Introduction

“Open Skies,” in general, refers to the liberalization of aviation markets that can be pursued on a bilateral, regional, or multilateral basis. However, the depth of liberalization may differ from one Open Sky agreement to another as these agreements enhance the competition between airlines in different degrees. Capacity deregulation and the removal of price controls may also be treated differently in different agreements. Moreover, the geographic and functional dimensions covered may also differ from one agreement to another (Forsyth et al. 2004). In the case of the Association of Southeast Asian Countries (ASEAN), with the progressive implementation of the various ASEAN Open Sky agreements, it is envisaged that air traffic between capital cities will be liberalized by the end of 2008. Ultimately, ASEAN seeks to build a unified aviation sector by 2015, whereby designated airlines from a member country in ASEAN will be able operate unrestricted flights to the designated airports of other member countries.

For ASEAN countries, increasing competition from the People's Republic of China and India has created a new impetus to enhance their competitiveness, including a renewed effort to improve their transportation and logistics support services, for several reasons. First, the declining importance of tariffs has increased the importance of other types of trade transactions costs. In particular, the rise of global and regional production networks and the increasing use of just-in-time logistics, inter-modal transport and new security considerations since 9/11 have changed the face of the international economy and, with it, the type of trade transactions needed for exporting and importing goods. These transactions comprise a whole range of trade support services needed to send goods from a factory in an exporting country to the importing country. Transportation and logistics support services play a key role in these transactions and therefore can be harnessed to enhance the export competitiveness of a country. In this way, these transactions costs also affect the competitiveness of a country as a host economy since multinationals evaluate the viability of each new node in their global and regional production networks based in part on the cost and availability of transport and communications in a host economy for tying that node to others already in the network (Leinbach and Bowen 2004).

Second, ASEAN is an important export platform for electronics goods whose final markets are the US, Europe and Japan. Air cargo services and airports are particularly important because electronic products, and specifically semi-conductors, have a high value-to-weight ratio, rapid product cycles, and greater risk of damage associated with sea freight. Consequently, semiconductor firms have higher air cargo intensity, thereby rendering cargo services and airports as one of the key determinants of the competitiveness of each node in the production networks of multinational corporations (MNCs) in this sector. The significant variations in the quality and capacity of air cargo services, including ground-based logistics services, in the region further magnify the importance of these services as sources of competitive advantages to the firms that use these services and the national and regional economies where these firms are located (Leinbach and Bowen 2004).

Third, since tourism bears a particularly close relationship to the development of the aviation sector, the increasing demand for air travel has further heightened the importance of air services and airport development in each member country of ASEAN. Tourism statistics for the region show an upward trend in travel destinations in different parts of ASEAN as well as increasing domestic travel within each country due to increasing affluence.

However, air services and airports do not operate in a vacuum. Rather, their operations are contingent upon the aviation policies of each country and the region. While the objectives of aviation policy and the ability to implement these policies effectively differ significantly between the ASEAN member countries, they have in general relied on bilateral Air Service Agreements (BASAs), although some have joined regional and multilateral arrangements (Forsyth et al. 2006). Studies have shown that the liberalization of air services can lead to new and better air services, thereby increasing trade in airlines services, gains in consumer welfare, and in the end, economic growth (InterVistas-ga undated; Forsyth et al. 2006).

Since airport development and the pace of liberalization of air services is determined by the government of each country, this paper seeks to examine the implication of open skies in ASEAN on the airport development strategy in Malaysia. In particular, it examines: (i) the initiatives that were undertaken for positioning the main international airport in Malaysia, namely the Kuala Lumpur International Airport (KLIA), as a regional hub, (ii) the achievements of KLIA to date, and (iii) the potential impact of the impending liberalization of air services on KLIA's aspirations to be a regional hub.

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