Until quite recently Hong Kong’s aviation scene was a depressing one. Badly hit by the SARS outbreak in 2003, some said it would never fully recover, particularly with the mainland Chinese market forecast to grow so rapidly and with the potential to take away business from the former British Colony.

hong kong intl

At the time Hong Kong’s air transport policies were seen as protectionist due to restrictive air services agreements and major barriers to entry. This, in part, meant there were just two home base airlines operating passenger services out of Hong Kong – Cathay Pacific Airways and Dragonair – which have close ownership ties. A third has been around for some time, cargo carrier Air Hong Kong, but it, too, is not independent being majority owned by Cathay.

Today, however, things are very different and the Chinese Special Administrative Region’s government wants people to know about it, insisting it is no longer fair to label it protectionist. Air services agreements have been dramatically opened up, the government says, and this has helped two new locally based airlines to launch services, with at least one more planned.

“There is a lot of misunderstanding about Hong Kong that we are not open enough. Hong Kong is far more open than people actually think,” says deputy secretary for economic development and labour Wilson Fung. “For the past two and a half years...we have been increasing the pace of our liberalisation…Now we are the ones pushing for it in the region.”

Fung, who heads Hong Kong’s air services negotiating teams, has been a busy man over the past couple of years. As proof of how open Hong Kong has become, Fung points to the fact that the Chinese territory has now signed around 20 “open-capacity” agreements providing for unlimited third- and fourth-­freedom traffic rights. Around the time of the SARS outbreak there were only a handful of such agreements.

Hong Kong is now willing to sign such deals with anyone providing reciprocity, says Fung. While acknowledging that Hong Kong continues to be criticised for not opening up more in terms of providing fifth-freedom rights – the USA is the most vocal critic – he argues that this too is highly unfair and does not reflect the true situation.

In the case of the USA, he says, there are many fifth-freedom rights that its airlines are entitled to but that are not being utilised. In addition, he says he needs much more in return from the USA before opening up to many more flights beyond Hong Kong by US cargo or passenger airlines.

Hong Kong has been a Special Administrative Region of China since Beijing took control from the UK in 1997, but it retains autonomy over its air services regime. In the view of Dragonair chief executive Stanley Hui, Hong Kong has effectively been forced to change, in part to keep up with the pace of developments in China where restrictive air services policies have been dramatically eased.

Time to open up

“Hong Kong now is very different from the early years when everything in the aviation industry was so controlled,” says Hui. “Certainly in the past couple of years China has taken the lead in opening up and we had to recognise that with the changes in the aviation policies of the authorities around you, you cannot continue to keep things the way they have always been. You cannot stay restrictive if the areas around you are having more open arrangements. If you do, people will be going over you and into these areas around you,” he says.

The more liberal regime in Hong Kong – particularly with regard to air services to and from China – has created opportunities for new players to enter the market. Already flying are CR Airways and Hong Kong Express, which both operate regional jets mainly to secondary cities across the border in China. A third new entrant, Oasis Hong Kong Airlines, is being planned and hopes to launch long-haul passenger services around the middle of 2006 to London Gatwick using Boeing 747-400s. It recently secured route licences from Hong Kong’s Air Transport Licensing Authority to serve several points in Europe and the USA.

Things are on the up in Hong Kong and there has undoubtedly been a sea change in the thinking of its leaders. This has also resulted in the launch of new services by foreign airlines and that is something Dora Kay is very happy about. As head of international marketing for the Airport Authority (AA), which runs Hong Kong International Airport (HKIA), Kay has seen 10 new customer airlines starting services to its increasingly busy terminal over the past 12 months.

She says there are also good prospects for 2006, with several more foreign airlines set to start serving the airport, which now has some 80 airlines connecting it with nearly 150 destinations. But Kay says the AA is not resting on its laurels as it recognises there are many challenger airports seeking to take its business away. “We are doing okay but we don’t want to become complacent either,” she says. “That is why we are looking at more value-adding services.”

