Hong Kong's Jetstar Hong Kong decision could be a milestone in liberalisation. Or a compromise

At issue is Hong Kong's Basic Law, with ramification for all pan-Asian airline pursuits

Cathay Pacific and wholly owned subsidiary Dragonair have formally objected to Jetstar Hong Kong's application to operate scheduled air services, one of many steps towards launching flights. This is a separate process from obtaining an AOC. The main argument from Cathay and Dragonair is that Jetstar Hong Kong will be managed and controlled by a foreign entity, Qantas, and thus have its principal place of business in Australia. This would violate Hong Kong's Basic Law, which requires a principal place of business in Hong Kong.

The situation in Hong Kong is different from almost all other global markets as there is no requirement for an airline to have a locally owned majority. Such a clause was intentionally left out as it would have conflicted with Cathay Pacific's foreign ownership profile. Yet Cathay's argument has potential ramifications for all of the planned and future cross-border airline subsidiaries being established in Asia.

The region lacks a single market like Europe, so airlines have creatively turned to subsidiaries where they find a local partner to take majority local ownership.

Foreign laws for airlines generally require local ownership and control, the latter often winked at. Cross-border subsidiaries have so far had little trouble persuading authorities that local ownership equates to local control, even if foreign subsidiaries are not entirely autonomous, depend heavily on the foreign airline and the local owner is a silent shareholder.

Cathay's argument is that although the relevant boxes are ticked, reality will be different from what is presented on paper. So despite Jetstar Hong Kong having one-third local ownership (not a strict requirement), a Hong Kong CEO, Hong Kong board members and a large Hong Kong staff, they will take orders from Jetstar in Australia, the point argued by Cathay.

Cathay is mounting the largest challenge yet to what has generally been a relatively relaxed process to establishing cross-border subsidiaries.

As Southeast Asian LCCs entered domestic markets, then sought to expand internationally, it was near impossible in the short term to amend the host of bilateral agreements necessary to allow the liberalisation needed to allow efficient services. These air services agreements, based on reciprocity, were described by the last CEO of IATA as "archaic" in their restrictiveness, and born of a very different age.

They prevent the cross-border establishment that has been such an important part of freeing up Europe's previously closed skies. By allowing Asia's LCCs to establish on a minority shareholding joint venture basis ("cross border joint ventures"), all governments involved were prepared to allow de facto liberalisation, without having to go through a process of re-negotiating the dozens of bilateral combinations otherwise needed.

There is a risk - albeit fairly small - now that Cathay's unabashedly protectionist plea move could embolden incumbents in other markets to challenge proposed start-ups. The argument in other markets would be the same: boxes may be ticked - including majority local ownership - but the foreign carrier might ultimately call the shots. But other governments have taken the course of favouring the economic benefits additional airlines bring, even if it meant looking past the technicality of local control. (The restrictive ownership and control provision in bilaterals was established 68 years ago when aviation was in its infancy. Its origins were in ensuring there was adequate safety regulatory oversight by a recognised authority. But it has since been perverted to become the cornerstone of protectionism.)

It is no secret these cross-border subsidiaries depend heavily on their foreign airline, and at times may be subservient. But proving a lack of local control would generally be difficult. Cathay would have to prove its position that despite all the local factors in Jetstar Hong Kong, Hong Kong does control the day-to-day operations. Cathay in its objection wrote: "Any local franchise operation has local managers. This does not stop it from being controlled from overseas. Management control of the Jetstar Hong Kong franchise clearly rests in Australia."

Cathay has not publicly offered specific evidence to its claim other than to say various and lengthy applications from Jetstar to Australian regulators show Australia will control Jetstar Hong Kong.

Cathay likely has some sympathy in Hong Kong as Jetstar Hong Kong was originally announced with only China Eastern and Qantas as equal shareholders. This was despite the parties being aware of Hong Kong's sensitivity to airline ownership. One view is that the parties always envisioned bringing in a local shareholder but doing so at launch did not present the best timing.

