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What the papers say about Cathay Pacific flying to the Chinese Mainland

16 Jan 2004

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"Sheltering Sky" - The Standard, 3 December 2003

Cathay Pacific is back. After a gap of more than 13 years, Hong Kong's number one airline returned to the mainland yesterday, flying about 280 passengers to the capital.

While the media hoop-la surrounding the flight was in stark contrast to Cathay's low-key send-off, the service was significant for two reasons.

First, it was part of Cathay's continuing metamorphosis into a truly global airline. This will again be boosted when Cathay is allowed to operate the services between London and New York that were agreed on last week by Hong Kong and British officials.

Second, it has helped strengthen Hong Kong's position as an aviation hub and reinforced the SAR's role as a gateway to China.

Critics will argue that Cathay's thrice-weekly service to Beijing – the maximum number of services it is allowed to operate under the existing air services agreement – is too small to make much of a difference.

That is not the point. After all, from tiny acorns do mighty oak trees grow. One analyst already forecasts that the flights, limited as they may be, will add HK$4 million to Cathay's net revenue.

The real issue is how soon Hong Kong and the mainland governments can sit down together and agree on a new services pact. This would not only increase capacity on the Hong Kong-Beijing route, allowing Cathay to begin approaching the thrice-daily service that it is allowed under the licence, but it would also allow Cathay to operate flights to Shanghai and Xiamen again in line with the licences it won in April.

Making Cathay a designated carrier on the Shanghai and Xiamen routes would also bring reciprocal benefits for the major mainland carriers, two of which are currently squeezed out from operating Hong Kong-Shanghai and Hong Kong-Xiamen.

This again would further boost Hong Kong's position as an aviation centre by increasing its connectivity. International passenger and cargo traffic that currently passes through Singapore or Bangkok or Seoul or Tokyo to reach Beijing, Shanghai and Xiamen would transit through Hong Kong. The benefit for Hong Kong is obvious: a financially stronger airline creating more job opportunities across all sectors for the people of Hong Kong.

Perhaps the way forward is for Hong Kong negotiators to offer the mainland the same kind of liberalised bilateral air services pact it offered the UK last week and Australia the week before.

With two Hong Kong carriers already able and willing to fly to the three major mainland cities and three Chinese airlines able to fly to Hong Kong, why have any restrictions on the number of flights and the sizes of aircraft?

The ending of some travel restrictions on mainland tourists has already demonstrated the benefits of a more liberalised regime. Now it's time that liberalisation came to Hong Kong air routes.

"A perspective on Cathay Pacific's resumption of services to Beijing" - International Business Daily (Beijing), 14 December 2003

After an absence of 13 years, Hong Kong's flagship airline Cathay Pacific on 2 December resumed services to the Chinese Mainland, raising concern among the aviation industry, travel agencies, people in the Chinese Mainland and players of the HK stock market. Why made such move? What is its vision?

On 2 December, Cathay Pacific Airways was allowed to operate services to Beijing. The approval came amid other initiatives aimed at boosting Hong Kong's economy and strengthening ties with the Chinese Mainland, including the "Closer Economic Partnership Arrangement" or CEPA, and allowing individual travellers to visit Hong Kong. While all sectors of the community are ambitiously preparing for these initiatives which affect a number of industries, Cathay Pacific's move in resuming service to the Chinese mainland would have an exceptional impact.

Mainland aviation: a market all carriers stand to gain

China is the fastest growing aviation market in the world. When Cathay Pacific transferred its Beijing and Shanghai routes to Dragonair 13 years ago, there were only 23 services a week operating between Hong Kong and Beijing and 24 a week to Shanghai – by all carriers combined. There are now 101 weekly services each week to Beijing (including Cathay Pacific's three weekly services) and 165 services a week to Shanghai.

Overall, the China Aviation Industry Corporation estimates that air passenger volume in the country will rise at an average annual rate of 8.3 per cent. And in 20 years time, the volume will be four times that of 2000. In such a market all carriers stand to gain. The entry of Cathay Pacific is, therefore, definitely a significant milestone in its development.

More important is that Cathay Pacific's service to Beijing is vital to strengthen its position as a primary gateway to the Chinese Mainland.

Hong Kong's gateway position being challenged

Hong Kong being a small territory has, throughout history, served as an important gateway to China. To a great extent, this is how Hong Kong made its economic miracle.

In theory, in the recent 20 years when the Chinese Mainland underwent reform and impressive economic growth, it should not be difficult for Hong Kong to establish itself as the principal point through which travellers and freight pass en route to or from China, given its geographical position and its modern airport, which has plenty of capacity for growth.

However, the territory is handicapped by the wholly inadequate provision of same-airline connections between China flights and flights to the rest of the world, offering passengers "through" services to and from the Chinese Mainland via Hong Kong.

The fact is that an ever increasing amount of traffic to and from China is presently moving over other hubs in the region and beyond. Singapore, Bangkok, Kuala Lumpur, Seoul, Tokyo and even Macau are becoming major China hubs as their home airlines flow traffic between their China services and other connecting flights. Sooner or later, Hong Kong will lose its competitiveness as a gateway for China. This shows that Hong Kong's future development depends upon it becoming the key hub for traffic to and from China.

Today, Hong Kong has achieved the number-one rank in the world in international air cargo traffic, and number five in international passenger terms. In order to maintain and enhance such positions, it is important that Hong Kong continues to be a global hub and attract traffic from other parts of the world.

The role and vision of Cathay Pacific

Hong Kong owes its success, if not its very existence, to trade and to the achievements of its people in competing in world markets. Over the years Hong Kong has developed an impressive infrastructure including one of the world's best airports. This reflects the critical importance to successful trading of efficient and comprehensive linkages with the rest of the world. As Hong Kong's de facto flag carrier, Cathay Pacific has a vital role to play in building these linkages.

Cathay Pacific's comprehensive network links with the networks of its oneworld Alliance partner airlines to offer Hong Kong consumers unparalleled access to the world. The airline aims to build up Hong Kong as an aviation centre by attracting traffic over its magnificent airport from any point on its network to any other. From the other point of view, building up transfer traffic at Hong Kong International Airport (HKIA) will have the consequent boost to local employment and to the Hong Kong economy in general.

Cathay Pacific will continue to provide a quality of service to its passengers which is rivalled by only one or two other airlines in the world, by continuing to invest in its products and in the people who deliver the service. It will do so while offering competitive fares and tariffs to all its customers.

It also aims to develop further the employment opportunities it offers to Hong Kong people, from the cockpit through to the check-in counter or the management office, and it will continue to deliver a reasonable return to those who invest in it. No wonder its shares become the buying target of investors after the news of Cathay Pacific resuming services to the Chinese Mainland was known.

Last year one senior officer from Cathay Pacific had clearly pointed out that "We aim to position Hong Kong as one of the world's leading aviation hubs, and to place it at the very heart of Chinese aviation.

"However, realising this vision cannot be achieved unless we can connect the major cities of China with the rest of its network. Hong Kong needs a global airline, and Cathay Pacific cannot be that global airline if it does not even serve the major cities in the country where it is based. As long as we cannot operate to China we are inhibited from competing globally: we need to fill this increasingly glaring and obvious gap in our network.

"How could London, Amsterdam or Frankfurt have developed as major hubs if their home carriers had been denied the right to fly beyond these cities to the European hinterland? Achieving our vision and goals for the airline and for Hong Kong will take some time. But the requirement to link up Cathay Pacific's existing network with the principal Mainland cities is urgent.

"Other airlines and other airports in the region and elsewhere are adding capacity, with the express aim of building hubs in Asia, some specifically targetted at capturing a large share of the Chinese market. Hong Kong and Cathay Pacific cannot afford to wait any longer. The competition will otherwise build up an unassailable lead."

Application to resume services led to battle

Cathay Pacific has played an important role historically in the development of Hong Kong/Mainland air services links. Following the adoption of "Open Door" economic policies, CAAC operated back to Hong Kong from several Mainland cities since 1979.

In 1979, the conclusion of a new air services agreement between the UK and China paved the way for Cathay Pacific to commence scheduled passenger to Shanghai in June 1980. In the mid 1980s Cathay Pacific began operating charter services to Beijing, and these were converted into regular scheduled services in April 1986.

In the mid 1980s, a new airline was born. Dragonair, established in 1985, concentrated initially on South East Asian destinations. Following an injection of capital in late 1985 the airline shifted its focus to the Mainland. Dragonair commenced operations to Beijing and Shanghai in 1988, reflecting Government's "one route, one airline" designation policy.

