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Open Sky Policy: Future of Free Trade in ASEAN?


In 2003, at an ASEAN summit meeting, the proposal began for an extension of the free trade zone into the skies, an open sky policy within the ASEAN region.  The open sky agreement, whose target has been set for 2020, is said to be an inaugural part of the economic…


In 2003, at an ASEAN summit meeting, the proposal began for an extension of the free trade zone into the skies, an open sky policy within the ASEAN region.  The open sky agreement, whose target has been set for 2020, is said to be an inaugural part of the economic integration of the ASEAN member countries.  As stated in a report done by the Australian Government, open sky will promote trade and competition within the airline industry ultimately resulting in overall economic gains across the region1.  While there is no finite definition as to what the ASEAN Open Sky policy will entail, the main concept lies in policy reforms such as the removal of both price controls and capacity regulations.  While the planned agreement would potentially result in economic and development benefits, some ASEAN members are hesitant to join.

Europe’s Open Sky

The European air transport industry had initially been highly restrictive, including limited scope for competition and domination of large, scheduled airlines. In the case of Europe, there was not a specific agreement allowing for liberalization of the aviation industry, there was simply a gradual move towards one. Ultimately the process began as a result of a judgment in Europe, which determined competition policy did apply to the airline industry.  The liberalization process in Europe took place in three stages.  It began in 1987 when there was minimal liberalization of fare setting, capacity controls and additional market access2.  Next the opening up of more fare controls and capacity occurred; and finally, a single market was created in 1993 as a result fierce liberalization.  While initially there was not a noticeable change in industry structure beyond the opening up of lower fare seats, it paved the way for the eventual development of low cost carriers thus promoting competition and choice in the aviation industry. 

Open Skies on the Asia’s Horizon

Similar to Europe, it is hoped that the open sky agreement in ASEAN will allow for more airline productivity and flexibility of airlines.  Ultimately, the competition allowed by opening up routes to carriers will force airlines to lower prices benefiting the consumer.  Additionally, the new liberalized industry environment will allow for low-cost and lesser known carriers to prosper.  By allowing a third country to provide services between two other countries, the lowest cost will gain market access and overall costs will fall.  The primary benefits, low cost and the ease and access of travel, go directly to the consumers3.  Additional benefits go to the country, by allowing lower airline rates, better services and raising capacity, inbound tourism is predicted to increase, thus bringing more revenue. A third benefit is the increase in employment, foreign exchange and government revenue that would eventually occur as a result of competition and tourism. Furthermore, the overall free flow of goods would benefit the countries involved. 

Singapore supports an open sky agreement as it already has a liberal aviation industry and is a major hub, offering flights into and out of various regions in Asia due to its key location4.  Malaysia also has a liberalized aviation industry as it attempts to expand tourism.  It recently opened up allowing new companies to compete with Malaysia Airlines5.  While several ASEAN countries have entered into multilateral and bilateral open sky agreements, containing 3rd and 4th freedom rights, which allow for airplanes to carry both passengers and cargo from one’s country to another and the right to carry passengers from one country to the airlines country of origin,  the extent of liberalization is varied6. Not all allow for 5th freedom rights, which is the right to carry passengers from one’s own country, into a second country, then from the second country to a third, however, places like Thailand, which are considered hubs, allow several 5th freedom rights. 

Turbulence over ASEAN

It can be appropriate to use the European model as an example in some cases; however, there remain vast differences between Europe and the ASEAN member countries. The liberalization in Europe was decided upon by a judge in a central court, ASEAN does not have a central court. Additionally, European airports are highly congested and have slot restraints that needed to be addressed in the transition; most ASEAN countries would not face this difficulty. Perhaps the most prominent distinction is that European countries entered at the same or very similar levels of industry development, GDP, size and policies, ASEAN countries, on the other hand, have a wide range of industry development, levels of GDP and sizes. 

With a number of countries containing an abundance of different policies, economies and infrastructure, how can it be possible for such an agreement to bring benefits to all involved parties?  In order for an ASEAN open Sky policy to be effective, the respective governments must recognize and address several potential hindrances including competition policy, subsidies and infrastructure.
 
Competition policy in the ASEAN countries remains in its early years and if it is not formed in a cohesive manner among the countries, the open sky policy potential gain from competition will fail.  Price Fixing, predatory behavior, mergers and collusive behavior would all allow for airlines to avoid the competition of open sky by allowing them to force out new competition and prevent consumer cost benefits.  In order to prevent such obstacles, it would be necessary to establish a code of conduct outlining specific rules and regulations regarding competition policy. 

Another potential problem arises out of several ASEAN countries subsidizing airlines.  The problems are obvious with government subsides as there is no longer fair competition.  In Europe there exists a highly specific plan for subsidies, only permitting a one time grant when it has been approved by the governing body.  In ASEAN, there might be reason to subsidize some airlines as the developing ones would not have the experience and funding needed to become competitive in the industry.  To ease the problems with subsidies, the governments must make them transparent and provide guidelines for future reference. 

The infrastructure and business environment present in ASEAN countries also provides complications for an ASEAN open sky agreement.  It is possible for an open sky agreement to favor the larger aviation powers by providing them with more opportunity.  Several countries, like Singapore, have found it relatively easy to set businesses, including airlines.  Other ASEAN countries, like Cambodia, whose national airline, Royal Air Cambodge, closed in 1994 after losing USD 20 million, have found it difficult to establish an aviation industry.7  Financial instability and lack of technical workers within the countries proves to also be a challenge ASEAN members must take into account.   A slow transition to an open sky policy, allowing the smaller airlines to establish themselves before entering into competition, allowing the needed growth, improvement of infrastructure, and gaining of skilled workers, is a suggested way to enter into the agreement. 

The Road Ahead

While the overall concept of an open sky agreement for ASEAN proves to be hopeful and beneficial, one cannot be certain that implementing it will warrant the desired results.  Despite study and observation, the issues of whether the ASEAN markets can support such agreements, policies and infrastructure still remain. It is important for the leaders to know the differences between the European Union and ASEAN and take into account those discrepancies by molding an agreement that would adjust to the imbalanced ASEAN countries.  By providing transparency in allowance of traffic rights, slowly moving into the system allowing time for adjustment and establishing a working competition policy, the ASEAN open sky system could avoid the foreseeable problems and eventually benefit from the gains of the agreements.

Source: www.asiaecon.org |

 

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