ASEAN Aviation Services and Liberalization

22 January 2018

Jae Woon Lee

Assistant Professor, Chinese University of Hong Kong, Faculty of Law

1

Workshop on ASEAN Aviation Integration, Kuala Lumpur

2

1. Overview

2. Market Access Liberalization (3 agreements)

3. Collateral Benefits: Joint Venture Airlines

4. The Common External Strategy

5. Success Factors

6. Remaining Challenges

7. Conclusion

3

Overview

• Aviation has been an integral component in the establishment

of the ASEAN Economic Community (AEC).

• Significant integration and liberalization have taken place

since 2004.

Liberalization

New and

better

air services

Traffic

growth

Economic

growth

Job

growth

4

Overview

Market Share of Low Cost Carriers

Source: CAPA (Centre For Aviation)

5

Market Access Liberalization (3 agreements)

• In 2004, the ASEAN transport ministers adopted the Action Plan

for ASEAN Air Transport Integration & Liberalization 2005–2015

and the Roadmap for Integration of the Air Travel Sector.

• This roadmap has been successfully incorporated into three

formal legal agreements:

1) The 2009 Multilateral Agreement on Air Services (MAAS)

2) The 2010 Multilateral Agreement for the Full Liberalization of

Passenger Air Services (MAFLPAS)

3) The 2009 Multilateral Agreement for the Full Liberalization of

Air Freight Services (MAFLAFS)

6

The 2009 Multilateral Agreement on Air Services (MAAS)

Protocol Scope

Protocols 1 to 4

Limited impact, mainly covering secondary cities in

growth areas (sub-regions) straddling borders of

neighboring states

Protocol 5

Unlimited 3rd and 4th freedoms between capital cities

(A’s carriers between A’s capital and another capital)

E.g. Singapore Airline (SQ) Singapore-Bangkok and vice

versa

Protocol 6

Unlimited 5th freedom between capital cities (A’s carriers

from A’s capital to C’s capital via B’s capital)

E.g. SQ’s Singapore-Kuala Lumpur-Hanoi and vice versa

7

The 2010 Multilateral Agreement for the Full Liberalization

of Passenger Air Services (MAFLPAS)

Protocol Scope

Protocol 1

Unlimited 3rd and 4th freedoms between all cities (A’s carriers

from A’s capital to B’s non-capital, A’s non-capital to B’s capital,

and A’s non-capital to B’s non-capital)

E.g. Philippine Airlines (PAL) Manila-Ho Chi Minh, Cebu-Jakarta,

Cebu-Ho Chi Minh

Protocol 2

Unlimited 5th freedom between all cities (except capital-capital-c

apital)

E.g. Garuda Indonesia (GA) Surabaya-Singapore-Bangkok,

Jakarta-Kuala Lumpur-Ho Chi Minh, Jakarta-Chiang Mai-Hanoi

Jakarta-Kota Kinabalu-Cebu

8

The 2009 Multilateral Agreement for the Full Liberalization

of Air Freight Services (MAFLAFS)

Protocol Scope

Protocol 1

Unlimited 3rd, 4th, and 5th freedoms between designated points

E.g. Vietnam Airlines’ Hanoi-Clark and Hanoi-Vientiane-Bangkok

cargo routes

Protocol 2

Unlimited 3rd, 4th, and 5th freedoms between all points with interna

tional airports

E.g. Vietnam Airlines’ Ho Chi Minh-Singapore and Hanoi-Singapo

re-Manila cargo routes

9

O X

Market

Access

1st Freedom

2nd Freedom

3rd Freedom

4th Freedom

5th Freedom

(6th Freedom)

7th Freedom

8th Freedom

9th Freedom

10

Collateral Benefits: Formation of Joint Venture Airlines

• Ownership and Control Restrictions:

An airline must be substantially owned and effectively controlled by

nationals of the state in which the airline is registered.

• EU broke with this tradition by introducing the concept of the

“community carrier” for the first time.

• In ASEAN, the wholly owned subsidiary strategy is not legally

allowed.

• Instead, joint venture airlines formed by two different ASEAN

nationalities are commonplace in ASEAN.

