THE POTENTIAL IMPACTS OF ASEAN OPEN SKY ON VIETNAM’S AVIATION INDUSTRY

Figure 1.1 The simple economics of Open Skies policy...14Figure 1.2 The emergence of hub & spoke system after deregulation...20 Figure 1.3 Elements of the Economic Analysis of an OSA……….

FACULTY OF ECONOMICS AND INTERNATIONAL

BUSINESS

-*** -GRADUATION THESIS

Major: International Business Economics

THE POTENTIAL IMPACTS OF ASEAN OPEN SKY ON VIETNAM’S AVIATION INDUSTRY

Student’s Full Name: Nguyen Thuy An

Student ID: 1111150117 Class: A27 – High Quality Program Intake: 50

Supervisor: Do Ngoc Kien, MPP.

TABLE OF CONTENTS

INTRODUCTION 1

CHAPTER 1: AIR SERVICE LIBERALIZATION: RATIONALE AND THEORY 4

1.1 Regulation and deregulation in air service sector: rationale and scope 4 1.1.1 Air service regulation 4

1.1.2 Air service deregulation 7

1.2 Introduction to an emerging vehicle for air service liberalization: Open Skies Agreement 11

1.3 Economic impacts of liberalization on aviation industry 13

1.1.3 Impact on competition and fare 13

1.1.4 Impact on traffic 16

1.1.5 Impact on strategic behaviour 18

1.1.6 Impact on route structure 20

1.1.7 Impacts on the aviation industry as a whole 24

CHAPTER 2: ASEAN OPEN SKY’ POTENTIAL IMPACTS ON VIETNAM AVIATION INDUSTRY 27

2.1 Introduction to ASEAN Open Skies 27

2.1.1 Overview of ASEAN Economic Community 27

2.1.2 ASEAN Open Skies Agreements 29

2.1.3 ASEAN Open Skies’ progress to realization: ratification status 41

2.2 Analysis of potential impacts on Vietnam aviation market 44

2.2.1 Overview of Vietnamese Aviation Market 44

2.2.2 Impact on competition, market scale and fares 47

2.2.3 Impact on route structure 52

2.2.4 Impact on strategic behavior 58

AIRLINES 60

3.1 Development orientation of Vietnam aviation industry 60

3.2 Groups of recommendations for the development of passenger air transport sector 61

3.2.1 Infrastructure development 61

3.2.2 More open policies 64

3.2.3 Increasing airlines’ competitiveness 65

3.2.4 Human resources development 67

3.2.5 Tourism – aviation partnership 68

CONCLUSION 70

REFERENCES 71

APPENDIX 1 79

Figure 1.1 The simple economics of Open Skies policy 14

Figure 1.2 The emergence of hub & spoke system after deregulation 20

Figure 1.3 Elements of the Economic Analysis of an OSA……… 26

YFigure 2.1 Total number of passengers carried in Vietnam aviation market (domestic and international) 44

Figure 2.2 Carriers’ 2014 seat capacity share in Vietnam domestic market 46

Figure 2.3 Major carriers’ 2013 seat capacity share in 46

Figure 2.4 Vietnam top 10 international destination countries in 2013 47

Figure 2.5 Noi Bai and Tan Son Nhat airports’ routes 53

Figure 2.6 Projection on new international routes via Long Thanh hub in Southeast Asia as a result of Open Skies……… ……57

LIST OF TA Table 1.1: Overview of ASA key provisions’ common amendments during liberalization 9

Table 1.2: Gravity model estimating traffic impact of air service liberalization 17

YTable 2.1 Summary of AEC Blueprint 28

Table 2.2 MAAS Protocols 1 to 4 and Designated Points 37

Table 2.3 MAAS Protocols 5 and 6 and Designated Capital Cities 38

Table 2.4 Low-cost airlines operating outside Vietnam 50

Table 2.5 Capacity of four international hub airports close to Vietnam 53

YTable 3.1 Demand estimation of passenger air services 60

1 Rationale of the study

Air transport plays a key role in economic development and in supporting long termeconomic growth It facilitates a country’s integration into the global economy,promotes the development of tourism and logistics industry Aviation industry andthe overall economy have a mutual stimulating effect on each other

Vietnam is a potentially lucrative market for air transport Regardless of the poorand limited infrastructure system and the economic growth averaging at just above5% per year, the sector has experienced a dramatic annual two-digit growth at leastover the past ten years (Kraiser, 2013) According to Vietnam Aviation Authority(2014), there were up to 17,5 million domestic seats purchased in 2014, increasing

by 20,5% in relation to 2013 International Air Transport Association (2013, ascited in Phuong, 2014) evaluates that Vietnamese airlines will possibly double ortriple their fleets to serve the huge domestic population of more than 90 million andthe number of foreign visitors annually growing by approximately 20%

Southeast Asia is also sharing the same dynamics with the rise of low-cost airlinesand booming tourism This will be further facilitated by the regional liberalizationrealized by Open Skies agreements The agreements gears towards creating ASEANSingle Aviation Market by 2020, where air carriers are fully free to fly between anypoints in the region, without any restrictions on capacity, frequency, ownershipstructure and other commercial activities Starting in 1 December 2008 with theremoval of restrictions on Third and Fourth Freedoms between capital cities ofmember states for air passenger services, the open skies are targeted to graduallyform as per a roadmap agreed by ASEAN members’ ministers by 2020

In such context, the fledging Vietnam aviation industry is expected to encounterboth opportunities and challenges: a potentially surging demand but protectionismadopted by the government, fierce competition from aggressive foreign carriers,underdeveloped infrastructure and poor management capacity So what will be theVietnam market’s picture under the one single open sky; whether Vietnam will beable to catch up with the enhanced competition brought about by foreign rivals to

take advantage of its potential or it will lose this right time to develop remains greatconcerns.

