Where to now for Jetstar Hong Kong?

The airline was expected to be up and running in a year, initially with a fleet of three Airbus A320s that would grow to 15 aircraft by 2015.

And it would be yet another Orange Star in Asia, joining Singapore, Vietnam and Japan as a Jetstar hub.

Things did not go according to plan.

The application to secure an operating licence took more than three years before it was officially rejected in June and was vigorously opposed at every step by Hong Kong-based carriers, with Cathay Pacific leading the charge.

Although Qantas and China Eastern say publicly they are reviewing the decision, analysts are doubtful there is any way back for Jetstar Hong Kong.

CAPA – Centre for Aviation senior analyst for North Asia, Will Horton, says Jetstar Hong Kong is all but dead and buried.

“There appears to be almost no chance of a reversal,” Horton told Australian Aviation from Hong Kong.

“Incumbents clearly perceived this as a threat given the ferocity with which they opposed it.

“Protectionism is always a victory for incumbents and a loss forconsumers and the wider economy.

”To understand Cathay’s opposition to Jetstar Hong Kong is to understand how China looms large over the aviation sector as one of the fastest-growing markets in the world.

The statistics leave one’s head spinning.

China is forecast to overtake the United States as the world’s largest passenger market by 2030, with the number of travellers to, from or within the Middle Kingdom tipped to reach 1.

3 billion by 2034.

Meanwhile, the head of China’s Civil Aviation Administration (CAA) told an industry conference in March 2015 he would like to see each of China’s 2,800 counties have a general-purpose aviation airport by 2030.

China already has about 200 commercial airports.

Despite China’s potential, it is a country Qantas has struggled to make any real headway in, for a number of reasons.

First, China is a big market requiring a lot of aircraft to serve properly given the large population bases in not just the major gateway cities of Shanghai and Beijing, but also in secondary cities that Qantas could not possibly serve profitably on its own metal.

And that’s been shown with routes launched and then dropped over the years until today, when Qantas has just one route – Sydney-Shanghai – with its own aeroplanes.

Second, the cost base of Qantas’s international operations is, although improving, higher than the Chinese carriers that currently serve Australia.

And while Qantas does have a product advantage, both in terms of the cabin amenity and level of service, extracting a yield premium for that product advantage is proving extremely difficult given Chinese travellers are quite price sensitive and loyal to their local flag carriers.

Therefore, China is best servedthrough partnerships via hubs.

And Jetstar Hong Kong would have fitted the bill had it gone ahead.

The reason it failed to get off the ground was because the airline could not, in the eyes of Hong Kong’s Air Transport Licensing Authority (ATLA), meet the principal place of business test as required under the territory’s Basic Law.

In a bid to strengthen the proposed airline’s Hong Kong credentials, Qantas and China Eastern added a new local investor, conglomerate Shun Tak Holdings.

A local chairman, Pansy Ho, and chief executive, Edward Lau, were appointed.

And Shun Tak was given majority voting rights on the board, although the economic ownership of the proposed airline was split at one-third each.

There was also a subtle shift in language, with a media release published in August 2013 highlighting the strong local appetite for a low-cost carrier and the cheaper fares they came with – in effect, saying Jetstar would be good for Hong Kong by boosting tourism and creating jobs in the local economy.

In January 2015, the airline put its case before the ATLA in a two‑day hearing and after six months’ consideration the authority formally rejected the application for an operating licence.

In a 150-page decision, the ATLA found Jetstar Hong Kong could not make its decisions independently from the two foreign shareholders, Qantas and China Eastern.

Although the ATLA said there was “no dispute” the day-to-day management of the airline would be conducted in Hong Kong and managed by a local chief executive, that was not sufficient to establish and meet the principal place of business criteria.

“In operating as a licensed Jetstar branded airline, JHK [Jetstar HongKong] is to surrender the right to determine its own network, fare structures and other flight-related matters to the Jetstar Group,” under the business service agreement, the ATLA decision said.

Cathay director for corporate affairs James Tong said the judgement was the “right decision for Hong Kong”.

“The ATLA decision 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,” Tong said in a statement.

However, CAPA said in a June 29 research note although Jetstar Hong Kong would initially have only a small impact overall, Cathay would have felt pressure on overlapping routes.

Also, CAPA said Jetstar Hong Kong could have, if approved, “opened the gates to an Emirates Hong Kong or a Singapore Airlines Hong Kong”.

