentives for ASEAN investors to take stakes in Lao airlines (including majority stakeholding as allowed by the concept).

63 Lifting-the-barriers REPORT: AVIATION

Malaysia

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Malaysia Airlines International points: Kuala Liberal. Party to MAAS, Liberal. “Substantial ownership (includes Firefly, Lumpur, Penang, Kota MAFLPAS and MAFLAFS. and effective control” as default, MASWings) Kinabalu, Kuching. with foreign investment allowed using this model (e.g. Malindo AirAsia (includes Numerous secondary points. Air). Supports “principal place of AirAsia X) business / effective control”. Medium-sized domestic Malindo (51% market. Welcomes options in ASEAN owned by multilateral agreements, including Malaysia’s Major international markets: ASEAN Community Carrier. National Singapore, Indonesia, Aerospace and Thailand, Australia. Defence Industries Foreign Ownership in Local and 49% by Lion Carriers Air) Malindo (49% Lion Air)

Malaysia international capacity share (% of seats) by carrier

Source: CAPA – Centre for Aviation & Innovata

Analysis Malaysia has one of the region’s most developed aviation markets. Its main international hubs are at Kuala Lumpur, Kota Kinabalu, Kuching and Penang. Even though its population of 28 million is only medium-sized, its carriers have a large impact in the region, particularly the low-cost carrier (LCC) group AirAsia. Both AirAsia Berhad and the national airline, Malaysia Airlines, control around 26% each of international air traffic capacity into and out of Malaysia. When combining the market shares of Thai AirAsia and Indonesia AirAsia, the AirAsia group’s international capacity exceeds Malaysia Airlines’.

Malaysia is already reaping some of the benefits of liberal bilateral arrangements with other countries, both within the aviation sector and tourism. With a relatively well- developed economy and aviation sector, Malaysia is among the best-placed states to take advantage of ASEAN liberalisation toward the ASAM. The government’s position 64 Lifting-the-barriers REPORT: AVIATION

is to fully support an unrestricted third, fourth and fifth freedom regime within ASEAN, having ratified the MAAS and MAFLPAS agreements. In addition, due to Kuala Lumpur’s undisputed status as the region’s busiest LCC hub, the government appears ready to support seventh freedom operations within the region. Malaysia is also keen to develop the Kuala Lumpur International Airport (KLIA) as a competitor hub to Bangkok and Singapore. To do this, the government recognises it needs to support unrestricted market access into and out of the country for foreign carriers.

The AirAsia group has led the way as Asia’s undisputed leading LCC and has set up joint venture subsidiaries in Thailand, Indonesia and the Philippines within ASEAN. It also has a long-haul arm, AirAsia X, that was publicly floated in July 2013. The AirAsia group’s pioneering model of taking minority stakes in foreign subsidiaries has been replicated by several other airline groups in the region. These include Jetstar Asia (Singapore), Jetstar Pacific (Vietnam) and Tiger Mandala (Indonesia). In doing this, AirAsia has pushed forward the liberalisation movement significantly, and is well-poised to take advantage of further liberalisation in ASEAN. In recent months, Indonesia’s Lion Air has taken the competition right to AirAsia’s doorstep with the establishment of Malindo Air in partnership with Malaysia’s National Aerospace and Defence Industries (NADI).

The national flag carrier Malaysia Airlines has also seen recent encouraging signs of a turnaround after years of poor performance and returns. This should give it confidence to support more far-reaching liberalisation initiatives such as fifth freedom relaxations as well as greater consolidation among airline operations. Its entry into the Oneworld alliance as the sole member from ASEAN has also seen it reap benefits in the form of transferring traffic from its partner airlines’ networks.

