Visa, lack of flights block Asean aviation integration

Visa-free travel and limited supply of services to certain destinations within Asean remain some of the challenges of fully integrating the aviation sector of the regional bloc, according to a recent regional report.

Integration remains a work in progress and while there have been some improvements in ease of travel between Asean countries for its citizens, several barriers remain standing, said the report by McKinsey Global Institute (MGI) in collaboration with the six offices of American global management consulting firm McKinsey in Southeast Asia.

MGI, the business and economics research arm of McKinsey and Company, in the report cited Myanmar as an example, as a country which has yet to conclude visa free-tree travel agreements with Indonesia, Malaysia, Singapore and Thailand.

“The more ambitious target of an Asean single visa will likely take some time to accomplish,” said the report.

There are also barriers on the supply side as domestic routes are open only to national carriers, the report added.

The report said the Asean Multilateral Agreement on Air Services and the Asean Multilateral Agreement on the Full Liberalisation of Passenger Air Services would allow air carriers to serve any international route within ASEAN.

These agreements, however, do not apply to domestic routes and have yet to be ratified by all Asean member states, the report added.

This, it said, is still short of the progress made by Europe in moving toward an “open skies” model.

The report also said that existing regulations have forced operators to set up separate and partially owned subsidiaries in different Asean countries to gain access to local markets.

These restrictions prevent Southeast Asian flag carriers from achieving the type of pan-regional economies of scale that have made European low-cost airlines successful, MGI said in the report.

There are also restrictions on bilateral traffic rights between major cities and a lack of common standards across the region for systems such as air traffic control and engineering, the report added.

Additionally, MGI said, some Asean carriers today are struggling with overcapacity and high cost bases and had posted “heavy losses” in recent years.

“Consolidation, either within the region or with other international airlines, may be the longer-term end game,” said the report.

However, in Asean, similar to elsewhere around the world, airline is a highly protected industry that is closely linked to national identity and national development concerns, especially in boosting tourism.

Full mergers have also been complicated by international air route rights.

“Without further global liberalisation, true consolidation is hard to achieve,” said the report.

MGI suggested that special structures, as used in the Air France and KLM consolidation and by the LATAM Group of airlines in Latin America, could be needed.

The report said Southeast Asia’s airline industry is one of the priority service sectors targeted for integration by the Asean Economic Community.

The industry has enjoyed robust growth over the past decade, fueled by the entrance of a number of low-cost airlines such as Lion Air, AirAsia, and Tiger Airways.

The gradual but ongoing removal of visa requirements for short-term travel by Asean citizens in member states has also played a role in the growth, the report added.

On the customer side, competition has lowered fares, creating new demand and making intra-regional travel within Southeast Asia one of the fastest-growing global markets over the past five years.