11 Source: CAPA (Centre For Aviation)

12

Collateral Benefits: Formation of Joint Venture Airlines

Country/

Territory

Joint Venture

Airline Foreign Shareholder/s

Local

Shareholder/s

Indonesia Indonesia AirAsia AirAsia Investment – 49%

Neither airline

companies, nor

do they have

prior business

experience in

the airline

industry

Indonesia Indonesia

AirAsia X AirAsia X Berhad – 49%

Malaysia Malindo Air Lion Air – 49%

Philippines Philippines AirAsia AirAsia Investment – 40%

Thailand Thai AirAsia AirAsia Investment – 45%

Thailand Thai Lion Air Lion Air Group – 49%

Thailand Thai AirAsia X AirAsia Berhad – 49%

13

Challenges to Community Carriers

Traditional Restrictions in Air Services Agreements

“Each Contracting Party shall have the right to refuse to accept

the designation of airlines or to refuse to grant the operating

authorisation…, in any case where the said Contracting Party is

not satisfied that substantial ownership and effective control of

those airlines are vested in the Contracting Party designating

the airlines or in its nationals.”

Ownership Control

Domestic

Law A B

Air Services

Agreement C D

India’s FDI Rules on the Airline Industry

■ 1927: Setting up of Civil Aviation Department

■ 1932: Tata started air services between Delhi and Karachi

■ After WWII, 6 new private companies started business

■ 1953: Civil aviation sector was nationalized

■ 1994: Opened for private and foreign investment

- FDI up to 40% permitted

- Foreign airlines are not allowed

■ 2012: 49% permitted, including foreign airlines

■ 2016: 100% FDI permitted, but 49% for foreign airlines

14

15

The Common External Strategy

• Since the early stage of the ASEAN, the member states have

been aware of the need to establish a common external strategy

vis-à-vis third countries and regions.

• CU: FTA + common external tariff

• CM: CU + free movement of capital &

labor, some policy harmonization

• Economic Union: CM +

common economic policies

16

ASEAN – China

• Good progress with China (in relation with FTA)

• The ASEAN-China Air Transport Agreement (2010)

Protocol 1 (2010)

Unlimited 3rd and 4th freedoms access for airlines on both sides

Protocol 2 (2014)

Limited 5th freedom access for airlines on both sides

• Plan to further expand 5th freedom rights in 2018

17 Source: Alan Khee-Jin Tan (2014)

18

ASEAN – Japan

• The ASEAN-Japan Working Group on Regional Air Service

Arrangement (AJWG-RASA) was established in 2014.

• Japan signed open skies agreements allowing 3rd and 4th

freedom for passenger and cargo services with 8 ASEAN states

(except Laos and Cambodia).

• 6 out of the 8 agreements allow unlimited 5th freedom except

Tokyo (8 – Thailand and the Philippines).

• The key is the 5th freedom via Tokyo.

19

ASEAN – Korea

• ASEAN is actively looking to establish a new agreement as a

group with Korea.

• Korea has signed open skies agreements permitting 3rd and 4th

freedom with 6 ASEAN members (Vietnam, Malaysia, Myanmar,

Thailand, Cambodia, and Laos).

• None of air services agreement contains unlimited 5th freedom.

• Again, the key is the 5th freedom.

20

ASEAN – The EU

• The EU and ASEAN agreed to commence negotiations on a

comprehensive air transport agreement between both regions in

2014.

• The two parties are negotiating not only market access issues

but various topics including fair competition.

• It is named as the ASEAN-EU Comprehensive Air Transport

Agreement (CATA).

• This will be the first ever region-to-region aviation agreement.

• The impact of the agreement to the other parts of the World will

be interesting to watch.

21

Success Factors

• All States are Better Off

• Gradual Approach

• Role of Airlines

22

Remaining Challenges

• Insufficient Infrastructure

• Incomplete National Commitments

• Lack of Shared Vision

23

Conclusion

• ASEAN is now looking at a greater level of integration as stated

in the AEC Blueprint 2025.

“Air transport: Strengthen the ASEAN Single Aviation Market (ASAM)

for a more competitive and resilient ASEAN, through the following key

measures:

a. Advance safer and more secure skies in ASEAN;

b. Enhance air traffic management efficiency and capacity through a

seamless ASEAN sky; and

c. Foster greater connectivity, including the conclusion of aviation

agreements with Dialogue Partners.”

Thank you