Not so fast, Mr Joyce

In all the fanfare surrounding Jetstar's partnership with China Eastern in Hong Kong, some have missed that approval for the deal will require a reinterpretation of the special region's 'Basic Law'.


So having been knocked back on his plan for a premium carrier based outside Australia, somewhere in South East Asia, Alan Joyce has grabbed the headlines back this week with his plan to partner with China Eastern and set up Jetstar Hong Kong.

In the rush to excite the markets and placate Qantas shareholders has anyone bothered to read the fine print? Those words, ‘subject to regulatory approval’ were included in the press releases – and this may turn out to be far more than a formality.
My guess is that Qantas and China Eastern are trying to railroad the government of the Hong Kong Special Administrative Region into coming out in early support of the plan. It all sounds good – Hong Kong has a huge, relatively new, airport to fill and it lacks a true low cost airline in its otherwise broad and impressive aviation portfolio. But there is just one snag: allowing Jetstar Hong Kong to set up in the territory doesn’t just require a tweak in policy direction. It actually requires a change in Hong Kong’s constitution, know as the Basic Law.

When Hong Kong moved from British to Chinese sovereignty in 1997 it developed a then unique formula to protect its autonomy in aviation matters. When Australia negotiates a bilateral air services agreement with another country it typically agrees that only airlines owned and controlled by Australian nationals will be allowed to exercise the Australian set of traffic rights that exist under it (i.e. who flies where and when).

Hong Kong has no nationals as such so it uses the formula of Incorporation and Principal Place of Business (IPPB) to determine which airlines should qualify to use those rights – and there is no way in which an airline carrying an Australian branding and controlled in effect from Sydney and from Shanghai can be said to have its principal place of business in Hong Kong.

Many have tried to circumvent the IPPB rules; none have succeeded. If this project were to be allowed, there would be a long queue of other airlines waiting to operate from Hong Kong – maybe Lufthansa Hong Kong or KLM Hong Kong or Virgin Atlantic Hong Kong. (Even Qantas Hong Kong?)

Hong Kong would quickly become something it has never wanted to be: the aviation equivalent of a Liberia; that is, a flag of convenience. And Cathay Pacific, the territory’s highly successful, de facto flag carrier would probably be looking for a new home.

But let us suspend disbelief and consider that Hong Kong, under pressure from its Beijing masters, decides to ignore Cathay Pacific’s concerns and then moves to rewrite or reinterpret its own constitution; what then of its 60 or so aviation partners? They signed up to formal and solemn treaties granting air traffic access to their markets based upon a very precise understanding of what being a Hong Kong carrier constituted. They're unlikely to roll over and accept an Australian airline travelling in disguise as the real thing.

A good idea in concept – the devil is indeed lurking in the details. Back to the drawing board, Mr Joyce.

Andrew Pyne is senior partner at specialist aviation consultancy, Concuros Partners, based in Moscow. He worked in the Hong Kong Economic Services Bureau as the desk officer for aviation policy between 1994 and 1996.

This story first appeared on on March 27. Republished with permission.

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