Paul Lewis/HONG KONG
IN JUST UNDER 12 months' time, Hong Kong reverts back to Chinese sovereignty, ending 156 years of UK rule. During the seemingly endless countdown to the transfer of power, the question has been repeatedly posed: "What will happen in 1997?" For Hong Kong's and aviation industry, fundamental change is already under way, making 1 July, 1997, just another date on next year's calendar.
The 1984 Sino-British Joint Declaration has made an impact on virtually every aspect of life in Hong Kong, requiring major re-adjustments in both public and private sectors. The political realities of 1997, in particular, have had a profound effect on the territory's lucrative and prestigious air-transport industry.
In the 12 years since the UK agreed to concede control of Hong Kong to China, the territory's de facto flag carrier, Cathay Pacific Airways, has emerged as one of the world's leading profitable international airlines. The territory, in an effort to sustain its pivotal position, has embarked on one of the largest and most costly civil engineering projects ever, the construction of a new airport at Chek Lap Kok (CLK). Given such high stakes and the number of vested interests competing to play in the Hong Kong market, the transition to 1997 has at times proved to be politically highly charged and commercially volatile. After one of the biggest post-war shake-ups, however, the industry is finally shedding its last remaining colonial vestiges in favour of a distinctly more Chinese appearance.
Senior Government and industry officials are confident that the aviation annexe enshrined in the territory's new mini-constitution, the Basic Law, provides for a bright future. "We've been promised autonomy in aviation matters after 1997 and I don't think that anything that happened has threatened or undermined that," says Hong Kong governor Chris Patten.
CATHAY CHALLENGED
The company with perhaps the most at stake in post-1997 Hong Kong is the Swire Group. As well as its property, shipping and manufacturing interests, Swire and its subsidiaries exercise control over Cathay, cargo carrier Air Hong Kong and Hong Kong Aircraft Engineering. It also has investments in regional carrier Dragonair and freight handler Hong Kong Air Cargo Terminals. Until early 1995, Swire had managed to steer a politically "savvy" course, avoiding any entanglement in the verbal battles between Beijing, London and the Hong Kong Government. At the same time it worked hard at cultivating all important guanxi (relationships) through joint-venture investments in China.
It came as a profound shock, therefore, when state-run China National Aviation (CNAC) applied for an Air Operator's Certificate with Hong Kong's Civil Aviation Department (CAD) in March 1995. Its planned China HongKong Airlines start-up formed part of a larger move by the former Chinese flag carrier to assert itself after having lain dormant for more than 40 years.
With Cathay committed to a $9 billion fleet-modernisation programme, totalling more than 60 aircraft orders and options through to 2000, the prospect of a state-run Chinese carrier setting up in local competition triggered alarm bells in the Swire boardroom. At a higher level, CNAC's move was seen as a test of the Basic Law. "Cathay and Hong Kong's future is intimately bound-up together," observes Patten.
In March 1994, Swire had moved to block the threat of an earlier incursion by the Chinese airline industry by buying up 75% of struggling Air Hong Kong. Confronted by CNAC and its parent, the Civil Aviation Administration of China (CAAC), Swire's only defence was to cry foul. CNAC's "principle place of business" was not in Hong Kong, and so it was not entitled to run a local airline, argued Swire.
"Hong Kong aviation has to contend with competition from one airline from Singapore, one airline from Thailand, and so on. I don't think it would serve Hong Kong interests if the resources available were split up among more than two carriers," adds Cathay chairman Peter Sutch. In the end, Dragonair proved to be the sacrificial lamb, in a wide-reaching settlement ending the year-long battle for control of Hong Kong's skies. CNAC, in exchange for aborting its planned China Hongkong Airlines start-up, paid Swire and Chinese investment company Citic Pacific HK$1.97 billion ($258.7 million) for a controlling 35.9% interest in Dragonair (Flight International, 8-14 May, P13).
Citic was compensated for the loss of its 17.66% interest in Dragonair with HK$6.3 billion worth of new, discounted Cathay stock. China's collective stake in Cathay has risen as a result to over 30%, and, in Dragonair, to 64.4%, while Swire's interest in the two airlines has shrunk to 43.9% and 25.5%, respectively.
