Executive Summary

The liberalisation of the ASEAN air transportation sector has increased tremendous competition in the business approaches of Air carriers and Passenger traffic. This research work is about the process of understanding the act of liberalisation through the Open Sky policy and analyse the same in terms of the increasing competition in the selected domains. For this purpose the Case Study research methodology has been selected as the appropriate means of meeting the answers to the research questions. Moreover, interview sessions with experienced professionals from the aviation sector are also considered by this research work. The basic idea is to know the competitive advantages and the disadvantages led by liberalisation in the business approaches of air carriers and passenger traffic in ASEAN region. The data collected for CAPA (2016) will also be analysed in justification of growth that the liberalisation has added to the aviation sector. The way to control the activity of liberalisation for better benefit of the ASEAN aviation sector will remain as core target of this research work.

1.0 Introduction

The thematic concern of the emerging concept of ‘Open Sky’ refers to the act of liberalization in the international domain of aviation, which remains under the persuasion of bilateral, absolutely regional, or otherwise on the verge of multilateral functionalities. Irrespective of this concern, the implication of liberalization is subject to differ to the ideological concept of having single ‘Open Sky’ operative features (Yeoh, et al., 2015). As a result, the agreements made in this approach are liable to get enhanced to the competitive peripheries of airlines in diversified degrees.

This research is investigating the relevance of the ‘Open Sky’ policy along with the increasing competitive edge among the air carriers and the passenger traffic. The purpose is to have an insight into the justifications and challenges that this policy will bring in to the Association of Southeast Asian Countries (ASEAN)  aviation domain.    

1.1 Background Overview

The ASEAN Single Aviation Market, or as popularly termed as ASEANSAM is the ASEAN Open Sky policy, which gets recognised as the most major policy of this particular region. Based on this policy, ASEANSAM geared up all the developmental approaches and further aimed in enhancing the unified as well as the market of single aviation business among the ASEAN members. According to the report of Tan (2009), the initial proceedings of ASEANSAM for the Southeast Asian members date back to 1^st of Jan., 2016. The Air Transport Working Group of ASEAN proposed the policy of ‘Open Sky’ in the aviation domain, and the same was supported by Senior Transport Officials. Moreover, ASEAN Transport Ministers endorsed it.

The research based declarations of Chinaview (2007) and Tan (2009) state that the establishment of ASEANSAM was initiated with the aim to establishment the strong hold of ASEAN Economic Community, whereby it was expected to get accomplished by the activity of liberalization and air travel business among the ASEAN members. The approach of the ‘Open Sky’ policy is to offer direct benefits to the aviation sector and add the element of growth and sustainability in the business of air travel in the global sky. This policy is also meant to establish free tourism related services, ventures of trade and commerce, and assist in high quality based services to all the ASEAN member states (Chinaview, 2007 and Tan, 2009).

1.2 Problem Formulation

The problem that this research laid emphasis on- is about the clashes of policies and agreements that are liable to happen between the aviation services of the ASEAN member state. Based on the investigative research of Forsyth, et al. (2004) and Forsyth & Rodolfo (2006), this research concentrates in gaining the key towards progressive solution to the probable clashes. It also is in pursuit of attaining adequate amount of resolution in the implementation of liberalisation to the aviation industry under the regulations of ‘Open Sky’. The problem with the air traffic liberalisation among the capital cities, the ASEAN members are subject to get into the competition of holding unified aviation principles and at the same time designate individual competitive approaches, hence the current research approach.

1.3 Research Questions

Keeping in consideration with the aforementioned problem formulation, the current research has attained some questions in terms of understanding the challenging competitive platform between the air carriers and passenger traffic, while implementing and developing ‘Open Sky’ policy, by the ASEAN liberalisation of aviation sector. These are the research questions are as follows:

1. What is the process of liberalisation of the air transportation system in the region?
2. How does liberalisation of the air transportation system create an impact on the competition between air carriers and passenger traffic?
3. What is the impact of air transport liberalisation on competition between air carriers and passenger traffic in ASEAN region?
4. What are the recommendations provided to appropriate entities for controlling liberalisation of the air transportation system that creates an impact on the competition between air carriers and passenger traffic in ASEAN region?