65 Lifting-the-barriers REPORT: AVIATION

Myanmar

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Myanmar Airways International points: Yangon, Liberal. Party to MAAS, Liberal. “Substantial ownership International Mandalay, Naypyidaw. MAFLPAS and MAFLAFS. and effective control” as default. (MAI) Likely to see foreign investment Numerous secondary points. in joint ventures using this model. Golden Myanmar Emerging medium-sized Position toward other options, Myanma Airways domestic market. including ASEAN Community Carrier, unclear but likely to be Air Bagan Major international markets: favourable subject to reciprocal Thailand Singapore, Malaysia, treatment for its own carriers. Korea.

Myanmar international capacity share (% of seats) by carrier

Source: CAPA – Centre for Aviation & Innovata

Analysis Myanmar’s recent emergence from near-complete isolation has meant that the air services industry is poised for significant growth, albeit from a low base. This applies to both domestic as well as international traffic. Already, international air travel from Myanmar grew 31.2 per cent in 2012 from the previous year. Even then, Myanmar remains hugely underserved, with the air transport market being the third smallest in ASEAN, despite a fairly large population of around 50 million.

Myanmar’s current international points are its biggest city and former capital, Yangon, Mandalay and the new capital, Naypyidaw. The national carrier, Myanmar Airways International, has around 12% of international market share, with Thai carriers (Thai Airways, Thai AirAsia and Bangkok Airways) controlling a large share of the market to Thailand. Thai Airways alone is the biggest international carrier, with 16.6% of seat capacity. The biggest international routes are from Yangon to Bangkok, Singapore and Kuala Lumpur. A second international carrier, Mandalay-based Golden Myanmar, recently inaugurated its first international flights to Singapore and Bangkok. New domestic airlines have also been established, including Asian Wings and Air Kanbawza, joining existing carriers such as Myanma Airways.

66 Lifting-the-barriers REPORT: AVIATION

In line with its future growth trajectory, the government is supporting liberal access by foreign carriers into Myanmar. The government has already ratified the CLMV, MAAS and MAFLPAS agreements, and there is now unlimited access by carriers from all ASEAN countries into Myanmar. The creation of significant links with key regional hubs will significantly increase the number of leisure visitors and potentially stimulate both trade and inward investment. New infrastructure projects are already being pursued - a new international airport at Hanthawaddy to serve Yangon has been announced.

It is also likely that the government will support ASEAN’s “community carrier” concept which would allow Myanmar airlines to be set up with substantial capital from ASEAN investors. There has already been interest from several ASEAN investors such as the Lion Air and AirAsia groups to set up LCC subsidiaries in Myanmar. However, these will have to be reconciled with Myanmar’s new Foreign Investment Law which states that joint ventures with Myanmar nationals must be formed to operate domestic and international air services, and that foreign capital must be at least 35% of the total capital.

While clarification is still lacking, this suggests that foreign investors will get to own at least 35% of shareholding. In line with the practice in other countries, this proportion can normally go up to as much as 49% for international airlines. If the ASEAN “community carrier” concept is approved, the proportion held by ASEAN investors taken together can go even higher. Moving forward, it is likely for Myanmar to see expressions of interest by airline groups to set up subsidiaries and franchises. The potential for LCC operations is particularly great as there is presently only a 16% LCC market penetration in the country.

67 Lifting-the-barriers REPORT: AVIATION

Philippines

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Philippine Airlines International points: Manila, Liberal, except for Manila’s Less liberal. “Substantial (including PAL Clark, Cebu, Davao Ninoy Aquino Airport. ownership and effective Express) Prefers to open up access control” as default, with foreign Numerous secondary points. at Clark Airport. Party to investment allowed using this Cebu Pacific MAFLPAS and MAFLAFS but model but subject to strict Large domestic market. not MAAS Protocols 5 and 6 maximum of 40% foreign Tigerair ownership (e.g. Philippines Philippines Major international markets: AirAsia and Tigerair Philippines). (formerly SEAir) Singapore, Malaysia, Thailand, U.S. Position toward other options, AirAsia Philippines including ASEAN Community Carrier, uncertain. AirAsia Zest (formerly Zest Airways) Foreign Ownership in Local Carriers