BIGGER CHINA STAKE
The extra capital will go towards Cathay's fleet expansion and planned HK$3.8 billion headquarters at CLK. "What we have here is a pragmatic solution that meets the needs of all. Everyone gives up something, but everybody gains something," claims Sutch. "Any agreement that doesn't bring benefits to every party is not an agreement that's going to last."
While the agreement has been applauded and has helped restore confidence in the airline's future, both internally and externally, some analysts have questioned its longevity. More than a few observers have interpreted the deal as only the first step towards a larger Swire sell-out and majority Chinese control of Cathay.
Sutch is quick to dismiss any such suggestion, saying that "-it has always been our intention to remain thoroughly involved in aviation and airlines in Hong Kong. I have no doubt that the structure that is in place, with the blessing that it has and the investment that is represented from people like Citic, is fine today and will be fine as long as Hong Kong and Cathay are around."
Whatever long-term shareholding structure does emerge, Cathay now faces the prospect of increasing competition from its former sister carrier, Dragonair. CNAC chairman Wang Guixiang has already been appointed head of Dragonair's board of directors, and it has disposed of most of its 4.2% interest in Cathay. A new executive management team is planned for Dragonair, independent of Swire. "We're already competing with 50-60 airlines flying into Hong Kong," points out Sutch. "As long as the playing field is level, as long as the Air Transport Licensing Authority's rules and regulations are in place, that's fine by me. Under those circumstances, we have no problem."
Swire is pinning a lot of its future hopes on Chinese ally Citic, which is closely associated with ailing Chinese leader Deng Xiaoping's ruling clique. CNAC, however, is plugged directly into China's regulatory authority and this has already paid Dragonair dividends.
Within weeks of CNAC's announced buy-in, Dragonair received long-awaited CAAC approval to launch new services to Kaohsiung, Taiwan from 31 July and five mainland points, including Shantou, Tsingtao and Urumqi (Flight International, 26 June-2 July, P10)
Cathay will probably speed up its process of assimilation into Hong Kong's post-1997 political landscape. It has been slow to localise senior management, and suffered a major setback in 1994 with the resignation of deputy managing director and heir apparent Linus Cheung.
Sutch claims that the issue is now being addressed, with a large number of Hong Kong Chinese managers "-set to emerge in a fairly big way in a short period of time". Attention in particular appears to be focused on Dragonair chief operating officer Philip Chen, who is being tipped as an eventual successor to Rod Eddington as Cathay managing director.
Other major changes at Cathay include the launch in 1994 of a new "Asian" corporate identity and a HK$1 billion customer-services upgrade. In a symbolic move, the Union Jack has been erased from the tails of Cathay's Boeing 747s and Lockheed TriStars and replaced with a Chinese calligraphic-style brushwing.
Sutch reflects that, with the possible exception of the transition from Lockheed Electra turboprops to Convair 880 jets in 1962, Cathay has been through more changes over the past five years than during its entire 50-year history.
A major factor in airline confidence in Hong Kong's future is the construction of the new HK$70.7 billion airport at CLK. There have long been plans to replace Kai Tak Airport, but it was not until October 1989 that Hong Kong's former governor, Sir David Wilson, approved the project. The airport and accompanying HK$87.5 billion-worth of connected infrastructural development was billed as an investment in Hong Kong's post-1997 prosperity.
funding blessing
Because of the vast amount of money required to build the new airport and its impact on the post-1997 Hong Kong administration, the UK sought Beijing's blessing early on. CLK, though, quickly become a pawn in the wider political battle being waged between London and Beijing over Hong Kong's democratic reforms.
Despite tacit Chinese approval for the project in September 1991, it still took another 50 months of arduous negotiations and an improvement in overall Sino-UK relations for a financing package to be finally agreed.
Four separate financing plans were proposed, before 1:3 debt-to-equity ratio could be agreed, limiting borrowing to $23 billion for the airport and the 34km-long airport railway. Until a deal was reached in November 1995, the Hong Kong Government was unable, to raise private funding and was instead forced to keep construction going, through incremental injections of cash.
