In September last year, when the Asia Pacific Economic Co-operation (APEC) forum leaders met in New Zealand and pledged to further liberalise air service, it was hardly front-page news. Critics have long had their doubts about the effectiveness of the 21-member group. And this, after all, was a non-binding promise and lacked concrete measures as to how the liberalisation would be realised.
But an absence of interest in APEC's public pledge is perhaps an injustice to several of its members who have been working to open up the Asia-Pacific market after decades of protectionism. This has led to stunted growth in the Asian air transport market and left it, in the estimation of industry watchers, at least 10 years behind the mature North American and European markets.
Only in recent years have genuine efforts been made to allow new competition in major domestic markets such as Australia, India and Japan. And, on the international front, the removal of fare restrictions, the inclusion of multiple airline designations in air service accords and the easing of capacity controls are fairly new phenomena.
This further opening of markets is supported by the Association of Asia-Pacific Airlines (AAPA), the club of 18 major carriers within the region. It calculates that "progressive liberalisation" to date has allowed traffic to grow by 7-8% annually over the 15 years up to the days before the economic crisis struck, with much more growth to be had.
Most people would agree that Asia-Pacific has been slow to liberalise and embrace the demise of the national carrier, but there are some trendsetters. New Zealand is among them. It was, therefore, fitting that the APEC liberalisation pledge should be announced in Auckland, site of last year's annual group forum.
Airlines pledge support
In announcing the pledge, chair of the meeting and then-New Zealand prime minister Jenny Shipley said that leaders had supported eight specific steps "to take the region closer to an open market in air services" despite "pressures they faced to protect their airline industries".
Four of the group's proposals have been tagged for priority action:
eliminating restrictions on air-related services, such as ground handling and computer reservations; removing barriers to air freight service providers, whose capacities and rates are currently set by governments; allowing multiple airline designation, to increase competition in domestic and international markets; and allowing airlines to co-operate with each other through ventures such as codesharing.New Zealand is arguably pressing the most aggressively for the easing or removal of restrictions on air service and has signed "open-skies" bilateral accords with several nations, including the USA and Singapore.
It has also agreed to give rare domestic operating rights, or "cabotage", to airlines from Brunei and Ireland, and has also been working towards a new open-skies agreement with Australia, expected to be unveiled soon. Industry insiders expect the agreement will prove to be one of the world's most liberal.
Australia is also working to push the world to embrace open-skies agreements. Its deputy prime minister and minister for transport and regional services, John Anderson, has even called for an outright end to the bilateral system governing air service.
"The system of bilateral treaties encourages negotiators to focus narrowly on advancing the business interests of flag carriers, sometimes at the expense of consumers and the industries that rely on air travel. It helps to create and maintain a pool of under-capitalised, debt-dependent airlines in an industry that is notoriously cyclical," Anderson says.
Anderson last year tabled reforms for air service that give foreign carriers unlimited access to all but four international airports in Australia and allow for more outside investment in the industry. The government promised to seek open-skies agreements wherever possible.
Australia also now allows domestic airlines to be entirely foreign-owned and the Virgin Group has taken advantage of this to launch low-cost carrier Virgin Blue. In June, another no-frills carrier, Impulse Airlines, became the first to launch low-fare services in Australia. Such developments have given rise to a domestic price war in which the price for a one-way Sydney-Brisbane ticket fell from typical levels of A$350 ($202) in 1999 to as little as the A$33 promotional fare Impulse has charged on the route.
Elsewhere in Asia, other countries are also publicly embracing liberalisation: Singapore, Malaysia, Taiwan, South Korea, Brunei and Pakistan all have open-skies air service agreements with the USA, and several are fighting for their gateway airports to be dominant regional hubs.
Liberalisation spreads
In Taiwan and South Korea, liberalisation measures in the late 1980s and early 1990s spawned the birth of carriers that are now major players in their countries' air service sectors, both domestically and internationally. In Thailand, the domestic market is undergoing deregulation and new private players are looking to expand, while Indonesia is being filled with new entrants, following government moves to allow more competition.
In India, Pakistan, Bangladesh, Nepal, the Philippines and Malaysia, domestic markets underwent varying forms of deregulation in the early-to-mid-1990s and, despite some hiccups, passengers have generally come to experience much greater choice in domestic travel.
Even China has been opening up and foreign investment is being urged, while in Hong Kong restrictions barring more than one locally based airline from operating on a particular route are being eased. Hong Kong has promised to grant enhanced access to foreign airlines, particularly for cargo.