These questions have lead the author to choose the topic “The potential impacts of

ASEAN Open Sky on Vietnam aviation industry” with the purpose of estimating

potential effects of ASEAN Open Skies agreements on Vietnam aviation industry,with the focus on passenger air transport in this study Thereby, the author couldmake recommendations on how to address the changes for the purpose ofdeveloping the market to a degree that is worth its potentials

2 Objective of the study

The study attempts to examine the impacts of the ASEAN Open Skies agreements

on Vietnam aviation industry in order to produce a prospect overview of the market

in the years to come This picture would be expressed in the following dimensions:competition level, traffic and route structure

From those projections, the author would give some implications on policies topromote the development and competitiveness of the market

3 Scope of the study

Within the framework of a graduation thesis, the author would like to confine thescope of Vietnam aviation industry down to passenger air sector; the air freightsector will not be discussed This would ensure the depth and focus of the impactanalysis

The research objects are ASEAN Open Skies agreements and Vietnamese aviationmarket (mainly in terms of market side: competition, scale and infrastructure) Maincountries in research would be ASEAN country members over the past ten years

4 Research methodologies

Overall, the study employs statistical collection, information synthesization,inductive and deductive methods It collects and synthesizes a number of data andinformation to present an overview of theories and arguments in chapter 1, to giveout assessment points in chapter 2 It uses inductive and deductive methods toexpress ideas and present supporting arguments throughout the entire paper

In addition, analysis (including comparison and contrast methods) is employed veryoften in chapter 2 to draw comments and conclusions about the agreements’impacts

5 Thesis structure

Apart from introduction, conclusion, references and appendices, the thesiscomprises the following sections as main elements

Chapter 1: Air service liberalization: rationale and theory

Chapter 2: ASEAN Open Sky’ potential impacts on Vietnam aviation industry Chapter 3: Policy implications and recommendations for airlines

The author would like to express deep gratitude to Do Ngoc Kien, MPP for hiscritical comments and encouraging support as a supervisor He has employed hisstrong research expertise and experience not only to orient the topic, structure theoutline but also to have overall and detailed looks into the study to help the authoraccomplish it in a better way

Being aware of the importance of the thesis, the author has paid serious attention tostudy and research However, due to limited time, reference resources andprofessional competences as well as practical experience, the thesis does expose anumber of shortcomings Thus, any feedback or comment for this study would be ofgreat value for the author to improve it later on

CHAPTER 1: AIR SERVICE LIBERALIZATION: RATIONALE AND THEORY

1.1Regulation and deregulation in air service sector: rationale and scope

1.1.1 Air service regulation

Since its inception, air transport has been imposed with restrictive regulations1bygovernments Together with telecoms, water, energy, electricity and transport ingeneral, air transport in particular normally falls into most heavily regulated sectors

of an economy Due to the industry’s distinct nature, the controls over it serve toguarantee the country’s economy and security stability Major rationales for thesector’s regulation are in details as follows

Firstly, air transport is seen as a public utility Indeed, there is a strong degree ofpublic interest in transportation, especially air transport; so this serves as a primarylegal basis for regulation (Walter, 1984 as cited in Smith, 1998, pp 31-34) A moredetailed theory supporting Walter’s agreement is "public interest" theory whichholds that regulation is supplied in response to the demand of the public for thecorrection of inefficient or inequitable market practices The theory tends to beimplicitly assumed rather than completely expressed There are two fundamentalassumptions associated with this theory: one is that economic markets are extremelyfragile and apt to operate very inefficiently (or inequitably) if left alone; the other isthat government regulation is virtually costless With these assumptions, it was veryeasy to argue that the principal government interventions are simply responses ofgovernment to public demands for the rectification of remediable inefficiencies andinequities in the operation of the free market (Posner, 1974)

Also sharing the same viewpoint of market remedying, Dempsey (1988) briefsairline regulation’s rationale as to ensure: a) the provision of an adequate level ofservice at reasonable rates throughout the nation, b) the prevention of price orservice discrimination between communities or shippers, large or small, c) theestablishment of economic services and stability for the industry and the public itserves, and d) the reduction of carrier concentration and protection of smallercompetitors

1 Within the limit of a thesis, for the most part of the study, the term “regulation” implies economic regulation

Secondly, safety is of paramount concern in operating air transport Aviation is aspecial sector because it applies highly advanced technological innovations; merely

a small defect in operating a flight can cause a colossal tragedy Therefore, the tightcontrol imposed on the sector is aimed at ensuring safety standards, whilecompetition is seen as an element resulting in lower safety standards The USFederal Act of 1958, article 102 clearly stipulates the purpose of this regulation:

“The regulation of air transport in such a manner as to recognize and preserve theinherent advantages of, assure the degree of safety in and to improve the relationsbetween, and co-ordinate transportation by, air carrier”

Thirdly, aviation is closely related to national defense and security Walter (1984, ascited in Smith, 1998, pp 31-34) finds that one actual purpose of regulations is tohelp protect flag carriers (national carrier) in order to ensure national defense and toserve other political and military purposes In such situations as wars, emergencies

or natural disasters, states certainly need its own air transport For the sake ofnational security, ownership restrictions enable governments to gain control of theairlines in times of national emergency Also, the flying of an aircraft outside,across or to any countries concerns those nations’ air sovereignty This sensitivematter, hence, is certainly an area of control

Fourthly and also noticeably, in contrary to the “public interest” theory, the controlover air transport is believed by a group of economists to hugely benefit specificinterest groups According to Marxists and by Ralph Nader-type muckrakers (ascited in Posner, 1974, pp.341), regulation is supplied in response to the demands ofinterest groups struggling among themselves to maximize the incomes of theirmembers It is not about the public interest at all, but is a process of the by whichinterest groups seek to promote their (private) interests Taking a specific example,Vermooten (1996) describes the rationale for the introduction of economic control

in South African air transport as a desire to establish, protect and subsidize theState’s own interest As such, this restriction was not for the purpose of protectingthe interest of the public (users) directly by air services, but rather the interest ofSouth African Railways and Habour Administration as a result of its publicownership which has been regarded as “in the interest of the public”

Concerning scope of air transport regulation, this study mainly covers economicones Normally, economic regulation in air transport covers the following areas(Margo Commission, as cited in Smith, 1998, pp 35-36):

o Entry restriction: the control over the entrance of new airlines into a market.These airlines have to satisfy certain prerequisites to get an operation license fromlocal governments

o Routes/ areas in which airlines provide services: in some circumstances,proof of an existing demand for the service must be given before permission isgranted for that route

o Types of aircraft used: this may be specified to limit excess capacity oncertain routes

o Capacity allowed for airlines and routes

o Frequency or designation: this is specified in certain cases, for instance, thenumber of return flights per day on city-pair routes…

o Tariff regulation: price setting mechanism

o Relationship between airlines was also a scope of regulation, for examplejoint ventures and cooperative agreements between airlines (e.g US antitrust lawscontrolled these areas)

o Ownership: to be authorized for operation, carriers must be substantiallyowned by the State or its nationals

