THE VIEW
The View
by

Jetstar verdict shows cartels in charge in Hong Kong economy

PUBLISHED : Wednesday, 01 July, 2015, 11:53am
UPDATED : Thursday, 02 July, 2015, 8:48am

In another victory for Hong Kong’s cartel style of doing business, Jetstar’s attempts to establish a local airline have almost certainly been thwarted by the government.

The tightly controlled local airline market has a total of three players who help keep the cost of flying high for Hong Kong consumers. Now that Jetstar’s no-frills service has been denied a license to operate here it is likely that cheaper flying options for Hongkongers will remain limited. Services of this kind account for no more than 10 per cent of Hong Kong’s passenger traffic, compared to around a quarter of flights out of Singapore.

To add insult to injury the Hong Kong Air Transport Licensing Agency went through the farce of holding a public inquiry into Jetstar’s application. Although its outcome was not hard to predict there was an interesting wrangle over the definition of ‘principle place of business’, the key determinant for whether Jetstar qualified for a license.

Cathay’s lawyer, with evident success, claimed that ‘principal place of business’ did not necessarily mean the place where most of the company’s business was carried out. He argued that the crucial factor was the provision in the Basic Law allowing the Hong Kong government to grant these licenses, which, he stated, was designed to ensure that Cathay could continue operating in Hong Kong following the handover.

Maybe inadvertently or maybe otherwise this argument gives us a vivid insight into the extent to which the cartels are able to have their interests enshrined in law.

Despite all the nonsense about Hong Kong having one of the world’s most free markets, the airline sector is doing its best to make this a joke. Its chosen tool for thwarting competition is to ensure that only allegedly local carriers qualify to be based in Hong Kong.

The definition of local is complex in the Hong Kong airline industry as it is in other industries. There has been no judicial review of the concept of ‘principal place of business’ as a definition of local, possibly because elaboration would open a can of worms in a place where the biggest companies have their domicile overseas.

In the case of the airlines, overseas companies control all the three players considered to be ‘local’. Cathay Pacific’s ultimate main shareholder is the London based John Swire & Sons, while its other another major shareholder is Mainland-based Air China. The smaller Hong Kong Airlines and Hong Kong Express are also controlled by Mainland entities.

Jetstar, for it’s part, is essentially an offshoot of the Australian based Qantas, with other major shareholdings in the hands of the local Shun Tak group, plus the Mainland-controlled China Eastern.

Thus we are in the bizarre position of airline companies controlled overseas vying to keep another foreign controlled company out of the market on grounds that it is not ‘local’. Despite this irony, Jetstar’s chances of winning an appeal to challenge its exclusion are assumed to be minimal.

The problem is not interpretation but the law itself that is nonsense at every level. Why is there even a problem with foreign entities participating in the local airline market? Elsewhere, for example, there is no barrier to a French company controlling Hong Kong’s iconic tramway system.

On the other hand in a city that is famous for its shipping industry, we have a cartel operating the ports even though, as elsewhere, foreign owned vessels operate out of Hong Kong. The problem is that port business is shrinking as the cartel does its worst and pushes trade to other centres.

The local airline cartel has said that there is nothing to stop a carrier, such as Jetstar, using the publicly financed airport, so, according to them; they are not trying to curb competition. However the reality is that foreign low cost carriers, Air Asia, being a prime example, have faced formidable barriers in operating out of the airport and this is reflected in Air Asia fares out of Hong Kong, which are considerably higher than out of its home base in Malaysia and neighbouring countries.

Hong Kong’s anti-competitive policies are hardly restricted to the airline industry, they cover many other sectors, ranging from the very big issue of land supply and disposal, to other aspects of the transportation industry, energy supply, TV licensing and even the humble meat trade.

There are no prizes for guessing who suffers from the insistence on maintaining officially sponsored cartels, the only surprise is that there are not more protests from consumers.

Meanwhile aficionados of black humour will savour the declaration from the Transport and Housing Bureau, which said that it spent last year fine-tuning the designation of local carrier status to include public interest considerations, if you believe that you will also believe that the bureau has solved the housing problem.

 

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster