ANALYSIS: Balancing act over ASEAN nation open skies

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Alan Khee-Jin Tan, a law professor at the National University of Singapore specialising in Asian aviation, co-authored this article.

China and member states of the Association of Southeast Asian Nations (ASEAN) have agreed to open skies under a new accord that could boost Asia's liberalisation. But the pact also highlights how far ASEAN itself still has to go.

The landmark deal allows unlimited third and fourth freedoms between China and ASEAN nations that have ratified the accord. So far, these are Singapore, Malaysia, Thailand, and Vietnam. This means AirAsia for example can now offer unlimited capacity from Malaysia to anywhere in China, subject to slot and schedule restrictions.

The same is true for any joint venture with Qantas for a premium carrier, and all Singapore-based carriers, including Scoot Airlines which is due to launch mid-year. All of them may operate unlimited nonstops from their own country to China.

The new agreement does not authorise cabotage or address fifth freedoms, so ASEAN airlines may not operate between Chinese cities and Chinese carriers may not operate between ASEAN cities, except as allowed under existing bilateral agreements. The accord does not include Hong Kong or Macau.

"This agreement will facilitate increased traffic in and out of China," says Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA). "As more Chinese reach middle class, they want to travel. This is a fast growing market."

ASEAN, as a group, has been interested for some time in air service agreements with its Asian neighbours. China was keen to be first. It sees this agreement as supporting the broader ASEAN-China Free Trade Area. From ASEAN's perspective, China is the first and most populous trading partner identified for its planned aviation accords.

Six ASEAN nations - Brunei, Cambodia, Myanmar, Indonesia, Laos, and the Philippines - have yet to ratify this agreement. Some of them have traditionally dragged their feet on liberalisation to protect their own airlines. For now, they continue to be bound by existing bilaterals with China. Will this accord encourage them to open up more? Herdman doubts it. "I wouldn't link this agreement with the pace of liberalisation within ASEAN itself," he warns. "For this kind of agreement, ASEAN members show varying levels of enthusiasm."

Yet even if all 10 ASEAN nations ratify this accord, it contains an inherent limitation for all of their airlines. Under its terms, Chinese carriers can fly between any domestic point and any ASEAN point, a market of 2 billion passengers. Conversely, each ASEAN carrier can only carry traffic between China and its own country. AirAsia, for instance, cannot operate between Singapore and Beijing - only from Malaysia. This is an unavoidable result of any air services agreement that only grants third and fourth freedoms between a group of smaller states and a single bigger state.

ASEAN airlines could only compete on an equal footing if member nations form a single aviation market. AirAsia cannot connect Singapore with China because this would require a seventh freedom that no ASEAN state has granted.

ASEAN has set the lofty goal of a single aviation market and taken some steps towards it. In 2009, it agreed to open third, fourth, and fifth freedoms between capital cities, and in 2010 to extend these freedoms to other cities. But Indonesia has yet to accept any of these changes. With half of ASEAN's population, Indonesia is the region's largest aviation market and a critical link in opening its skies.

These intra-ASEAN agreements do not grant seventh freedoms that would allow AirAsia, for instance, to operate between Singapore and any other ASEAN country. Some ASEAN members have a deep aversion to these rights, fearing that they would allow such carriers as Singapore Airlines and AirAsia to dominate even more.

The lack of seventh freedoms has encouraged the likes of AirAsia and Jetstar to create affiliates such as Thai AirAsia and Vietnam's Jetstar Pacific. Singapore-based Tiger Airways' recent purchase of a stake in Indonesia's Mandala Airlines was driven by this same desire.

Such cross-border expansion must adhere, at least nominally, to local ownership and control rules, but it seems the best response so far to ASEAN's incomplete liberalisation.

The China-ASEAN accord mirrors the situation between the USA and EU states before their historic 2007 agreement. That deal changed the aeropolitical landscape by allowing EU carriers for the first time to carry traffic between any EU point and any US point, thereby balancing what US carriers were already doing. This only became possible because European nations, pressured by the European Commission, agreed to recognise the right of all EU airlines to carry traffic between any EU point and any US point. ASEAN has no counterpart to the European Commission, and its new agreement with China does not permit ASEAN airlines to do this.

Now that the China agreement is in effect, ASEAN is turning its sights on further pacts. It wants to strike similar aviation deals with India, Japan, and South Korea. Such agreements will help liberalise Asia, but they will also enshrine the same imbalance for ASEAN carriers that the accord with China creates. The only remedy for this is for ASEAN's members to confront and resolve their own differences.

In the meantime, AAPA's Herdman reminds everyone to keep the China accord in context. "It's another step in a historical process," he says.