Home' Asian Aviation : AAV July-Aug 2014 Contents AsianAviation | JULY-AUG 2014 35
EU-ASEAN OPEN SKIES
by one or more of the Middle Eastern carriers.
In any event, most direct ASEAN-E.U. flights
already enjoy unlimited rights under existing bilateral
agreements (except with some countries like France).
Singapore carriers, for instance, have had unlimited
rights into London Heathrow for some years now;
the real problem is the lack of slots, which an E.U.-
ASEAN agreement does not cure. More rights into
Paris would be welcome, but unlimited rights alone
will not help the E.U. and ASEAN carriers fill up
flights and grow their markets.
More significant would be agreements between
airlines from both sides that are immunized for joint
venture, "metal-neutral" operations. Hence, KLM and
Garuda Indonesia could conceivably launch daily
flights between Amsterdam and Jakarta that see
both carriers jointly marketing and operating these
flights beyond simple code-sharing. Of course, such
close co-operation (presumably along alliance lines)
will invite competition or antitrust law scrutiny from
regulators. But they represent a more viable strategy
against rival sixth freedom carriers.
The E.U.-ASEAN comprehensive agreement should
also go beyond exchanging third and fourth freedoms
flights (i.e. direct, non-stop flights) to relax fifth freedom
operations for airlines from both sides. Thus, E.U.
carriers could gain from having traffic rights at mid-
point stops in the Middle East or India and beyond-
ASEAN rights to Australia, New Zealand and the
Pacific, while ASEAN carriers could gain beyond-E.U.
rights to the Americas. As part of the exchange, the
negotiations could consider more liberal investment
opportunities in both sides' airlines, similar to what the
E.U. had struck with the United States. With the E.U.
having more investment capital, the deal is likely to
see more E.U. airlines buying stakes in ASEAN airlines
than the other way around.
INCOMPLETE OPEN SKIES WITHIN ASEAN
There is another important point. In their quest to
forge a comprehensive agreement with the E.U., the
10 states that make up ASEAN should not forget
that theirs is an internal market that hardly comes
close to the E.U.'s common market. Indeed, the
ASEAN Single Aviation Market (SAM) scheduled to
take effect in 2015 is an incomplete and unfinished
project. Unlike the E.U. airlines, ASEAN airlines do
not enjoy the "seventh freedom" right that allows
them to fly between two points outside their home
state (not even two points within ASEAN).
Hence, a Singapore carrier cannot establish a base
in Indonesia to fly to the Philippines or to operate
between domestic points in Indonesia, unless it sets
up a subsidiary that is majority-owned by Indonesian
nationals. Of course, such restrictions have been
abolished in the E.U., where any E.U. airline can freely
connect any number of E.U. points and can establish
itself in any other member state without having to
ensure that majority ownership and effective control
reside in that state.
As for the more modest third, fourth and fifth freedom
rights, the ASEAN SAM does attempt to liberalize
these completely. However, for these rights to take
effect in an individual ASEAN state, that state must
explicitly accept the relevant agreements that spell
them out. This is unlike the E.U. where the common
market is applied Community-wide by force of law.
ASEAN is today still waiting for its biggest member
economy, Indonesia, to accept the agreements that
free up third, fourth and fifth freedom rights completely.
For now, the other ASEAN member states must still
turn to their bilateral air services agreements with
Indonesia that retain finite capacity entitlements for
their airlines' operations into Indonesia.
On ownership and control, the ASEAN SAM
takes a leaf out of the E.U. book by providing for the
possibility of "Community Carriers". Hence, the SAM
makes it possible for an airline set up in Cambodia, for
instance, to be majority-owned by ASEAN interests
taken together (e.g. 20% Malaysian, 20% Thai and
11% Cambodian). There is no need for a Cambodian
majority interest, as long as effective regulatory
control over the airline resides with the Cambodian
authorities. While this provision exists on paper, no
airline has actually been formed as a Community
Carrier to date. This is because each member state
can still reject the application by such a carrier to fly
to its points. Not surprisingly, new airlines in ASEAN
- primarily the low-cost-carriers - continue to be set
up using the traditional model with local interests
owning more than 50% of shareholding (the foreign
investor typically holds 49%).
What all this means is that ASEAN negotiates with
third countries and blocs even as its own internal
market is not yet fully liberalized. Consequently, an
E.U.-ASEAN agreement will see an ASEAN airline
being able to connect E.U. points only from points
in its national or home territory. Conversely, all E.U.
airlines will be able to connect any ASEAN point
from any E.U. point! This is a significant market
imbalance that disadvantages the ASEAN airlines.
Of course, this imbalance can only be corrected
if the ASEAN states treat their own backyard as a
true single market, but this is politically difficult and
will take years to realize. Hence, an E.U.-ASEAN
comprehensive agreement stands to benefit the E.U.
airlines more in terms of market penetration, at least
in the short term.
Yet, the pragmatic ASEAN position is that it is
unrealistic to wait until its own internal market is
complete before engaging with external trading
partners. That is why ASEAN had gone ahead to
conclude an air transport agreement with China
in 2010, with all the market imbalance drawbacks
highlighted above. Negotiations with the E.U. are
likely to see a broadly similar deal being reached.
Even so, there is no reason why the future E.U.-
ASEAN agreement cannot be more ambitious in
liberalizing joint ventures, fifth freedom operations and
investments in both sides' airlines, while promoting
deeper co-operation in safety, security and regulatory
oversight. These are important liberalizing features
that can grow the E.U. and ASEAN airlines' markets
and enhance their competitiveness significantly. ✈
Garuda Indonesia and KLM could benefit from "met-
al-neutral" operations in the future
"... the pragmatic ASEAN position is
that it is unrealistic to wait until
its own internal market is complete
before engaging with external
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