The selection of these questions are meant for the understanding of the ‘Open Sky’ policy and the impact that the same as on the futuristic approaches of air carriers and passenger traffic among the ASEAN members. Moreover, these are the questions that are further considered in adding research objectives to the current paper and are mentioned hereafter.

1.4 Research Objectives

This research paper aims in gaining the insight into the liberalisation of Aviation in the peripheral count of ‘Open Sky’ venture noted by ASEAN. Diversified aspects, especially the concerns of capacity deregulation, along with the approach on the process of implementing price related controls, will be investigated hereby. This research work will focus in understanding all sorts of different agreements and policies, counted as per geographic as well as functional dimensions in the competitive arena of air carriers and passenger traffic, for the meeting the liberalisation approaches as noted by the formulations of ASEAN ‘Open Sky’.  The core objectives of this research paper are as follows-

• To gain adequate critical information about the relevance of liberalisation through ‘Open Sky’ by ASEAN.
• To understand the challenges and the issues related to the developmental approach of ASEAN air carriers.
• To understand the challenges and the issues related to the developmental approach of ASEAN passenger traffic.
• To identify the competitive stress among the air carriers & passenger traffic, caused by liberalised ‘Open Sky’.
• To figure out the possible resolutions in offering better competitive edge to ASEAN air carriers and passenger traffic.

1.5 Research Rationale

The rationale behind this research work, is to gain a critically analysed understanding of the liberalisation of  ASEAN  aviation sector and to point out the impact of ‘Open Sky’ policy over the ASEAN air carriers and passenger traffic. As this gets initiated this research paper aims in offering resolution to the increasing competitive stress between the air carriers and passenger traffic of the ASEAN members. The chief purpose is to derive all those proceeding through which this research can aim in generating  the positive aspects of liberalisation and eventually add a comfort level to the international competitive platform of aviation industry.

2.0 Literature Review

In this section, the basic importance is in researching various books, peer-reviewed journal articles, officially recognised articles from internet and official sites, in order to get adequate basic information related to the selected topic. For the current research, the researcher selects innumerable documents, articles, and books related to the topic and sorts out all those important points that are relevant in offering adequate knowledge to the research approach. The process of sorting of all the secondary data are based on the criteria determined by the research questions and the objectives. This section offer wider ranged understanding of all the terms that are related to the research and further assists in gaining in-depth realisation about the research questions. 

2.1 Liberalisation in the ASEAN Community

The practice of adding liberalisation in the ASEAN community is noted as a very common practice (Corbett, 2008).  According to Corbett (2008), the context of services gets a very high esteem and plays a vital role in the output functionalities and employment opportunities of the ASEAN business scenario. Corbett (2008) offers a wide ranged distribution of the services in the ASEAN business countries and establishes his point more practically (see Table 1 for details):

Figure 1 Service Percentages of GDP in ASEAN

Source: Corbett (2008)

As noted in Figure 1, it is the services that covers 30-40% of GDPs of these nations. In order to gain higher international marketing exposure, a decade ago it has been marked that there is the huge demand of increasing the accessibility of services in these regions. For this purpose the most suitable way for ASEAN is that of liberalisation. By means of undertaking liberalising commitments, these nations gain the accessibility to the proceedings that can remove general barriers to the international markets (Hew, 2007). As derived by Hew (2007) the only way to attain the liberal mode of getting connected to international businesses is through open and least restricted terms and conditions in the businesses. This approach of liberalisation gets further extended to every domain of ASEAN business and the aviation sector gets the ultimate call of ‘Open Sky’.

2.1.1 Liberalisation of Air Transportation

The extension of liberalisation to the aviation sector of ASEAN has been noted as a remarkable progress. According to the research of Tham (2008) air services and the ASEAN airport operations are comparatively more contingent over the international functionalities. Referring to the ‘Open Sky’ policy for liberalisation Tham noted that such aviation policies are subject to remain in association with particular country and region. Moreover, the basic objective of such policy must concentrate in adding the ability features for the implementation of effectively service delivery and generating benefits for the aviation industry (Tham, 2008). In reference to the ASEAN members in the aviation sector, Forsyth et al. (2006) stated that there are huge differences among the airlines of different ASEAN members. However, it is only through liberalisation that some stability and equality can be achieved in general. With the variations of being bilateral, multilateral and regional, the ASEAN members are getting wider scopes of services with standardised norms of liberalisation, and that is indeed very competitive to the air carriers and passenger traffic (Forsyth et al. 2006). However, Forsyth et al. (2006) claims that the liberalisation of ASEAN aviation sector is the effective means for offering better and novel air services to the clients, whereby the same service domain will increase trade benefits with scopes for consumer welfare.