There are problems, however. While some governments, such as that of South Korea, saw they had to open up further following the start of the Asia-Pacific economic downturn in mid-1997, others took the opposite tack and became protectionist.
One widely cited example is the Philippines, despite officially being a progressive market allowing the entry of new domestic players and healthy international competition. Last year the country began cracking down on foreign carriers that it said were violating terms of air service agreements and unfairly taking traffic away from the troubled Philippine Airlines (PAL).
PAL entered into receivership in mid-1998 and narrowly avoided collapse. As a financial restructuring was being hammered out, the Philippine Civil Aeronautics Board (CAB) took aim at foreign operators such as Middle East-based Emirates, which it said was breaking the terms of the Dubai-Manila air accord. Emirates was ultimately forced to drop its Hong Kong-Manila service.
The CAB then went after Taiwan, claiming, among other abuses, Taiwan's use of so-called "sixth freedom" rights. Manila said Taiwan's EVA Air and China Airlines were unfairly carrying passengers from the Philippines to the USA via Taipei, thereby "stealing" passengers from PAL. In the end, an air service accord between the Philippines and Taiwan was scrapped altogether.
Spurring recovery
The dispute led to the AAPA calling publicly for a further liberalisation of the region's air transport market. The association, whose members include PAL and Taiwan's main carriers, said soon after the spat broke out that the Asia-Pacific region was in a delicate recovery phase and attempts to restrict the operating rights of the region's airlines would hinder development.
"Traffic is growing again, and government restrictions on existing rights and opportunities will only limit that growth, deter the price-sensitive traveller and send negative signals to the international investor, the tourism industry and the travelling public at large," the association said.
"Once a government has agreed to an exchange of rights, it cannot seek to limit foreign access to any particular segment of traffic, or challenge consumer choice. Above all, no government can lay claim to any segment of the market on behalf of its own airlines, even if that segment originates in its own country."
The AAPA also suggested that some in the industry do not understand the nature of a bilateral agreement and specifically the term sixth freedom. Although not officially adopted at the 1944 Chicago Convention, which formally defined operating rights by creating five so-called freedoms, "sixth freedom" generally refers to the right of an airline to carry traffic between two foreign countries via its own state.
"Past debates about the precise definition and significance of sixth freedom rights have become largely irrelevant as passengers seek seamless travel, and airlines expand globally from their hub airport," says the AAPA. It goes on to warn that "the resurgence of the Asian air travel market will be stultified" if regulatory authorities are tempted to put caps on levels of capacity growth. The AAPA says that would be a mistake, arguing that the market is not overheating but simply expanding to meet demand. "Such action could stem from a misunderstanding of the agreements under which air services are operated, and the rights and privileges which are accorded to airlines," it adds.
There are critics of deregulation efforts in Asia, however. Among them is the Centre for Asia Pacific Aviation (CAPA), the Australia-based consultancy. It has argued that the deregulation of domestic service in at least three key markets has undermined competition and threatened major carriers.
The CAPA stated in its newsletter earlier this year that "simplistic" measures "have no prospect whatsoever of achieving their stated goals" and will lead to an ineffectual status quo, the consolidation of large carriers and less competition, or the collapse of major carriers.
"History suggests one of the second two outcomes," the CAPA says. "Most international airlines will simply not survive in future."
Ownership risks
The relaxing of foreign ownership laws in Australia is described by the CAPA as a high-risk option that tacitly admits the failure of domestic deregulation. It claims that domestic deregulation since 1990 has led to higher ticket prices, accelerating industry consolidation and greater domination by the majors, and leading to few new entrants and limited traffic growth.
In Japan, the centre says, insufficient legislative safeguards expose new low-cost entrants Hokkaido International Airlines (Air Do) and Skymark Airlines (both established under deregulation in 1998) to the risk of takeover. It believes new entrants will most likely be forced to secure alliances with Japan's three established carriers - which will themselves consolidate - or fail outright in their bid to survive.
The centre describes India's drive towards deregulation as too cautious and limited. It says the changes that spawned the establishment of privately owned Sahara India Airlines and Jet Airways in the early 1990s remain subject to route and pricing controls, and restrictive airport usage and entry costs.
Still, most believe deregulation has been a major benefit to Asia's air transport markets, which are often referred to as still being in their infancy.
It is probably going to be years before passengers in Asia see the same benefits as those in North America, but it is undeniably easier to travel by air in the region, and Asian consumers have much more in the way of choice.
Source: Airline Business