Regarding scheduled international air services, similar control dimensions were alsostipulated in bilateral air service agreements (ASAs) Out of a wide range ofregulation areas such as aviation security, incident investigation, immigration,control of travel documents and many others, The World Trade OrganizationSecretariat (2006) points out most commonly founded terms of an ASA whichindicate openness:

o Market access: Grant of rights which specifies the air freedom rights

allowing airlines to provide services over designated markets These rights range

from First to Ninth Freedom of the Air Details about these freedoms are provided

in Annex I

o Capacity clause: This regulates seat number, frequency of service and/or

aircraft types

o Tariff approval: which defines how air services are priced: whether fares

need to be approved before applied

o Withholding: which defines the conditions for the foreign carrier to operate,

such as ownership and effective citizen control requirements

o Designation: which governs the number of airlines allowed to serve the

market between two countries and on specific routes

o Statistics: that requires the exchange of operational statistics between

countries or their airlines

o Cooperative arrangements: which regulate the cooperative marketing

agreements between airlines

An illustrating example of these agreements is ones in EU Before deregulation,international air fares in Europe were set via bilateral agreements betweencountries The industry was tightly controlled and inflexible, leading to thepersistence of little competition between national carriers A web of bilateral airservice agreements formed a restrictive industry where routes, carriers and airportswere specified; while aircraft types, fares and frequencies were subject to limitation(Button, 2001)

1.1.2 Air service deregulation

However, with time, these restrictive regimes proved not to generate efficient airtransport systems for Europe (Scharpenseel, 2001) According to the author, thoughsome countries may have enjoyed a few benefits because of their bargainingposition, overall it tended to restrain trade and competition, thus, protect inefficientoperations and distort the overall pattern of services provided High barriers tofledgling airlines’ entry, slow government response to existing airlines entering tocompete in city-pairings, and monopolistic practices by legacy airlines (or long-standing airlines) inflated passenger ticket prices Also, increase in air travel beganimposing great pressure on the ability of authorities to cope with the changingnature of air travel The emergence of high inflation, slowly moving economy,

decreasing productivity, rising labor costs and fuel costs proved caused problems tothe airlines As a result of restrictive bilateral ASAs within Europe, many Europeanregions left outside agreed route networks due to decisions taken at national levelhad either no possibility of attracting air services or had to rely on connectingservices through the emerging network hubs of the flag carriers In short, airtravelling was unaffordable for average consumers and the regional integrationsuffered.

In that context, since early 1990s, governments began to approach the aviationindustry in a more liberal manner That was when deregulation commenced

Airline deregulation or liberalization refers to the process of removing imposed entry and price restrictions on airlines in an effort to promote competition.Deregulation could mean privatization in some countries, but globalization in others

government-or both Within the paper’s framewgovernment-ork, liberalization in terms of international airtransport will be the focus of this chapter, in order to provide better understandingand background for the next two ones

In a more liberal approach towards aviation industry, governments have amendedthe bilateral air services agreements in a way that releases more freedom forairlines Shown below is a table of comparison between restrictive regulations andmore liberal ones concerning air transport:

Table 1.1: Overview of ASA key provisions’ common amendments during liberalization Control dimension More restrictive More liberal

Third, Fourth Freedom…

The right to fly from one's own country to another andvice versa

Fifth Freedom…

The right to fly between two foreign countries on a flight originating or ending in one's own country

Ninth Freedom

The right to fly inside a foreign country without continuing to one's own country

Capacity clause Predetermination

Capacity is subject to permission before being applied

Tariff approval Dual approval

Air fare must be approved by both countries before becoming effective

Country of origin disapproval

Fare can only be disapproved

by the State where the flight originates from

Dual disapproval

A fare can only be ineffective upon both States’ disapproval

Zone pricing

A fare is automatically approved if

it falls within a specific range and meets certain conditions

Otherwise, (a combination of) previous mechanism(s) shall apply

Free pricing

Fare is out of regulatory control

Withholding Substantial ownership and effective control

A State reserves the right to withhold an

Community of interests

A State reserves the right to withhold an

Principal place of business

In order to be granted an operating

2 The clause is named after an early bilateral agreement between United Kingdom and the United States relating to air services between their respective Territories

(Bermuda Agreement).

operating license granted to an airline designated by the other State in any case where it is not satisfied that substantial ownership (more than 50%) and effective control are vested in that designating State or its nationals

operating license granted to an airline designated by the other State in any case where it is not satisfied that substantial ownership and effective control are vested in one of a group of countries (a community of interest) specified in the agreement

license by a State, the airline’s principal place of business and, if any, its registered office must be located in that member State

Designation Single designation

One airline is allowed to operate a specific route between the two countries

Airline code-sharing3, alliances, franchising, leasing of aircraft and intermodal transport …

Source: Own elaboration from literature review

3 A codeshare agreement is an aviation business arrangement where two or more airlines share the same flight.

1.2 Introduction to an emerging vehicle for air service liberalization: Open Skies Agreement

An emerging trend in air transport industry all over the world is the liberalization ofbilateral (or unilateral) ASAs into Open Skies air services agreements which aim atcreating a competition-based market with less state intervention This concept arose

in the late 1970s when the United States started to liberalize the domestic cargomarket and the domestic passenger sector (Button, 2009)

Open Skies is not a single, well-defined concept Rather, it refers to packages of anumber of distinct policy aspects, such as capacity deregulation and removal ofprice controls, which lead to less regulated airline services It can be pursued on abilateral, regional or multilateral basis (Forsyth et al 2008) In general, Open Skiesgives rise to:

o More competition between airlines;

o More scope for airlines of a third country to serve on a route between twoother countries; and

o More flexibility for airlines to develop their routes and networks as theychoose

According to ICAO (2013), 440 Open Skies Agreements(OSA) have been signed

by March 2013 in which 112 states signed OSAs with the United States, 24 with the

EU, or any of its members, and 19 States signed OSAs with both the EU (or any ofits member States) and the United States The most noticeable and comprehensiveexample of liberalisation has been the European Union Open Skies that created EUsingle aviation market since 1987 Carriers from the EU are now free to operate anyroute within the EU, without restriction on price or capacity, including cabotage Inaddition, all restrictions on airline ownership have been removed for EU citizens(e.g., an air carrier operating from Italy can be 100% owned by investors from theUK; however, investment by non-EU citizens is restricted to 49%)

In current practice, an Open Skies Agreement normally incorporates the followingprovisions as key features

o Free market competition: Grant of Fifth Freedom upwards; no restriction onnumber of designated airlines; capacity; frequencies; and types of aircraft ICAO(2013) reports that over 60 per cent of the agreements also grant “SeventhFreedom” traffic rights for all-cargo services (twelve agreements granting this rightfor passenger services, and ten agreements granting Eighth Freedom traffic rightsfor all services4).

