The Association of Southeast Asian Nations (ASEAN) and its 10 member states have an ambitious 2015 deadline to create a Single Aviation Market for the region. This is often referred to as the “ASEAN Open Skies” project. But what does “open skies” really mean?

The idea gets the travel industry and media all excited because it promises a goldmine for airlines to offer unlimited travel within a region of 600 million residents. Yet, the reality isn’t as rosy. The term “open skies” is misleading because it implies that airlines can freely connect any two points in the region without restrictions. In fact, only international flights beginning and ending in the airline’s home state (the third, fourth and fifth freedom flights, in aviation lingo) are open.

So, Singapore carriers can carry passengers from Singapore to points in Thailand (“third freedom”) and back (“fourth freedom”) without any restrictions on frequency, capacity or aircraft type. This means they can offer a hundred flights a day if they want to, as long as they can find the passengers to fill up their planes! In both directions, they can also stop in Malaysia to drop off some passengers and fill up the vacated seats with passengers picked up from there (the “fifth freedom”). These rights are all made possible by several ASEAN agreements that replace the existing bilateral agreements between the individual ASEAN countries.

Indonesia Staying Out

However, Indonesia has not accepted any of the ASEAN agreements. With almost half the ASEAN population, Indonesia is the largest economy and aviation market in the region. For the other ASEAN states’ airlines, this means that their operations to and from Indonesia remain governed in the traditional bilateral fashion with capacity limits. Why does Indonesia persist with such limits instead of accepting the ASEAN agreements to provide unlimited rights?

The economic benefits for Indonesia would be obvious: greater choice and lower fares for passengers, increased business and tourist arrivals, and positive effects for foreign investment and the overall economy. But the reality of aviation politics is such that national airlines lobby their governments aggressively to adopt protectionist measures. Because they are not as competitive, Indonesian airlines have long lobbied their government to restrict their foreign rivals’ operations. This is unlikely to change unless the major carriers, Garuda and Lion, become more competitive and successful internationally.

Seventh Freedom and Other Prohibitions

The story doesn’t end there. A true single or common aviation market such as that in Europe allows carriers to connect two international points outside their home country freely. In airline jargon, this is the “seventh freedom”. British Airways can thus operate freely between Paris and Frankfurt if it wants to, without government prohibitions.

In ASEAN, however, the agreements do not permit this seventh freedom. Hence, AirAsia (a Malaysian carrier) cannot base a fleet in Changi to ply routes between Singapore and Vietnam as it would be competing head-on with the Singapore carriers.

How does this explain AirAsia’s hubs in Thailand, Indonesia and the Philippines? What AirAsia has smartly pioneered is the creation of subsidiaries in those countries that are technically local airlines. For example, Indonesia AirAsia carries a different airline code and is, on paper, majority-owned and effectively controlled by local Indonesian interests. For all purposes, it is an Indonesian airline. Indeed, AirAsia owns only minority stakes (less than 50%) in each of its foreign subsidiaries.

This arrangement allows the AirAsia group to get around the “seventh freedom” prohibition and to effectively operate such flights out of their Bangkok, Jakarta and Manila hubs under a common brand. This is the same model now used by other low-cost carriers such as Jetstar Asia (operating out of Singapore), Jetstar Pacific (Vietnam), Tiger Mandala (Indonesia) and Lion Air’s subsidiaries, Malindo (Malaysia) and Thai Lion Air (Thailand). In a true single aviation market, such joint ventures would be unnecessary as all airlines would be able to operate freely within the region.

The ASEAN agreements also do not free up domestic or “cabotage” operations. This is a sensitive issue for large countries with huge domestic markets. And so, domestic flights are reserved exclusively for local players. However, the likes of Indonesia AirAsia can operate domestic flights precisely because they are Indonesian carriers. “Open skies” thus excludes domestic operations for foreign players unless they are prepared to hold only minority stakes in local airlines.

Now for the China Challenge

So, the skies over ASEAN may be “open”, but in truth, only partially. ASEAN’s failure to forge a real single market is now exposed by a separate agreement signed between the 10 ASEAN states and China.

For the ASEAN airlines, the new agreement with China opens up unlimited flights to and from China, excluding Hong Kong, Taiwan and Macau. At first glance, this appears lucrative for the ASEAN airlines. However, there are long-term strategic disadvantages. This is because the ASEAN airlines can only fly to the Chinese points from their own territory. Hence, Singapore carriers can only operate to China from Singapore. To fly to China from other ASEAN countries would require the “seventh freedom”, which is not allowed.

Yet, for the Chinese airlines, they can potentially operate unlimited flights between all of China and all points in ASEAN. This is because for them, China is a unified market or backyard. Ultimately, a serious imbalance will result unless the ASEAN countries can agree to treat their entire region as a true common market or backyard. This will be politically difficult as there will be winners and losers among the ASEAN airlines. Unlike in Europe, there is no body in ASEAN akin to the European Commission that can compel member states to prioritize the regional interest over individual interests.

In sum, the prospect for a truly single aviation market in ASEAN remains elusive. And yet, when pitted against larger, unified markets, the ten small economies of ASEAN have little choice but to continue forging a closer common market and true “open skies”.

• Alan Khee-Jin Tan is Professor of Aviation Law at the National University of Singapore. He has served as a consultant to the ASEAN Secretariat on the Single Aviation Market project and is a leading commentator on Asian aviation.