Assessing the Prospects
for an E.U.-ASEAN Air Transport
Agreement

02

Discussion Paper 2015 • 02
Alan Khee-Jin Tan

National University of Singapore

Assessing the Prospects for an E.U.-ASEAN
Air Transport Agreement

Discussion Paper No. 2015-02

Alan KHEE-JIN TAN
National University of Singapore

January 2015

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

Table of contents

1.

Introduction ............................................................................................................................. 5

2.

Envisioning the E.U.- ASEAN “open skies” market............................................................... 6
Unlimited Third and Fourth Freedom Rights? ................................................................... 6
Fifth Freedom Rights and Ownership and Control Rules? ............................................... 10
ASEAN Skies: Not Yet Truly Open ................................................................................. 13

3. Conclusion ................................................................................................................................. 15
References ....................................................................................................................................... 15
Annex I...........................................................................................................................................................16

Tables
1.
2.
3.
4.
5.

Status of E.U. designation agreements with ASEAN member states................................................... 6
Direct operations by E.U. and ASEAN carriers between the two regions ........................................... 7
One-stop operations by sixth freedom carriers between the E.U. and ASEAN ................................... 8
Middle Eastern and Turkish carriers’ capacity into ASEAN, by weekly seats .................................... 9
Points Offered for the ASEAN-China Agreement’s Draft Protocol 2 on Fifth Freedom Rights ....... 12

Figures
1.
EMIRATES ........................................................................................................................................ 16
2. QATAR AIRWAYS ................................................................................................................................ 16
3. TURKISH AIRLINES............................................................................................................................. 17
4. KOREAN AIR......................................................................................................................................... 17
5. THAI AIRWAYS .................................................................................................................................... 18
6. SINGAPORE AIRLINES ....................................................................................................................... 18

A. Khee-Jin Tan — Discussion Paper 2015-02 — © OECD/ITF 2015

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

1. Introduction

In February 2014, transport officials from the European Union (E.U.) and the Association ofSoutheast Asian Nations (ASEAN) met on the sidelines of the Singapore Airshow to discuss a possible
comprehensive air transport agreement between both sides. At the meeting’s conclusion, the ASEAN states
invited the European Commission to launch the internal processes necessary to secure a mandate tocommence negotiations on an agreement. In particular, ASEAN welcomed Vice President of the European
Commission and Commissioner for Transport Siim Kallas’ statement that he would propose to theCommission to seek authorization from the Council of the European Union to start negotiations (E.U.ASEAN Joint Declaration, 2014).
The economic potential of a “bloc-to-bloc” agreement is obvious: it would be the first accord to lay
out an “open skies” or “open aviation area” arrangement between two major regional trading blocs. This
could significantly liberalize traffic rights and market access for both regions’ airlines into each other’s
respective territories, along with numerous other potential benefits. Indeed, with 28 and 10 countries
respectively and a massive combined population of 1.1 billion, the E.U. and ASEAN economies stand tobenefit greatly from an ambitiously-crafted agreement.
Air traffic between the two regions has nearly doubled in the last 15 years to more than 10 million
passengers in 2012 (E.U.-ASEAN Joint Declaration, 2014). At the same time, a significant amount oftraffic in the E.U.-ASEAN market has been captured by airlines from third countries, particularly the“sixth freedom” carriers like Emirates, Etihad, Qatar Airways and Turkish Airlines. Thus, a major impetus
for the proposed E.U.-ASEAN agreement is the desire on both sides to stem this loss of traffic to the sixth
freedom carriers.
This paper assesses if the proposed agreement can realistically counter the sixth freedom carriers’
market power. At the same time, the asymmetries between the E.U.’s common aviation market and theincomplete ASEAN Single Aviation Market (ASAM) will be analyzed to illustrate both sides’ unequalbargaining positions.

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

2. Envisioning the E.U.- ASEAN “open skies” market

Unlimited Third and Fourth Freedom Rights?
While actual negotiations have not started, it is nonetheless possible to predict the features of any
meaningful accord. One critical liberalizing feature would be the complete relaxation of third and fourth
freedom rights on a bloc-to-bloc basis. Hence, market access in the form of direct, non-stop flights between
the two regions operated by airlines designated by both sides could become unlimited in capacity,
frequency and aircraft type. This is the basic philosophy behind all modern “open skies” aviationagreements, and should form the backbone of the proposed E.U.-ASEAN agreement.
An “open skies” regime with unlimited third and fourth freedom rights and capacity for both regions’airlines could go some way toward winning back some of the traffic lost to sixth freedom rivals. Hence,
major hub-to-hub operations between Singapore, Bangkok and Kuala Lumpur (on the ASEAN side) andLondon, Paris, Frankfurt, Amsterdam and Rome (on the E.U. side) will likely benefit from increased
operations and market competition.
Here, it should be noted that currently, not all the bilateral agreements between the E.U. and ASEAN
states have been fully liberalized. The proposed comprehensive agreement will undoubtedly seek toovercome this problem – indeed, with full relaxations, the ASEAN carriers will enjoy unlimited rights andcapacity into all the E.U. countries, including those such as France, Greece and Italy that still maintaincapacity restrictions bilaterally. The E.U. carriers will similarly enjoy reciprocal unlimited access into
ASEAN points.
To date, the European Commission has concluded “horizontal” agreements with only 4 out of the 10
ASEAN states (Indonesia, Malaysia, Singapore and Vietnam) to allow for the automatic designation of all
E.U. carriers to enjoy the traffic rights between individual E.U. states and these ASEAN states (European
Commission, 2013). Four other ASEAN member states - Brunei, Cambodia, the Philippines and Thailand have agreed to E.U. designation in a more limited way, i.e. through amendments of bilateral agreementswith individual E.U. states. The two remaining ASEAN states, Laos and Myanmar, have not yet enteredinto any agreement for E.U. designation. The table below shows the status of such agreements:
Table 1. Status of E.U. designation agreements with ASEAN member states
E.U. designation agreed under a horizontal agreement
Total no. of bilateral agreements amended

E.U. designation agreed bilaterally with E.U. Member State
No. of bilateral agreements amended

Singapore
Malaysia
Indonesia
VietnamThailandPhilippines
Brunei
Cambodia

22
19
19
17

7
4
2
1

Source: European Commission, Bilateral Air Services Agreements brought into legal conformity since the Court of Justice of theEU judgments of 5 November 2002,
http://ec.europa.eu/transport/modes/air/international_aviation/external_aviation_policy/doc/table__asa_brought_into_legal_conformity_since_ecj_judgments-_january_2013.pdf

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

In essence, E.U. designation allows carriers such as Lufthansa (and for that matter, all E.U. airlines) to
be designated to fly between, say, Paris and Singapore even though they are not French carriers. However,actual traffic capacity remains governed by the relevant bilateral agreements. If these have finite
entitlements (e.g. the France-Singapore agreement), the E.U. carriers will have to share that limited
capacity between themselves following E.U. Regulation 847/2004. Of course, a comprehensive E.U.ASEAN agreement will overcome this problem and eliminate capacity constraints altogether.
Table 2. Direct operations by E.U. and ASEAN carriers between the two regions
Carrier(Region)Thai
Airways(ASEAN)

Originating
Points/Hubs
Bangkok

Singapore
Airlines(ASEAN)

Singapore

Malaysia
Airlines(ASEAN)KLM (E.U.)

Kuala Lumpur

Vietnam Airlines(ASEAN)Air
France(E.U.)
Lufthansa (E.U.)

Hanoi, Ho Chi Minh
City
Paris

British Airways(E.U.)
Finnair (E.U.)
SWISS (E.U.)
Austrian (E.U.)
Norwegian(E.U.)
GarudaIndonesia(ASEAN)
Condor (E.U.)

Destination Points
Brussels, Copenhagen, Frankfurt, London
Heathrow,
Madrid, Milan, Munich, Oslo, Paris, Rome,
Stockholm, Zurich
Amsterdam,
Athens,Barcelona,
Copenhagen,Frankfurt,
LondonHeathrow, Manchester (via Munich),
Milan, Munich, Paris, Rome, Zurich
London Heathrow, Frankfurt
Paris, Amsterdam

Total
Seats
64,410Weekly% of Total
Capacity
26.1

61,79225.0

27,516

11.2

Bali (via Singapore), Bangkok, Kuala
Lumpur, Jakarta (via Kuala Lumpur),
Manila (via Taipei), Singapore
London Heathrow, Frankfurt, Paris

15,6206.3

13,508

5.5

13,394

5.4

11,648

4.7

London Heathrow

Bangkok, Ho Chi Minh City, Kuala
Lumpur, Singapore
Bangkok, Jakarta (via Kuala Lumpur),
Kuala Lumpur, Singapore
Bangkok, Singapore

11,284

4.6

Helsinki
ZurichViennaStockholm, Oslo

Bangkok, Singapore, Hanoi, Krabi, Phuket
Bangkok, Singapore
Bangkok
Bangkok

9,992
6,132
4,312
3,492

4.0
2.5
1.7
1.4

Jakarta

Amsterdam

3,140

1.3

Frankfurt

Bangkok, Phuket
TOTAL

498
246,7380.2
100.0

Amsterdam

Frankfurt

Source: Airline websites and Centre for Aviation (CAPA) and Innovata, at http://centreforaviation.com/analysis/emirates-etihad-qatar-continue-to-pursue-rapid-expansion-in-southeast-asia-western-europe-market-120471
Note: Weekly capacity is for week of 4-10 November 2013. The figures reflect direct flights on the respective airlines’ own metal(aircraft) only; codeshare operations on other carriers are excluded. Fifth freedom operations by non-E.U. and non-ASEAN
carriers are excluded; SWISS and Norwegian taken as E.U. carriers.

