Commentary: Hong Kong Can't Keep Its Skies Closed Forever

By Bruce Einhorn

When Cathay Pacific Airways Ltd. recently fired dozens of raise-seeking pilots, its message was plain: Accept market forces. Pilots around the world are living with lower pay, Hong Kong's dominant carrier was essentially saying. So get used to it.

There's a contradiction here. Even as it exhorts its pilots to get real, Cathay is one of Asia's best-protected carriers. As a result, Hong Kong's three-year-old Chek Lap Kok airport is a Cathay stronghold. Other airlines would love to turn the state-of-the-art facility into a regional hub. But the government continues to balk at opening up. That reduces competition and hurts the economy.

Here's what's happening: The U.S. wants Hong Kong to conclude an "open skies" agreement with Washington. Such a pact would let a U.S. carrier fly to Hong Kong, pick up passengers or cargo, then fly on to another destination, presumably in Asia. Right now, U.S. carriers can do that to just a handful of cities from Hong Kong. If Hong Kong would drop the restrictions, more airlines and cargo carriers would fly there, because they could generate extra business. That would lower fares, boost Hong Kong's cargo business, and generally improve its competitiveness. It also would create ripple effects for the local tourism industry, which is still recovering from the Asian crisis. In return, Cathay would be able to fly to the U.S. and then on to other nations like Mexico.

U.S. negotiators have been systematically opening up aviation markets around the world with open skies agreements. They pitched Hong Kong on the idea again in July--and went home empty-handed. Cathay and its government protectors say Hong Kong would be at a disadvantage if it agreed, because Cathay still wouldn't be able to fly to one U.S. destination and then another, picking up passengers and cargo along the way. That's a specious argument. While Cathay is asking for the right to fly to second American cities, U.S. airlines want to fly onto third countries.

"HISTORY." To see what Hong Kong is missing, check out Singapore, which reached an open skies agreement with the U.S. four years ago. United Parcel Service Inc. can fly to only one destination from Hong Kong: the U.S. But it can fly wherever it wants from Singapore. As a result, UPS employs over 1,000 people in Singapore, nearly double the number in Hong Kong, and recently opened a logistics center.

Yet Charles A. Adams, UPS Asia Pacific president, says the company would prefer to move some operations to Hong Kong to take advantage of its proximity to China. Ditto for FedEx Corp., which runs a hub at Subic Bay in the Philippines. But without a market-opening deal, what's the point? "Hong Kong has to sustain its superiority--and one way is through a liberal aviation regime," says David L. Cunningham Jr., president of FedEx Asia Pacific. "Restrictive aviation regimes are history."

Interestingly, exasperation over Cathay's labor woes may push deregulation along. Four years after the handover, some in Hong Kong find it galling that the government is protecting an airline controlled by British-run Swire Group. It doesn't help that many pilots are Westerners. The policy on open skies is "outdated," says pro-Beijing politician Ma Lik. Total deregulation, he adds, would benefit not only U.S. carriers but also let China Eastern Airlines and other mainland outfits operate more flights from Hong Kong.

The government is not standing still. A deal on cargo may be reached by yearend, says UPS's Adams. And the government is likely to end its policy prohibiting more than one local airline from flying to the same city. That should help regional carrier Hong Kong Dragon Airlines Ltd. crack the lucrative Hong Kong-Taipei route. Progress, to be sure, but Hong Kong needs to go further. It might not be good for Cathay. But it sure would be good for Hong Kong.

Einhorn covers Asian business from Hong Kong.

    Before it's here, it's on the Bloomberg Terminal.