These include the addition of a second passenger terminal, which is set to open in 2006, along with conference and exhibition facilities, a golf course, second hotel, more retail and eating outlets, and the further development of “multi-modal transport links”, such as direct ferry services to points in southern China. The AA says it is also improving facilities for airline users, such as by adding new “quick turnaround” aircraft stands, mainly to cater to low-cost airlines. The Civil Aviation Department says that at the same time it is trying to find ways to increase runway capacity and ease the congestion that is already arising at peak times.

Kay says the AA has seen clearly over the past year that new airlines serving HKIA have grown markets rather than taken away business from incumbent operators. Hong Kong has also now become a new “kangaroo route” transit point for services between Australia and Europe – a market traditionally the domain of Bangkok and Singapore.

“Through the introduction of new third-country carriers, so to speak, we have been able to increase the number of passengers,” says Kay. “They really have helped to lower prices and have created new markets.”

HKIA is also seeking to expand its ties with airports in mainland China. In 2005 the AA signed an agreement to acquire 35% of Hangzhou’s Xiaoshan international airport in the eastern province of Zhejiang and hopes to secure final Chinese government approvals to allow the buy-in to be formalised.

Privatisation timetable

Other Chinese airports that the AA has spoken to include those at Shenzhen, which is just across the border from Hong Kong, and Zhuhai, which is close to Macau. Kay also says “there are others” with whom the AA is looking at co-operating. It is doing so as the Hong Kong government is proposing to partially privatise it at some point. The original target was for the AA’s part-privatisation through an initial public offering in 2005 but this has been delayed and the government now says there is “no timetable for the privatisation plan at this moment”. From the AA’s point of view, says Kay, “we will be ready when our shareholder is ready”.

While things are looking up for Hong Kong’s aviation sector, it does face a number of serious challenges. It sits on the doorstep of the most populous nation on the planet, where the economy is booming with no let-up in sight. There are several new hub airports in China threatening to draw business away from HKIA, including nearby Guangzhou, which is aggressively working to attract new customers to its recently opened New Baiyun Airport. New Baiyun has already had its successes, with several foreign passenger carriers adding it to their China networks and FedEx planning to move its express freight Asia-Pacific hub operations there from Subic Bay in the Philippines.

There are also fresh concerns that Hong Kong will lose out if non-stop flights between political rivals Taiwan and China are permitted. Regular non-stop flights between the two sides have been banned since 1949 and this has greatly benefited Hong Kong, which has traditionally acted as the main transit point for passenger and cargo services between the two sides, followed by the former Portuguese enclave of Macau.

But early in 2005 the first non-stop flights were allowed between Taiwan and mainland China by airlines from each side. Although this was only on a temporary basis during the Chinese New Year holiday period, another round of temporary charter flights is set to begin late in January and there is hope on both sides of the Taiwan Strait that flights will eventually be allowed permanently.

Dragonair’s Hui is one who recognises that business stands to be impacted by the introduction of regular non-stop flights between Taiwan and China. His airline carries a significant amount of traffic between the two sides via its home base and in his view Hong Kong is “on borrowed time”.

New challengers

Hui says new challenges are also growing from Guangzhou as well as Shenzhen, from where a new long-haul cargo airline – Jade Cargo International – is due to start operating soon. Jade is being established by Shenzhen Airlines, Lufthansa Cargo and a German financial institution. Hui says to cope with this and other threats Hong Kong must focus heavily on reducing costs, as China’s fast-growing Pearl River Delta region is today a much cheaper place to operate from.

“We as Hong Kong had our run of good times for many years, particularly before 1997, and we have to recognise that we benefited tremendously from the lack of development in mainland China. But now things are developing rapidly there. Facilities are being improved significantly and there are more direct flights, so there may be less need to go through Hong Kong,” says Hui.