o Fare level: Carriers are allowed a much greater pricing flexibility Tariff isusually set based on mechanism of “Free Pricing” or “Dual disapproval”

o Fair and equal opportunity to compete (Forsyth et al 2008).For example:

 All carriers, designated and non-designated, of both countries mayestablish sales offices in the other country, and convert earnings and remitthem in hard currency promptly and without restrictions Designated carriersare free to provide their own ground-handling services or competingsuppliers of ground handling services Airlines and cargo consolidators mayarrange ground transport of air cargo and are guaranteed access to customsservices

 User charges5 are non-discriminatory and based on costs; computerreservation system displays are transparent and non-discriminatory

o Cooperative marketing arrangements: Designated airlines may enter intocode-sharing or leasing arrangements or other forms of cooperation with airlines ofeither country, or with those of third countries, subject to usual regulations

o Dispute Resolution: Open Skies Agreements typically include procedures forresolving differences that may arise during the currency of the agreement

o Charter Market: charter markets are freed up

o Safety and Security: governments of contracting states typically agree toobserve agreed standards of aviation safety and security

4 The right to fly inside a foreign country, continuing to one's own country

5 A charge imposed on airlines by competent authorities for the provision of airport property or facilities or of air navigation facilities

1.3Economic impacts of liberalization on aviation industry

While the net effects of these major liberalization events vary across the markets,there are some common changes brought to the air transport industry

1.1.3 Impact on competition and fare

Firstly, deregulation lifts up constraints on pricing, route access, flight capacity andcooperative arrangements among airlines This allows airlines to compete moreeffectively and operate more efficiently Liberalization increases airlines efficiencythrough several ways: the optimization of an airlines network and the increasedcompetition which force the merger or even bankruptcy of less efficient firms andthe adoption of new business models and innovations (Fu et al., 2010) More flights,more routes and carriers will come to service The improved operation efficiencyincreases average load factor, thus gradually reducing average costs.Simultaneously, the enhanced competition will cause prices to fall also As a result

of all these occurrences, passenger traffic can be stimulated substantially This, inturn, will reinforce the decrease of air fares

Furthermore, liberalization enables airlines to optimize their network configuration.The implementation of hub-and-spoke networks6 enabled carriers to link smallmarkets with their hub airports, expanding air services to new destinations Whenthe system is maximized, the cost will be reduced

In his analysis, Button (2009) points out that in most cases, liberalization with OSAresults in air service price reduction, sketching Figure 1.1 as an basic illustration ofhis arguments Accordingly, under government controls where airlines’ capacitywas constrained and fares were regulated, fare level stood at F1 When OSA comesinto force, the removal of capacity constraint and fare control lower F1 to F*1 Thedecreased average cost (C2) and the increased demand (D2), which result fromliberalization, cause fares to go further down to F2 However, in some cases, if thedemand curve shifts too much outwards (due to a better service quality: moreconvenient flights, transferability of frequent-flier miles, and seamless ticketingwhich mean prospective travelers are more willing to pay than before), the shift out

6 Definition: A route structure where passengers, except those whose origin or destination is the hub, stop at a hub for transit to their destination (Cook, G N., & Goodwin, J 2008).

in demand may offset the fall in costs, resulting in F*1< F2 He also notes that faresmay get higher than F2 with output smaller than Q2 in case of airline alliances, andfares far more lower than F2 with output far more larger than Q2 in case of “a fullOpen Aviation Area – a genuine open market”.

Figure 1.1: The simple economics of Open Skies policy 7

In another study of effects of OSA, Alves and Forte (2015) develop a theoreticalframework, using Cournot model8 with three market segments as to makecomparison between pre-agreement and post-agreement situations (including cases

of competition in substitutes and complementary services) The hypotheses testedconcern with the entry of airlines in certain market segments and theimplementation of a collusion between two airlines, one of which is incumbent.They conclude that after an OSA being implemented, prices should decline oninternational routes where there is an increase in competition This decrease in

7 Given that technological factor holds constant

8 An economic model that describes an industry structure in which competing firms that make the same homogeneous and undifferentiated product choose a quantity to produce independently and simultaneously ( Allaz, B., and J.-L Vila 1993)

prices aligns with what is expected by the literature and is also due to the effect ofdouble marginalization.

In an empirical study of US’s bilateral OSAs using 599.533 observations from 1992

to 2007, Cristea and Hummels (2011) draw a result that the liberalisation of an airtransport market should lead to a small direct effect (decrease of 1,6% on average)due to factors such as increased competition or cost synergies caused by theformation of airline alliances which better coordinate services via restructuringroute system structure However, they note that it takes a certain time for thebenefits to materialize in terms of prices of flights departing from US In the longterm, the effect should be a 32% fall in fare level

The removal of restrictions on route rights permits the expansion of supply, giving awider range of choices, and the increased competition leads to downward pressure

on airline costs and so fares Prices are also thought to fall as a result of increasedcooperation between airlines (Euro Commission, 2002) The research estimated theadditional traffic generated as a result of an OAA by means of a regression model.This used 10 explanatory variables to predict traffic, including airline costs and thetime the route had been operated Applying this model gave an overall 10% rise intraffic The study found that the cost reductions resulting from an OAA would

‘imply fare reductions of between 2 and 6%’ and that this would result in anincrease in total transatlantic traffic of between 1 million (assuming a priceelasticity of -1,0) and 3,2 million (elasticity of -2,5) passengers per annum For the

UK, an additional 1,8 million passengers per annum was forecast

Holding a different view from authors above, Pukar (2012), based on his modeling

of airline liberalization’s effect on fares using game theory, shows that while insome markets, deregulation leads to the fall in fares, in others fares might increase

By using a two-stage Nash non-cooperative simultaneous game, he finds that in anunsaturated high density market, liberalization can cause many airlines to enter andset lower fares than incumbent firms However, in a low density sector with littlepotential, a higher fare is possible as some airlines can exit this less profitablemarket to focus on the high density market

1.1.4 Impact on traffic

With increased competition and lower price, a following result would be highertraffic volume This has been proved by a great number of studies on aviationliberalization occurring all over the world

The International Air Transport Association [IATA] (2009, pp.16) developed agravity model to measure air traffic change due to bilateral liberalization, covering

