Hong Kong’s Aviation Policy
A Green Paper
Table of Contents
Introduction
Importance of Air Travel in Hong Kong
Background of Civil Aviation in Hong Kong
Restriction for Foreign Capital and Control
The Chicago Convention
Open Skies of Hong Kong
Hong Kong’s Open Skies Agreement with the U.S.
Hong Kong and China Relationship
Summary
References
Appendices
Appendix A: U.S. and Hong Kong Tourism Relationship
Appendix B: Impact of Aviation Policy
Introduction
Hong Kong is facing different challenges and changes in terms of its economy. The country is facing great changes in the tourism industry such as the country’s close relationship with the mainland Chinese government. The said relationship had helped to enhance the position of the country in both a destination in its own right as well as a gateway for the travelers that are entering as well as leaving the People’s Republic (Heung, 1997, p. 51).
On the other hand the emergence of the air transport had greatly smoothed the progress of long distance travel as well as the exchange of goods. The aviation industry of Hong Kong helps the development of the economy of the country. According to the study of Fung, Law & Ng (2006), in 2003, the aviation industry had contributed to 2.54% of the total gross domestic product (GDP) at factor costs, while contributed to 4.48% of the trade services and tourism industry. The total benefits and influence of the aviation industry was about 7.02% of GDP. It shows that the industry is considered as a major component of the Hong Kong economy. That is the reason why, the current and changes in the aviation policies can alter the overall business environment of the entire aviation market (p. 19).
Furthermore, it is also important to consider the potential advantage of the Travel & Tourism to the economy of the country that will help to exploit its position as the gateway to China. That is the reason why there is a great need for different improvement and development in the aviation policy of the country.
The Green Paper sets out the vision of the country for the future of policing that will include different plans in order to improve the aviation industry of the country in order to manage and regulate the aviation freedom in Hong Kong.
Importance of Air Travel in Hong Kong
Hong Kong has many visitors and its residents travel a lot. During 1980’s, there were over 11 million travelers who passed through the Kai Tak Airport early, and the said number is increasing. The said travel offer an important benefits to the economy of the country, whether they be locals who uses the Hong Kong-based airlines in order to travel overseas, or foreign business people and tourists who visits and patronize the country’s transport, accommodation and other industries (Heilbronn, 1990, p. 1).
Background of Civil Aviation in Hong Kong
There are about 85 international airlines that operate about 5700 scheduled passenger and all-cargo flights each week between Hong Kong, and some 155 destinations worldwide. 70% of the said flights are being operated with the wide-bodied jets. There are also an average of around 84 non-schedules passenger and cargo flights each week (Information Service Department, 2008, p. 1).
Furthermore, the Civil Aviation Department of CAD is the one that is responsible for the provision of the air traffic control services; certification of the Hong Kong registered bilateral Air Services Agreements, as well as the regulation of the general civil aviation activities. The Airport Authority Hong Kong or AAHK is the one that manages and operates the HKIA under an Aerodrome licensed that was issued by CAD (Information Service Department, 2008, p. 1).
Restriction for Foreign Capital and Control
The airline industry is considered as a cyclical that its success directly depends on the good economic times. But the combination of the Gulf war and the recession propelled the airlines into one of their most severe downward economic cycles. From 1990 to 1992, US carriers collectively lost more than they earned during the entire history, while in Europe, during the same time, the EU airlines lost more than .5 billion.
Despite the different latest improvements in terms of load factors, most of the airlines in the world is suffering from overcapacity as well as increased competition, while other still have sever economic problems. The said difficulties have been connected with the major needs of the airlines for the replacement of fleet. According to the study of ICAO in 1992, from 1991, to 2010, the airline industry of the world will have to spend more than 0 billion in their new aircrafts and the number will double after 20 years.
