The real battle behind Jetstar HK’s rejection

Courtesy Jetstar

IT might well have been a technical inquiry. Jetstar Hong Kong (JHK)’s fate was hanging in the balance as the court debated the definition of “principal place of business” (PPB) which Cathay Pacific Airways and other airlines in the opposing camp so successfully narrowed down to as the sole criterion to decide Jetstar’s legitimacy. They contend that “the task before ATLA (Air Transport Licensing Authority) is the determination of whether JHK meets the PPB requirement now, and not whether 25 other airlines met that requirement at any point in the past.”

The objectors submitted that JHK does not have its principal place of business in Hong Kong, so granting it a licence to operate scheduled air services contravenes Article 134 of the Basic Law. If they had attempted to set the direction of the proceedings, they had succeeded, stating that “the common law meaning of PPB, i.e. that the PPB of an entity where the effective exercise of central and ultimate management control of the entity lies, is thus the intended meaning as it best suits the intended purpose of ensuring that only Hong Kong-based airline may be licensed by the HKSAR (Government of Hong Kong Special Administrative Region) authorities.”

It has been two years since JHK set up its intended base in Hong Kong, initially as a joint venture between Qantas and China Eastern Airlines. Cathay and other home-based airlines – Dragonair, Hong Kong Airlines and Hong Kong Express Airways – were quick to protest, and as it became clear that the PPB clause would be the hot issue of contention, local conglomerate Shun Tak Holdings came on board as the majority shareholder (51%), and its managing director Pansy Ho was named the new company’s chairman. The onus then rested on JHK’s shoulders to demonstrate how that composition, the control and decision making machinery as structured by it, would make the airline a Hong Kong company. JHK contends that it “has entered an arrangement with Jetstar Airways Pty Limited (JAPL) as licensor of the ‘Jetstar’ brand and as a service provider.”

In the end, ATLA decided that was not good enough. It said: “In determining whether the principal place of business of an applicant is in Hong Kong, the answer is not confined to where the day-to-day operations are conducted (but) its activities must not be subject to the control of senior management, shareholders or related parties located elsewhere.” It concluded: “The Panel is of the view that JHK cannot make its decisions independently from that of the two foreign shareholders. The Panel does not have to decide whether its nerve centre or whether its principal place of business is in Australia or the mainland China. The Panel needs only to determine whether JHK has its PPB in Hong Kong. We are of the view that it is not and therefore the PPB requirement is not satisfied.”

Naturally both Qantas CEO Alan Joyce and JHK CEO Edward Lau expressed disappointment at the outcome, but one wonders if they were at all surprised even though they had previously expressed confidence that ATLA would eventually approve JHK’s application. The thing is that technically the state of play is not theirs to win, for as much as Mr Lau insisting that “we genuinely believed that Hong Kong is Jetstar Hong Kong’s principal place of business.” JHK as a branch of the main Jetstar entity and Qantas’s vehicle to extend its market reach is more than just implied in the brand’s genesis, which the objectors made capital of, pointing out that “JHK is related to Qantas via Jetstar International Group Holdings Co. Lrd and through Qantas to JAPL.” They contend that it is all part of a Jetstar Pan-Asia Strategy “to create an integrated Jetstar network in which each Jetstar LCC will, far from operating independently, share aircraft, boarding, airport facilities and a further range of unspecified goods and services.” JHK’s rebuttal that JAPL, in spite of the relationship, is but an outsource partner was not convincing.

To some degree, JHK might have felt straitjacketed by the narrow scope for arguing its case. Mr Joyce said ATLA’s ruling was as disappointing for JHK shareholders as it was for travellers: “At a time when aviation markets across Asia are opening up, Hong Kong is going in the opposite direction. Given the importance of aviation to global commerce, shutting the door to new competition can only serve the vested interests already installed in that market.” That is an issue that the Hong Kong government may have to address separately, as a matter of policy unprejudiced by JHK’s application.