1400 country pairs worldwide Hereby, traffic is a function of two countries’ GDP,their total trade flow, geographic relationship and ASA’s openness factor Theimpact of specific ASAs provisions is estimated introducing dummy variables in theregressions denoting whether the agreement provides the right for stop-over (the socalled fifth freedom), price controls, capacity constraints and designationrequirements (that is, a limit in the number of air companies that can provide aservice)

TrafficAB = F (GDPAB, Service TradeAB, InterveningAB, ASA Factors(0,1)AB)The result shows that liberalization does have a positive impact on air transporttraffic

Table 1.2:Gravity model estimating traffic impact of air service liberalization

Single Disapproval Pricing -0,03629 -3,37

Fifth Freedoms’ absence -0,00036 -1,11

of airports (US and another), each route comprising roughly 12 observations.Thereby, the authors prove that an OSA should generate a significant increase of18% in outbound air traffic in at least five years from agreement signature Thisincrease is attributable to the introduction of new point-to-point routes (direct ones)

in the liberalised international markets (40%) and to the growth in traffic on thepreviously operated routes (60%) On the contrary, the impact of such an agreement

in the volume of incoming traffic in the US is insignificant, once again suggestingthe need of time for market and airlines to readjust The authors also found strongevidence that the demand for international flights is expected to increase regardless

of the initial price level This econometric study, however, gives no consideration of

airline’s strategic behaviour, such as collusion, alliances, or other behaviour ofincumbent firms aimed at preventing the entry of new firms to the market

Concerning the difference in volume’s change of traffic in and out, Oum and Yu(1995) reason that this is due to the fact that North American airlines are moreefficient than the airlines of countries with which the US concluded OSAs Theyfind that before deregulation, European airlines and 6 Asian airlines wereremarkably less efficient than American companies These findings suggest thatefficiency variation across airlines can lead to agreements that benefit more efficientcompanies while becoming detrimental to others

However, Pitfield (2011) considers that parties are “mistaken in expecting asignificant change in passenger numbers to result from changes in regulation”.According to the author, what the Agreement has done is to increase airline choice

in terms of where they can fly from, subject to slot constraints, and in the same way,consumer choice has also been increased His estimates of the impact of the EU-USOpen Skies Agreement are implemented for routes from London to four major UScities and from Paris, Amsterdam to New York, using ARIMA model9 In no casehas a significant impact on passenger numbers been found, except for Amsterdam

1.1.5 Impact on strategic behaviour

Air transport liberalization normally adopts (or removes the restrictions on)cooperative permission that allows airlines to better cooperate As a result,tremendous increase in airline allying has been seen in recent times and now thisform of cooperation dominates international air transportation Indeed, most of thelargest passenger airlines worldwide are members of one of three major alliances:the Star Alliance, SkyTeam and Oneworld which, as of 31 March 2014, providingservices to 637,6; 588 and 512,8 million passengers respectively (data from factsheets of the alliances)

Alliance agreements contain a variety of elements, such as code-sharing, blockedspace, cooperation in marketing, pricing, inventory control and frequent flyerprogrammes, coordination in scheduling, sharing of offices and airport facilities,

9 Time series models or Autoregressive Integrated Moving Average

joint ventures, revenue sharing and franchising (ICAO Secretariat, 2013) Oneinteresting common characteristic of alliances is code-share agreement, whichallows airlines to reach markets that they have not been able to reach yet Eachairline publishes and markets the flight under its own airline designator and flightnumber as part of its published timetable or schedule A seat can be purchased oneach airline's designator and flight number, but is operated by only one of thesecooperating airlines, commonly called the operating carrier Hence, alliances helpopen market.

Button (2009) says international airline alliances involving transatlantic servicesbegan to emerge in the late 1980s as carriers sought to create the economies ofscope and density on the cost side and market presence on the revenue side Thiswas made possible due to the removal of regulations imposed on airline cooperativearrangements

Furthermore, by coordinating flight schedules and ensuring gate proximity atconnecting airports, alliance partners can offer greater convenience to thepassenger Alliance travel thus resembles one-line (single-airline) service, avoidingmany of the inconveniences of a traditional interline trip This effect, which attractspassengers away from non-allied carriers, is reinforced by the unification of thepartners’ frequent-flier programs (Brueckner and Whalen, 2000, pp.56) Whilealliances stem from the lack of open skies agreements between countries, theirformation is possible due to antitrust immunity, which comes about due toliberalization Thus, a highly regulated airline industry would not sustain alliances.Pukar (2012) reasons for the emerging strategic alliance of carriers afterderegulation via Stackelberg and Cournot firm models By identifying the newprofit earned, the author indicates that firms are well motivated to cooperate witheach other under liberalization One way in which the collusion described in themodel could take place in reality would be by the formation of airline alliances.Alliances allow the member airlines to share information and act together in themarket as a single dominating entity The sharing of information gives them a

distinct advantage over those firms that do not collude and have knowledge onlyabout their own respective performance functions

1.1.6 Impact on route structure

According to Fu et al (2010), this liberalization should allow airlines to restructureand optimize their networks, becoming viable to operate routes between twolocations that were not possible before due to the small number of passengers forthat route Deregulation enables market access and freely-determined capacitywhich means airlines can connect more cities, especially small ones, creating an airroute structure called “hub and spoke”

Figure 1.2: The emergence of hub & spoke system after deregulation

Source: Rodrigue et al (2013)

After deregulation, market competition forces the airlines to come up with a moreefficient way of using their fleets in order to compete for customers on the basis oflow cost, convenient, and attractive service According to Rodrigue et al (2013),hubs existed before deregulation, but the removal of restrictions on market entryand exit, along with policies permitting airline mergers, allowed surviving carriers

to “consolidate hub-and-spoke networks, feeding traffic to and from strategicallylocated hubs”

Furthermore, as is analyzed above, liberalization further encourages the formation

of airline alliances, which are typified by codeshare agreements The extended flightnetwork and code-share agreements stemming from the alliance are those that helpair carriers utilize the hub and spoke network to a maximum degree For example, aVietnamese airline, despite not operating the Hanoi – Honolulu route, still can selltickets for this flight through a codeshare with an American airline Journey fromHanoi (spoke) to the transit point or the hub (e.g Del Norte International Airport)can be operated by the Vietnamese carrier, while the remaining route from this stoppoint to Honolulu (spoke) can be done by the American airline

Cook, G N., & Goodwin, J (2008) suggest that hub and spoke route systembecame the post deregulation standard for a variety of reasons