Then in Jun-2013 Jetstar Hong Kong announced as one-third shareholder the familiar Hong Kong name Shun Tak Holdings. But the long intervening period - Jetstar Hong Kong was announced in Mar-2012 - had created the impression that this was an afterthought.

Cathay has directly discounted any local validity Shun Tak Holdings may bring, saying: "The Hong Kong residence of a particular shareholder of Jetstar Hong Kong and the number of shares held by that shareholder do not determine management control or principal place of business under the Basic Law. Nor does the fact that particular officers of Jetstar Hong Kong are residents in Hong Kong."

Jetstar Hong Kong CEO Edward Lau in a statement however said recently: "We reject any suggestion that Jetstar Hong Kong is controlled by a foreign airline."

Hong Kong has learned from its experience with Hong Kong Airlines

Cathay's approach is to question the first applicable hurdle - Basic Law - and thus stop Jetstar Hong Kong's application from proceeding further. Absent Cathay's specific evidence, it is seemingly easier for Jetstar Hong Kong, with local ownership and local representation, to prove its principal place of business is in Hong Kong than for Cathay to argue ownership and local representation are not fundamental. So it is worthwhile considering what is the Basic Law requirement.

Yet that is unclear. There is no checklist: the Air Transport Licensing Authority (ATLA), to whom Jetstar Hong Kong has applied, has stated that "the requirements of being incorporated and having its principal place of business in Hong Kong and the airline's shareholding structure are the factors that would be taken into account, but those are not the sole determining factors."

What other factors are not made clear, but ATLA has said it will consider matters such as the larger aviation environment, economic impact and consumer interest. In that medley will surely be a reflection of Hong Kong learning from its experience with Hong Kong Airlines, which had some rocky moments as operational reliability was reduced and its financial track looked uncertain. Ownership of the airline from mainland China's Hainan Airlines gave the impression that at times Hong Kong Airlines was neglected as management decisions were heavily tied to Hainan. An order from Hong Kong's Civil Aviation Department in 2012 restricted growth so Hong Kong Airlines could have a sounder operational base, which seems to have worked.

So Hong Kong's interest is not just nationalistic but also in ensuring an airline is productive. This is encapsulated in one clause of ATLA's designation powers for route authority. Matters ATLA takes into account are: "The extent to which it is probable that the applicant will be able to provide a satisfactory service in respect of continuity, regularity of operation, frequency, punctuality, reasonableness of charges and general efficiency". Hong Kong is not alone in this concern of foreign-tied airlines losing focus. It was only in 2011 that Australia effectively found that Tiger Airways Australia had lost operational and safety reliability as a result of its 100% Singaporean owners being too distant from the airline. (Australia permits 100% foreign ownership of domestic airlines, so for example Cathay Pacific could establish a wholly owned domestic airline in that country.)

Public benefit of an LCC is in Jetstar Hong Kong's favour

Jetstar Hong Kong is strongly emphasising the economic benefits it will bring to the SAR. It is hard to think of an example where adding airlines and flights have been seen as a detriment to the economy, yet Cathay Pacific argues Jetstar Hong Kong is not "in the best interests of the Hong Kong economy".

Jetstar will not fall short on evidence. It has already cited public opinion polls (which it commissioned) that express interest for greater budget travel options. Spot checks on air fares two months in advance provide ammunition to Jetstar Hong Kong on how consumers are paying higher prices for air fares to or from Hong Kong.

Tied to that is the basic principle that lower fares stimulate more traffic - bringing greater benefits to local economies. Spot checks show air fares on routes where LCCs operate are often one-third the price of non-stop air fares when adjusted for distance. i.e. - offer three times the yield. Even ignoring distance the difference is clear: Hong Kong-Tokyo is more expensive than Kuala Lumpur-Tokyo despite Hong Kong being considerably closer to Tokyo than Kuala Lumpur. Cathay is conspicuously absent from offering the lowest price on any of these routes.

The LCC fares in the table below typically exclude checked luggage and meals, but even including those the fares do not close the gap.

