Business HKFP Voices

Grounding of Jetstar blights cheap flight hopes

By Uny Chan

At the behest of local airlines, the Air Transport and Licensing Authority has ruled that Jetstar Hong Kong Airways does not have its Principal Place of Business (PPB) in Hong Kong. The PPB provision is a prerequisite in the Basic Law to determine the eligibility of an airline start-up. The authority’s ruling means Jetstar cannot obtain an Air Operator Certificate. It has also set an undesirable precedent to impede our city’s aviation development.

When Jetstar challenged Cathay Pacific on its interpretation of PPB, it was dismissed as “fussy thinking” and “divert(ing) attention away”. But getting entangled in the technicalities does not yield a meaningful discussion. Let’s talk public interest.

So far, the discussion has focused solely on Jetstar’s violation of the PPB requirement. Little has been said on Cathay’s manipulation of its shareholding structure, or the public good of embracing low cost aviation in Asia, a region that has pioneered a model of cross-border ownership, which Cathay is incidentally against.

Regional standards

Unlike Europe and North Africa, Asia is not known for its Open Skies policy. Aviation bilateral agreements tend to be restrictive. The boom in low cost carriers (LCC) did not take place until a decade ago, with the more conservative North Asia opening up only from 2012.

Having said that, the region should take a pride in its innovative approach. Asia is a pioneer in using the franchise model to bring its LCC venture across borders. AirAsia, a Malaysian company, also operates from various hubs in Indonesia, Thailand, India and the Philippines through partnering with local people and companies. Tiger Airways, a Singaporean company, operates trans-continentally from Australia. Scoot, also a Singaporean company, operates long-haul low cost flights from Bangkok and Kaohsiung by charting multi-stop routes. Jetstar works with the government to operate international flights out of Vietnam. Spring Airlines, based in Shanghai, operates a domestic division in protectionist Japan.

jetstar aircraft

A Jetstar aircraft. Photo: Jetstar Airways via Flickr.

In return, ASEAN achieves a remarkable intra-bloc trade growth of 10.5 percent every year. Japan, once hard-hit by the 2011 tsunami, has attained a 13 percent growth in the number of international arrivals since it relaxed its foreign ownership restrictions on LCCs. Aviation safety has improved dramatically in Indonesia and the Philippines in the past five years as LCC franchises are duty-bound to safeguard their brand image, thus contributing to better safety oversight and ultimately benefitting the travelling public.

‘Not against competition’

Meanwhile, our home-based carrier still fixates on a harsh and unrealistic set of standards when it comes to opening up to competition in the wake of the LCC revolution in Asia.

Cathay stresses that it is “not against competition” and that it has competed “with other airlines every day in Hong Kong and around the world. This includes the 107 other foreign airlines serving Hong Kong, 17 of which call themselves LCCs”.

What Cathay didn’t mention is that it has never competed with a reputable home-grown LCC that enjoys international recognition and a sensible route/fleet strategy. Hong Kong Express Airways has been a breath of fresh air to the local market. Yet neither its scale nor its reliability present any material threat to Cathay’s dominance in Hong Kong.

With Jetstar, however, Cathay has every reason to feel pressured. The Jetstar proposition involves three veteran parties: a national airline that knows the ins-and-outs of the PRC (China Eastern), an Australian LCC with a decade of operational history throughout Asia-Pacific (Jetstar) and a fledging local enterprise providing all administration, marketing, sales and distribution support (Shun Tak).

cathay pacific

A Cathay Pacific aircraft. Photo: Wikipedia Commons.

This is the new norm of the LCC sector in Asia – and one that Hong Kong desperately needs to embrace. The franchise model is a proven and sustainable business model for Asia. There is no better time than now for Hong Kong to ride the tide.

One must be extremely cautious when considering Cathay’s propaganda on embracing competition. The Jetstar debacle comes in the context of Cathay trying to secure more access to the Australian market at the new HK-AU bilateral negotiation, and regrettably Jetstar has become a reluctant pawn.

London-based Swire Group owns a majority share of Cathay through a network of holding companies. Another 30 percent of Cathay’s shares are owned by Air China, the flag carrier of the People’s Republic. If a regulator conducted a holistic and comprehensive review of the PPB provision, Cathay’s moral high ground would be subject to heavy scrutiny.

Safeguarding public interest

Going forward, Hong Kong must come together to decide whether it accepts low cost aviation as a force of change. We are one of the few big Asian cities without a dedicated airport or terminal for LCCs. Travellers from Hong Kong pay exorbitant fares for regional flights. LCCs account for only five percent of seats in Hong Kong, compared with 27 percent in Singapore.

There is no doubt that Hong Kong has lagged behind. It is ironic that a commercial trading hub that calls itself Asia’s World City lacks fundamental understanding of what a mature low-cost aviation scene would bring.

Hong Kong has a unique role to play in the new era of north-south trade (China to ASEAN). Low cost aviation would be the perfect catalyst to stimulate and facilitate the growth of business traffic and flow of goods. A bigger presence of LCCs in Hong Kong would enhance our international transportation infrastructure and strengthen our competitiveness in the region.

cathay pacific hong kong airport

Cathay Pacific aircrafts at its home base at the Hong Kong airport. Photo: Michael Rehfeldt via Flickr.

A debate on public good should not be an overly technical discussion on the legal framework. Simply speaking, should any local airline feel threatened by competition from LCCs, they could launch one in response and tap into this lucrative market. Their peers in North Asia have mastered this side-business with commendable success. A formidable airline like Cathay should be no exception.

Hong Kong deserves more than just the meagre Tuesday fanfares. While no one would deny Cathay’s contribution to the city, it is time to facilitate the introduction of serious, potentially semi-foreign, LCC competitors to our dull and oligopolistic aviation market.

If the Securities and Futures Commission could veto weighted voting rights in name of public interest, the authority or other government bodies might too review whether it is sufficient to rule against entrepreneurial low cost endeavours in the name of law, or to rule in favour for the general public, once and for all.

Uny Chan was educated in Hong Kong, Italy, Turkey and the U.S. He works in a bag and apparel manufacturer and runs a side business to facilitate Foreign Direct Investment into Macedonia and the UAE. A private pilot himself, Uny is passionate about aviation policies and Islamic finance.

Grounding of Jetstar blights cheap flight hopes