Government told not to open Hong Kong's skies

The SAR government should further liberalize the skies based on the bilateral negotiation under a fair and equitable exchange of economic opportunities, but should not unilaterally open its 5^th freedom air traffic right, according to a study by Hong Kong Policy Research Institute. The government should also formulate concrete and comprehensive aviation policies, so as to enhance Hong Kong's competitiveness as an air hub.

The researchers estimated that air transport industry was directly and indirectly responsible for at least 8.1% of GDP in 1998, employing 325,851 persons in key industries such as imports/exports and tourism. Given Hong Kong's unique geographical location in Asia, the aviation network is the most valuable and important part of the aviation industry of Hong Kong.

The study reveals that the US domestic aviation market remains closed from foreign competitions. For instance, non-US citizens cannot hold more than 25% of the voting shares of a US carrier. Foreign carriers are not allowed to carry passengers between US cities. For Hong Kong, an unequal exchange of air traffic rights would lead to negative externality. Any weakening of the home-carriers would diminish their ability to build up the "hub-and-spokes" system for Hong Kong. The study also says that liberalization in the US has generated some undesirable outcomes and prompted the US government to consider re-regulation.

Hong Kong's air cargo market is much less dominated by local carriers (totally 38%), compared with other Asian cities such as Seoul (58%), Bangkok (59%) and Singapore (59%). The sector is also under competitive pressure from Macau and cities in Southern China. Liberalizing the air freight market unilaterally would benefit users of freight services, but would hurt passengers. One or two foreign mega-carriers would eventually dominate the local market. Many short-term benefits may not be sustained, resulting in many uncertain outcomes.

The study also finds that unilaterally opening of Hong Kong's skies (both passenger and cargo) would benefit some customers buying economy-class tickets, but would increase the burden of business travellers. It would not significantly improve the operating efficiency of home-carriers. The suffered home-carriers would have to cut their service quality, flight frequency and other supporting requirements, resulting in an uncertain impact on consumer welfare and the overall economy in the long term.

At present, the major routes of Cathay Pacific are being served by at least another five foreign airlines. This is highly competitive for a capital intensive and heavily regulated industry. Passengers in Hong Kong are having a wide variety of choices of airlines, flight schedules and air fares. Operating statistics shows that the local airline has not earned an "abnormally" high profit in recent years.

The study finds that overseas governments have formulated policy to protect the interest and financial viability of their home-carriers against external penetration and domination. In order to promote the overall interests of Hong Kong, the government should recognize that the interest of home-carriers is an essential part of the entire aviation industry.

On the other hand, the study examined the experience of UK, Australia and Canada and suggested that the "one-route one-airline" policy has played a crucial and positive role in maintaining healthy competition of two domestic airlines to operate internationally. It is important to examine how this policy could be liberalized in order to promote competition between Cathay Pacific and Dragonair fairly and effectively, given the small population size of Hong Kong and the primary importance of a unified aviation network.

The researchers state that a strong home-carrier is important for enhancing Hong Kong's air hub position because:

• only the strong home-carrier can expand the trunk routes and extend the network efficiently for Hong Kong;

• a dominant home-carrier, with the headquarter located in the home base, has much stronger linkage and multiplier effect to the local economy than foreign carriers;

• a strong home-carrier will be more valuable as a member in global aviation alliances;

• a strong home-carrier can maintain a stable supply of air transport services for the hub. This would prevent the disruption of services due to political and other crisis situations; and

• a strong home-carrier brings "national" prestige to the home base.

The study urges government to consider several policy recommendations.

• to design a comprehensive and transparent aviation policy by taking all domestic and international factors into account; quantitative relation should be estimated;

• to formulate a negotiation strategy for liberalization by adopting a game theory approach; considering to promote better aviation co-operation among Asian economies;

• to maintain bilateral negotiation under a fair and equitable exchange of economic opportunities in 5^th freedom and other rights negotiations; unilaterally "open skies" may not be the best strategy for HK;

• to maintain a strong home-carrier in order to enhance the hub's development; and

• to review the market structure regularly.

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