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What will Open Skies bring to ASEAN countries?


Almost 20 years after the financial crisis of 1998, ASEAN members are challenging the rest of the world in terms of civil aviation sector growth, with airlines such as AirAsia, Lion Air, VietJet and Cebu Pacific Air having expanded rapidly in the last decade.

Consulting company McKinsey forecasted that ASEAN, with its 10 members – Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam – will become the fourth-largest economy in the world by 2050.  Home to more than 600 million people or 9% of the world’s population, ASEAN still has a long way to go in terms of air connectivity.

With the new ASEAN Single Aviation Market or Open Skies policy ratified last year, the region is expecting the benefit of liberalization in terms of lower air fare, aviation industry growth, and more jobs. However, the policy was received with protectionist attituted from some of the member countries, leaving analysts and policy makers to wonder whether the region’s aviation business will fly higher under open skies.

Reviving the aerospace industry

Proper timing is everything and this is especially true for the aerospace industry of Indonesia – ASEAN’s most populous country. In 1995, the country had successfully conducted the maiden flight of its 50-seat turboprop plane, N-250. N-250 might have had a go at the bustling regional aircraft market if not for the 1998 financial crisis that forced Jakarta to discontinue the program. An opportunity was lost indded, perhaps forever, but come 2017 and Indonesian Aerospace Company, the manufacturer of the N-250 is getting ready to launch another offspring in the air. This time it’s a smaller, less ambitious 19-seater – the N-219.

Across the Karimata strait, Malaysia has more ambitious plans for its aerospace industry, with export numbers having increased by 32.6% in 2016 compared with the previous year, mainly thanks to aerospace parts and components. The Philippines, in turn, has also benefited as and aircraft parts and components exporter. In 2014, the aerospace industry in Philippines recorded a total exports valued at $226.36 million.

In Singapore, an ex-military airbase Seletar airport is now transformed into Seletar Aerospace Park, home to more than 60 local and foreign aerospace companies, including Rolls-Royce and Pratt & Whitney. The aerospace park, mainly aimed for MRO services, has been contributed for more than 2% of Singapore’s economy, the Strait Times reports.

Tourist-crazy Thailand has recently declared its ambitious plan to become the aviation hub of the region with its Eastern Economic Corridor (EEC) scheme. Under the scheme, foreigners may own a majority share of aviation businesses and benefit from lower taxes.

Talking about MRO services, homegrown service providers like Garuda Maintenance Facility, Philippines’ Asian Aerospace Corporation and Singapore Airlines’ Engineering Company have become well-known within the aviation industry in ASEAN.

However, Shukor Yusof, an aviation analyst and founder of Malaysia-based Endau Analytics, said that ASEAN open skies might not provide a lot benefits due to the lucrativeness of the industry.

“The benefit to MRO and manufacturing is negligible, if any, to a single nation,” Yusof points out.

“This is because such sectors are incredibly lucrative and it would be naive to think any one country would want to “share” it with another. It will be a very cut-throat competition.”

Meanwhile, the growing aviation market in the region becomes a magnet for global companies to establish their hubs or centers in ASEAN. Lufthansa Technic, AFI KLM E&M and FL Technics are examples of European MRO companies which have established facilities in ASEAN countries. Canada-based training company CAE has also established a joint venture training center with AirAsia in Malaysia.

Match of LCCs

ASEAN has witnessed the birth of several successful LCCs. With net profits around $355.28 million in the first nine months of 2016, AirAsia shows the airline business in the region can be as sweet as honey. Meanwhile, one of the leading airlines in ASEAN Singapore Airlines has booked profit of $239 million in 2016.

As all ASEAN member countries have ratified the ASEAN Open Skies Act in May 2016, all members are required to allow foreign carriers from other ASEAN members to land at any airport on any number of occasions with unlimited seat capacity. The region’s geographically unique conditions will also benefit the OEMs as the demand grows. ATR, a turboprop plane manufacturer, has forecasted that Asia-Pacific will need around 750 new turboprops over the next two decades.

Alan Tan, an aviation law professor at National University of Singapore, told Reuters that airlines can launch any number of international flights as the market can support. ASEAN spokeswoman said that the connectivity in ASEAN will be a boon for tourism and strengthen ASEAN as an economic union.

Malaysian MIDF Research wrote that under the deregulated conditions, LCCs have a tendency to thrive. This is largely due to their dynamic cost structure, allowing these companies to be nimble as they negate through tough times and challenges while breaking into new markets.

Seeing the opportunities to grow bigger, such LCCs as AirAsia, Lion Air, VietJet and Cebu Pacific have been looking forward to international expansion with more flights to other ASEAN destination.

According to Yusof, LCCs will continue to erode FSCs market share in ASEAN but will not overtake it, at least not in the near term. “The best case scenario is perhaps 50-50,” he said.

Barriers in the sky

Despite promising a lot of benefits, the Open Skies policy might not run smoothly without infrastructure support such as the availability of airports. In fact, not all airports of ASEAN member countries are open to the policy. Indonesia, the biggest country in the ASEAN, for example, only opens its five main airports.

Indonesia and the Philippines have also opposed to some of the proposed components of the ASEAN open skies policy agreement, namely, the relaxation of the third, fourth and fifth freedoms. Yusof added that, beside the reluctance of some countries to fully open up for open skies, the vast differences in economic growth and disparity in currency values will also influence the success of the policy application.

James Jordan, an associate at Holman Fenwich Wilman law office, stated: “A more liberalized market also requires standardization and this in itself comes with its own set of challenges in a bloc where there is great disparity in economic and social development amongst Member States. One key task lies in adopting homogeneous levels of safety and security across ASEAN. This will require significant investment with the richer nations being expected to take the lead.”

In addition, Alan Khee-Jin Tan, an aviation scholar at the National University of Singapore, told Asia One News that the failure by ASEAN nations’ to forge a truly single aviation market and a common negotiating position would cause risk disadvantaging airlines from larger markets such as China.

Research reveals that the middle class in Asia-Pacific will be double by 2035, and, according to Boeing, the middle class has contributed to the growth of budget carriers in the region as the demand for connectivity in the archipelago and tourism increase.

The growth will accordingly cause a domino effect in other related industries such as aircraft MRO services, training, ground handling services, cargo, and travel industry. In addition, the growth of the industry means more jobs opportunities for the citizens of ASEAN. However, regulatory barriers, poor infrastructure and flawed human resources in each ASEAN member country might hinder the growth of the industry. Lax safety standards will also be a major concern in making the ASEAN Open Skies policy bring maximum benefits to ASEAN member countries.

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