Philippines AirAsia (40% AirAsia)

Tigerair Philippines (40% Tigerair)

AirAsia Zest (cross shareholding with Philippines AirAsia)

Philippines international capacity share (% of seats) by carrier

Note: PAL numbers include those of subsidiary PAL Express. Source: CAPA – Centre for Aviation & Innovata

Analysis The Philippines has seen tremendous growth in domestic and international air services in recent years as a result of a vibrant economy and rising middle class. The major international airports are at Manila (Ninoy Aquino International Airport), Clark (Diosdado Macapagal Airport), Cebu and Davao. The national carrier, PAL (including its subsidiary PAL Express) has a 26.4% share of international weekly seat capacity, followed by LCC Cebu Pacific (17.6%) and a host of foreign carriers. For Philippine-Southeast Asia

68 Lifting-the-barriers REPORT: AVIATION

operations, however, Cebu Pacific actually has a higher market share, with around 28% of all seats compared to the PAL Group’s 23%. Cebu Pacific is also the market leader for domestic flights, with about 50% of the market. PAL remains the market leader for long- haul international flights such as to North Asia and the U.S.

The government has traditionally protected PAL from foreign competition. In recent years, with the emergence of new carriers such as Cebu Pacific, the government has taken on a more liberal stance. For instance, it is committed to liberalising market access by foreign carriers, particularly to secondary cities to spur regional development. However, access into Manila’s Ninoy Aquino International Airport remains restricted, with the government citing terminal and runway congestion and overall capacity problems at the airport. For this reason, the government has not accepted MAAS Protocols 5 and 6 that would have freed up access into Manila by other carriers from ASEAN.

The government’s preference is for liberal access to be provided into Clark instead. Clark is a former U.S. air base that is situated 80 km from downtown Manila. It has extensive runway facilities and has no capacity issues. There is no rail link to downtown Manila but road access is adequate. Indeed, access into Clark has for some years been fully liberal as a result of unilateral (i.e. self-declared) pronouncements made through governmental Executive Orders. Despite the liberal access at Clark, some carriers like Tigerair have reported regular difficulties in obtaining long-term approval for operating certain routes such as the Singapore-Clark-Macau fifth freedom sector that was eventually discontinued.

The Philippines has 67% LCC penetration in its domestic market, one of the highest in the world. Traffic patterns at Philippine airports are thus largely dominated by LCC operations. Both Clark and Ninoy Aquino International have around two-thirds of their weekly seat capacity taken up by LCCs (covering both domestic and international flights). The LCC sector has also seen a significant infusion of foreign capital with the establishment of Philippines AirAsia (40% owned by Malaysia’s AirAsia) and Tigerair Philippines (formerly SEAir) (40% owned by Singapore’s Tigerair). In addition, Philippines AirAsia and AirAsia Zest (formerly Zest Airways) have cross share-holding in each other.

The Philippines is unique in ASEAN in that its Constitution treats airlines as public utilities that cannot be more than 40% owned by foreign nationals. Hence, this is a departure from the usual 49% cap for foreign investment. For this reason, it is uncertain if the Philippines will be able to accept the ASEAN “community carrier” concept that allows ASEAN nationals to take up majority (or even 100%) ownership in an airline without Philippine interests owning at least 60%.

69 Lifting-the-barriers REPORT: AVIATION

Singapore

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Singapore Sole international points: Liberal. Party to MAAS, Liberal. “Substantial ownership Airlines (includes Singapore Changi Airport. MAFLPAS and MAFLAFS. and effective control” as default, SilkAir, Scoot and with foreign investment allowed Tigerair) No domestic market. Together with Brunei, using this model (e.g. Jetstar party to APEC’s Multilateral Asia). Jetstar Asia Major international markets: Agreement on the Indonesia, Malaysia, Thailand, Liberalisation of International Supports “principal place of Hong Kong, China, India, Air Transport (MALIAT) and business / effective control”. Philippines, Australia its Protocol that accords seventh freedom to parties. Welcomes options in ASEAN Likely to be liberal for multilateral agreements, including seventh freedom within ASEAN Community Carrier. ASEAN.