Firstly, passengers can depart "from anywhere to everywhere" (Hansson, Ringbeck,

& Franke, 2002, p 1.) Anyone departing from any non-hub (spoke) for their finaldestination in another spoke in the network first flies to the hub where they connect

to a second flight to the final destination The system is optimized when providingair service to a wide geographic area and many destinations Inbound and outboundflights are tightly timed and coordinated to minimize connection time (McShan &Windle, 1989)

Secondly, the hub-and-spoke system enables operational efficiency as it serves

network destinations with the fewest routes compared to point-to-point structure orany other alternative design For example, five destinations require only four routeswith one hub and four spoke cities but ten routes are required if the samedestinations are connected with a point-to-point system Consequently, for anygiven level of frequency and number of destinations, the H&S system requires thefewest number of aircraft (Button, 2002, as cited in Jenkins, 2002) The authorstresses that the price of mainline commercial aircraft ranging upwards of $35million dollars, this is a major consideration for any airline

Thirdly, the advantages of the H&S system also derive from consolidating the travel

demand of each spoke city to most or all of the destinations in the network.Economic advantages increase with passenger density and network growth As

destinations in the network grow and more passengers funnel through the hub, flightfrequency can be increased High frequency allows the passenger to match flightswith desired itinerary times (Gillen & Morrison, 2005); major network carriersoperate ten or more connecting complexes per day Increases in both number ofdestinations served and frequency also provides a bigger base over which to spreadadvertising and promotional expenses A single advertisement promotes 50destinations instead of just a few Frequent flier programs gain utility and efficacy.

Fourthly, Cook, G N., & Goodwin, J (2008) show that on the supply side, seat

mile costs benefit from economies of traffic density Larger aircraft can be utilized

as the number of passengers per route increase; and, because seating capacityincreases faster than operating and capital cost with aircraft size, seat mile costsdecline These savings allow for lower fares and/or increased margin Theseeconomies of density and scope also encouraged network growth Adding a city tothe network requires only one additional route, utilizes many of the existing hubfacilities, but potentially provides new service to every city in the network Withmore destinations, smaller, lower demand cities can be added that a network withfewer destinations would not support

Pukar (2012) models air transport market to show that after liberalization, thereoccurs the possibility of developing a hub-and-spoke routing option Table 1.3summarizes his arguments

Table 1.3: The formation of hub-and-spoke structure due to increased liberalization

Before

liberalization

o PA, PB, PC are respectively carriers of country A, B and C

o PA can go from A to B, from A to C (so can PB and PC)

o Thus flyers can travel from B to C by transiting through A (so can PB and PC)

o But PA cannot fly directly from B to C (neither can PB and PC)

Vector of PB’s flightsVector of PA’s flightsVector of PC’s flightsAfter

Rational for the formation of hub-and-spoke system:

Assume that PB has one 100 passenger jet and operates fully-occupied flights from B to C, A to

C and B to A Each of the routes has 100 passengers respectively In this non-stop routingoption, 3 flights have to be carried out

To minimize costs, PB would be better off operating a fewer number of flights, but providingservice to the same amount of passengers Suppose PB purchases a 200 seat jet PB has the option

of flying from B to A with 200 passengers, 100 of which actually wanting to go from B to C butare flying via A as a layover When 100 passengers get off at A, this allows seats to be availablefor 100 more from A to C Thus, by operating only 2 flights, PB can provide equivalent servicefor 3 routes The same applies for PA

Source: Pukar (2012)

1.1.7 Impacts on the aviation industry as a whole

Besides major specific effects, air service deregulation brings about a change inevery part of the whole sector dynamics

Concerning productive efficiency improvement, apart from what was mentionedabove, aviation market will also advance to a higher level of operation due to theexit of unprofitable airlines Less efficient airlines are either merged or bankrupted,while new business models and innovations are (e.g., low cost carriers, e-tickets andself-service check-in) nurtured when firms drive to achieve competitive edge Liberalization also enables better access to capital Instead of being limited todomestic market, airlines will obtain access to a wider pool of capital This maylower the cost of capital due to the increased supply available, especially forcountries with less developed capital markets In addition, struggling or start-upairlines with weak credit ratings can obtain access to capital that would otherwise beunavailable Airlines may also benefit from the expertise of the investor as manyinvestors will likely to have a specialized interest in the sector (e.g., other airlines).Ownership and control restrictions being removed would give rise to cross-borderintegration and merger of airlines This would enable airlines to exploit costefficiencies and network synergies with considerable benefits for consumers (IATA,

2009, pp.9)

Another point to mention is the effects on employment in the aviation industry.Undeniably, an expanded market brought by liberalization must create more jobs inthe aviation sector: ranging from the servicing, management to the maintenance ofthe additional air services More employment opportunities will arise in activities atairlines, airports, air navigation and other supporting businesses The impact canextend to food wholesalers that supply food for catering on flights, truckingcompanies that move goods to and from the airport, refineries processing oil for jetfuel, etc

It should be noted, however, that the effects mentioned above are not automatic.There are several factors that can hinder the achievement of these effects, such as:some strategic behaviour that incumbents can adopt with the purpose of preventing

or hindering the entry of airlines to the market (e.g code share agreements(Brueckner, 2001), the restructuration of networks and frequent flier programs andnatural monopolies (Agarregabiria and Ho, 2010), limited airports’ capacity (so thatnot all airlines can start flights at the same time) (Barbot, 2004 as cited in Alves, V

& Forte, R 2015), among others

Liberalisation may lead to a loss of market share by the home carriers; however, thismay be offset by high traffic growth as liberalisation stimulates the market Whileincreased competition has the potential to weaken the viability and profitability ofhome carriers in some instances, liberalisation also offers the means to protectprofitability by expanding into new markets, accessing a wider pool of investmentand through consolidation (IATA, 2009)

In a work commissioned by European Commission (2007), the impact analysis of

an OSAis summarized in as in diagram 1.1 below Accordingly, an OSA wouldinclude the removal of all regulatory restrictions on capacity, frequency anddesignation The removal of these constraints can lead to increased competition andoutput since : new entrants can commence operation in markets from which they arecurrently excluded; additional competition in the market encouraged by the removal

of barriers to entry may also mitigate against fears of market dominance by largernetwork alliances, so that anti-trust immunity10 may be more readily granted anddeeper alliances enabled; new entrants may also lead to more efficient firmsreplacing less efficient firms At the same time, airlines can generate cost savings inoperations or gain economies of scale in capital expenditure (e.g aircraft purchases)

in a merged company, which were not possible on an individual basis; they mayalso adopt new service patterns which can offer more efficient routings All theseoccurrences will lead to the lowered fares, which stimulates demand