Fare comparison to Asian cities from Hong Kong and LCC hubs: Sep-2013 for travel in Nov-2013

Route	Distance (km)	Lowest non-stop fare ex taxes	Yield
Hong Kong-Taipei Singapore-Taipei	807 3213	USD205 (Hong Kong Airlines) USD267 (Scoot)	USD25.4 cents USD8.3 cents
Hong Kong-Tokyo (Narita) Kuala Lumpur-Tokyo (Haneda)	2964 5344	USD435 (ANA) USD280 (AirAsia X)	USD16.7 cents USD5.2 cents
Hong Kong-Beijing Singapore-Beijing	1987 4474	USD291 (Dragonair) USD304 (Jetstar)	USD14.6 cents USD6.8 cents

Source: CAPA - Centre for Aviation and airline websites

Cathay states it "is not against competition" but its history includes protesting failed startup Oasis Hong Kong, as well as an application early last decade from Dragonair (prior to Cathay taking over Dragonair) to serve cities Cathay flew to. Cathay even says it "supports increased choice for consumers in Hong Kong, including the set up of LCCs with their principal place of business in Hong Kong." But the appearance is that Cathay is focusing on details so it can indirectly protest rather than overtly take a protectionist posture.

Hong Kong's slots are running out and Cathay says Jetstar is underserving

Cathay briefly raises Hong Kong International Airport's (HKIA) shrinking capacity, with subsidiary Dragonair stating: "We do not believe that Jetstar's business model will make the best use of the remaining available slots at HKIA." Further details are not supplied for this argument - one which was first put forward in Jun-2013 by Hong Kong Express.

Hong Kong Express deputy CEO Andrew Cowen, speaking at CAPA's recent LCC and New Age Airlines summit in Seoul, remarked that flying patterns out of Hong Kong must change as slots become more restricted. Overall, there are few flights departing Hong Kong before 0800 and LCCs - such as Hong Kong Express - must start using these earlier slots. Slots at prime hours are typically gone, requiring new entrants to use off-peak slots. LCCs have shown that passengers will fly at inconvenient hours if the price is less.

Hong Kong airport movements by hour: 02-Sep-2013

Source: CAPA - Centre for Aviation and Innovata

Hong Kong's slot profile contrasts to LCC hubs like Singapore, Bangkok Don Mueang, Manila and Jakarta - many of which, like Hong Kong, are congested. Singapore has a strong 0700, and even 0600, departure bank while Don Mueang's 0600 departure bank is the largest of the day. Manila has strong 0400, 0500 and 0600 departure banks while Jakarta's 0500 departure bank is the largest of the day.

Singapore airport movements by hour: 02-Sep-2013

Source: CAPA - Centre for Aviation and Innovata

Bangkok Don Mueang airport movements by hour: 02-Sep-2013

Source: CAPA - Centre for Aviation and Innovata

Manila NAIA airport movements by hour: 02-Sep-2013

Source: CAPA - Centre for Aviation and Innovata

Jakarta airport movements by hour: 02-Sep-2013

Source: CAPA - Centre for Aviation and Innovata

Jetstar is no stranger to Hong Kong's slot shortage, saying its rapid growth in the early years was designed to use slots before they became scarce or dried up. Any stalling of its application further reduces slot opportunities, and already preliminary slot allocation options are available at commercially weak hours. But Jetstar has repeatedly said its strategic goals are for the long term, as shown by the years it took Singapore based Jetstar Asia to reach profitability. Securing a position in Hong Kong early will be important as the airline will have a market advantage once additional slots become available next decade with the opening of a third runway.

Cathay and Dragonair will be challenged to use early morning slots as their strong emphasis on connecting traffic requires flights to arrive first, feeding traffic into departing flights. On a typical Monday morning, for example, Cathay has only two flights departing at 0800 while Dragonair has no flights departing before 0800 (excluding services departing in the middle of the night). On the reverse, Jetstar Hong Kong can arrive late in the evening when most movements are for departing services. (There are ground infrastructure challenges, such as limited hours of trains and buses, but those are largely a case of chicken-and-egg, as there are few flights at those times for them to service.)