Table 3 illustrates the points serviced in both regions by the Middle Eastern and Turkish sixth
freedom carriers, while Table 4 sets out these carriers’ weekly capacity into ASEAN.

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

Table 3. One-stop operations by sixth freedom carriers between the E.U. and ASEAN
Carrier

Originating HubDestination Points
E.U.

Emirates

Qatar

EtihadTurkish Airlines

Dubai

Doha

Abu Dhabi

Istanbul

Amsterdam
AthensBarcelonaBirmingham
Brussels
Copenhagen
DublinDusseldorf
Frankfurt
GenevaGlasgow
Hamburg
Larnaca
LisbonLondon
Lyon

AthensBarcelona
BerlinBrussels
Bucharest (via Sofia)
Budapest (via Zagreb)
Copenhagen
EdinburghFrankfurt
GenevaLarnaca
LondonMadridAmsterdam
Brussels
AthensBerlinDublinDusseldorf
Larnaca
LondonA total of 74 points in the E.U.

ASEAN
MadridMalta
Manchester
Milan
MunichNewcastle
Nice
Oslo
Paris
PragueRome
Stockholm
VeniceViennaWarsaw
ZurichBangkok
Ho Chi Minh City
Jakarta
Kuala Lumpur
ManilaPhuketSingapore

Total: 32

Total: 7

Manchester
Milan
Munich
Oslo
Paris
Rome
Sofia
Stockholm
VeniceViennaWarsaw
Zagreb
ZurichBali (via Singapore)
Bangkok
Clark, Manila
Hanoi (via Bangkok)
Ho Chi Minh City
Kuala Lumpur
Jakarta
ManilaPhnom Penh (via Ho Chi Minh)
Phuket (via Kuala Lumpur)
Singapore
YangonTotal: 26

Total: 12

Frankfurt
GenevaManchester
Milan
MunichParis
Rome
ZurichBangkok
Ho Chi Minh City
Jakarta
Kuala Lumpur
PhuketManilaSingapore

Total: 16

Total: 7
Bangkok
Ho Chi Minh City (via Bangkok)
Jakarta (via Singapore)
Kuala Lumpur
Singapore
Total: 5

Source: Respective airlines’ websites.
Note: E.U. points include those in Norway and Switzerland.Own elaboration of Ministry of Transport Statistics, 2014.

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

Table 4. Middle Eastern and Turkish carriers’ capacity into ASEAN, by weekly seats
CarrierEmirates
Qatar Airways
EtihadTurkishNovember 2011
72,982
46,372
29,202
N.A.

November 2012
80,58847,72038,812
N.A.

November 2013
112,028
68,374
48,314
approx. 10,000% growth over Nov 2011
54
47
65
N.A.

No. of ASEAN destinations
7
12
7
5

Source: Centre for Aviation (CAPA) and Innovata, at http://centreforaviation.com/analysis/emirates-etihad--qatar-continue-topursue-rapid-expansion-in-southeast-asia-western-europe-market-120471 andhttp://centreforaviation.com/analysis/http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-2112353
Note: Seat capacity is for the first week in November 2011, November 2012 and November 2013.