10 The privilege of being out of regulatory control of anti-trust laws

Figure 1.3: Elements of the Economic Analysis of an OSA

Source: Euro Commission (2007)

CHAPTER 2: ASEAN OPEN SKY’ POTENTIAL IMPACTS ON VIETNAM

AVIATION INDUSTRY 2.1 Introduction to ASEAN Open Skies

2.1.1 Overview of ASEAN Economic Community

ASEAN Open Skies lies in the framework of ASEAN Economic Community(AEC) which is deemed to commence by the end of 2015 It will be an importantcomponent of the overall economic integration of ASEAN, since transport links arecritical to bringing down barriers to trade, and facilitating change Therefore, beforegoing into details about the Open Skies, it is necessary to grasp fundamentalinsights into AEC

The AEC comprises of 10 ASEAN members: Brunei Darulssalam, Cambodia,Indonesia, Laos, Malaysia, Myanmar, The Philippines, Thailand, Singapore andVietnam

In 2015, the ASEAN Economic Community (AEC), envisioned as a single commonmarket and production base, will become a reality This will lead to the freer flow ofgoods, services, investment capital and skilled labour in the region Tariffs and non-tariff barriers will be reduced, which will have implications for intraregional tradeand investment New opportunities for growth and prosperity are likely to emerge.The AEC Blueprint has four principle components:

(i) single market and production base, including the free flow of goods,

services, investment, skilled labour and a freer flow of capital;

(ii) competitive economic region, with competition policy, consumer

protection, commitments to greater protection of intellectual propertyrights, infrastructure development, e-commerce and avoidance of double-taxation;

(iii) (equitable economic development to help close development gaps in the

region; and

(iv) integration into the global economy, including the need for ASEAN

centrality and enhanced participation in global supply networks

Table 2.1 provides an overview on AEC’s core elements:

Table 2.1: Summary of AEC Blueprint Core elements Actions

A Single market and production base

 Goods

Eliminate duties and non-tariff barriers

Simplify rules of origin

Trade facilitation, customs integration, single window

Harmonize standards and regulations

 Services

Remove restrictions on service trade

Allow at least 70% equity participation

Schedule commitments for mode 4

Extend mutual recognition arrangements, liberalize financialservices

3 Investment Investment protection, facilitation, promotion, liberalization

Non-discrimination, national treatment

4 Capital Harmonize regulations

Promote cross-border capital raising

5 Labour

Facilitate movement of skilled and professional labour incross-border trade

Enhance movement of students

Work towards harmonizing qualifications

6 Priority sectors Projects in 12 priority sectors

Promote technology transfer

B Competitive economic region

Implement ASEAN IPR Action Plan

Promote regional cooperation

4 Infrastructure

Facilitate multimodal transport

Complete Singapore–Kunming rail link

Integrated maritime transport, open sky policies, singleaviation market

High-speed IT interconnections

ASEAN power grid, gas pipeline

5 Taxation Complete bilateral agreements

6 E-commerce Adopt best practices and harmonize legal infrastructure

C Equitable economic development

1 SMEs ASEAN Blueprint of best practices

2 Initiative for

integration Technical assistance and capacity building in CLMVeconomies

D Integration in to the global economy

networks International best practices and standardsTechnical assistance

Source: ASEAN Secretariat (2008)

ASEAN Open Skies falls within element B, section 4: Infrastructure which gearstowards the materialization of ASEAN Single Aviation Market The policy isexpected to enable ASEAN countries and airlines operating in the region to directlybenefit from the growth in air travel around the world, and also freeing up tourism,trade, investment, and service flows between member states

2.1.2 ASEAN Open Skies Agreements

2.1.2.1 History

The term “Open Skies” dates back to the 1990s when it was proposed for the firsttime in ASEAN (Findlay and Forsyth, 1992) In the following years, the proposalwas inputted as a cooperation aspect in the “Plan of Action for Transport andCommunications (1994-1996)” To achieve the plan, air travel has become one ofthe 12 priority sectors aimed for economic integration, all of which are keycomponents for the proposed AEC blueprint (table 2.1)

Over the years, the concept had been a content for discussions and agendas byASEAN state members until in November 2004, building upon earlier discussions,the 10th ASEAN Transport Ministers’ Meetings in Phnom Penh, Cambodiadeclared the adoption of Action Plan for ASEAN Air Transport Integration andLiberalization 2005-2015 (ASEAN Secretariat, 2004) This Action Plan, togetherwith an accompanying document known as the Roadmap for Integration of Air

Travel Sector (RIATS) (ASEAN Secretariat, 2004) maps out a strategic route forthe realization of a unified aviation market in 2015 In summary, RIATS identifiedthe following specific goals and target dates:

(i) For air freight (cargo) services, significant liberalization by 2006, and full

liberalization by 2008;

(ii) For scheduled passenger services

unlimited third and fourth freedom flights for all designated pointswithin ASEAN sub-regions by 2005, and for at least two designatedpoints in each country between the ASEAN sub-regions by 2006;

unlimited fifth freedom traffic between designated points within theASEAN sub-regions by 2006 and at least two designated points ineach country between the ASEAN sub-regions by 2008;

unlimited third and fourth freedom flights between the capital cities by2008;

unlimited fifth freedom flights for the capital cities by 2010

Following the attempt, in 2007, at the 13th ASEAN Summit, ASEAN memberstated declared the Implementation Framework of The ASEAN Single AviationMarket with the vision of establishing an ASEAN Single Aviation Market (ASAM)

by 2015 and basically completing the liberalization phases by 2020 (ASEANSecretariat, 2007) The roadmap for the economic elements of the ASAM is asfollows

Subjects Measures Timeline

Market Access Consistent with paragraph 11 of Part VI (Implementation Mechanism) of

this Implementation Framework:

Ratify/Accept and implement the ASEAN Multilateral Agreement on theFull Liberalisation of Air Freight Services (MAFLAFS) and its Protocols 1and 2 as soon as possible, in support of the establishment of the AEC by

2015, noting that the implementation timeline of the MAFLAFS and itsProtocols 1 and 2 as agreed by the ASEAN Transport Ministers is 31December 2008

2008

Ratify/Accept and implement the ASEAN Multilateral Agreement on AirServices (MAAS) and its Protocols 1 to 6 as soon as possible, in support ofthe establishment of the AEC by 2015, noting that the implementationtimelines of the MAAS as agreed by the ASEAN Transport Ministers are

31 December 2008 for Protocol 5 and 31 December 2010 for Protocol 6

Protocols 1-5:2008

Protocol 6: 2010

Sign the ASEAN Multilateral Agreement on the Full Liberalisation ofPassenger Air Services (MAFLPAS) by 2010, and ratify and implementthe MAFLPAS and its Protocols 1 and 2 as soon as possible, in support ofthe establishment of the AEC by 2015, noting that the implementationtimelines of the MAFLPAS as agreed by the ASEAN Transport Ministersare 30 June 2010 for Protocol 1 and 30 June 2013 for Protocol 2

Protocol 1: 2010Protocol 2: 2013

Review the implementation of MAAS, MAFLAFS and MAFLPAS andcommence discussion on the possibility of further liberalisation of market

2016-2020

access, if necessary.