Jetstar Hong Kong will have a strong point-to-point focus and low cost base that can stimulate traffic to travel at off-peak hours. This suggests that, contrary to Dragonair's claim, Jetstar's business model is actually more suitable to use the remaining slots than Cathay or Dragonair, which have a high cost base and connecting traffic focus that have a greater requirement for peak hour slots.

Cathay Pacific Hong Kong airport movements by hour: 02-Sep-2013

Source: CAPA - Centre for Aviation and Innovata

Dragonair Hong Kong airport movements by hour: 02-Sep-2013

Source: CAPA - Centre for Aviation and Innovata

Questioning the merit of an airline to use of slots could backfire on Cathay and Dragonair. Dragonair especially has rapidly expanded mainland China services in order to utilise slots. Cathay and Dragonair's mainland China network in the year through Jul-2013 has run at a relatively low 72% load factor. Dragonair's expansion has likely come at the expense of profitability, although Cathay and Dragonair do not release separate financials.

Deeming Jetstar not the best airline to make use of available slots raises the question if Dragonair, running unprofitable flights with low load factors, best serves the use of those slots. An extreme situation of applying this analysis can be found at Tokyo Haneda Airport, where new slots are awarded based on past performance and likely future results.

Hong Kong needs to recoup the cost of its third runway

Another dimension of the slot environment is that while a third runway opening around 2025 will bring 50% more capacity, it is also preceded by a large bill, further fattened by Hong Kong having to reclaim land for the third runway. This makes for a considerable investment, and one that cannot be fully recouped until the runway is in use. But Hong Kong wants to shore up revenue, and having LCCs that can use the airport's remaining slots brings revenue.

As Benjamin Wong, head of transport and industrial at government affiliate InvestHK said at CAPA's Seoul conference: "We could sit here and wait for Cathay to grow" or alternatively "get new players and grow together".

Cathay also argues traffic rights are wasted on Jetstar Hong Kong

In addition to saying Jetstar Hong Kong would violate Basic Law, Cathay argues the proposed LCC would use Hong Kong's "hard-negotiated sovereign air traffic rights" that are "valuable economic assets for any government and must be used in the best interests of Hong Kong and its economy." Using air traffic rights by any airline or type of carrier inherently benefits the local economy as passengers and cargo are brought in. There is also not necessarily a limited pool of air traffic rights as Cathay implies. In some markets like Korea there is an open skies arrangement while in other key markets there is generally capacity available.

A notable exception is perhaps Indonesia, where the bilateral space is limited, as that government seeks to protect its flag carrier from strenuous competition.

Cathay also argues the oblique case that Hong Kong may not be able to secure bilaterals if there is a de facto foreign carrier using them. "Allowing a carrier that is a franchise controlled by a foreign airline to gain access to Hong Kong's air traffic rights would severely weaken Hong Kong's ability to negotiate with foreign governments for the expansion of Hong Kong's air services."

This of course ignores the evidence that no government in the region - even Japan which was previously one of the most precious when it came to nationality issues - has made this a bilateral issue over the decade since the cross border joint venture movement began. Recent practice suggests strongly that if the Hong Kong government designates Jetstar Hong Kong as a local carrier, then foreign governments will accept that designation without question.

Cathay versus Jetstar also contains an Air China versus China Eastern sub plot

A proxy fight is also occurring in mainland China where Cathay's strategic and equity partner Air China is lobbying against Jetstar Hong Kong while Qantas and Jetstar partner, China Eastern, is lobbying for Jetstar Hong Kong, with both sides hoping their voice will trickle down into Hong Kong's authorities.

Air China and Cathay have so far been losing the fight as Jetstar Hong Kong received anti-trust approval from mainland China in Jan-2013, a sign widely seen as Beijing blessing Jetstar Hong Kong. This is despite Air China being the flag carrier, a designation China Eastern does not have, even though it too is effectively state owned.