Foreign Ownership in Local Carriers

Jetstar Asia (49% Qantas Group)

Singapore international capacity share (% of seats) by carrier

Source: CAPA – Centre for Aviation & Innovata

Analysis As a city-state with no domestic air traffic market, Singapore has traditionally championed full liberalisation of international air transport services. Singapore already effectively operates open skies agreements through a number of bilateral and multilateral arrangements with various countries. Within Asia, it is party to the MAAS, MAFLPAS and MAFLAFS agreements, and also the APEC MALIAT Agreement (together with another small ASEAN market, Brunei).

70 Lifting-the-barriers REPORT: AVIATION

The government has in recent years promoted the growth of Changi Airport as a global and regional hub. The “hub” strategy is to offer foreign airlines full access into Singapore and to grow the number of passengers using Changi, even if this may affect local carriers’ interests. The strategy has been highly successful, with recent growth in passenger numbers driven largely by the LCC sector. At the same time, the market share of the national carrier, Singapore Airlines (together with its subsidiary SilkAir) has declined, even though the Singapore Airlines group still commands over 40% of seat capacity at Changi. The group has recently set up Scoot, a wholly-owned long-haul LCC that complements the operations of short-haul LCC Tigerair (in which the group has a 33% share).

Changi is home to several major LCC brands, including Tigerair and Jetstar Asia. The latter is 49% owned by the Qantas group and had acquired local LCC Valuair in 2005. In addition, the AirAsia group has a significant presence in Singapore, even though not in the form of a Singapore subsidiary. In fact, due to Singapore’s liberal access rights, the AirAsia operations are mounted by AirAsia Malaysia and its Thai, Indonesian and Philippine subsidiaries. Tigerair, Jetstar Asia and the AirAsia group all have significant LCC operations at Changi.

In the coming years, liberalisation within ASEAN and Asia can be expected to bring more growth to Changi, particularly as LCCs continue to expand their operations. As regards the ASAM goals, Singapore fully supports all the market access and ownership/control relaxations, including seventh freedom passenger rights and the ASEAN “community carrier” concept. At the same time, Singapore’s strategy is to continue signing even more liberal agreements with individual partners (on a bilateral basis), and to agree with like- minded ASEAN states to bring forward the timetable for aviation liberalisation.

Infrastructure-wise, the award-winning Changi Airport has long been known for anticipating and planning for future demand. That said, congestion has started to appear during certain hours of the day, due partly to the surge in LCC operations and the impact these have on runway capacity. Plans to open a third runway are being discussed. Construction of a fourth terminal (T4) building has also begun on the site of the former Budget Terminal, with plans for a fifth terminal (T5) soon to be announced. This means that Changi will no longer have a dedicated terminal for budget/LCC carriers.

71 Lifting-the-barriers REPORT: AVIATION

Thailand

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Thai Airways International points: Liberal. Party to MAAS, Fairly liberal. “Substantial (includes Thai Bangkok, Phuket, Chiang MAFLPAS, MAFLAFS. ownership and effective Smile, Nok Air) Mai, Hat Yai. control” as default, with foreign investment allowed using this Thai AirAsia Medium-sized domestic model (e.g. Thai AirAsia). market. Bangkok Airways Position toward other options, Major international markets: including ASEAN Community Orient Thai Singapore, Malaysia, Hong Carrier, uncertain. Likely to insist Kong, Indonesia. on “substantial ownership and effective control” for Thai (i.e. own) carriers.