It can be seen that the Middle Eastern and Turkish carriers’ penetration into both regions, particularlyin the E.U., is hugely impressive. Hence, they have tremendous capacity to compete for traffic in the E.U.ASEAN market. Turkish Airlines alone has more than 70 destinations in the E.U., although its seatcapacity into ASEAN lags behind the Middle Eastern carriers’. Of course, these sixth freedom carriers
collect passenger “feed” from other regions such as Northeast Asia, North America and Africa as well. As
such, their operations benefit from greater economies of scale in being able to funnel passengers from avariety of markets through their mid-point hubs. This is particularly important for filling up aircraft on thethinner routes involving smaller cities.
What this means is that an unlimited “open skies” regime between the E.U. and ASEAN may not help
to justify their respective carriers’ direct, non-stop flights between ASEAN and smaller non-hub E.U. cities
such as Bordeaux, Oslo, Glasgow, Prague or Zagreb. The problem for these operations is not the lack oftraffic rights but the absence of a sizeable market to fill up the aircraft. The same applies to direct flights
between the E.U. and ASEAN cities such as Bali, Phuket, Manila, Ho Chi Minh City or Yangon. Due tosuperior geography and operating economics, the Middle Eastern and Turkish sixth-freedom carriers are
better-positioned to exploit their “hub-and-spokes” advantage. Indeed, all the above cities are connected by
one or more of the sixth freedom carriers through their respective hubs.
Consequently, an E.U-ASEAN comprehensive agreement with unlimited third and fourth freedom
rights is likely to boost, if at all, only the hub-to-hub operations between the two regions. The thinnerroutes will remain difficult to fill. Even for the hub or trunk routes, there is unlikely to be a significant
increase in actual traffic carried. With some exceptions, most direct E.U.-ASEAN routes already enjoy
unlimited or near-unlimited capacity under the existing bilateral agreements. For instance, Singapore
carriers have had unlimited rights into London Heathrow and all points in the U.K. since 2007; the real
problem here is the lack of slots at Heathrow Airport which an E.U.-ASEAN agreement does not cure.
Elsewhere, unlimited or generous rights for ASEAN carriers to fly to the likes of Berlin, Brussels orBarcelona already exist, but are largely unutilized due to the lack of a market for regular and profitable
operations. Similarly, the E.U. carriers have more than enough rights into points such as Kuala Lumpur,
Hanoi, Phnom Penh and Jakarta but these have also proven to be unprofitable. Overall, unlimited capacity
into points such as Paris and Manila that are still limited by the relevant bilateral agreements might bewelcomed, but unlimited traffic rights alone will not help the E.U. and ASEAN carriers fill up their flights,
particularly on the thinner routes.
A more significant strategy to grow the market would be to facilitate agreements between airlines
from both sides that are immunized for joint venture, “metal-neutral” operations. These will allow hitherto
competing players on a particular route to co-operate and engage in joint marketing and revenue-sharing.
To illustrate, KLM and Garuda Indonesia could conceivably launch daily flights between Amsterdam and
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Jakarta that see both carriers jointly marketing and operating those flights beyond simple code-sharing.
Each carrier could take one of two daily flights, for instance, or half of the number of weekly flights. In
this manner, the co-operating carriers would be “metal-neutral”, in that they become indifferent to which
between them operates a particular segment, as long as both work toward marketing all seats that are
cumulatively on offer. Overall, this represents a more viable strategy against rival sixth freedom carriers.
Naturally, such close co-operation (presumably along alliance lines) will invite competition or
antitrust law scrutiny from regulators. Such “metal-neutral” operations have already received the blessingsof regulators in the U.S., Japan, Korea and Singapore (for trans-Pacific flights, e.g. by Japan Airlines and
All-Nippon Airways) and the U.S. and E.U. regulators for operations across the Atlantic. A comprehensive
E.U.-ASEAN agreement could conceivably seek to facilitate such operations between the two regions andto lay down the necessary safeguards for protecting competition. It follows that in each case, regulators
will still have to conduct robust economic analyses to determine the effect on competition. However, to theextent that strong competition is posed by the sixth freedom carriers in the E.U.-ASEAN market,
approving such co-operation by airlines from both ends appears to be straightforward.
Fifth Freedom Rights and Ownership and Control Rules?
The proposed E.U.-ASEAN agreement should also go beyond liberalizing third and fourth freedoms
flights (i.e. direct, non-stop flights) to relax fifth freedom operations as well. Thus, E.U. carriers could gainfrom having mid-point stops with traffic rights in the Middle East or India as well as beyond-ASEAN
rights to Australia, New Zealand and the Pacific. For instance, E.U. carriers could stop over in Mumbai,
India on an E.U.-Singapore-E.U. flight with unconstrained traffic pick-up rights in Mumbai in both
directions, as well as similar rights in Singapore for an onward segment to Sydney, Australia and back.
Conversely, ASEAN carriers could secure similar rights in Mumbai en route to the E.U. as well as beyondE.U. rights to the Americas (e.g. Thai Airways on a Bangkok-Mumbai-Frankfurt-New York operation).
Such fifth freedom rights already exist in many of the current bilateral agreements, although their
daily or weekly capacity may be restricted. Singapore Airlines, for instance, utilizes beyond-E.U. fifth
freedom rights for its Singapore-Frankfurt-New York and Singapore-Barcelona-Sao Paolo operations. The
E.U. carriers have similar traffic pick-up rights in ASEAN points for onward segments to Australia (e.g.
British Airways’ London-Singapore-Sydney operations). The E.U.-ASEAN agreement’s aim should be torelax such operations to a greater or unlimited degree in order for its liberalizing impact to be meaningful.
Of course, such operations must also be permitted by the respective agreements with the third countries
concerned (i.e. India, Australia, the U.S. and Brazil in the above examples).
The exchange of full intra-regional fifth freedom rights within the E.U. and ASEAN should also be
considered. Again, the bilateral agreements already provide for such operations, albeit with limited
capacity on some routes. Hence, E.U. carriers like KLM have been operating to Bali via Singapore andJakarta via Kuala Lumpur, in both cases with traffic pick-up rights in the mid-point ASEAN cities.
Conversely, Singapore Airlines offers a Singapore-Munich-Manchester routing. Such fifth freedom
operations should be freed up completely with capacity and pricing left to the market to dictate. Indeed,
under the E.U.’s Regulation 1008/2008, E.U. carriers and, on the basis of reciprocity, air carriers of third
countries, can freely set air fares and rates for intra-E.U. services. That said, given the fierce competition
from the LCCs, few airlines from outside the E.U. have actually found it profitable to mount intra-E.U.
operations.
The beyond-E.U. fifth freedom rights are likely to be more contentious, particularly because thelucrative trans-Atlantic market to the U.S. would be impacted. The E.U. airlines and their member states
have tended to guard this market jealously, and ASEAN would conceivably have to offer a suitable quid
pro quo or exchange. Here, the logical beyond-ASEAN market to barter would be Australia and New