Hong Kong is considered as one of the most restrictive government in terms of the law regarding the foreign investments towards aviation industry. The foreign stake is limited to 25%. Furthermore, the scope of the investment in the Civil Aviation by the Foreign Investors shall only include and limited in the civilian airport, public air transport enterprises, general aviation enterprises as well as other air transport that are related to the project. Thus the foreign investors are not allowed in investing in as well as managing the air traffic control system (Civil Aviation Administration, 2002).
The Chicago Convention
The Chicago Convention is a multilateral treaty in terms of which the member states have agreed on certain principles and arrangements in order to allow the international civil aviation to be developed in a safe and orderly manner as well as to enable the international air transport service to be established on the basis of equality of opportunity and operated soundly and economically (Webber Wentzel, 2008).
The 1944 Chicago Convention organized the air transport. The bilateral agreements that grew out of the principle regarding the national sovereignty over the airspace that forms the references of the Chicago had two consequences: one was that airlines had nationalities and that the governments were given a central role in the process of negotiating the route rights; while the other was a series of national laws that limits the foreign ownership or control of the carriers.
But it is important to consider that the Chicago Convention is neutral on the subject of the foreign ownership. As a matter of fact, the Article 77 of the Convention explains that it permits operations that involve the joint or coordinated efforts among the different airlines in order to provide international service. However, there is a wording the model forms, that shows in the Article 6 that focuses on the bilateral form that permitted either of the party to withhold or even revoke a certificate or permit to an airline where it is not satisfied that the substantial ownership as well as effective control are vested in the nationals of either party (International Chamber of Commerce, 1994).
There are different reasons for the retention of controls over the foreign investments in the industry such as national security, economic security, safety, competition issues, bilateral issues and other important legal issues. In terms of the national security, the government of Hong Kong argued that the foreign ownership of the airlines could compromise that national security because the civil aircraft capacity can be widely used by the military, particularly during the times of national security. Furthermore, due to the fact that the country is dependent on the tourism industry, it would be unwise to turn over the principal earners of the foreign exchange into the foreign hands, the government also focus on the fact that during difficult economic times, the foreign owners would be tempted to discontinue its vital air links that will lead them to leave the country defenseless to a serious disturbance in the availability of the air transport services. It follows that job losses will follow once the foreign owners take control of airline. The government of the country is also raising the possibility that the foreign ownership could result in the weakening of the safety standards, this is due to the fact that the foreign-owned carriers which have their aircraft registered in other countries can be subject to less strict safety test than those airlines that have been registered in the country of destination. In addition, the government also believes that there will be a move towards the creation of the flag of convenience airlines in the same way that the flag of convenience shipping operates in the maritime transport. The government of Hong Kong is one of the governments in the world that expressed their doubts about the confidentiality as well as willingness of airlines in order to compete strongly with one another when they have overlap ownership as well as boards of directors (International Chamber of Commerce, 1994).
Furthermore, it is also been argued that the foreign takeovers would run counter to the bilateral agreements, that require that the significant ownership and control focuses on the local nationals of the airlines. Thus it show that if the negotiating countries were reluctant to amend it, they could be refused to allow an airline falling into the foreign hands in order to exercise the rights in the routes that had been granted before. This would suggest that will throw the negotiating process into deadlock. On the other hand, it must be considered that if the foreign-owned airline is permitted to exercise their rights, it can result in the airline to gain access to a country by backdoor, that will result to the avoidance of the traditional give-and-take of the bilateral negotiations (International Chamber of Commerce, 1994).
The Hong Kong government must focus the relaxation of their investment rules in having a prior conditions, where in the foreign entity that seeks to own a local carrier must come from a specific country that maintains a pro-competitive, private sector-run regime that is governed by equitable as well as practice transparent rules and regulations. This situation shows that the liberal foreign investment rules will be established only in return for other features of the liberal bilateral agreement, thus shows that the openness of the foreign investment rules are important for the process of negotiation (International Chamber of Commerce, 1994).
The government of Hong Kong must note that the evolution of the aviation industry should not only be shaped and influenced by government officials as well as bureaucratic decrees but also focus on the needs of the commercial marketplace as well as the capital markets (International Chamber of Commerce, 1994).