In January 1990, the structure of Hong Kong airline industry altered significantly with Cathay Pacific and Swire's purchase of a 35% stake in Dragonair. The change in Dragonair's shareholding structure led to significantly increased cooperation with Cathay Pacific in a variety of fields, both commercial and technical.

In April 1990, Cathay Pacific transferred, as part of the restructuring, its Beijing and Shanghai routes to Dragonair. Under the policy of "One Route One Airline" Dragonair was the only Hong Kong based airline to fly to the Mainland destinations.

The development of the Dragonair/Cathay Pacific relationship since 1985 can only really be understood in the context of Government's "one route, one airline" designation policy. This policy reflected the prevailing conditions of the airline industry in the 1980s, heavily regulated by inter-government bilateral agreements.

These agreements often allowed designation of only one airline per route by each side and usually tightly restricted capacity in order to provide viable and effective competition to foreign airlines. In these circumstances, it made sense to allocate all Hong Kong's available capacity to one airline. The policy also reflected to some extent Dragonair's then status as a fledgling airline, and that it needed a degree of support and protection.

It should be noted, however, that "one route, one airline"' ("OROA") was the general policy and not the invariable policy and the Government would designate a second local carrier where it judged that "more competition was needed in the public interest". Approval to Cathay Pacific's application to operate the Mainland routes is just such a case. The OROA policy remains flexible and the Government has tried to ensure a level playing field for all parties.

In August 2002, Cathay Pacific submitted its application to the Air Transport Licensing Authority ("ATLA"). Dragonair objected to ATLA on grounds that Cathay Pacific flights to Beijing, Shanghai and Xiamen would "result in the uneconomical overlapping of air services". An ATLA hearing was thus called on 23 January 2003.

Cathay Pacific's grounds boiled down to these basic points: Cathay Pacific flying back to the Chinese Mainland will be good for Hong Kong, good for the Chinese Mainland and good for consumers. The hearing, which was initially scheduled to last three days, continued over 11 days, with a six-week break in the middle. Its duration was unprecedented in ATLA history.

Outcome of the hearings

In its application to ATLA, Cathay Pacific requested a licence to operate 28 weekly cargo and passenger services to both Beijing and Shanghai and seven weekly services to Xiamen.

ATLA on 17 April 2003 granted a licence to operate 21 weekly services to Beijing and Shanghai and three weekly services to Xiamen.

On 18 June, the Hong Kong Government designated Cathay Pacific to operate passenger and cargo services between Hong Kong and Beijing. However, limited by the capacity stated in the current air service agreement between Hong Kong Government and the Chinese Central Government, Cathay Pacific was allowed only to operate an initial three services a week to Beijing. The first flight was scheduled to fly on 2 December.

Cathay Pacific's immediate objective is to ensure the smooth launch of its services to Beijing. Obviously, three services a week will not be sufficient to create the degree of same-carrier "connectivity" to strengthen Hong Kong as a hub and China gateway in a truly meaningful way. Three flights a week is small compared to the more than 100 flights Cathay Pacific operates to Taipei each week.

Similarly, Cathay Pacific operating three flights a week from Hong Kong to Beijing pales compared to about 100 flights operated by other carriers. We will have very little impact on their business.

The launch of services to Beijing is a major milestone in Cathay Pacific's effort to enhance Hong Kong's position as a primary gateway to China and better connect cities in the Chinese Mainland to the outside world.

However, this is still a first step. There is still a long way ahead for Cathay Pacific to achieve its vision in the competitive aviation market.

"Vanilla Sky" - The Standard, 12 January 2004

The upcoming round of air talks between Hong Kong and the mainland may be the most positive so far. Negotiators from both sides had demonstrated enthusiasm for more open skies over the last two years. But Hong Kong has no room for complacency. The city's future depends in large part on continuing to open up links with the mainland. That's why it's so worrying that Hong Kong air negotiators are apparently under pressure from within the SAR government itself to soften their stance.

Fifteen months ago, SAR and United States officials concluded a deal that increased the number of frequencies for US cargo airlines, while granting Cathay Pacific codeshare rights with American Airlines. The Economic Development and Labour Bureau negotiating team have since sought to build on the US deal in discussions with the Australian and British governments, attempting to end restrictions on flights between Hong Kong and destinations in the two countries.

