Australian air service negotiators are under mounting pressure as they grapple with a potential crisis in bilateral relations with Hong Kong and the prospect of a major equity link between Ansett and Air New Zealand, which could put the status of a range of bilateral agreements in doubt.

Hong Kong is threatening to curtail Qantas' unlimited fifth-freedom rights between the territory and Singapore and Bangkok, with sources suggesting Cathay Pacific and Thai Airways are becoming increasingly agitated over the Australian flag's mounting intra-Asian traffic.

Coupled with Qantas' alliance with British Airways, they perceive the growing presence as a threat to future profits in their own markets. Indeed, through its joint venture with Vietnam Airlines to Ho Chi Minh City, Cathay recently played a central role in blocking BA's startup of services to Vietnam, due to be routed via Hong Kong.

Adding to Australia's bilateral woes, Air NZ is on the verge of buying a 49 per cent stake in Ansett and at presstime negotiations were continuing with News Corporation, which owns 50 per cent of the carrier, over the price, expected to be between A$400-500 million ($295-370 million).

Under the deal media tycoon Rupert Murdoch would pull News Corp out of Ansett, selling its remaining one per cent to co-owner TNT, to lift the latter's stake to 51 per cent. The Air NZ move is a response to Canberra's refusal to allow it to operate domestically in Australia.

The deal would have to be approved by the Foreign Investment Review Board but if it goes ahead Air NZ's large minority holding could have a significant impact on existing Australian air treaties. 'Some government transport officials around Asia might suggest a trilateral treaty with Australia and New Zealand will be needed to cover Ansett's offshore services,' says one analyst. The prospect of the linkup has even raised questions about Ansett maintaining international services.

Executives of rival Qantas are asking privately whether the deal will give back-door access to Air NZ, which has already caused the Australian flag some angst with its existing fifth freedom services through Australia. Qantas chief executive James Strong says the deal would have a positive impact on Qantas' float by removing doubt over Air NZ's Australian strategy.

Questions are also being asked about Air NZ's potential 49 per cent share because foreign ownership in Qantas has been limited by legislation to just 35 per cent.

Meanwhile a serious row has erupted with Hong Kong over Qantas' use of fifth freedoms: the airline operates a lucrative 'golden triangle' of daily services between Hong Kong, Singapore and Bangkok, which Cathay claims takes 85 per cent of all Hong Kong-originating traffic. Talks held in Canberra in early April broke down with sources describing the mood as 'very nasty'. Qantas' operating permit to Hong Kong was due to expire on 29 April.

Hong Kong wants to impose a new condition limiting Qantas to a maximum of 35 per cent fifth freedom traffic but Australia insists the bilateral is open-ended and contains no limitations. The issue is particularly delicate because Australia is talking with China over additional rights (Qantas has one weekly service between Sydney and Beijing) and its relations with Hong Kong are key to Sino-Australian links.

Source: Airline Business