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Zealand. Yet, the E.U. carriers that have attempted this route in the past have mostly pulled out due to thehigh operating costs and severe competition. In fact, British Airways remains the only E.U. carrier still
operating a fifth freedom flight to Australia (Sydney) via Singapore and even then, competition is stiff due
to over-capacity in this sector. A bargain in some other form will likely have to be found in order to makefifth freedom liberalization work.
One possible avenue would be to negotiate a “package deal” involving more liberal investment
opportunities in both sides’ airlines. This would be similar to what the E.U. had negotiated with the U.S.
and Canada, only that the U.S. still insisted on restricting foreign ownership of voting shares in U.S.
airlines to no more than 25%. Here, the E.U. agreement with Canada would be more instructive – theliberalization of traffic rights is explicitly conditioned upon ownership limits in each side’s airlines being
progressively relaxed (E.U.-Canada Air Transport Agreement, 2009). Hence, when the national laws ofboth parties permit nationals of the other party to own and control up to 25 per cent of the voting interestsof its airlines, unlimited third and fourth freedom rights for both sides’ airlines shall be granted. When therelaxation on ownership and control goes up to 49 per cent, relaxations on fifth freedom rights shall apply.
Following this approach, the E.U. and ASEAN could phase in provisions allowing for either side to
own up to 49% of shareholding in the other’s carriers, with ownership allowed to be held region- or
Community-wide. The relaxation of traffic rights could then be explicitly tied to such progressive
relaxation on ownership. Practically, this will allow a consortium of E.U. airlines (possibly from within thesame airline alliance group, e.g. Star, Oneworld or Skyteam) to hold 49% of interests in an allied ASEAN
carrier. With the E.U. generally having more investment capital, the deal is likely to see more E.U. airlines
and interests buying stakes in ASEAN airlines than the other way around.
What is notable about the E.U.-Canada agreement, though, is the fact that Canada previously limited
foreign ownership of its airlines to 25% of voting shares and prohibited foreign control. As such, a
progressive relaxation up to 49% could be traded in negotiations with the E.U. In the case of ASEAN, thecomplication is that the various member states have different ownership and control rules. Most alreadyallow foreign ownership of local airlines up to 49%, in which case there would be nothing new to barterwith the E.U. There is then the exceptional case of the Philippines, which maintains a lower threshold(40%) for foreign ownership of local airlines. This simply means that the ASEAN states will have to craft aconsistent internal policy on airline ownership stakes first before they can negotiate effectively with the
E.U.
Assuming ASEAN can agree on a common 49% cap for foreign ownership, this could conceivably beoffered to the E.U. along the lines of the E.U.-Canada agreement. Alternatively, the E.U.-ASEAN
agreement could simply provide for a 49% relaxation and leave it to the individual ASEAN states if theywish to adopt it. This could be a more realistic avenue as the relevant legal restriction in the Philippines is
actually found in its Constitution and may be very difficult to amend.
For now, the E.U. and ASEAN should perhaps attempt to replicate what the E.U. has concluded with
Canada, particularly in tying the relaxation of traffic rights (including eventually fifth freedom rights) tothe progressive relaxation of ownership restrictions in the other party’s airlines. Another model, albeit
hugely imperfect, would be the draft fifth freedom deal that ASEAN has struck with China. While agreeing
to trade unlimited third and fourth freedom rights, the Chinese were wary of giving up beyond-China fifth
freedom rights to ASEAN airlines. China thus excluded its three major cities of Beijing, Shanghai andGuangzhou from the fifth freedom deal. Further, it offered a finite list of 10 points (mostly secondary
cities) through which “beyond” fifth freedom rights could be exercised by ASEAN carriers. No “linkage”
between traffic rights and ownership rules was made, which was probably wise given the complexities indoing so. However, capacity is limited to 14 weekly flights for each contracting state.