2.1.2 ASEAN Liberalisation         

The air transportation system of ASEAN focuses in gaining regional integration with an emphasis over the act of liberalisation meant within the aviation services and trading provisions. Following the policies of ASEAN Vision 2020, there is a constant desire for the provision of free trade in the domains of goods as well as services, by the ASEAN members (AJRC-ANU, 2008). The report from ASEAN (2007) notes that it was in the Bali Concord that there are agreed terms for the setting of targets as well as determined schedules related to liberalisation in the process of services for bringing in free trade scopes by liberalisation till the end of 2020. In accordance to the Vientiane Action Plan, 11 sectors get prioritised for the means of gaining integrated and liberalised business proceedings, and aviation sector appeared to be the most relevant to this plan. The aim was to remove all the substantial restrictions in the trading of aviation business by the year 2010, with specific inclusion of both air carriers and the passenger traffic services  (ASEAN, 2007). The approach of liberalisation focussed on investment negotiations within the structural provisions led by the ASEAN Investment Area Agreement (AIA). The liberalisation activities were meant to get redeemed by the dialogue partners of ASEAN, especially China, Australia, India, Korea, Japan, and New Zealand (ASEAN, 2007).

2.1.3 Air Carriers & Passenger Traffic

The services of ASEAN aviation system comprises of 10 member with 600 million population. The nations included in this member list are-  Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam (Tan, 2009). The aviation services meant for the air carriers and passenger traffic follow the determined roadmap in integration with the sector for ASEAN aviation. In fact the terms and conditions of liberalisation, and the scope of developing aviation business offer free option for trade to both the air carriers and passenger traffic. However, the effectiveness of the same can be counted since 2008 (Tham, 2008). Liberalisation of air carriers and passenger traffic to the capital cities meant for the designated airlines from the member nations are meant on the basis of ASEAN-X principle (ASEAN, 2007). A detailed speculation can be noted as below:

Figure 2 Open Sky Formulation for Air Carriers and Passenger Traffic

Source: Tham (2008, p.4)

As depicted in Figure 2, the agreements among the member states are planned to remain without any kind of restriction meant over the frequency, capacity, and types of aircraft, etc., which is apparently a state of anticipation for the current research work. Ratification over the agreement stays viable for most of the members of ASEAN, whereby Malaysia, Thailand, and Singapore remain very determined with the terms.

2.2. Competitive Factors: ASEAN region

The reports led by DBS (2016) offer very clear idea about the positive and relevantly long-term perceptions towards the liberalisation of ASEAN aviation secort along with eth Open sky venture in the international market. According to the DBS (2016) in last decade the ASEAN countries are gaining ‘strong growth trajectory’, that is highlighted through the expected margin of their GDP, which is expect to attain a growth CAGR of 8.3%, which is an estimated range of the US$4trillion by the fiscal year of 2020. The derived reasons are the increasing affluence class and the doubling income of the middle class population of the ASEAN member nations by 2020. With the promotional expectation of the policies of ASEAN Open Sky, there is every point justified for the removal of all kinds of aviation barriers within the intra-regional domain and the resultant consequences are the increase in the competition among all the state carriers. These aspects comprises the factors related to the downing airfares, openings towards more destinations, and customisations in the hospitality and the catering services. Closer investigative report by InterVistas-ga Consulting Inc. (2006), note that the implementation of liberalisation is liable to add enhanced provisions to the increasing demands of ASEAN aviation market. The increasing competitiveness is subject to offer better quality and hence wider range of consumer oriented services.