As a key aviation hub in the region, Hong Kong International Airport (HKIA) can only benefit from an open policy and more competition.  Throughout the proceedings were timely reminders of the importance of maintaining “the status of Hong Kong as a centre of international and regional aviation.”

However, Qantas had misread the apparent liberalised aviation landscape in Hong Kong, assuming it to be as open as, say, Singapore. When it once considered setting up an Asia-based premium carrier, Hong Kong was an attractive alternative because of the growing traffic from the China hinterland. Qantas had also failed to anticipate the strong opposition from OneWorld partner Cathay and compatriots, considering the relative ease that it had experienced in setting up the Jetstar brand in other locations such as Singapore, Vietnam and Japan. At some point, the advance is apt to draw awareness of the competition it poses.

Across the globe, entering into a joint venture with a local partner provides a convenient channel for a foreign carrier to gain a foothold in the local market, perhaps made easier if the partner were an airline, better still, the national flag carrier. In that connection, Shun Tak might have been viewed by the objectors as a potential local threat to come into its own riding on the back of more experienced operators.

Qantas might also have placed too much weight on the facilitation expected of a name like China Eastern. That became apparent when the court pointed out that “the Central People’s Government (of China) shall give the Government of the Hong Kong Special Administrative Region the authority to issue licences to airlines incorporated in the Hong Kong Special Administrative Region and having their principal place of business in Hong Kong.” It may even be suggested that the relative silence of both Shun Tak and China Eastern in the tussle could only project their passive roles but Qantas’s prime-mover position.

The technicality of Article 134 of the Basic Law as a moot point aside, it cannot be denied that  implicit in the objectors’ presentation is their concern of the competition posed by JHK. They contend that the joint venture aims “to deepen the Qantas Group presence in Asia-Pacific.” Refuting JHK’s claim of “the economic benefits which can be brought by the new airline and its contribution to maintaining Hong Kong as an international aviation hub,” the objectors insist that the Jetstar business model is designed “in the wider interests of all the Jetstar LCCs rather than JHK alone” and that all decisions pertaining to JHK’s operations such as capacity and aircraft purchases “are made with a view to maximising profitability for the Qantas Group.” They argued that through the Jetstar Pan-Asia Strategy, “Qantas is increasing the international competitiveness of a key Australian business by seeking to capitalise on the growth in demand for air travel services in Asia for its own benefit and ultimately the benefit of Australians.”

Indeed, Cathay’s early objection had hinged on the economic aspects of JHK’s proposition, which might have given JHK firmer ground to promote its application. Cathay insisted that unlike other Asian countries, the nature of the Hong Kong market is such that it has no real need of LCCs – that, in spite of the operations of Hong Kong Express and calls made by foreign budget carriers. Why would Cathay, already one of the world’s most successful and profitable carriers, be so threatened by JHK? It is apparent that the rivalry is more specific than general, the wariness of an expanding Jetstar network that is supporting an international competitor.

All’s fair in war as in love even as some observers hint at Cathay’s political sway. What next then for JHK? As at December last year, Qantas has invested some A$10 million (US$7.7 million) in the joint venture. JHK has already sold eight of its nine aircraft. Rather than accept ATLA’s decision as a natural demise of the unborn carrier, Mr Joyce has not ruled out appealing the decision. Consulting experts may already be working at more creative solutions to skirt round the technicality of the Basic Law. Or, as Qantas too had hinted, it might reconsider basing the low-cost carrier in Hong Kong, perhaps elsewhere but close enough where the real market screams loud to be served. No doubt a costly affair, it all depends on how much farther the shareholders are prepared to go.

And as the objectors hailed ATLA’s ruling as “the right decision for Hong Kong” with Cathay corporate affairs director James Tong reiterating that it “ensures that important Hong Kong economic assets, its air traffic rights, are used for the benefit of the people and the economy of Hong Kong,” proponents of more liberal aviation competition may begin to wonder to whom the real victory belongs.

This article was first published in Aspire Aviation.