This debate comes as mainland China looks to announce in Oct-2013 policies which will support phased low-cost development. While Jetstar Hong Kong is not based in mainland China, it will benefit China Eastern since China Eastern will learn about the low-cost model and gain experience it can bring to its own operation or a future LCC. Blocking Jetstar Hong Kong could possibly indirectly contradict the new policy.

Should Beijing's view hold sway, however, China Eastern could be told to stop its lobbying. At the opposite end of the spectrum, any changeover in the CAAC leadership could see the installation of China Eastern chairman Liu Shaoyong, who might remain true to his China Eastern heritage and the objectives China Eastern would like to accomplish.

Against this backdrop, Hong Kong is seeking greater access to Australia

There is a mountain of bilateral history between Hong Kong and Australia and Cathay will undoubtedly be tweaking this nerve in its local authority. Cathay and Qantas, despite being oneworld partners, harbour no love for each other, something that translates through to their respective governments. This is not all a one sided debate either. In seeking to promote the interests of its own national airlines, Australia has played hardball in negotiations, capping Hong Kong's available capacity. This currently prevents another Hong Kong airline from entering the Hong Kong Australia market with suitable frequency, a measure that would arguably be very positive for Australian consumers and tourism.

So, at the same time Cathay is lobbying against Jetstar/Qantas, it is seeking greater bilateral access to Australia. This is highlighted when Cathay's submission asks if approving Jetstar Hong Kong creates a "conflict-of-interest in terms of air traffic rights negotiations between Hong Kong and Australia".

As CAPA previously wrote:

Then there is the more pragmatic and mercantilistic aspect of the matter. Hong Kong has exhausted its airline capacity access to Australia under the bilateral air services agreement. Cathay would like to expand its presence (especially as competitors Singapore Airlines and Emirates over the past year have pumped capacity in) while Hong Kong Airlines could even launch its own services. (Emirates and Cathay are restricted by frequencies while Singapore Airlines benefits from a much more liberal policy with Australia - now for example with Virgin Australia also partnering with Singapore Airlines.)

Australian carriers have not used their full capacity allotment and, without full beyond rights - notably into the Mainland - will not in the foreseeable future. Virgin Australia is largely out of the picture and Qantas is no longer interested in the traffic rights beyond Hong Kong it once was, such as to London. In the old currency, countries negotiate bilaterals on behalf of their airlines, and the one access Qantas would like is to see Hong Kong approve Jetstar Hong Kong.

Hong Kong has a restrictive bilateral environment but Australia in the past has benefited (beyond typical third and fourth freedoms) from Hong Kong needing more access to Australia than Australia needs to Hong Kong. In 2004 Qantas received access to a Hong Kong-London service in exchange for Hong Kong carriers having greater access to Australia - necessary as at the time Dragonair was planning its own services to Australia. (Dragonair was shortly afterwards taken over by Cathay, confining the smaller carrier to regional services.)

See related report: Jetstar Hong Kong's local investor reflects HK's new attitude, learning from Hong Kong Airlines

It is inconceivable that a pro-competition Hong Kong can credibly reject Jetstar's application

Cathay's ultimate concern is not just Jetstar Hong Kong but the fear that approval of Jetstar Hong Kong will pave the way for other carriers to establish a base. This is probably soundly based. ANA part-subsidiary Peach Aviation and China's independent Spring Airlines have publicly stated their interest in possibly pursuing that option.

"Granting a licence to a foreign-controlled airline would set a very negative precedent," Dragonair said in its statement. While Hong Kong may not fully see it this way, it probably does agree that Jetstar Hong Kong will establish a precedent that foreign parties are watching carefully.

Now Hong Kong has to reconcile how to respond to Jetstar Hong Kong's application without compromising its pro-business environment. At the same time it needs to address its regulations that were written well before the advent of cross-border joint venture airline subsidiaries, something that Hong Kong may not see as valuable.