Foreign Ownership in Local Carriers

Thai AirAsia (45% AirAsia)

Pending: Thai Lion (49% Lion Air); Thai Vietjet Air (49% Vietjet Air)

Thailand international capacity share (% of seats) by carrier

Source: CAPA – Centre for Aviation & Innovata

Analysis Thailand is one of the most advanced aviation hubs in ASEAN, along with Singapore and Malaysia. International flights are highly centralised at Bangkok Suvarnabhumi Airport which has reached its capacity despite being a relatively new airport. The re-opening of Bangkok Don Mueang Airport has alleviated congestion at Suvarnabhumi, and major operations such as Thai AirAsia’s flights have now moved to Don Mueang. Besides Bangkok, other international points include the resort island of Phuket, Chiang Mai, Hat Yai, Krabi and Samui (where Bangkok Airways dominates). The Thai Airways group (including Thai Smile and LCC Nok Air) has the highest international market share (28.8%) out of Thailand, with Thai AirAsia in second place.

72 Lifting-the-barriers REPORT: AVIATION

On account of its booming tourism sector, Thailand has traditionally been liberal when granting third and fourth freedom access to foreign carriers. Hence, even before it accepted the ASEAN instruments MAAS and MAFLPAS, Thailand already had unlimited access bilateral agreements with neighbouring Singapore and Malaysia. With MAAS and MAFLPAS, full third, fourth and fifth freedom access is provided into Thailand for all carriers from ASEAN state parties. At the same time, the government is known to be protective of Thai airlines, particularly the flag carrier Thai Airways. The government’s position with regard to fifth freedom rights through Bangkok is thus more guarded, particularly for operations to points outside the ASEAN region.

The position toward ownership and control is also somewhat cautious, particularly for Thai-designated airlines. The AirAsia group was allowed to establish Thai AirAsia but with strict Thai-majority ownership requirements. As for the proposed ASEAN “community carrier” concept, this is likely to be approved only for carriers from other ASEAN countries.

73 Lifting-the-barriers REPORT: AVIATION

Vietnam

Key Air Transport Characteristics

Major Airlines Key Aviation Features Position on Market Access Position on Foreign Ownership/ Control Vietnam Airlines International points: Ho Chi Liberal. Party to MAAS, Fairly liberal. “Substantial Minh City, Hanoi, Da Nang MAFLPAS and MAFLAFS. ownership and effective Jetstar Pacific control” as default, with foreign Large domestic market. investment allowed using this Vietjet Air model (e.g. Jetstar Pacific). Major international markets: Air Mekong Thailand, Singapore, Supports “principal place of (suspended) Malaysia, Hong Kong business / effective control”.

Position toward other options, including ASEAN Community Carrier, uncertain. Likely to approve if reciprocal guarantees can be obtained from other member states.

Foreign Ownership in Local Carriers

Jetstar Pacific (30% Qantas)

Vietnam international capacity share (% of seats) by carrier

Source: CAPA – Centre for Aviation & Innovata

Analysis Vietnam has in recent years emerged as a strong aviation market, backed up by a growing economy, inward tourism and foreign investment and a rising middle class in a large domestic population. The international market between Vietnam and other countries is dominated by the government-owned national carrier, Vietnam Airlines, which has a 40.2% seat share. This is followed by Thai Airways, which accounts for large passenger flows to and from Thailand, the biggest international market.

The major international points are the commercial capital Ho Chi Minh City, the capital Hanoi, and the seaside resort of Da Nang. Vietnam has largely been liberal in its air services policies, particularly toward market access. It has now accepted the MAAS,

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MAFLPAS and MAFLAFS agreements that free up all its points for unlimited third, fourth and fifth freedom access for other carriers from ASEAN. Third and fourth freedom relaxation is already evident in the large number of new carriers making international point-to-point flights into Vietnamese cities, including the major LCCs.

