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Facebook:@Dethivaonganhang www.facebook.com/dethivaonganhang GRADUATION THESIS Major: International Business Economics THE POTENTIAL IMPACTS OF ASEAN OPEN SKY ON VIETNAM’S AVIATION INDUSTRY www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 1
Facebook:@Dethivaonganhang www.facebook.com/dethivaonganhang 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 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 2
Facebook:@Dethivaonganhang www.facebook.com/dethivaonganhang 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 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 3
Facebook:@Dethivaonganhang www.facebook.com/dethivaonganhang LIST OF FIGURES 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 Figure 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 TABLES 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 Table 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 Table 3.1 Demand estimation of passenger air services ...........................................60 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 4
1 INTRODUCTION 1. Rationale of the study Air transport plays a key role in economic development and in supporting longterm 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 togradually 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 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 1
2 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 estimatingpotential 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 attemptsto 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. www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 2
3 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 toorient the topic, structurethe 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. www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 3
4 CHAPTER 1: AIR SERVICE LIBERALIZATION: RATIONALEANDTHEORY 1.1Regulation and deregulation in air service sector: rationale and scope 1.1.1Air service regulation Since its inception, air transport has been imposed with restrictive regulations1by 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 tothe industry‟s distinct nature, the controls over it serve toguarantee 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 1Within the limit of a thesis, for the most part of the study, the term “regulation” implies economic regulation www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 4
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