A27-1111150117-Nguyễn Thùy An-Graduation thesis PDF

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FOREIGN TRADE UNIVERSITYFACULTY OF ECONOMICS AND INTERNATIONAL BUSINESS---------***--------GRADUATION THESISMajor: International Business EconomicsTHE POTENTIAL IMPACTS OF ASEAN OPENSKY ON VIETNAM’S AVIATION INDUSTRYStudent’s Full Name: Nguyen Thuy An Student ID: 1111150117 Class: A27 – High Quality...

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FOREIGN TRADE UNIVERSITY 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.

Ha Noi, May 2015

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

CHAPTER 3: POLICY IMPLICATION AND RECOMMENDATIONS FOR 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

LIST OF FIGUR 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

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INTRODUCTION 1. Rationale of the study Air transport plays a key role in economic development and in supporting long term economic growth. It facilitates a country’s integration into the global economy, promotes the development of tourism and logistics industry. Aviation industry and the overall economy have a mutual stimulating effect on each other. Vietnam is a potentially lucrative market for air transport. Regardless of the poor and limited infrastructure system and the economic growth averaging at just above 5% per year, the sector has experienced a dramatic annual two-digit growth at least over 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, as cited in Phuong, 2014) evaluates that Vietnamese airlines will possibly double or triple their fleets to serve the huge domestic population of more than 90 million and the number of foreign visitors annually growing by approximately 20%. Southeast Asia is also sharing the same dynamics with the rise of low-cost airlines and booming tourism. This will be further facilitated by the regional liberalization realized by Open Skies agreements. The agreements gears towards creating ASEAN Single Aviation Market by 2020, where air carriers are fully free to fly between any points in the region, without any restrictions on capacity, frequency, ownership structure and other commercial activities . Starting in 1 December 2008 with the removal of restrictions on Third and Fourth Freedoms between capital cities of member states for air passenger services, the open skies are targeted to gradually form as per a roadmap agreed by ASEAN members’ ministers by 2020. In such context, the fledging Vietnam aviation industry is expected to encounter both opportunities and challenges: a potentially surging demand but protectionism adopted by the government, fierce competition from aggressive foreign carriers, underdeveloped infrastructure and poor management capacity. So what will be the Vietnam market’s picture under the one single open sky; whether Vietnam will be able to catch up with the enhanced competition brought about by foreign rivals to

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take advantage of its potential or it will lose this right time to develop remains great concerns. 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 could make recommendations on how to address the changes for the purpose of developing 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 to promote 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 the scope of Vietnam aviation industry down to passenger air sector; the air freight sector will not be discussed. This would ensure the depth and focus of the impact analysis. The research objects are ASEAN Open Skies agreements and Vietnamese aviation market (mainly in terms of market side: competition, scale and infrastructure). Main countries 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 and information to present an overview of theories and arguments in chapter 1, to give out assessment points in chapter 2. It uses inductive and deductive methods to express ideas and present supporting arguments throughout the entire paper.

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In addition, analysis (including comparison and contrast methods) is employed very often in chapter 2 to draw comments and conclusions about the agreements’ impacts. 5. Thesis structure Apart from introduction, conclusion, references and appendices, the thesis comprises 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 his critical comments and encouraging support as a supervisor. He has employed his strong research expertise and experience not only to orient the topic, structure the outline but also to have overall and detailed looks into the study to help the author accomplish it in a better way. Being aware of the importance of the thesis, the author has paid serious attention to study and research. However, due to limited time, reference resources and professional competences as well as practical experience, the thesis does expose a number of shortcomings. Thus, any feedback or comment for this study would be of great value for the author to improve it later on.

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CHAPTER 1: AIR SERVICE LIBERALIZATION: RATIONALE AND THEORY 1.1 Regulation 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 regulations 1by governments. Together with telecoms, water, energy, electricity and transport in general, 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 to guarantee the country’s economy and security stability. Major rationales for the sector’s regulation are in details as follows. Firstly, air transport is seen as a public utility. Indeed, there is a strong degree of public interest in transportation, especially air transport; so this serves as a primary legal basis for regulation (Walter, 1984 as cited in Smith, 1998, pp. 31-34). A more detailed theory supporting Walter’s agreement is "public interest" theory which holds that regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices. The theory tends to be implicitly assumed rather than completely expressed. There are two fundamental assumptions associated with this theory: one is that economic markets are extremely fragile and apt to operate very inefficiently (or inequitably) if left alone; the other is that government regulation is virtually costless. With these assumptions, it was very easy to argue that the principal government interventions are simply responses of government to public demands for the rectification of remediable inefficiencies and inequities in the operation of the free market (Posner, 1974). Also sharing the same viewpoint of market remedying, Dempsey (1988) briefs airline regulation’s rationale as to ensure: a) the provision of an adequate level of service at reasonable rates throughout the nation, b) the prevention of price or service discrimination between communities or shippers, large or small, c) the establishment of economic services and stability for the industry and the public it serves, and d) the reduction of carrier concentration and protection of smaller competitors. 1Within the limit of a thesis, for the most part of the study, the term “regulation” implies economic

regulation

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Secondly, safety is of paramount concern in operating air transport. Aviation is a special sector because it applies highly advanced technological innovations; merely a small defect in operating a flight can cause a colossal tragedy .Therefore, the tight control imposed on the sector is aimed at ensuring safety standards, while competition is seen as an element resulting in lower safety standards. The US Federal 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 the inherent advantages of, assure the degree of safety in and to improve the relations between, and co-ordinate transportation by, air carrier”. Thirdly, aviation is closely related to national defense and security. Walter (1984, as cited in Smith, 1998, pp. 31-34) finds that one actual purpose of regulations is to help protect flag carriers (national carrier) in order to ensure national defense and to serve other political and military purposes. In such situations as wars, emergencies or natural disasters, states certainly need its own air transport. For the sake of national security, ownership restrictions enable governments to gain control of the airlines in times of national emergency. Also, the flying of an aircraft outside, across or to any countries concerns those nations’ air sovereignty. This sensitive matter, hence, is certainly an area of control. Fourthly and also noticeably, in contrary to the “public interest” theory, the control over air transport is believed by a group of economists to hugely benefit specific interest groups. According to Marxists and by Ralph Nader-type muckrakers (as cited in Posner, 1974, pp.341), regulation is supplied in response to the demands of interest groups struggling among themselves to maximize the incomes of their members. It is not about the public interest at all, but is a process of the by which interest 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 the State’s own interest. As such, this restriction was not for the purpose of protecting the interest of the public (users) directly by air services, but rather the interest of South African Railways and Habour Administration as a result of its public ownership which has been regarded as “in the interest of the public”.

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Concerning scope of air transport regulation, this study mainly covers economic ones. 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 from local 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 is granted for that route. o

Types of aircraft used: this may be specified to limit excess capacity on

certain routes. o

Capacity allowed for airlines and routes

o

Frequency or designation: this is specified in certain cases, for instance, the

number 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 example

joint ventures and cooperative agreements between airlines (e.g. US antitrust laws controlled these areas). o

Ownership: to be authorized for operation, carriers must be substantially

owned by the State or its nationals. Regarding scheduled international air services, similar control dimensions were also stipulated in bilateral air service agreements (ASAs). Out of a wide range of regulation areas such as aviation security, incident investigation, immigration, control of travel documents and many others, The World Trade Organization Secretariat (2006) points out most commonly founded terms of an ASA which indicate 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.

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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 between countries. The industry was tightly controlled and inflexible, leading to the persistence of little competition between national carriers. A web of bi...