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Korea steps back into the dark. Airline protectionism flourishes in Seoul

CAPA Executive Chairman, Peter Harbison
CAPA Executive Chairman, Peter Harbison
  • Incheon Tiger forced to delay startup plans after opposition from competition;
  • Led by Korean Air, the opposition relies on archaic principles which have been condemned by the world airlines’ body, IATA;
  • Korean Air has in the past been a major beneficiary of liberalisation, giving it access to foreign markets and helping grow Incheon Airport as a global hub;
  • North Asia liberalisation has massive potential for market expansion – along with jobs and development of regional centres;
  • The Ministry of Transport should quickly move to show where it stands on liberalisation – and reject regressive nationalistic and protectionist arguments in the wider national interest;
  • For Incheon International Airport, restrictive moves will only serve to undermine returns to taxpayers when the airport is partially privatised.

The Korean Ministry of Transport this week failed to reject a protectionist request led by its national airline to turn back the clock of liberalisation in the region. The request from several vested interests - worded in clear aviation nationalism overtones - was designed solely to protect local airlines from added competition - and the lower fares that competition would bring.

As justification, the opponents resorted to technical bilateral agreement provisions which the airlines' global body, IATA, has described as "archaic" and which are rapidly being rejected worldwide (and elsewhere in this region), as the aviation system emerges from a 60 year-old regulatory structure whose main purpose was to protect nationally-owned airlines.

Arguments presented to the Korean authorities used "substantial ownership and effective control" provisions in bilateral agreements as a reason to reject Incheon Tiger Airways' establishment in Korea. These are the exact provisions which IATA's leadership and its member airlines have attacked so strongly over recent years. By accepting a strict application of the protectionist rules, Korea promises to isolate itself from a global evolution where airlines are freeing themselves up to compete efficiently in a consumer-oriented marketplace.

Only last week, while on a tour of this region, IATA's Director General and CEO, Giovanni Bisignani said, "who cares who owns an airline so long as it is safe and provides efficient service? It's time to move from the world of flags and politics to brands and business".

The Korean authorities' move is particularly ironic, as the government has in the past consistently pursued liberal access for its own airlines into other countries' markets. This strategy has been followed to enable Seoul's world class Incheon Airport to become an effective global hub. It can only achieve this if market access is free and open. Korean Air itself has been a major beneficiary of this added liberalisation, as it gained entry to major markets like the US, with open skies agreements, feeding traffic through to other countries, which also allowed liberal access.

The petition to the Ministry, from several Korean LCCs, was led by Korean Air and its LCC subsidiary, Jin Air. It argued that Tiger Airways is effectively controlled by the Singapore Government, providing it an unfair advantage over private airlines and alleging that: "Under the mask of `Korean carrier', Tiger is attempting to get a free ride in the big Northeast Asian market of Korea, China and Japan, as Singapore's domestic market is very small. Its operation here will attack Korea's aviation sovereignty. If the government permits Incheon Tiger's business, similar cases will follow. We hope the government will not approve the license and prevent the problem from getting worse".

Tiger Airways - which is in fact not controlled by Singapore Airlines (only a minority owner) and competes head to head with SIA on several routes - has been admitted by all other countries in Asia Pacific, from India to Australia, Indonesia, Thailand, China as well as the Special Administrative Regions of Macau and Hong Kong, to enter freely over recent years. Other LCCs, such as AirAsia and Jetstar Asia, with similar partial local ownership, have also been treated as valuable market entrants and have massively stimulated traffic growth (and economic activity). In most cases too, they have stimulated older flag carriers to become much more efficient and productive, creating new jobs as they expanded and greatly stimulating tourism and airport activity.

The result of the petition - and of the Korean Ministry's apparent acceptance of the principles - has been that majority owner, Incheon Municipal Government, was forced this week to postpone the application for a licence "indefinitely". The Korean Air-led campaign has stirred up local nationalist sentiment and looks like preventing the proposed airline from establishing. If this is the case, it threatens to prevent similar operations, proposed by Jetstar and others.

The Centre has estimated that if the three North Asian markets of Korea, Japan and China were opened up to full and free airline competition, there is potential for over 300 million additional tourist trips annually. The beneficial impact of such economic activity would be exponential, in creating new employment and opening up regional centres and their airports to new opportunities - not to mention stimulating cultural ties.

For Incheon International Airport too, restrictive moves like this will only serve to undermine returns to taxpayers when the airport is partially privatised.

Korean Air itself is a relatively efficient airline, although it needs to re-evaluate its network and adjust to what is going to be a very challenging future for the entire industry. The flag carrier's real competition comes not from small entrants like these LCCs - which history shows will in fact mostly stimulate new traffic - but from other major international airlines, all of whom are moving into a new generation.

As long as Korean seeks to prop up a model which is intrinsically flawed, using rhetoric that is a throwback to the bad old days, it does itself a massive disservice. And, by doing so, allows itself to avoid taking the hard decisions necessary to meet inevitable future competition in the wider marketplace.

Meanwhile, unless the Korean Ministry quickly takes policy leadership and intervenes to clarify that Korea is serious about airline liberalisation, the negative impact of this action threatens to become a precedent that will backfire badly on Korea itself and hinder the spread of liberalisation across the region. It also sends the wrong message to Korean Air, which could undermine much-needed efforts to adjust to the world of the future - rather than hide in the past.

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