Hong Kong is unlikely to protect de facto flag carrier Cathay Pacific, but nor does Hong Kong want to be responsible for Cathay's demise (although that scenario is scarcely credible as a result of LCC entry; there are many other forces for change in the aviation world).

But for Hong Kong to decide against permitting Jetstar Hong Kong's establishment would fly in the face of a whole decade of airline liberalisation in Asia. No other administration has seen fit to prevent this form of liberalisation, despite there now being numerous joint ventures of this kind. Nor has Hong Kong itself has questioned designations by foreign governments of these carriers.

There are, as is usual in such circumstances, some great historical ironies in this confrontation. For many years, when Australia's preoccupation was in protecting its flag carrier, Hong Kong fought in vain to open up greater bilateral access - which would undoubtedly have been in Australia's wider economic interests. Yet also Cathay owes its very existence to bilateral tolerance on the part of other countries, where it was not a Hong Kong owned company and therefore had to rely on foreign governments accepting the unusual "principal place of business" basis for designation. This now, in a pinnacle of irony, becomes the core argument that Cathay appears to be leveraging against Jetstar.

Cathay also relies inevitably for its lifeblood on sixth freedom operations (using two separate bilateral agreements to link two other countries), themselves a creature of liberalisation. The restrictive bilateral system was established with the clear intention of regulating all end to end services between the two parties involved. It was only political and commercial pressures that permitted intermediate airlines to start participating in these end-to-end flows.

Then, at a commercial level, Cathay is near-unique among its peers in the Asian region in not establishing its own LCC subsidiary. Even supposedly restrictive administrations in Japan and South Korea have seen all of their respective flag carriers introduce their own branded LCCs. Cathay has stood aloof from this movement; history will judge whether they, or everyone else, are out of step.

A commercial compromise may be the solution. What might the carve-out be?

With all these ingredients a compromise seems an attractive outcome. This creates the question of what the carve-out might be and what the likely implications are.

Could Hong Kong bless Jetstar Hong Kong in exchange for Australia granting added capacity to Hong Kong? On strictly technical grounds these are not issues that should spill over into the decision making process of the ATLA, but stranger things have happened in international trade.

The added capacity would benefit Cathay and Hong Kong Airlines, which has been eyeing Australia. Hong Kong Airlines and sister carrier Hong Kong Express, which in Oct-2013 will adopt the LCC model, have reportedly objected to Jetstar Hong Kong's establishment. Were Jetstar Hong Kong permitted to launch, might it be in a restricted route environment?

Cathay was previously contained by its government in serving mainland China and perhaps, it might be argued, Jetstar Hong Kong should serve out its time too, even though this could be inimical to Hong Kong's best economic interests, as the majority of visitor arrivals into Hong Kong are from mainland China.

Cathay's objection delays Jetstar's progress, further burning cash in the Qantas Group, although pockets are deep and the group has previously shown no hesitance in investing heavily in long-term objectives. In any event, the losses from Jetstar Hong Kong pale into insignificance compared with the losses Qantas tolerated from its international network in recent years. Perhaps Cathay hopes Qantas will give up, as it did with its proposed southeast Asian-based premium full-service carrier. But there the strategy and opportunities were far from clear. "Joining the dots" is a fundamental to Jetstar's spread across Asia and Hong Kong offers a very large dot. One that is worth pushing very hard to achieve.

Delay is always a resort of negotiators wishing to prevent an outcome, even where the eventual result is not in doubt. It is unclear if Cathay is using this time to prepare a strategic response, delay the inevitable or make the situation so convoluted it stands a chance of achieving a greater compromise.

One thing is certain: Jetstar Hong Kong believes it has found new markets, which will bring additional passengers and economic benefit to Hong Kong. That is a clearer pro-Hong Kong position than asking for protection under the veil of questionable claims. Now is perhaps the moment for Cathay to pull out its competitive card. It has delayed - probably well beyond its best interests - in joining the low cost movement. Now, as almost inevitably the tide is washing in, it may not be too late.