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As for “internal” or “behind” fifth freedom rights (e.g. a Singapore carrier’s Singapore-BangkokShanghai operation, i.e. an ASEAN-ASEAN-China routing), the Chinese offered a list of 28 cities throughwhich such operations can be mounted. Again, these are mainly secondary cities and the three major pointsof Beijing, Shanghai and Guangzhou are excluded. For both “internal” and “external” fifth freedom, theASEAN states each offered a secondary point through which the Chinese carriers’ operations can berouted. The result is a fifth freedom deal that is limited to secondary cities on both the Chinese and
ASEAN sides.
Table 5 below reproduces the list of cities that are implicated in the deal. It is obvious that there are
few realistic fifth freedom operations that can be mounted. A likely candidate route could be SingaporeChongqing-Los Angeles, given Chongqing’s size and huge catchment population. However, its
geographical position in the interior of China means that the route will be circuitous and lengthy. Filling up
the Chongqing-Los Angeles sector could thus turn out to be difficult.
The lesson here for the E.U. and ASEAN is that if a finite city “list” approach were to be taken, it
must be ensured that the possible routings are commercially feasible, lest the agreement ends up being
practicably worthless. If limits to fifth freedom have to be imposed at all, the better way would be to limit
capacity only (e.g. no more than a maximum number of weekly flights or seats), rather than to add afurther limitation on the cities through which the rights can be exercised.
Table 5. Points Offered for the ASEAN-China Agreement’s Draft Protocol 2 on Fifth Freedom Rights“External” Fifth Freedom(e.g. ASEAN – China – Third Country or
China – ASEAN – Third Country)“Internal” Fifth Freedom(e.g. ASEAN – ASEAN – China or
ASEAN – China – ASEAN or
China – ASEAN - ASEAN)

Example: Malaysian carrier operating
Kota Kinabalu - Kunming – Delhi;
Chinese carrier operating
Xian – Chiang Mai - Sydney

Example: Malaysian carrier operating
Kota Kinabalu - Chiang Mai - Kunming or
Kota Kinabalu - Haikou - Chiang Mai;
Chinese carrier operating
Xian – Chiang Mai - Singapore[Weekly limit of 14 per country]

Brunei
Cambodia
Indonesia
Lao PDR
Malaysia
MyanmarPhilippines
Singapore
Thailand
VietnamChina[No weekly limit]
Bandar Seri Begawan
Preah Sihanouk (Sihanoukville)
Mataram (Lombok)
Luang Phabang
Kota Kinabalu
Any point except Yangon
Any point except Manila
Singapore
Chiang Mai
Any point except Hanoi and Ho Chi Minh City
Nanning, Guilin, Kunming, Chengdu, Chongqing, Urumqi, Nanning, Guilin, Kunming, Chengdu, Chongqing,
Xian, Changsha, Zhengzhou, either Xiamen or Fuzhou
Urumqi, Xian, Changsha, Zhengzhou, Xiamen,
Fuzhou, Xishuangbanna, Wuhan, Shenyang, Dalian,
Haikou, Sanya, Guiyang, Lanzhou, Xining, Yinchuan,
Lhasa, Kashgar, Hohhot, Harbin, Changchun,
Ningbo, Yanji
Total: 10

