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

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AVIATION + Lifting-The-Barriers Report Lifting-The-Barriers REPORT: AVIATION 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. i LIFTING-THE-BARRIERS REPORT: AVIATION 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
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