“For now, Hong Kong still has, in terms of an international network, more to offer. In terms of cargo handling, Hong Kong’s quality is still superior. But you have to accept that Guangzhou and Shenzhen will continue to improve. They may not have the international network as far-reaching as Hong Kong now, but five years down the road? Ten years down the road? That is a real challenge to Hong Kong.”

Dragonair is still continuing to grow, however. As a result of the challenges that Hui sees the carrier facing, management has been looking at new ways to bring in revenue. One has been to move heavily into the cargo market by adding 747 freighters. Dragonair now earns around 40% of its total revenue from freight carriage and Hui says this will rise as more freighters are added.

The carrier, which makes most of its passenger revenue from China services, is also focusing on developing its outbound China passenger business. This is an area that is growing at a phenomenal rate as more of the country’s nationals venture abroad with their new-found spending power. Hui says a few years ago sales from mainland China amounted to only around 10% of total revenue but this is now approaching the 20% mark. In the past most sales for its China services have come from foreign markets.

Hong Kong’s other scheduled airlines have also been adapting to changes in the marketplace. This includes Cathay, which late in 2004 bought 10% of Chinese flag carrier Air China and which is seeking to develop new ties with it, such as codeshare links.

Cathay chief operating officer Tony Tyler says the Air China buy-in was strategic and will enable the two carriers to develop long-term ties. “We are working towards doing a lot together. We have a number of project teams up and running looking at operational and commercial areas,” says Tyler.

“The main benefits to the two airlines are going to come on the commercial side. Meanwhile, we are looking at helping them out with more training. Nothing happens quickly when two big airlines talk, but relationships are building and that is very important.”

Cathay’s Air Hong Kong has also been changing its ways. It now operates mid-size Airbus A300-600 freighters rather than large 747 freighters and focuses primarily on the intra-Asia express freight market for DHL, which is now a 40% shareholder. Chief operating officer David Saechiu says the freight carrier’s revamp from its traditional long-haul focus has proved a success so far, and new routes are planned for launch this year.

Cathay is in turn expanding its own freighter operation with additional 747-400Fs and new destinations in the USA, while investing heavily in an expansion of its passenger fleet. Cathay recently placed the largest-ever aircraft order in its history, covering the addition of up to 36 777-300ERs, including options, and said it will lease three more A330s.

Meanwhile CR Airways, which is owned by local businessman Robert Yip, has been negotiating to sell a stake to China’s fast-growing Hainan Airlines. It is also looking at operating aircraft larger than its 50- and 70-seat Bombardier regional jets, such as 737s.

Hong Kong Express, which is owned by a helicopter operator controlled by companies close to casino and tourism magnate Stanley Ho, is separately studying whether it should operate A320-family aircraft or 737s to expand its fleet beyond its 76-seat Embraer 170s, says chief executive Andrew Tse. In addition, says Tse, Hong Kong Express has agreed a deal to manage a new airline known as Golden Dragon that plans to launch late this year out of nearby Macau. Hong Kong Express has also just secured new route licences to serve several additional points in China and other parts of Asia.

The Hong Kong government says it too is continuing to adapt. It is currently looking to negotiate more open air services arrangements with China, for example, to provide for more air connectivity beyond what became available from the last revision to their air services deal in 2004. Negotiator Fung also says he recently wrote to eight of Hong Kong’s more protectionist air services partners in other parts of the world requesting “open-capacity” agreements. “Hong Kong is now at the stage where we should not be criticised for not being open enough,” he insists.

Hong Kong has clearly faced the fact that there was a dire need for change and it has come a long way towards opening up its aviation market in the short time since the 2003 SARS outbreak, which so badly dented confidence. It says it recognises that still more needs to be done, but if those in Hong Kong’s government are worried about the territory’s future now, they are hiding it very well. ■



Hong KongGuangzhouShenzhenAsia Pacific
Av growth 99-044.3%10.9%22.1%4.6%


 Hong KongGuangzhouShenzhen


Av growth 99-049.4%7.2%27.1%5.6%

source : RATI and ACI

Source: Airline Business