“A number of airlines had considered a Hong Kong joint venture but watched Jetstar Hong Kong’s application to see what the process would entail.

None expected an easy ride so waited to see if there would even be a chance.

That answer is clearly no,” CAPA said.

Joyce said the ATLA ruling amounted to shutting the door to new competition, which “can only serve the vested interests already installed in that market”.

“It’s the travelling public who have lost out, because the message from this decision is that Hong Kong appears closed to fresh aviation investment even when it is majority locally owned and controlled,” Joyce said in a statement.

While waiting for a decision on Jetstar Hong Kong, China Eastern in 2014 established its own low-cost carrier by transforming one of its subsidiaries, China United, into a budget airline.

As far as Qantas’s ambitions for China are concerned, attention now turns to the Flying Kangaroo’s other proposed partnership with China Eastern, a joint-venture alliance on Australia-Chinese routes.

And on that front, the signs are also less than positive.

The Australian Competition and Consumer Commission (ACCC) has expressed some concerns about the partnership and in a draft determination released in March said it was inclined to reject the application because the tie-up would give Qantas and China Eastern too much market power on the Sydney-Shanghai route.

Industry groups, the federal government and even China’s ambassador to Australia have all come out in support of the alliance and urged the ACCC to reverse its stance.

Former Qantas chief economist and managing director of Webber Quantitative Consulting Tony Webber says “China is a difficult market to operate in and foreign airlines such as Qantas need the support of a local carrier to be successful.

”“The thing about China, like a lot of Asia is, it has very volatile growth and as a result it represents risky growth,” Dr Webber told Australian Aviation from London.

“The rewards can be high but they can be volatile as well.

“It is growing much stronger than elsewhere in the world but that growth is subject to very intense competition and whenever you have got extreme competition and the risk of excess supply, your profits can plummet.

”Qantas and China Eastern say their partnership will result in new routes and increased frequencies on existing routes between Australia and China.

Moreover, passengers would have shorter transit times at Shanghai

China is forecast to overtake the US as the world’s largest passenger market by 2030.

Pudong Airport and be able to connect to a wider range of Chinese cities once Qantas relocates its operations to China Eastern’s Terminal One.

Qantas told the ACCC in its submission the airline’s share of passengers in the Australia-China market had declined from 21 per cent in 2010 to 15 per cent by April 2014.

By contrast, China Southern had doubled its share from 11 per cent to 22 per cent over that four-year period.

“Without access to sufficient capital to profitably expand its own operations, Qantas needs to collaborate with a local partner in order to leverage network benefits and distribution strength and better align its product to the predominantly leisure-oriented passenger base,” the submission said.

“Currently, Qantas is not earning a return on capital on its own operations, primarily due to its high cost base.

By being able to expand its product offering by selling on China Eastern’s services and coordinating complementary customer propositions, Qantas can improve its profitability without the need for significant additional capital outlay.

“Alone, Qantas would not be able to keep pace with the capacitygrowth being driven by carriers such as China Southern and Sichuan Airlines.

”In mid-July China Southern provided the latest example of its sustained push into Australia, which it has previously described as its “most important overseas market”.

The Skyteam member said it was adding frequencies over summer that will entail operating 18 flights a week into Melbourne and triple daily into Sydney from its Guangzhou hub between December and March.

The likes of Sichuan, Hainan Airlines, Air China and Xiamen Airlines are either growing or poised to enter the market Down Under.

Dr Webber says the proposed Qantas-China Eastern alliance, which was announced at Parliament House in Canberra in November 2014, looks on paper a much better prospect than Jetstar Hong Kong and added his voice to calls for the ACCC to reconsider.

“You need to hook up with one of the local carriers or set yourself up in China,” Dr Webber said.

“I think if you want to tap into the Chinese market then you form a deeper alliance with a Chinese carrier.

You have to be located in China, not located in Hong Kong.

”“I actually think it is silly for the ACCC to knock that back.

”China is Australia’s largest inbound tourism market.

The two carriers said inbound tourism from China to Australia was expected to be worth $9 billion annually to the Australian economy by 2020.

To use Qantas’s own words, the airline risks becoming increasingly marginalised in the Australia-China market should the partnership with China Eastern, like Jetstar Hong Kong, fail to win over regulators.