2.2.1 Competitive Impact on Growth

The competitive impact led by the policies of  liberalisation by the ASEAN members lay emphasis over the act of generating positive and relevantly long-term outlook to the aviation market of ASEAN. There is a notable rise in the stock records of the major aviations under this propensity (see Table 1 for details):

Table 1 Stock Details of Major ASEAN

Source: DBS (2016)

As noted from the aforementioned Table1, the increasing status of the stocks of all the major aviation companies of ASEAN is offering the foreground for the increasing demand of the regional organisations, at large. DBS (2016) makes forecast about the short-haul to the status of RPK that is subject to grow at 9% CAGR by the year 2020. This is liable to outpace all kinds of mid as well as long-haul with 14% CAGR. With better prospects of income and increased earnings, the DBS expects that ASEAN airlines is likely to gain a significant post operating growth in profit, which will be supported by cheaper prices of the fuel. The major ASEAN players of this trade AAX, GIAA, THAI and Tigerair, are further expected to attain huge profit margins by 2015-16 (DBS, 2016) (See Appendix 1 for specific growth rates).

2.2.2 Budgetary Benefits of Liberalisation

The Reuters (2016) of The Indian Express noted some of the very relevant budgetary benefits as generated by the liberalisation policies of the ASEAN aviation market. As per this report, losses as led by the air carriers are much revived through the provisions of passenger traffics. In this context the report refers to the ASEAN airlines, such as Garuda Indonesia, Thai Airways, and Philippine

Airlines, have lost extensive portions of the aviation market share in the past. Their dealings with air carriers have actually revived with the plan of long-haul networking services to the passengers in the Southeast Asian domain.

Estimations led by ERIA Study Team (2010), Hauser & Range (2012) and Maxon (2014), and DBS (2016) there are clear indication that SEAN liberalisation and implementation of ‘Open Sky’ policies are meant for long-term sustainability ventures in the market. As referred by Vinoop Goel, the Director of Asia Pacific airports IATA (International Air Transport Association),       with the line of global airline trade, IATA declares that the ASEAN nations are in capacity of generating more than 25 million employment opportunities with estimated GDP of US $298 billion in this particular global location by the year 2035. This declaration is directly referred to the investments preferences made towards the aviation sector of ASEAN nations, in particular (DBS, 2016).

2.3 ASEAN Open Skies

According to ERIA Study Team (2010) the establishment of  Open Sky Policy among the nations of ASEAN regional is the result of the developing trends of competitive modes of air services as offered by the member states of ASEAN. The creation of ‘Open Sky’ as a policy is more likely to get identified as ASEAN Open skies (or the AOS). It is by 2015, that this establishment aims in developing a single community in the economic domain of aviation sector (ERIA Study Team, 2010).

With any further exploration, it is reasonable to check into the ideological approach of the concept called ‘Open Skies’ in the modern aviation international market. As per the illustration of Yeoh, et al (2015) ‘Open Sky’ is international policy that is capable of liberalising certain sector of the market, based on specific regulations. The approach of ASEAN ‘Open Sky’ in this matter is concerned about the international industry of aviation in the SEAN location for commercial profitability of air carriers and the passenger traffic. The ideology is towards the creation of freemarket in the international airline industry, from the ASEAN members. The primary objectives get identified as, liberalisation with least intervention of the government, for both air carriers and the passenger traffic. The basic aim is to generate extensive profits and offering necessary share to the aspect of regional developments.

2.3.1 ASEAN Open Skies: Freedom of Air

The process of liberalising the ASEAN aviation industry and implementing ‘Open Sky’ policies concentrated in availing 3^rd, 4^th, 5^th and 7^th freedom rights as bestowed by the aviation markets (see Appendix 2 for all ‘The Freedoms of the Air’ rights). The 3^rd and the 4^th Freedom of Air rights are meant for the flights that are from the home country of the airline to a foreign nation and to-&-fro (Boeing, 2009). This is a freedom that is refrain from any government approval. The 5^th Freedom of Air right lay the right to take flights between two nations that are not host country of the airline, in between the flights that are originally ending in home country of the airline. this ASEAN Open Sky policy also remain inclusive of the 7^th Freedom of Air rights, whereby the airlines get the rights to take flights between two foreign nations, without offering any flight to the home country of the airline company (Boeing, 2009).

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