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENTASEAN Skies: Not Yet Truly OpenAt this point, one should note the reality that the ASEAN states do not yet have a true single market
among themselves comparable to the E.U.’s. Hence, ASEAN is nothing like the E.U., let alone a fully
unified market like Canada or the U.S. For one thing, the ASEAN carriers do not enjoy the so-called“seventh freedom” that would allow them to fly between two points outside their home state (not even two
points within ASEAN!).
As a result, a Singapore carrier cannot set up a base in Indonesia to fly to Thailand or to operate
between domestic points in Indonesia, unless it adopts the traditional method of incorporating a subsidiary
in Indonesia that is majority-owned and effectively controlled by Indonesians. Of course, such restrictions
have been abolished in the E.U., where any E.U. airline can freely connect any number of E.U. points(even domestic ones) and can establish itself in any other E.U. member state without having to ensure thatmajority ownership and effective control reside in that state.
As for the more modest third, fourth and fifth freedom rights, the ASEAN Single Aviation Market(ASAM) project does attempt to liberalize these completely by way of several multilateral agreements.
However, for these rights to take effect in an individual ASEAN member state, that state must explicitly
accept the relevant multilateral agreements that spell them out. This is totally unlike the E.U. where thecommon market has automatic Community-wide application by force of law.
In ASEAN, the largest member state, Indonesia, has only recently on 30 May 2014 accepted theagreements that free up third, fourth and fifth freedom rights (and even then for its slot-constrained capital,
Jakarta, only). For now, the other ASEAN states must still rely on their bilateral air services agreementswith Indonesia that contain finite capacity entitlements to enable their airlines’ operations into otherIndonesian points.
The crux is that ASEAN’s regional integration is not as developed as the E.U.’s. Critically, there is no
supranational organ like the European Commission that can compel member states to place the regional
interest above individual, national interests. The fact that the Commission can bring E.U. member states
before the European Court of Justice (notably in the Open Skies cases) to extract compliance with a single
market ambition is the precise reason why the E.U. common aviation market is relatively successful. Of
course, aviation is only part of the larger E.U. project for regional integration, and that gives the common
aviation market additional momentum. In ASEAN, the SAM project is wholly voluntary in that individual
member states can accept liberalization commitments as and when they feel ready. As such, reluctant states
can hold up the entire project if they do not see it as in their or their airlines’ interests to accept.
As for ownership and control, the ASAM takes a leaf out of the E.U.’s book to provide for the
possibility of a “Community Carrier”. Hence, the ASAM makes it possible for an airline set up in
Cambodia, for instance, to be majority-owned by ASEAN interests taken together (e.g. 20% Singapore,
20% Thai and 11% Cambodian stakes). In theory, there is no need for a Cambodian majority interest as
long as effective regulatory control over the airline resides with the Cambodian authorities. While thisprovision exists on paper, no airline to date has actually been set up as a Community Carrier. This isbecause the ASEAN agreements provide that each individual member state retains the discretion to rejectapplications by such a carrier to fly to its points.
Not surprisingly, new airlines set up in ASEAN in recent years have continued to employ the
traditional model with local (i.e. national) interests owning more than 50% of shareholding (the foreign
investor typically holds 49%). This is still seen to be the preferred and more sustainable model. The recent
examples of joint venture airlines of this type are low-cost carriers (LCCs) bearing a foreign parent’s brand– Thai Lion Air, Malindo, Thai VietJet Air and Nok Scoot. These now join the more established LCCs like