Open Skies of Hong Kong
According to the World Travel and Tourism Council, aviation is considered as one of the most important driver of the Travel & Tourism development, thus improve job creation. That is why it is important to make even a greater effort to open the air transport markets that will help to attract more air transport services as well as improve the regional networks. Thus the government must continue to pursue the managed liberalization as well as relaxation of different aviation regulations (World Travel & Tourism Council, 2003).
Open Skies agreements are bilateral pacts where in a specific government agree to deregulate its international aviation markets. It signifies that unlimited number of airlines can operate to, from and beyond each other’s territory, thus both countries can set whatever prices that they see fit, as well as establish hubs in the territory that will help the aviation industry players to offer new as well as innovative products and services. In general, it shows that the government can do what is best for the international aviation that can help to let the flow of commerce where the market drives, minus the interference (Washington Files, 2005).
Due to the changes and trends in the global market and industry of aviation, there are different suggestions that the country must abandon the bilateral aviation negotiation that is based on the principle of the fair as well as equitable exchange of the economic opportunities, and must unilaterally open its skies to the foreign airlines. Furthermore, the one-route one-airline policy must also be abandon. This is due to the fact that it can help to introduce new competition in terms of passenger and cargo markets, thus it will help to promote the overall competitiveness of the country. Furthermore, the open skies will help to promote more direct investments in the country (World Travel & Tourism Council, 2003).
Hong Kong’s Open Skies Agreement with the U.S.
The United States is proposing an open skies agreement between Hong Kong and Washington. The said pact will provide a U.S. carrier to fly to Hong Kong, pick up passenger as well as cargo, then fly on to other destination, particularly in Asia. As of now, U.S. can offer their service in selected part and cities of the country. If the country would drop the restriction between the countries, more airlines as well as cargo carriers would fly in the country, because it can help to generate extra business. This would result to lower fares, as well as help to boost the cargo business in Hong Kong, therefore, help to improve the competitiveness (Law & Yeung 2000).
Above all, the said change in the policy will help the tourism industry of the country that is still recovering from the Asian and global financial crisis (Einhorn, 2001).
In 1998, the air transport industry was directly and indirectly responsible for the 8.1% of GDP that helps to employ 325,851 persons in different major industries such as the imports, exports and tourism. The unique geographical location of Hong Kong in the country, the aviation network is considered as the most valuable and significant part of the aviation industry of the country (Law & Yeung 2000).
On the other hand, it must be considered that although the open skies agreement of Hong Kong would cause an advantage for the customers that are buying economy-class tickets, but it would increase the burden of those business travelers. The said factor is important to consider because the business travelers are considered as the second most important travelers or tourists of the country. Therefore, it will not significantly improve the operating efficiency of the home-carriers of the country. The home-carriers then would have to cut their service quality, flight frequency as well as other supporting requirements that will results in the uncertain impact towards the consumer welfare as well as the overall economy in the long run (Law & Yeung 2000).
Furthermore, even under the US open skies initiatives, airlines are competing in the international environment that is still subjected to different artificial barriers. Restriction in air services agreements, alliances as well as mergers between carriers, limited access to the airport infrastructure and ground handling services, access to the computer reservation systems, code-sharing arrangement and everything that are connected to the relationship between airline nationalities, may all have negative influence and impact on the competition. This is due to the fact that when the airlines operate on the global basis, they are being influenced by the legislature environment in different countries (Law & Yeung 2000).
It is also important to consider that the unequal exchange of traffic rights would create negative externality to its home-carriers, Cathay Pacific and Dragonair. In addition, the US domestic market is still considered as completely close for the foreign competition. That is why, any weakening of the home-carriers would diminish the ability to build up the so-called hub and spoke system for Hong Kong (Law & Yeung 2000).
On the other hand, the government of Hong Kong must consider the fact that the global aviation industry is being affected by different aspects that can affect the performance of the local industry of the country. It must be considered that different countries from different part of the globe, at ever level of development is starting to embrace the aviation liberalization, event those markets that do not touch the United States.
