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Mar 27, 2012

Jetstar Hong Kong, and some flag carrier issues

Andrew Pyne's career and experience makes his observations about Jetstar Hong Kong of considerable relevance to Qantas shareholders and those of other airlines that might now recons

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Andrew Pyne’s career and experience makes his observations about Jetstar Hong Kong of considerable relevance to Qantas shareholders and those of other airlines that might now reconsider their options for expanded Hong Kong operations

Hong Kong-A flag of convenience?

By Andrew Pyne

So having been knocked back on his plan for a premium carrier based outside Australia, somewhere in South East Asia, Alan Joyce has grabbed the headlines back this week with his plan to partner with China Eastern and set up Jetstar Hong Kong.  In the rush to excite the markets and placate Qantas shareholders has anyone bothered to read the fine print?  Those words, ‘subject to regulatory approval’ were included in the press releases – and this may turn out to be far more than a formality.

My guess is that Qantas and China Eastern are trying to railroad the government of the Hong Kong Special Administrative Region (SAR) into coming out in early support of the plan: it all sounds good – Hong Kong has a huge, relatively new, airport to fill; it lacks a true low cost airline in its otherwise broad and impressive aviation portfolio.  Just one snag: allowing Jetstar Hong Kong to set up in the territory doesn’t  just require a tweak in policy direction.  It actually requires a change in Hong Kong’s constitution – the Basic Law.

When Hong Kong moved from British to Chinese sovereignty in 1997 it developed a then unique formula to protect its autonomy in aviation matters.  When Australia negotiates a bilateral air services agreement with another country it typically agrees that only airlines owned and controlled by Australian nationals will be allowed to exercise the Australian set of traffic rights that exist under it, ie who flies where and when.  Hong Kong has no nationals as such so it uses the formula of Incorporation and Principal Place of Business (IPPB)  to determine which airlines should qualify to use those rights – and there is no way in which an airline carrying an Australian branding and controlled in effect from Sydney and from Shanghai can be said to have its principal place of business in Hong Kong.   Many have tried to circumvent the IPPB rules; none have succeeded.  If this project were to be allowed,  there would be a long queue of other airlines waiting to operate from Hong Kong – maybe Lufthansa Hong Kong or KLM Hong Kong or Virgin Atlantic Hong Kong. (Even Qantas Hong Kong?)  Hong Kong would quickly become something it has never wanted to be:  the aviation equivalent of a Liberia, that is a flag of convenience.  And Cathay Pacific, the territory’s highly successful, de facto, flag carrier would probably be looking for a new home.

But let us suspend disbelief and consider that Hong Kong, under pressure from its Beijing masters, decides to ignore Cathay Pacific’s concerns and then moves to  rewrite or reinterpret its own constitution,  what then of its 60 or so aviation partners?  They signed up to formal and solemn treaties granting air traffic access to their markets based upon a very precise understanding of what being a Hong Kong carrier constituted. They re unlikely to roll over and accept an Australian airline traveling in disguise as the real thing.

A good idea in concept – the devil is indeed lurking in the details. Back to the drawing board Mr Joyce.

Andrew Pyne worked in the Hong Kong Economic Services Bureau as the desk officer for aviation policy between 1994 and 1996; prior to that he worked in the British Embassy Peking on aviation policy and then advised Governor Chris Patten on Hong Kong aviation designation issues.  Post 1997 he worked in senior positions at Cathay Pacific , at Viva Macau (as CEO) and at Avianova (Russia s first LCC) (again as founding CEO). Andrew Pyne is now senior Partner at specialist aviation consultancy, Concuros Partners, based in Moscow.

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