The ASEAN way

In the meantime, smaller nations – the likes of Myanmar, Brunei, Laos and Cambodia – are becoming extremely nervous their carriers will be swamped by the big operators and the rising tide of low-cost seats. It was an issue raised by Karam Chand, chief commercial and planning officer at Royal Brunei Airlines, on the sidelines of the recent CAPA aviation summit in Sydney.

“What it does is open up capacity in all the ASEAN countries and of course it opens up capacity to Brunei for competitors to open up capacity as they wish. It’s a very interesting dilemma and challenge. I pose this question to our competitors: Are they going to mount capacity based on sustainable economics or will they just place aircraft because they’ve got thousands of aircraft coming over the next several years? It’s a multimillion dollar question for us. What do we do? How do we react? It’s a very important challenge for small airlines around the region. What do you do under these kind of policy settings? It’s very interesting to say you can have open skies but open skies leads to capacity dumping and irrational pricing and that’s not the best outcome you want. ” Chand, a former executive with the now re-engineered Virgin Blue, pointed out that even before the arrival of open skies capacity dumping by low-cost carriers has become an issue.

“When you see $1 and $10 fares every second week it is a real challenge for full-service carriers. Our cost structures are simply not there. This is something we are discussing with different governments around the place.

We want Brunei, as an example, to exercise its rights under the air fares agreement and deal with what we call predatory behavior. ” These concerns are backed up by a recent report from Singapore broking house UOB Kay Hian, an arm of United Overseas Bank, which said LCCs such as AirAsia and Lion Air will be among the major beneficiaries if ASEAN’s Multilateral Agreement on Air Services (MAAS) is fully ratified.

It pointed out LCC penetration in South-East Asia is already at 59 per cent and this will rise further under open skies. The end result will, in reality, be semi-open skies. That being said, no-one should be under any illusions that ASEAN open skies will be a clone of the full liberalisation now in place in Europe. The Asian version is far less ambitious, allowing for only third, fourth and fifth freedom relaxations among member states. The third and fourth freedom rights allow airlines to carry passengers and cargo between two countries within ASEAN without restriction. The fifth freedom is essentially the right to carry passengers and cargo from one country to another, then pick up passengers and cargo from the second country to a third country (again, within ASEAN).

The deal doesn’t include seventh freedom access which would allow, for instance, a Singapore carrier to connect Jakarta and Manila without the flight originating or terminating in Singapore. Neither is the sensitive right of cabotage, the ability of a foreign airline to connect two domestic points in a country, included. Nor does it lift restrictions on cross-border ownership, that relentless barrier to much-needed consolidation.

The end result will, in reality, be semi-open skies.

There are other issues about ASEAN which are unsettling airlines. For example, back in 2010 ASEAN signed a landmark air transport agreement with China. It is already in force between China, Singapore, Malaysia, Thailand, Myanmar and Vietnam with other members free to sign up when they are ready. The problem is the agreement allows Chinese carriers to fly from any point in China to any point in ASEAN with unlimited access. But ASEAN carriers can only fly to China from their home country. For example, Singapore Airlines cannot operate from Manila to China. That, say airline insiders, puts ASEAN carriers at a disadvantage against their Chinese competitors and adds up to a lop-sided arrangement.

ASEAN’s ultimate target is to have a fully liberalised single aviation market. But no date has been set and it still looks a long, long way down the track.