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Thai AirAsia, Indonesia AirAsia and Jetstar Asia, all of which are joint ventures featuring majority
local/national ownership but using the foreign parents’ brands.
Consequently, there is adherence in ASEAN to the “substantial ownership” requirement in that theforeign partner does not enjoy majority shareholding. That said, the related requirement of local “effective
control” has taken on a much looser meaning. Most ASEAN member states gloss over the requirement andappear satisfied when their national is appointed as CEO. Whether effective control truly resides locally
could be questionable since many of the joint venture airlines are run as integrated operations alongside
their parent foreign carriers, using established common brands or identities as well as combined internet
booking platforms. Relevant examples include the AirAsia, Jetstar, Tigerair and Lion Air operations.
In this regard, the ASEAN governments’ relatively lenient attitude toward control has to be contrasted
with the increasing attention that E.U. regulators are paying to airlines allegedly controlled by foreign
minority shareholders, e.g. the Etihad equity stakes in various smaller European airlines. Even in liberalHong Kong, the proposed establishment of Jetstar Hong Kong has elicited huge opposition from incumbent
carriers such as Cathay Pacific and Hong Kong Airlines over the proposed new LCC’s alleged control by
the Jetstar/Qantas group in Australia. The more relaxed attitude toward control in ASEAN has actually
allowed liberalization to grow roots, despite the governments’ formal attitude toward foreign ownershipstakes.
As a result of its unfinished single aviation market project, what is interesting about ASEAN’s
aviation relations is that it readily negotiates with third countries and blocs even as its own internal market
is not yet truly “single”. Consequently, an E.U.-ASEAN comprehensive agreement will practically meanthat an ASEAN airline can fly to E.U. points only from its home national territory. Conversely, all E.U.designated airlines will be able to connect any E.U. point to any ASEAN point, for the simple reason that
the E.U. “backyard” is a unified one. This presents a significant market imbalance that disadvantages theASEAN airlines in the long term. Moreover, E.U. airlines can now merge among themselves (the way Air
France-KLM, British Airways-Iberia and Lufthansa-SWISS have done), but this is still impossible for the
ASEAN airlines. Of course, all these market imbalances can only be corrected if the ASEAN States start totreat their own backyard as a true single market but this will take years to realize.
In this regard, it is clear that for the immediate future, an E.U.-ASEAN comprehensive agreementwith open or unlimited capacity stands to benefit the E.U. airlines more in terms of market networks andpenetration. Yet, the pragmatic ASEAN position is that it is unrealistic to wait for its own internal market
to be forged first. This is why ASEAN had gone ahead to adopt an air transport agreement with China in
2010, despite all the market imbalance drawbacks described above. Hence, Chinese airlines can fly fromall of China to all of ASEAN, while ASEAN airlines can fly to all of China only from points in their home
states (Tan, 2010).
Fundamentally, apart from lacking a supranational mechanism to overcome national sovereignty andto prioritize the regional interest, the problem with ASEAN is that the individual member states’ interestsand levels of development are too disparate. The lack of a united negotiating stand is also partly why
ASEAN could not convince the Chinese to allow fifth freedom rights through the major cities of Beijing,
Shanghai and Guangzhou (as explained above). As a result, ASEAN’s negotiations with the E.U. will
likely be characterized by aero-political dynamics and asymmetries that are broadly similar to thoseencountered with China. Like with China, third and fourth freedom liberalization can probably be attainedwith minimal problems. However, fifth freedom rights and ownership and control issues will be much
more complicated.
The challenge then is to make the proposed E.U.-ASEAN comprehensive agreement as meaningful as
possible, despite the aero-political realities. Beyond third and fourth freedom relaxations, the negotiators

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

should attempt to negotiate a “package” deal entailing liberalization for fifth freedom operations, joint
venture and alliance arrangements as well as mutual investments in and control over their airlines. Bothsides should also seek to promote deeper co-operation in other challenging issues such as harmonization ofsafety and security standards and even regulatory oversight over passenger rights, competition law andcarbon emissions.

3. Conclusion

Ultimately, even if all these goals were progressively met in the proposed E.U.-ASEAN
comprehensive agreement, there is probably not too much that the agreement alone can do to stem the lossof traffic to sixth freedom carriers. Overall, the two blocs should not allow their proposed comprehensive
agreement to be defined only by the desire to neutralize the sixth freedom carriers. Other liberalizing steps
and areas of co-operation that promise mutual benefit should be pursued in order to bring two dynamic
regions that are separated by the tyranny of distance a whole lot closer, particularly in terms of market
philosophy, trading relations and people-to-people exchanges.

References

E.U.-ASEAN, Joint Declaration on E.U.-ASEAN Aviation Cooperation adopted at the first E.U.-ASEAN
Aviation Summit, Singapore, at http://ec.europa.eu/transport/modes/air/events/doc/eu-asean/jointdeclaration.pdf
E.U.-Canada, Agreement on Air Transport between Canada and the European Community and its Member
States, 2009, at
http://ec.europa.eu/transport/modes/air/international_aviation/country_index/doc/canada_final_text_agre
ement.pdf
European Commission, Bilateral Air Services Agreements brought into legal conformity since the Court ofJustice of the EU judgments of 5 November 2002, updated as at 30 January 2013, at
http://ec.europa.eu/transport/modes/air/international_aviation/external_aviation_policy/doc/table__asa_brought_into_legal_conformity_since_ecj_judgments-_january_2013.pdf
Tan, Alan Khee-Jin, “The 2010 ASEAN-China Air Transport Agreement: Placing the Cart before the Horse?”
Vol. 37, Air and Space Law 35 (2012) (Netherlands)

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

Annex I. Network maps of leading sixth freedom carriersin the Middle East and Asia

Figure 1. EMIRATES

Source: Emirate’s website

Figure 2. QATAR AIRWAYS

Source: Qatar Airways’ website

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

Figure 3. TURKISH AIRLINES

Source: Turkish Airlines’ website

Figure 4. KOREAN AIR

Source: Korean Air’s website

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ASSESSING THE PROSPECTS FOR AN E.U.-ASEAN AIR TRANSPORT AGREEMENT

Figure 5. THAI AIRWAYS

Source: Thai Airways’ website

Figure 6. SINGAPORE AIRLINES

Source: Singapore Airlines’ website

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