The mainland has been even more successful, concluding agreements with a raft of governments, including the US, Japan, South Korea and Singapore, that have led to more liberal air services, benefiting passengers and airlines alike.

Consequently, hope are high that Hong Kong and mainland negotiators will agree on an air deal that at least matches the liberal pacts agreed with other governments. At a minimum, an agreement should allow Hong Kong and mainland carriers unrestricted access to major cities, including Beijing and Shanghai, allowing carriers to operate as many flights as economically justified. Equally, it should also open direct links between Hong Kong and secondary cities to further boost the SAR's gateway status.

Such an agreement would also be in keeping with moves to strengthen the links between Hong Kong and the mainland that led to the creation of the Closer Economic Partnership Arrangement (Cepa) and the easing of travel restrictions on mainland tourists.

Hong Kong should not be subservient to Beijing in such complex talks, nor should it feel grateful in some way for Cepa and similar agreements. The mainland has gained as much as Hong Kong.

On the contrary, there is every reason to believe that Hong Kong faces being left behind if both sides fail to secure as liberal an open skies pact as possible. The number of flights between mainland cities and other Asian destinations has climbed substantially over the last three years, many at a faster rate than air links with Hong Kong. Those between the mainland and Tokyo have soared by more than 160 per cent.

There is no reason to doubt that the number of flights, and consequently seat capacity, between China and other nations will continue to rise. Hong Kong cannot afford to take second place if it is to remain as China's gateway.

HK needs level playing field in air talks - SCMP Editorial, 29 January 2004

Hong Kong air services negotiators and their central government counterparts will soon meet for their annual round of talks on how to update the air services relationship between the city and the mainland.

A date for the meeting has yet to be officially confirmed, but it is expected to take place within weeks. Already, there is a growing chorus of voices within the local aviation industry calling on Beijing to give Hong Kong a fair and transparent deal - one that recognises the importance of commercial aviation to the local economy and allows the same access to the mainland skies that the central government has granted to a number of neighbouring countries.

Simply put, expanding Hong Kong's air links with the mainland is critical to the city's economic future. The mainland's air travel market is the fastest growing in the world. Industry forecasters reckon that it will be the world's second-largest, after the United States, within a decade. More importantly, at least one in five jobs in Hong Kong is involved in the logistics and tourism sectors, both of which depend heavily on the strength of Hong Kong as a premier international air hub for the mainland and the region. Factor in the restaurant and retail businesses, with their reliance on tourism, and the economic impact of more air travel links with the mainland looms even larger.

Ironically, despite its motto as the gateway to the mainland, Hong Kong has been falling behind regional competitors, such as Singapore, Thailand, South Korea and Japan. All of these countries have recognised the mainland's potential and are aggressively building up their airline connections to its cities. The present deal was largely put together four years ago, before the mainland's commercial aviation regulator, the General Administration for Civil Aviation of China (CAAC), began to push for deregulation of international air services on the mainland. Since then, the CAAC has adopted a strategy of open-skies-style liberalisation with major trading partners. Thailand is the latest beneficiary of this policy, having signed a new pact with Beijing this month that effectively throws open all air routes between the two countries.

Hong Kong has yet to benefit from this, partly because of the concerns of rival airlines and airports in Beijing, Shanghai and Guangzhou, all of which would like to displace Chek Lap Kok as the premier air hub in China. Theirs is an understandable and fair ambition. But all Hong Kong needs is a level playing field with other Chinese cities, such as that enshrined by the Closer Economic Partnership Arrangement between Hong Kong and the mainland in respect of trade in goods and services. And it is important that Hong Kong's continuing contribution to the development of the mainland tourism industry not be forgotten in the rhetoric.

Recognising the service gap that still exists between mainland airlines and Cathay Pacific and Dragonair, it may be unfair to open up the mainland skies to Hong Kong immediately. Yet maintaining barriers to competition serves little purpose except to slow the mainland industry's commitment to change and modernisation. Mainland airlines need to know that competition provides the biggest impetus to growth.

So what should Hong Kong negotiators ask for? A clear commitment to a timetable. The request for an outline of a clear and gradual opening up of mainland skies to Hong Kong would give mainland carriers a timetable for catching up, while not unduly limiting our carriers' right to compete on an equal footing.
Better still, it would also demonstrate to the rest of the world that Beijing is committed to creating an open and fair air travel regime in line with its economic liberalisation.