The national carrier, Vietnam Airlines, is also poised to join the league of more developed airlines in the region. It is thus likely to benefit from increased third and fourth freedom penetration into other countries. Vietnam Airlines already enjoys a dominant market in its immediate neighbourhood in Lao PDR and Cambodia through the CLMV Agreement. The agreement provides for unlimited third, fourth and fifth freedom operations. This accounts for Vietnam Airlines’ strong market share into and out of Cambodia and Lao PDR, including fifth freedom operations linking all three countries (e.g. Hanoi-Vientiane- Phnom Penh and Hanoi-Luang Phabang-Siem Reap).

In terms of new carriers, Vietnam has also been taking a fairly liberal approach. It approved the Australian carrier Qantas’s investment in Pacific Airlines, which was subsequently rebranded and is now known as Jetstar Pacific. In recent years, however, the airline has come up against various challenges, including allegations of misconduct levelled against its senior management. There was also a well-publicised disagreement with the AirAsia group when it attempted to set up a Vietnamese subsidiary in partnership with local carrier Vietjet. The government reportedly did not want the new joint venture to carry the AirAsia brand, and there was a perception that this was to protect Vietnam Airlines. The deal with AirAsia eventually fell through.

On its part, Vietjet is now an established LCC in its own right, serving domestic flights but with ambitious international expansion plans. It has set up a joint venture in Thailand called Thai Vietjet Air, which is scheduled to commence operations in late 2013. It is reportedly also interested in a Myanmar subsidiary. At home, it has now surpassed Jetstar Pacific as Vietnam’s second largest airline. Meanwhile, the controlling stake in Jetstar Pacific (originally held by Vietnamese non-airline interests) has now passed to Vietnam Airlines. The national airline has thus emerged as the most powerful force in aviation, controlling its former rival Jetstar Pacific.

Vietnam Airlines also has a 49% stake in Cambodia Angkor Air, marking this as the first significant investment by a full-service airline from ASEAN in another member state’s airline. As such, it is likely that Vietnam will support more liberal ownership and control policies for ASEAN carriers, including the proposed “community carrier” concept. Such a concept, if approved by Cambodia and subject to the MAAS and MAFLPAS conditions, will allow Vietnam Airlines to own a majority of or even the entire shareholding in a Cambodian carrier.

At the same time, Vietnamese aviation also faces major infrastructure challenges. Some airports are already facing capacity strains, particularly in Ho Chi Minh City. In this regard, a new airport at Long Thanh is being planned to replace Tan Son Nhat Airport that currently serves Ho Chi Minh City.

75 Lifting-the-barriers REPORT: AVIATION Endnotes 1. InterVISTAS-ga, The Economic Impact of Air Service Liberalisation (2006), at http:// www.intervistas.com/downloads/Economic_Impact_of_Air_Service_Liberalization_ Final_Report.pdf (last accessed 30 September 2013).

2. InterVISTAS-EU Consulting, The Impact of International Air Service Liberalization on Singapore (July 2009), at http://www.iata.org/SiteCollectionDocuments/Documents/ SingaporeReport.pdf (last accessed 30 September 2013).

3. Indonesia Infrastructure Initiative (IndII), National Strategy for the Implementation of ASEAN Open Sky Policy Stage 2: Final Report (June 2011), at http://www.indii.co.id/ publications-detail.php?id_news=240 (last accessed 30 September 2013).

4. InterVISTAS-EU Consulting, The Impact of International Air Service Liberalization on Vietnam (July 2009), at http://www.iata.org/SiteCollectionDocuments/Documents/ VietnamReport.pdf (last accessed 30 September 2013).

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The views, responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views of CIMB ASEAN Research Institute and The Centre for International Law (CIL).

First published: November 2013

First print: November 2013

Publisher: CIMB Southeast Asia Research Sdn Bhd (CARI) Level 6, Menara SBB, Plaza Damansara No. 83, Jalan Medan Setia 1 Bukit Damansara, 50490 Kuala Lumpur, Malaysia

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