It is also important to consider that China is starting to adapt the Open Skies agreement because it can help to lessen the cost of the travel and shipping, furthermore, improve the number of the aviation businesses that will help to affect, in positive way, the economies, airports, airlines and the different stakeholders of all the businesses and customers in both of the country ().
It is important to consider and analyze the most important aspect of Open Skies agreement, and that is the improvement of competition in different aviation businesses or airlines, that will cause to lower cause of fares and services. This is important because the buying behavior of the customers towards the airline fares is being affected by different factors such as the current global financial crisis.
This will help the tourism industry of the country. According to the study of Business Monitor International, in 2007 the country had showed an increased in its number of visitors. During September of the said year, there are about 2,120,835 visitors that have arrived in the territory, showing a great increase of 15.9% year-on-year (y-o-y). Furthermore, the year-to-year arrivals have reached a total of 20,363,764, showing a great rise of 9.6% y-o-y (Business Monitor International, 2008).
The primary reason of the government of the US in having an Open Skies agreement with Hong Kong is because it offers a great opportunity for the economy of the United States. First is that, Hong Kong is a crowded city that has a population of 6.9 million and its citizen choose to spend their holidays overseas due to the lack of local recreational options. In addition, the citizens have relatively high average incomes and Hong Kong has an advantageous graphical location that allows easy access for people in order to travel abroad. Furthermore, most of the Hong Kongers hold the Special Administrative Region passport that does not require a visa in order to access over 140 countries. Because of the said factor, Hong Kong citizens are traveling abroad in record numbers both for business and pleasure (see Appendix A) (U.S. Commercial Service, 2008).
Open Skies agreement is important because Hong Kong is known as the shopping capital of the world, and because of the buying behavior of the tourists, particularly those Chinese tourists, different businesses are cutting their prices, in order to come up with the price sensitivity of the customers. By doing the said agreement, it can help the country to offer more cheap fares and packages that will help to capture the attention of the different tourists, particularly from the United States, which considered as the top spender out of all the tourist groups.
Furthermore, it could also help to promote more business investment because of the easy and cheaper access to the air transportation facilities. Above all, an Open Skies Regime for cargo will help Hong Kong to leverage its advanced telecommunications, its geographic location as well as its historic status as the gateway to China in order to become the e-commerce and logistic hub of the said region (Washington File, 2005).
China has become the global economic powerhouse, and Hong Kong has been much affected by the rise of China, and benefited by the different changes that had happened over the past decade (Clinton, 2007).
Hong Kong and China Relationship
The improvement in the overall economy of China is considered as one the most important aspects that must be considered by the government of Hong Kong. The number of the Chinese visitor in the country had increased to 27.1% from 13.1% from 1999 to 2007. It shows that about 50% of the total arrival of 12.9 million in the country is composed of tourists coming from the mainland China (AHK, 2006; Singer, 1999).
Furthermore, Hong Kong is considered as one of the leading financial centers of the world and serves as a major gateway both to China and other part of Asia that enables the country to become the transit between China and Taiwan. In addition, Hong Kong is considered as the leading international air hub in Asia, both in terms of passengers and cargo. In 2005 alone, the Chek Lap Kok Airport had served 40.3 million passengers, ranking 16th in the world, as well as processes about 3.4 million metric tones of cargo, ranking 2nd in the world (Robinson, 2006, p. 2).
According to the World Travel & Tourism Council, Hong Kong should develop as an aviation hub for the region as well as serve as a gateway to China. At the same time, there will be a great need to be a Hong Kong-based carrier in order for the said thing to happen, nothing requires that the resident airline or airlines need to be protected by a national or SAR policy in order to keep any given entity in place (2003).
