This article first appeared in The Edge Malaysia Weekly on October 16, 2017 - October 22, 2017

AS the 23rd annual meeting of Asean transport ministers wrapped up last week, the region’s open skies agreement still had miles to go before the full impact and benefits can manifest in the aviation market.

When that happens, though, the resulting heightened competition could pile on further pressure for full-service carriers (FSCs) that have been losing much ground against low-cost carriers (LCCs) over the past decade.

“Asean is now an LCC market — in fact, figures show that over 60% of traffic within the region is already captured by LCCs, and growing,” Prof Alan Tan, an aviation law expert at the National University of Singapore, tells The Edge. “But once implementation of Asean open skies hits full swing, the full-service sector will take an even bigger hit.”

According to the Capa Centre for Aviation, LCCs accounted for 32.1% of seat capacity within Southeast Asia in 2007 but that number had risen to 56.2% as of 2016.

Eventually, the bigger hit could mean FSCs being forced to “start behaving more like LCCs”, Tan says, by bundling and selling ancillary products such as meals for intra-Asean routes, while focusing on longer-haul routes outside of Asean at the same time.

One interesting strategy that has emerged in response to pressure from LCCs has seen Singapore Airlines Ltd concentrating on core trunk routes such as capital-to-capital flights where FSC demand remains sizeable, while sister carrier SilkAir and budget arm Scoot cater to lower-end routes.

“I think there will be a convergence where some FSCs will end up being very much like LCCs,” says Tan. “We’re already seeing that happening in Europe where a British Airways flight within Europe sells food and drinks.”

In the same vein, not all airlines will benefit equally from the coming liberalisation. The question comes down to competitiveness and resources, particularly the financial sort, says Shukor Yusof, founder of aviation research firm Endau Analytics.

An airline like AirAsia Bhd will have a distinct advantage due to its cost advantage and network around Southeast Asia and Asia-Pacific, he opines.

In 2016, AirAsia was the fourth largest airline in Asia by number of passengers carried, and the biggest out of China.

“To really take advantage of open skies, you need quite a lot of money because you’re taking in more passengers and you’ll need more aircraft, for example. So at the end of the day, we’re talking about who has the deeper pockets to take advantage of this,” says Shukor.

“Open skies will not benefit companies like Malaysia Airlines Bhd, but it will for AirAsia because its strategy had been very effective in terms of reaching out into places — intra-Asia segments that had not been fully serviced by other carriers before.”

Additionally, select airlines may need to reconfigure their fleets as many of the new routes set to open up due to the open skies agreement would be more effectively served by smaller planes of about 110 seats up to 180 seats, Shukor adds.

These smaller planes, such as regional jets like Bombardier of Canada or Embraer of Brazil, could serve some shorter intra-Asean routes more profitably than larger planes, he notes, citing previous calculations and research by Endau Analytics.

Certain countries in the region, such as Indonesia, Malaysia and Thailand, are perfect examples where a regional aircraft would work, because of the size and geography of those countries,” says Shukor.

“With a smaller plane, your break-even point is lower and you can fly it more frequently.” He adds that carriers that could go this way include Garuda Indonesia and Malaysia Airlines.

For the consumer, the heightened competition expected can only bode well in terms of cheaper fares in the region, says Ali Salman, director of research at the Institute for Democracy and Economic Affairs (IDEAS).

That would boost tourism within Asean, he adds, where 40% of total tourist arrivals comprise intra-Asean travellers.

“In the bigger picture, the single aviation market is a win-win scenario. We expect to see an increase in air traffic and tourism, and we expect this (40%) number will increase — this is hypothetical, but it will definitely increase to 50% or 60%,” opines Ali.

As for Asean, economic integration in general would benefit the regional grouping as a whole despite varying levels of economic development across the 10 member nations, adds Ali, thanks to economies of scale and labour mobility.

For the airlines, the heightened competition may see less competitive carriers choked by stronger competitors. That may open the way to merger and acquisition activity, depending on how airline ownership policy in Asean evolves, Ali adds. At present, most Asean countries require their airlines to be majority controlled by locals.

On the flipside, aviation infrastructure has lagged the growth in airline fleets and air traffic in recent years, says Shukor. In a nutshell, airlines can only launch new routes or increase flight frequency if airports have available slots to accommodate the expansion.

“That is quite a concern because the infrastructure can’t catch up with the growth [rate],” says Shukor. However, he adds that compared to cities like Jakarta, Manila and Bangkok, Malaysia’s airports are still alright.

“For example, the Kuala Lumpur International Airport and klia2 are just next to each other, so I think it’s a matter of realigning some inbound and outbound flights [to manage traffic growth]. But clearly, something needs to be done.”

In an August 2017 report, the Malaysian Aviation Commission flagged capacity issues at seven Malaysian airports that are handling more traffic than their design capacities. Several more are expected to surpass their design capacities within one to five years.

The commission concluded that significant capital expenditure for expansion is required over that timeframe to address these requirements.

In an interview with The Edge last August, Malaysia Airports Holdings Bhd managing director Datuk Badlisham Ghazali acknowledged capacity expansion as a priority for the airport operator moving forward, with plans already in place to upgrade several key airports.

Looking further ahead, the open skies agreement, which achieved full ratification in April 2016, albeit with significant restrictions by some member countries, must begin discourse on opening up the seventh freedom for airlines to truly create the intended single aviation market, says Tan.

The seventh freedom allows an airline to fly between two foreign destinations outside its home country without the flight having to connect to, or be an extension, of any service from its home nation. At present, the open skies agreement only remove restrictions up to the fifth airspace freedom.

“A truly open skies or single aviation market [like in the European Union] allows those [seventh freedom] rights,” says Tan. “At the moment, none of that has happened.”

Despite achieving full ratification, the agreement’s implementation has been ponderous. While the economic liberalisation — meaning Asean countries allowing foreign airlines free access to international airports — is almost complete, regulatory harmonisation among member states is still being discussed and not yet entrenched in any treaty.

Working out the differing standards and requirements to potentially create a single regional regulator will not be accomplished in the near term, says Tan, as it may involve asking Asean countries to give up sovereign power to a regional body on sensitive matters such as safety regulation.

“These are difficult things like mutual recognition of pilot schools and certification region-wide and mutual recognition of inspection certificates such that an aircraft inspected and cleared in Malaysia today need not be inspected by any other Asean member for the next six months and so on,” he adds.

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