The lucrative route between Kuala Lumpur and Singapore is currently the exclusive domain of the national carriers Malaysia Airlines and Singapore Airlines. If an open-skies agreement is reached, the route will be available for service by non-national carriers.
Malaysia's ministry of transport has created a task force to look into the possibility.
Industry officials suspect that the route would mean particularly good business for budget carriers such as Malaysia's Air Asia and Tiger Airways of Singapore. Air Asia has made several independent attempts to secure landing rights in Singapore.
However, not all observers agree that liberalisation is good for the country's airlines.
It is widely perceived that Malaysia Airlines System (MAS) would be one of the biggest losers in an open skies agreement with Singapore.
MAS's chief executive indicated this week that the restructuring plans to turn around the flag carrier would fail, if the government liberalises the country's aviation industry before 2008.
"An earlier liberalisation will set us back as we do need time to turn around,'' MAS chief executive officer Idris Jala told international financial press earlier this week. He explained that MAS's recent turnaround plan was based on the fact that open skies policy would come into effect in the Association of Southeast Asian Nations (ASEAN) in 2008.
An open skies policy would allow airlines in the participating countries free access to destinations with no restrictions on flight frequency and capacity. ASEAN has declared that each member state must open its capital to ASEAN carriers in 2008. An additional city must be liberalised in 2010, before full national access comes into effect in 2015.
Singapore, unlike Malaysia, is an international air transport hub that can provide direct connectivity around the world. The country has open-skies pacts with other countries including the UAE, the US, Australia, New Zealand, Brunei, Chile and Peru.
With an open-skies pact with Malaysia, Singapore airlines could pick up passengers while on transit in Malaysia to fly to other destinations, thus reducing MAS's competitive advantage relative to the island state. Also, foreign carriers operating in Singapore could grab Malaysia's business from Singapore, as there would be multiple feeder options.
However, open skies between Malaysia and Singapore could also increase the flow of Singaporeans to Malaysia. Airfares between Singapore and Malaysia are currently artificially high in comparison with fares from Singapore and Kuala Lumpur to popular destinations such as Bali, Manila and Bangkok, Malaysian Association of Tour and Travel Agents (MATTA) immediate past president Tunku Iskandar Tunku Abdullah told local media.
"More and more Singaporeans will opt to travel to other cheaper destinations such as Bangkok and Bali rather than Malaysia. Sixty percent of our arrivals into Malaysia are Singaporeans. We need to keep them here or keep them interested to come here and make it more affordable for them to come here," Tunku said.
There is perhaps some reason for concern, as between January and May this year, Singaporean arrivals have dipped by some 91,369 persons, according to figures from Tourism Malaysia. Singaporeans have always been Malaysia's strongest market in terms of total arrivals and foreign exchange earnings.
Moreover, Malaysia could attempt to attract more foreign carriers to Kuala Lumpur. With so many connections into Singapore, it is possible that many operators will value the shorter distance and cheaper costs of operating in Malaysia.
Two international airlines - Kuwait Airlines and Cebu Pacific - are expected to begin flights to KL International Airport (KLIA) by November, and Helsinki-based Finnair will begin arriving in Kuala Lumpur in May of 2007.
MAS has taken some drastic steps to prepare for the open skies agreement and to make the airline more competitive.
Since coming on board in December of 2005, Idris has sold the company's former Kuala Lumpur headquarters, slashed jobs, shed unprofitable routes and introduced more fiscal discipline.
MAS will now only operate 19 premier local routes, mostly heavy corridors for business travel and those offering international connections. Air Asia will take on the remainder - a full 99 routes. MAS has a free hand to determine passenger capacity, flight frequencies, and fares.