Hong Kong must have cooperation with China in exerting more efforts regarding activities and policies about open air in transport market, in order to attract more air transport services that will help to improve the regional networks. Both must continue to liberalize the different aviation agreements and provide greater commercial incentives and viability and pay attention to the different routes on which capacity is limited and capacity growth lags behind the growth in the demand of the traffic. Both must also continue to pursue the managed liberalization and the relaxation of the aviation regulations.
In addition, both of the governments must also establish an Aviation Unit within the tourism policy organization in order to coordinate and put into practice the different actions that will help to increase the number of airlines and passengers. Above all, the government of Hong Kong must be developed as an aviation hub for the region with at least one Hong Kong-based carrier minus the national or Special Administrative Region policy protection that will help to keep the given entity in place (World Travel & Tourism Council, n.d.).
With the fast-growing international trade, the demand for aviation service between Mainland cities and other international destinations will show a continuous strong growth with the coming 20 years. That is why it will be important for Hong Kong to maintain its position as one of the most important gateway hubs of China, at the same time maintain its position as the leading international aviation hub in Asia. Thus it will be important to work on the Civil Aviation Department or CAD in order to maximize the existing capacity of the runaway (yearbook.gov.hk, 2006).
Summary
Aviation industry is an important aspect of Hong Kong, due to the fact that it has a great impact on its different aspects and industries, thus its overall economic performance and position in the global market (see Appendix B). But due to the different factors such as globalization and improvement in technologies, most of the countries in the world are implementing Open Skies Agreement in order to improve the competition, thus helping to lower the fare and service price of different airline company that will help, not only the tourism industry, by ensuring cheap tickets and packages, but also the business sector by improving and developing easy access to the air transport.
In the case of Hong Kong, due to the economic growth of China, as well as its improving tourism industry, Hong Kong is directly affected, in positive way. This enables Hong Kong to have an improving and increasing number of tourists that are coming from the mainland China. That is the reason why it will be important to have a gateway or aviation hub that will connect mainland cities of China to the cities of Hong Kong.
On the other hand, Hong Kong is considered as one of the most important financial centers of the world as well as one of the most important global aviation hubs. On the other hand, there are different observers that are telling that maintaining their skies close can affect the relationship of the country towards their customers and business travelers because of lack of competition, therefore, the price of airline services and products will be high. Thus, different business will be having a hard time to access the air transportation.
It is also important that there is a great demand for high capital and needs for maintenance in the aviation industry, that is why it will be a great help if the country will liberalize the aspect regarding the foreign investments and control over the aviation business in the country.
By doing the said aspect, the country will be able to have a strong connections and relations to different important destinations in the world as well as invite more business in the country that will help to enhance the entire tourism industry and the entire economy.
References
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Clinton, G. (2007). Hong Kong 10 Years After: Asia’s ‘World City’ Matures. AmCham, Retrieved 8 October 2008, from http://www.amcham.org.hk/ content/view/5666/198/
Einhorn, B. (2001, August 6). Commentary: Hong Kong Can’t Keep Its Skies Closed Forever, Business Week, Retrieved 8 October 2008, from http://www.businessweek.com/magazine/content/01_32/b3744131.htm
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Fung, M. K., Law, J. S. & Ng, L. W. (2006). ‘Economic Contribution to Hong Kong of the Aviation Sector: A Value-Added Approach’, M. E. Sharpe, Inc., 39 (6), pp. 19 – 38
Heilbronn, G. (1990). Essays on Aviation and Travel Law in Hong Kong, Hong Kong: Hong Kong University Press.
Heung, V. (1997). ‘The Hong Kong Tourism Industry in Transition’. Cornell Hotel and Restaurant Administrative Quarterly. 38 (1), pp. 51 – 59
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Appendices
Appendix A: U.S. and Hong Kong Tourism Relationship
2004
2005
2006
2007 (estimated)
Arrivals from Hong Kong
184,668
205,117
209,219
215,496
Travel Receipts (US$
295
359
364
410
Fare Receipts (US$)
256
284
299
323
Source: (cited from U.S. Commercial Service)
Appendix B: Impact of Aviation Policy
Source: (Law & Yeung, 2000)
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