The implementation of the Asean Single Aviation Market (ASAM) runs in tandem with the Asean Economic Community (AEC) and it aims to liberalise air traffic. Two years from the deadline, how much has been achieved? Kinibiz also looks at the benefits of AEC for Malaysian manufacturers and how the country can position itself as a hub for non-Asean companies looking to enter the region.
The aviation sector will be substantially affected by open skies, a component of the Asean Economic Community (AEC). Companies like Air Asia, Malindo Air and even Malaysia Airlines could gain access to a market of 600 million people in a region where air travel is often the most convenient.
But how effective have the plans to ease access to the Asean skies been since the Roadmap for the Integration of the ASEAN Air Travel Sector was launched in October 2003, and since the signing of the Asean Single Aviation Market (ASAM) agreement in 2007? The latter sets out a timeline for full implementation by the end of 2015 in tandem with the deadline for the Asean Economic Community.
It depends on who you ask; the Asean governments mostly say that ASAM’s goals will ultimately be achieved in time, but many other observers and industry experts are more hesitant.
Free skies by end-2015?
ASAM contains two main goals, the first is the Multilateral Agreement on Air Services (MAAS) which addresses the the third and fourth, and fifth freedom access as per the Convention on International Civil Aviation of 1944 (or better known as the Chicago Convention), and covers access between the Asean states capital cities.
(There are as many a nine freedoms used to describe different levels of access, although only the first five are official as they are recognised via an international treaty)
The third and fourth freedoms, which are usually granted together, address basic international service between countries although many other local rules and other agreements can still substantially restrict air traffic.
The fifth freedom grants allows an airline to carry revenue-earning traffic between foreign countries as part of services connecting the airline’s own country. In other words, it allows an airline to carry passengers from its country of origin to another country and on to a third. An example would be a flight originating in Kuala Lumpur, flying to Singapore and then on to Indonesia. The fifth freedom is often hard to gain, as countries fear that it will negatively affect the strength of the local aviation sector.
Out of the Asean member states, eight have signed up to MAAS, with the exceptions being Indonesia and Philippines. The two have used the Asean-X policy which allows member states to stay out of any agreement they do not like or are not ready to join.
The second goal of ASAM, which is the Multilateral Agreement for the Full Liberalisation of Passenger Air Services (MAFLPAS), follows up on abolishing the third, fourth and fifth freedom restrictions by extending it to all Asean cities (not just capitals). Even fewer member states have signed up to this agreement with Indonesia, Brunei, Laos and Cambodia all opting out as of now.
Heading into 2014 and with 24 months to go before the single aviation market is to be in place, critics and supporters both are concerned that the Asean nations have not made enough headway towards the goals set out in ASAM.
Furthermore an article published by the Centre of Aviation (CAPA) titled Asean’s Single Aviation Market: Many Miles To Go, said that ASAM was fairly sedate in outlining the size and depth of the open skies dream. It notes that seventh freedom access has been left out. This allows a carrier to fly routes between two countries that neither originate nor terminate in its home country and the right of cabotage which allows a foreign airline to connect two domestic points in another country.
Ownership rules too are not what most airline companies would have liked them to be. Although ASAM advocates the removal of substantial ownership and control rules and encourages member states to allow for majority ownership by Asean countries or nationals, it is somewhat circumvented by provisions that allow a country to deny approval to airlines setting up operations for various other reasons.
Despite the progress of ASAM, companies like AirAsia and Jetstar, which so far have expanded by incorporating local subsidiaries, are still substantially owned by local interests with local operations.
AirAsia for example set up its operations in Thailand as Thai AirAsia in a joint venture with Asia Aviation Public Company Limited, while in Indonesia it set up Indonesia AirAsia together with local interests. In the Philippines, AirAsia has teamed up with local company Zest Air.
Despite the relatively disappointing progress of ASAM , AirAsia group chief executive officer Tony Fernandes is still positive on what the agreement aims to achieve and of the idea of the AEC as a whole.
