China National Aviation (CNAC) has applied to the Hong Kong Government for an air operators' certificate (AOC), threatening Cathay Pacific Airway's virtual monopoly and undermining confidence in its post-1997 position.

Hong Kong's Civil Aviation Department (CAD) has confirmed that CNAC, a subsidiary of the Civil Aviation Authority of China (CAAC), applied in late March for an AOC. According to the CAD, it will take up to eight months to be processed.

CNAC's submission for an AOC, and any subsequent application to the territory's Air Transport Licensing Authority to operate scheduled services, will almost certainly meet with strong legal objections from Cathay.

The carrier has enjoyed an almost total monopoly on air services under the Hong Kong Government's "one airline one route" policy. Cathay was strongly opposed to independent start-up airline Dragonair and cargo-operator Air Hong Kong, before eventually taking control of both carriers.

Cathay argues that granting CNAC operating rights would break the Joint Declaration agreement on the hand-over of Hong Kong to Chinese control in 1997. The Sino-British Treaty stipulates, that a local designated carrier must be incorporated and have its principle place of business in Hong Kong.

"There is the crucial point as to whether a Hong Kong company, clearly controlled from Beijing can qualify," says Cathay chairman Peter Sutch. "We see the implications as going well beyond our own interests and those of the aviation industry in Hong Kong."

Prior to the 1949 Communist revolution, CNAC was China's principal flag carrier. The company later retained its presence in Hong Kong, acting as a general sales agent for the CAAC. More recently, it has engaged in charter flights, using two China Southwest Airlines' Boeing 737 aircraft.

"They are not going to be able to stop CNAC as along as they comply with the rules," says Steve Miller, aviation consultant and former Dragonair managing director. He adds: "One thing is certain, CNAC does comply with the criteria and this is their principal place of business."

Earlier this year, Miller drew a strong reaction from Cathay when he suggested that it was unlikely that the British majority-controlled airline would be allowed to retain its dominant position in Hong Kong after 1997. Chinese companies collectively own 22.5% of Cathay, including 5% held by CNAC.

Some analysts have suggested, CNAC's application is designed to reduce the value of Cathay's shares and force Swire to cede greater control, of the airline to Chinese interests. Cathay's share price fell 6% in one day, shortly after CNAC's move was revealed.

Other observers argue that it is a serious attempt by CNAC to establish another Hong Kong airline and has the full backing of the CAAC and political leadership in Beijing.

One industry source notes that the company can easily obtain passenger jets from the CAAC's subsidiary China Aircraft Supplies. It has a large number of aircraft on order, not all of which have been allocated to Chinese carriers, including six Airbus Industrie A340-200s due for delivery in 1997.

Source: Flight International