No reason to give Jetstar a home in Hong Kong

Andrew Pyne says to comply with the Basic Law, authorities would be right to deny Jetstar a home base in Hong Kong. And, with other low-cost carriers already operating here, consumers wouldn't lose out

PUBLISHED : Monday, 19 May, 2014, 9:13pm
UPDATED : Tuesday, 20 May, 2014, 4:33am

More than one year after the project was first mooted, the debate over whether low-cost airline Jetstar should be able to secure designation as a Hong Kong carrier rumbles on. This issue defies easy analysis; indeed, for the layman, the arguments around whether an airline meets the criteria for local incorporation may seem the 21st-century equivalent of the medieval debates on how many angels could sit on the head of a pin. But at its core are some important issues for Hong Kong.

The key question is whether the Hong Kong public risks missing out on the consumer benefits that low-cost carriers bring to the market if Jetstar's attempts to base in Hong Kong are thwarted.

If the official position towards Jetstar's application did represent a barrier to low-cost airlines operating in Hong Kong, this would indeed be a legitimate cause of concern. But this is not the case. Low-cost carriers are already well represented in Hong Kong: the percentage share of aircraft movements at the Hong Kong International Airport now held by the low-cost sector has increased from virtually zero five years ago to over 12 per cent today. It may still be relatively low by European or Southeast Asian standards but it is broadly in line with the picture through North Asia as a whole, where the low-cost carrier revolution is still in its early stages.

In total, there are some 15 low-cost carriers now operating at the Hong Kong airport, a score that compares well with major international airports globally. And, last year, Hong Kong Express was relaunched as the city's first home-grown low-cost airline.

It can still be argued that the cost structure at Hong Kong airport - without its own terminal for low-cost carriers - militates to some extent against low-cost airline operations here. To be fair, the airport authority has to focus on making a return on the huge public investment sunk into developing airport facilities; there is therefore a natural inclination on its part to want to allocate scarce slots to wide- bodied aircraft - A380s or Boeing 777s, for example, with their 350 to 500 passengers a flight - rather than, say, the 180 passengers from a low-cost Boeing 737 or A320 flight.

Nonetheless, the only major short-haul market that remains relatively unpenetrated by low-cost airlines from Hong Kong is mainland China - here, the issues relate more to the Chinese regulatory regime than to Hong Kong. No doubt the low-cost revolution will come to China, but the timing will be set by Beijing, not Hong Kong. So whether Jetstar receives designation to base part of its fleet here is largely beside the (economic) point: low-cost aviation has a well-established and growing presence in the market already.

Ironically, low-cost carriers flying from cheaper base airports than Hong Kong have more, not fewer, opportunities to drive cost advantage over full-service airlines like Cathay Pacific than if they were actually based here.

To suggest that, as a matter of aviation policy, Hong Kong needs another "home-based" low-cost airline is a throwback to the thinking of the 1960s when each and every newly independent state set out to create its own flag-carrying airline, regardless of economic logic.

But this is not purely an economic argument; it is also an issue of regulation. In an ideal world, the market would decide which airlines operated from where; but aviation remains a highly regulated sector. The crux of the matter is that Hong Kong's criteria for deciding whether airlines can base here is almost unique: in nearly every other jurisdiction, airlines are allowed to operate as home airlines only if and when they are controlled by nationals of that country. This is a regime that has endured more or less intact since 1945.

Since Hong Kong has no nationals of its own, that regime could not be applied here. So in the late 1980s, the alternative - and arguably more liberal - notion of "principal place of business" was introduced. In other words, if an airline wanted to qualify for a share of Hong Kong's traffic rights, it had to demonstrate that Hong Kong was truly its main base of operations - not a secondary hub to a headquarters located somewhere else.

Therefore, what works for Jetstar and other regional airline groups, in border-hopping through Asia, and in partnership with local shareholders holding 50 per cent or more of joint-venture equity, will not work here.

It has been suggested that Cathay Pacific has adopted a "dog in the manger" position in this debate by arguing that "principal place of business" is all about control, not ownership. I would suggest that this is not so much Cathay's position as it is the long-standing position of the Hong Kong authorities themselves. Indeed, without evaluating where real control lies, how else could they reasonably decide whether Hong Kong really is the "principal place of business" for an airline?

The whole value to Jetstar, and its parent Qantas, of "border hopping" is that it provides a high degree of operational and commercial integration through its business units - while allowing the airline to access the traffic rights of other countries and jurisdictions. There is nothing at all wrong with this strategy - provided that it complies with local laws and regulations. In the Hong Kong case, it clearly doesn't.

Why, ultimately, is it important that we uphold these Basic Law provisions on aviation? As someone heavily involved with the arrangements made in the 1990s for a successful transfer of sovereignty in 1997, I recall that a key driver was the need to provide assurances to those who had invested in Hong Kong, or were contemplating investment here, that there would be reasonable policy continuity through and beyond 1997: hence the Basic Law.

It is reasonable to expect policy to evolve; less reasonable to contemplate abrupt changes of policy direction. In this instance, a decision to allow Jetstar to operate from Hong Kong would in turn open the gates to virtually any other international carrier moving in, incorporating a local subsidiary and then taking a slice of Hong Kong's air traffic rights.

There will be those who would suggest that this would be positive: but even they would surely have to accept that it represents a dramatic discontinuity with the past - and with a policy that has elevated Hong Kong into its current position as the No 1 aviation hub in the Asia-Pacific region.

Andrew Pyne is senior partner of Concuros, an Ireland-based aviation consultancy. He previously served in the Hong Kong government pre-1997 as principal assistant secretary for economic services. He has held the position of CEO at two low-cost carriers, Viva Macau and Avianova (Russia)