September 15, 2013 3:01 pm

Cathay hits at Qantas and China Eastern

Cathay Pacific, Hong Kong’s flag carrier, has become embroiled in an increasingly public dogfight with Qantas Airways and China Eastern Airlines about their plans to launch a budget airline in the Chinese territory.

John Slosar, Cathay’s chief executive, said Hong Kong should not grant Jetstar Hong Kong a licence. He claimed the airline’s “principal place of business” would not be Hong Kong – as required by law – saying it would effectively be controlled by Australian management. He added that it was important that Hong Kong carriers were not “taking directions from an overseas parent”.

Mr Slosar said Qantas and its low-cost subsidiary, Jetstar Airways, would effectively control the new airline. He pointed to a document they filed with the Australian competition regulator in which the companies said Jetstar-branded airlines would “operate as a single, fully integrated organisation by co-ordinating their operations and activities in the Asian region”.

In 2012, Qantas and China Eastern unveiled plans to launch Hong Kong’s first budget airline. Seen as a big step, the deal was supposed to help China Eastern to expand internationally and would provide Qantas with a foothold in the Chinese market. But rivals said the deal would breach the Basic Law, by which Hong Kong has been governed since Britain returned its former colony to China in 1997.

This year, the Australian and Chinese carriers brought in a local partner by selling a one-third stake to Shun Tak Holdings, a Hong Kong conglomerate run by Pansy Ho, the daughter of Macau gambling tycoon Stanley Ho. But the decision has failed to deflect criticism by competitors such as Cathay.

The battle over Jetstar Hong Kong takes place as many traditional full-service carriers try to grab a share of the growing low-cost aviation market in Asia. Cathay, which is part-owned by Swire and Air China, last year said it had no need to launch its own low-cost airline. Hong Kong’s government is expected to decide in the coming months whether to grant a licence to Jetstar Hong Kong.

Responding to Cathay, Jetstar Hong Kong says its principal place of business is Hong Kong. It says five of its seven board members are Hong Kong permanent residents, and that its staff – from the chief executive on down – are mainly local.

Edward Lau, chief executive of Jetstar Hong Kong, strongly denied Mr Slosar’s suggestion that the document filed with the Australian regulator suggested that the budget carrier would essentially be managed from Australia.

Mr Lau said the details outlined in the document referred to co-ordination and had no bearing on control. He said the carrier was a “fully independent” airline with Hong Kong as its principal place of business.

Cathay says Qantas and Jetstar Hong Kong are trying to circumvent a decades-old system by which countries negotiate with each other to gain equal access for their airlines in other markets. Mr Slosar said to give Jetstar Hong Kong a licence would mean that “the principle of equality of opportunity goes out the window”.

But Jetstar Hong Kong and some analysts contend that Cathay is relying on an antiquated global aviation system that benefits airlines more than consumers. Patrick Xu, an aviation analyst at Barclays, said Jetstar Hong Kong would be a “threat to Cathay’s position in Hong Kong” as the city lacks budget offerings.

Shun Tak’s Ms Ho, who was last in the limelight when she fought publicly with family members over her father’s fortune, says Cathay is trying to protect its dominant position. “The fewer the players, the easier it is for existing operators to work out their numbers,” she told the South China Morning Post.

The Centre for Aviation, an independent consulting firm, said recently that “the competitive outlook is not encouraging when a flag carrier feels the need to seek government protection”, adding that a decision not to grant a licence would “fly in the face of a whole decade of airline liberalisation in Asia”.

Mr Slosar declined to say how Cathay would respond if it were to lose the argument. “If they’re going to get the licence, they are going to get the licence, and then we will deal with that.”

Mainland Chinese regulators have already given Jetstar Hong Kong antitrust approval, in spite of the fact that Air China, which is one of Cathay’s investors, is the national Chinese flag carrier.

Demetri.Sevastopulo@ft.com

This article is subject to a correction and has been amended

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