The result was a nine-month delay pushing back the airport's opening to April 1998. Cynics have argued that China's intention all along was to stall CLK's completion until after the Union Jack was hauled down and governor Patten had departed from Kai Tak. With a finishing date now in sight, Hong Kong's aviation community has breathed a collective sign of relief. "The assurance that the new airport is there brings new optimism and new confidence into airline planning and future fleet-expansion programmes," says Hong Kong Airport Authority chief executive Dr. Hank Townsend.
The opening of CLK cannot come soon enough for Hong Kong's increasingly over-congested Kai Tak . The airport is among the busiest international gateways in Asia, handling a record 27.4 million passengers and 1.46 million tonnes of cargo in 1995. Passenger throughput is expected to approach 30 million by the time it closes in April 1998.
A series of "fine-tuning" improvements have been made to Kai Tak in an effort to keep pace with growth. Measures have included a final expansion of the south apron to take up to 11 747s and an enlarged terminal waiting area, but there is now no more room left to grow. The main constraining factor is its single 3,390m (11,100ft)-long runway, which is limited to 30 aircraft movements an hour. The introduction of updated radar-data-processing will increase this, but only to 31 aircraft an hour by 1998.
"We're running to stand still," admits Hong Kong CAD director Richard Siegel. "Because of that, we're not able to absorb the backlog-we're currently turning away 200 applications a week for scheduled flights."
CLK's 1,250Ha (3,080 acre) reclaimed site, by comparison, will offer a quantum leap in capacity over that of Kai Tak. On opening, the airport's 1.2km-long terminal building will be able to handle 35 million passengers a year, and the two planned new cargo centres up to 3 million tonnes of freight.
The airport has been given a further boost with the go-ahead to begin work immediately on a second, 3,800m-long, runway. China's swift approval took many by surprise, who had been expecting a repeat of the earlier endless rounds of negotiations. The northern runway falls outside the Phase 1 financing package agreed with Beijing, but faster-than-expected traffic growth had led to fears that the new airport would be swamped on opening. With two parallel runways, its capacity will now rise from a projected 37-38 hourly aircraft movements up to 63 in independent mode. The HK$4.3 billion works package will also include completion of the second arm of the airport's Y-shape terminal, adding ten more gates and adjoining apron parking. "This is a very positive step forward, it will be a great benefit operationally," says Siegel.
The opening of CLK will bring to a close 73 years of aviation at Kai Tak. Repeated suggestions that part of Kai Tak be retained as a city airport appear to be outweighed by the site's estimated $100 billion redevelopment value. "The arguments against it are so strong that the Government has firmly said that, once CLK opens, Kai Tak closes," states Siegel.
BEYOND 1997
Reaching agreement with China on CLK's financial support package also finally cleared the way for putting Hong Kong's Provisional Airport Authority on a more permanent footing. The reconstituted Airport Authority (AA) is tasked with both completing and running the new airport at CLK commercially.
The establishment of the AA and closure of Kai Tak will end CAD's direct involvement in the running of Hong Kong's airport. Its Airport Management division will be dissolved and about 150 of CAD's existing 650 staff will be transferred to the AA.
"There is a common view that, with the opening of CLK, the CAD dies, but nothing could be further from the truth," says Siegel. The CAD will continue to supervise CLK operations through a newly formed Airport Standards division, in addition to its other primary functions of airworthiness and air-traffic management.
The AA has not wasted any time in exercising its new powers to secure a HK$8.2 billion private loan to complete CLK. Post-Phase 1 airport developments, including the second runway, will be funded in a similar fashion. "We should also be able to finance those in a robust manner, as we now have the capability to stand on our own two feet," says Townsend.
Hong Kong's original 1992 New Airport Master Plan included the eventual addition of an interconnecting X-shape satellite concourse. The airport was intended to satisfy demand through to the year 2040, with a capacity for up to 87.3 million passengers and 8.9 million tonnes of cargo a year.
"We still think in those broad terms," confirms Townsend. "What we have experienced since that time is a more rapid growth, and that requirement may come forward a number of years. By how many years is very hard to predict, as no one in aviation is thinking beyond the next ten years, and even then experience tells us to watch out."
Source: Flight International