In an opinion piece to a Thai newspaper The Nation, Fernandes said that for AirAsia the implementation of AEC and ASAM cannot come sooner.
While noting that there will not be a perfect system in place come Jan 1, 2016, by setting forth roadmaps to achieve an economic community and open skies Asean nations have shown a commitment to economic liberalisation and the momentum is in place to make the plans a reality even if not in the stipulated timeline, said Fernandes.
AEC’s impact on Malaysia’s manufacturers
With a relative small home market of 29 million people, opening up access and easing restrictions to doing business in Asean stands to benefit Malaysian manufacturers, and the idea of the AEC is well received among business advocacy groups such as the Federation of Malaysian Manufacturers (FMM).
Noting that 50% of its members already have operations in Asean, FMM says that Malaysian businesses “will benefit tremendously from ASEAN operating as a single unified production, trade and investment bloc rather than as individual economies.”
The biggest reason for this is perhaps the fact that Asean has a combined population of 600 million people, which not only offers a significantly bigger audience for local manufacturers to market to but also allows them to create economies of scale, enhance competitiveness, allow for the outsourcing of low value-added activities and give greater access to global markets via multilateral free trade agreements.
Highlighting Indonesia as a popular market for expansion, FMM said that many of its members have expressed keenness to venture into that market, especially in view of its high economic growth rates, large domestic markets, abundance of natural resources, relatively low labour costs and geographical proximity to Malaysia. In addition Thailand, Philippines and the relatively new markets of Myanmar and Laos are also popular destinations for local companies looking to venture across the border.
That said, while the ongoing implementation of measures to liberalise trade in Asean has eased the entry process somewhat, there are still areas in which Malaysian businesses face hindrances overseas.
Issues such as compliance to technical standards, the high costs of trademarking products and services, the valuation of imports by third party inspection bodies in Indonesia and Philippines and other cumbersome local laws and regulations all tend to slow down the process of expansion.
As such there is still work to be done in the effort to create a more open market and a single production base that will make the transition from doing business locally to regional operations more streamlined and convenient.
FMM also emphasised that the Ministry of International Trade and Industry should play a role in assisting companies in their regional expansion, by providing services such as market intelligence to help local companies identify areas of opportunities and assist them in connecting with the right foreign partners/agencies to help establish their foreign operations for example.
Becoming an Asean hub
Malaysia also stands to benefit from its strong position both in terms of good connectivity to the region and its geographical position to become a hub for non-Asean businesses looking to penetrate the Asean market.
With good transportation and logistics systems in place, strong infrastructure and a well-educated populace, Malaysia can offer much to foreign companies and multinationals wanting to create an operations base in the region.
According to the EU-Malaysia Chamber of Commerce and Industry’s chairman Fermin Fautsch, Malaysia has certain strengths that it can leverage on to attract foreign companies, key among them being Malaysia’s central location, competitive costing and relative ease of doing business.
Furthermore with good infrastructure and the wide use of English, it is easier for foreign companies to set up shop here. Fautsch also said that the fact Malaysia is in the process of negotiating a FTA with the European Union also makes the country an interesting proposition for European companies, as it presents a scenario where companies setting up businesses in Malaysia will also have so called ‘open access’ to Asean, thanks to the AEC.
24 months to the deadline
With a little over 24 months to go, progress towards the AEC has been fairly decent – the Asean 6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) have almost entirely removed import duties, equity and foreign ownership of at least 70% in more than 100 services is now available for Asean citizens and the movement of skilled labour has been improved.
However there has not been as much progress as many would like to see in areas like the removal of non-trade barriers and there is still some work to do with regards to the open skies policies amongst others.
It seems fair to say that the AEC is entering a crucial phase, and the challenge now it would seem is ensuring that there is an equal buy-in from all Asean members – perhaps most especially from the Indonesians.
Successfully convincing the Indonesians that they stand to benefit from the AEC as much as any other member state, will likely be the factor that determines if Asean meets its self- imposed deadline of end 2015.