Charters Liberalise charters on international routes, which are not served by

scheduled airlines Consider all other cases on a case-by-case basis

2015

2015

Ownership and Control Work towards adoption of the principal place of business and effective

regulatory control criteria in the designation of airlines of ASEAN MemberStates

2015

Commence discussion on further liberalisation of ownership and control ofairlines of ASEAN Member States, including the concept of an ‘ASEANCommunity Carrier’

2016-2020

Commercial Activities, e.g:

- Airline commercial arrangements

- Computer Reservation Systems

- Maintenance, repair

Airport User Charges To be established in line with ICAO principles and guidelines 2015

Dispute Resolution To be governed by the ASEAN Enhanced Dispute Settlement Mechanism 2015

Dialogue Partners Engagement

Mechanism

Further strengthen engagement with Dialogue Partners in the development

of the ASEAN air transport sector, while maintaining ASEAN’s centrality

as the primary driving force

Conclude Air Transport Agreements with China by 2010, India, the ROKand possibly other Dialogue Partners, not later than 2015

2.1.2.2Terms and provisions of the Agreements

The State members have expressed their strong commitment to RIATS and theASAM implementing framework with two agreements signed on 2009 and 2010:the Multilateral Agreement on Air Services (MAAS) and the MultilateralAgreement for Full Liberalization of Passenger Air Services (MAFLPAS)respectively The agreements coming into force in 13 October 2009 and 30 June

2011 have marked the materialization of the so-called ASEAN Open Skies policy Regarding the validation mechanism, for each of these agreements or theircorresponding protocols, signature does not constitute validity because it “is subject

to ratification or acceptance by the Contracting Parties” and “shall enter into force

on the date of the deposit of the third (3rd) Instrument of Ratification orAcceptance11 with the Secretary-General of ASEAN and shall become effectiveonly among the Contracting Parties that have ratified or accepted it” (Article 19,MAAS and MAFLPAS) The two parent documents are enclosed withImplementing Protocols which are stand-alone legal instruments In other words,MAAS and MAFLPAS taking effect does not mean their Protocols becoming valid.The MAAS was signed by all ten State members on 20th May 2009 and so wasMAFLPAS on 12th November 2010 Afterwards, they became valid in 13 October

2009 and 30 June 2011 respectively

a) Traffic rights

To begin with, MAAS and MAFLPAS provide that each contracting state party willprovide the designated airlines of the other contracting parties the right to fly acrossits territory without landing (First Freedom) and the right to make stops in itsterritory for non-traffic purposes (Second Freedom)

The Implementing Protocols of MAAS grant Third, Fourth and Fifth Freedommarket access rights:

11 The instruments of "acceptance" or "approval" or “ratification” of a treaty express the consent of a state to be bound by the treaty (Vienna Convention on the Law of Treaties, 1969)

i Protocol 1 - Unlimited Third and Fourth Freedom Traffic Rights within

ASEAN Sub Region Designated airlines from each contracting party shall be

allowed to operate unlimited third and fourth freedom passenger servicesfrom any designated points in its territory to any designated points in the sub-region to which it belongs

ii Protocol 2 - Unlimited Fifth Freedom Traffic Rights Within ASEAN

Sub-Region Designated airlines from each contracting party shall be allowed to

operate unlimited fifth freedom passenger services from any designatedpoints in its territory to any designated points in the sub-region to which itbelongs

iii Protocol 3 - Unlimited Third and Fourth Freedom Traffic Rights between

ASEAN Sub Regions Designated airlines from each contracting party shall

be allowed to operate unlimited third and fourth freedom passenger servicesfrom any designated points in its territory to any designated points in othersub-region

iv Protocol 4 - Unlimited Fifth Freedom Traffic Rights Between ASEAN

Sub-Regions Designated airlines from each contracting party shall be allowed to

operate unlimited fifth freedom passenger services from any designatedpoints in its territory to any designated points in other sub-region

v Protocol 5 - Unlimited Third and Fourth Freedom Traffic Rights between

ASEAN Capital Cities Designated airlines from each contracting party shall

be allowed to operate unlimited third and fourth freedom passenger servicesfrom its capital city to any other capital city

vi Protocol 6 - Unlimited Fifth Freedom Traffic Rights Between ASEAN Capital

Cities Designated airlines from each contracting party shall be allowed to

operate unlimited fifth freedom passenger services from its capital city to anyother capital city

On their part, the Implementing Protocols of MAFLPAS address the same AirFreedoms but at a more liberal level, which does not limit to capitals only, butextend to all other cities of the States:

i Protocol 1 - Unlimited Third and Fourth Freedom Traffic Rights Between

Any ASEAN Cities Designated airlines from each contracting party shall be

allowed to operate unlimited third and fourth freedom between any two capital cities, or between a non-capital and a capital city

non-ii Protocol 2 - Unlimited Fifth Freedom Traffic Rights Between Any ASEAN

Cities Designated airlines from each contracting party shall be allowed to

operate unlimited fifth freedom between any two non-capital cities, orbetween a non-capital and a capital city

The first four Implementing Protocols of MAAS - Protocols 1 to 4 - are limited inimpact and relatively straightforward This is because they only deal with marketaccess relaxations designed to spur growth within sub-regions Four such sub-regions have so far been identified: the Brunei, Indonesia, Malaysia and PhilippinesEast ASEAN Growth Area (BIMP-EAGA), the Sub-regional Cooperation in AirTransport among Cambodia, Lao PDR, Myanmar and Vietnam (CLMV), theIndonesia, Malaysia, Singapore Growth Triangle (IMS-GT) and the Indonesia,Malaysia, Thailand Growth Triangle (IMT-GT).The sub-region’s components andtheir respective designated points are listed in Table 2.2