One thing is certain, Cathay is a formidable airline with enormous professional and financial resources. It would have no difficulty in establishing a seriously powerful LCC - and at a time when the previously closed shop of North Asian aviation is opening up. But, if that is part of its strategy, it is making a very good job of hiding its real intentions.

Letter from Cathay Pacific Airways

September 24, 2013

Dear Will,

Your September 10 article, "Hong Kong's Jetstar Hong Kong decision could be a milestone in liberalization. Or a compromise," correctly points out that our position on the approval of Jetstar Hong Kong's application to the Hong Kong Air Transport Licensing Authority is that it would be a violation of Hong Kong's Basic Law. However, you suggest that the Hong Kong authorities ignore this critical point to "find a solution that complements Hong Kong's business-friendly environment." It is important to recognize that Hong Kong has its well-earned reputation as a business-friendly environment precisely because it has a solid record of respect for the rule of law. Your suggestion that the authorities should ignore the law in this case is quite astonishing.

Your labeling of our position on the Jetstar Hong Kong application as protectionist overlooks the fact that we compete very successfully with 107 other carriers in our home market, 17 of which are LCCs, and many more internationally. It also overlooks the fact that we did not, contrary to your article, object to the licence application from Dragonair or press objections to a licence application from Oasis Hong Kong. We also had no objection to the license application of Hong Kong Express. Our record is very clear, we have no issue with any airline establishing a presence in Hong Kong as long as they follow the law.

We do have issues, however, with foreign carriers who believe that a franchise operation controlled off-shore, in clear violation of Hong Kong law, will be acceptable to the five Hong Kong airlines who rely on Hong Kong air traffic rights for their global operations.

In discussing air traffic rights, you quote former IATA Director General, Giovanni Bisignani, as saying they are "archaic" in their restrictiveness and born of a very different age. We disagree with that position - as do many governments - and believe the bilateral system has done much to promote competition by giving all governments, large and small, equal opportunity to negotiate and conclude bilateral agreements for air services. Within that framework, airlines compete vigorously and, more often than not, our passengers and shippers reap the benefit in terms of lower fares and improved service, which, together, have driven the huge increase in travel over the last few decades. But there are rules which must be followed. I can assure you that we follow them, and we expect our competitors to do the same. Hong Kong's position as Asia's largest international aviation hub is due, in large part, to the ability of the government to successfully negotiate liberal bilateral agreements with other jurisdictions to the benefit of the Hong Kong economy and the airlines based here.

Your article says that we have not publicly offered specific evidence to support our claim that management control of Jetstar Hong Kong rests in Australia. That is not true. We made clear reference to the filings to the Australian Competition & Consumer Commission (ACCC) made by Jetstar Hong Kong's ultimate parent, Qantas Airways. You will find them at this link:

http://transition.accc.gov.au/content/index.phtml/itemId/1063283/fromItemId/401858/display/application)

In any case, the onus is on Jetstar Hong Kong to prove to the Hong Kong authorities that it meets all legal requirements and we contend that is not possible.

Jetstar Hong Kong's licence application raises a number of important issues and that is why the review by the Hong Kong authorities needs to give careful consideration to its legal merits and to its impact on Hong Kong's future. Let me again be very clear, Cathay Pacific Airways has no problem with competition - including the establishment of additional LCCs with their principal place of business in Hong Kong - and we are fully prepared to continue to compete as we already do in our home market and in the many others we serve internationally. At the end of the day, Cathay Pacific Airways, in continuing to regularly add flights to new destinations and expand service to others, contributes to more, not less, competition in international aviation.

At the end of the day, your argument that the law should be ignored is very surprising. The Jetstar Hong Kong application raises an important legal issue that will have far-reaching impact on Hong Kong's overall competitiveness and should and will be taken seriously. Our position on this matter is very clear, any licence application must abide by Hong Kong law and it must be in the best interests of the Hong Kong economy. Jetstar Hong Kong's application meets neither of these important criteria.

Sincerely,

James Barrington

Director Corporate Development

Cathay Pacific Airways