Hong Kong’s Air Transport Licensing Authority’s (ATLA) decision to deny Jetstar Hong Kong a licence to operate marks the end of the upstart’s long battle to get airborne, and indicates that the barriers to entry in the Special Administrative Region are high indeed.

As poorly phrased laws go, Article 135 of Hong Kong’s Basic Law is difficult to beat:

“Airlines incorporated and having their principal place of business in Hong Kong and businesses related to civil aviation functioning there prior to the establishment of the Hong Kong Special Administrative Region may continue to operate.”

Yet a law panel’s interpretation of this article proved amply sufficient to kybosh Jetstar HK’s hopes of bringing its low cost business model to Hong Kong.

In its 150-page decision, the five member panel reached back into a broad range of historical court cases in numerous countries to interpret the phrase “principle place of business,” or PPB. In its original opposition to Jetstar HK, Cathay Pacific Airways had said that Jetstar’s HK’s overseas ownership contravened the 1980s-era Article 135.

Public relations counterattack

In a public relations competition waged from 2013, Jetstar HK took pains to highlight its local credentials. In January 2013 it hired “Hong Kong local” Howard Cheung as chief financial officer, and one month later another Hong Konger, Edward Lau, as chief executive.

There were more corporate gymnastics to come. In June 2013, sensing that more local credentials would be needed, 50% shareholders Qantas and China Eastern brought in Hong Kong firm Shun Tak Holdings. Each company was to hold one third in Jetstar HK. In 2014, Shun Tak’s voting rights were bumped up to 51%, putting a Hong Kong entity firmly in control.

Cathay, for its part, consistently maintained that allowing Jetstar HK to open shop would hurt the local aviation industry and the local economy. Joining it were local unit Dragonair, as well as Hong Kong Express Airways and sister Hong Kong Airlines. Arguments against Jetstar HK revolved around slots, stands, and the number of qualified support staff available.

That Jetstar HK planned to have just 18 Airbus A320 aircraft by the end of 2015, a fraction of the combined fleets of the incumbent carriers, was not mentioned.

In its determination, the panel made clear that while in the areas of shareholder votes, operational control, and in day-to-day operations Jetstar HK would satisfy a Hong Kong PPB, it was concerned that other business decisions related to the carrier such as fleet planning, fares, and the network would be decided elsewhere.

“In the context of an airline, there are other special features that are important to its business which are not covered above or considered in the cases,” it says. “The locale where the following decisions on operation are made is highly relevant to the PPB of an airline.”

Only in the airline business

Of course, had Qantas and China Eastern wished to open another sort of business, such as hotel or fast food chain, their level of influence and control would have been no issue whatsoever. Hong Kong’s economic development has depended on foreign direct investment: it is a certainty that the vast majority of investors desire a proportionate say in how their Hong Kong unit is run.

Qantas lashed out at the ATLA decision as “selling out” Hong Kong travellers. It and the other shareholders will review their options in regard to Jetstar HK.

Irrespective, the Hong Kong ruling marks a setback for Qantas as it seeks to expand its Jetstar franchise into new markets. It is also a missed opportunity for China Eastern, which would have gained exposure to the workings of a successful LCC operation. Hong Kong passengers will not get a fifth local carrier, which would have boosted cost competition in the city.

Perhaps the greatest legacy of the saga is how the dubiously-phrased Article 135, drafted three decades ago in a far different air traffic market, can be enlisted to retain the status quo in otherwise laissaiz-faire Hong Kong.

Source: Cirium Dashboard