Statement to Air Transport Licensing Authority
On behalf of
Caledonian Far East Airways
Leonard N. Bebchick, its Counsel

Caledonian Far East Airways has applied for licences to develop and operate a coherent network of regional air services to places not served by a Hong Kong carrier. As described in our Submission, access to China scheduled services is a necessary ingredient to the success of a second-level regional carrier, both as a means of attracting capital and of providing a volume of traffic to support a productively-sized airline. In our view, the sound evolution of Hong Kong air services dictates that the potential of the China routes be harnessed to assist the development of other regional services. The establishment of a comprehensive network of second-level regional services would enrich the air transport inheritance of the Special Administrative Region of China when the status of Hong Kong changes in 1997.

The operating proposal contained in our submission is a well-researched and carefully constructed plan which makes good commercial sense and meets our key objectives of generating profits. While forward looking, our approach to ths project and the basis upon which we invited Hong Kong investors to take majority shareholding was that of a practical businessman.

The events of recent weeks have had a direct impact upon our proposals. A re-evaluation of their commercial prospects has led us reluctantly to conclude that it simply does not make business sense for CFEA to pursue its application at this time. The principal events leading to our decision are these:

1.  Last month’s discussions between the People’s Republic of China and Her Majesty’s Government make it clear that the securing of traffic rights for Hong Kong carriers to operate scheduled services to China is likely to be a highly uncertain and drawn out affair with the outcome being particularly questionable for new entrants. We thus are unable to give our Hong Kong partners and realistic indication of whether or when CFEA could begin operations to China. The political uncertainty which now surrounds this question makes planning, commercial and investment decisions conjectural.

2. The Government’s recent Statement on Aviation Policy announced by the Financial Secretary (which surprisingly is much more restrictive than HMG’s White Paper on Airline Competition Policy published last year) adopts a policy of one Hong Kong carrier per route. This means that CFEA is foreclosed from mounting operations to Beijing [served by Cathay], the densest and most profitable of our planned China routes.

3. Cathay Pacific Airways has recently announced a number of pre-emptive moves which act to undermine our planned network of services to regional points outside China.

In April [1986], Cathay will resume services to Nagoya, Japan, a destination which t abandoned some five years ago and which is a major profit contributor to CFEA’s network.

In addition, Cathay in April will resume services to Kaohsuing, a destination it abandoned in 1980. Kaohsuing is an important element in the CFEA operating plan, being the only point to receive daily flights from the commencement of operations and serving as an essential support point for onward services to both Okinawa and Kogoshima.

Cathay has also announced a joint venture with Royal Brunei Airlines providing for an increase in that carrier’s unreciprocated services from Bandar Seri Begawan. That, of course, impacts CFEA’s plans to serve that point.

Cathay has thus responded to the threat of competition by moving to freeze CFEA out of important route opportunities; and given the rules of the regulatory game, there is little, practically speaking, we can do about that.

The creation of a new airline is a difficult task in the best of circumstances. We believe that Cathay’s neglect of second-level regional services, coupled with the expected opening of China, present a unique opportunity for the creation of a Hong Kong second-level carrier with equipment and management dedicated to such specialised operations. The response of Hong Kong investors to our polans was and remains positive. It underscores the advice of our financial advisers, East Asia Warburg, that CFEA would have no difficulty in raising the US $30million from Hong Kong sources for a majority shareholding in the airline. Indeed, their evaluation of the project’s attractiveness led East Asia Warburg - which as you know, is jointly-owned by two eminent institutions: the Bank of East Asia and S.G Warburg of London - to propose an investment for their own account.

CFEA’s prospects have now been chilled by the recent events described. They have turned a sound business venture into a commercial cul-de-sac. Withdrawal of our applications and deferral of plans for the creation of a new regional airline is a course of action dictated by sound commercial judgment and realistic business prudence. Our partners have accepted with great reluctance our recommendation to do so.

We and our partners are naturally disappointed by these events. We shall, however, watch aviation developments in Hong Kong closely, and will continue to advance public service proposals and innovations which make good business sense.  While our applications are not being pursued, we derive satisfaction from the knowledge that the mere tabling of our plans for a second-level regional carrier produced tangible benefits for Hong Kong. Just the threat of CFEA competition has prompted Cathay Pacific to announce resumption of services to regional points in Japan and Taiwan it long ago had abandoned, and, at long last, to seek a real Hong Kong shareholding, albeit a minority one.

We regret that, at least for the time being, commercial realities prevent us from continuing to provide the wholly independent competitive spur which the Hong Kong air transport industry badly needs.

Before we conclude our case for the withdrawal of our applications, there remains an essential pre-requisite now to be dealt with. This involves the securing of categoric confirmation from Cathay Pacific Airways that it indeed will operate, and sustain, the services to Nagoya and Kaohsuing (each planned at three a week) and represented to the Authority in Cathay’s written rebuttal to CFEA’s applications.

We hardly can fold our tents, only to later find that Cathay’s representation to resume service lacks real substance and was little more than a hollow litigation tactic. The Authority cannot permit its proceedings for the award of licences in the public interest to be turned in to a poker match. I therefore ask Mr. Stirland [Cathay’s Counsel] to now produce Cathay’s planned evidence as to its resumption of services to Nagoya and Kaohsuing.

Leonard N Bebchick - 2nd December 1985
Please remember that this statement, although initially objected to by Cathay Pacific and Dragonair; was agreed by them and their objections were fully withdrawn as publicly reported in the South China Morning Post on Tuesday 3rd December 1985. The Post also carried parts of the statement too.