(Reprinted from HKCER Letters, Vol. 5, November 1990)
The New Airport and Aviation in Hong Kong -
A New PerspectiveKai-sun Kwong
Recently, there has been much controversy surrounding the new airport in Hong Kong. The issues that have attracted most public attention are: the appropriate site for the new airport, the cost of construction, the urgency of the development, and the fiscal impact of the development on Hong Kong. The most crucial issue, however, is how the new airport can be made to work for Hong Kong. In particular, what the people of Hong Kong should spend their efforts studying is how the new airport can generate enough revenue to finance itself (regarding construction cost) and help develop Hong Kong into an attractive international center of trade, finance, and tourism.
The common air traveller might think that when there is demand for air travel in Hong Kong, some airlines, either foreign or domestic, would be willing to supply the flights and the greater the demand, the larger the supply of capacity. Unfortunately, this market principle is not allowed to work freely in reality. The fact is that all international air services are bound by air services agreements which are treaties negotiated between sovereign states. In most cases, these are not treaties that aim at protecting the interests of consumers but rather the interests of airlines. Additional capacity is possible only if airlines of both states agree.
There are however encouraging signs of gradual liberalization of air rights, possibly a result of absorbing the lessons of domestic deregulation in the United States. In 1992, air rights in Europe will be liberalized, and some Asian countries such as Singapore are proposing steps towards liberalization in the region. In the United States, domestic deregulation in 1978 led to a change in network pattern. Certain large and centrally located cities emerged naturally as air hubs while smaller cities were served by feeder routes in a so-called "hub-and-spoke" system. As international aviation liberalizes, hubs of a similar nature would tend to emerge, capturing a large share of international traffic.
It seems likely that a country that liberalizes first would stand a better chance of becoming a hub under liberalization. Hong Kong is in a good position to liberalize and capture the benefits of being a major hub in the Pacific Rim. Technically speaking, Hong Kong has sovereign authority beyond 1997 to negotiate and sign air services agreements with foreign states on routes that do not have a section involving a city in mainland China.
Liberalization is a general concept. In practice, it may take many forms. For example, Hong Kong may negotiate an agreement allowing a foreign carrier unlimited access to Hong Kong. Alternatively, an agreement may allow a foreign carrier unlimited access to Hong Kong provided that the foreign country allows Hong Kong carriers unlimited access as well.
After liberalization, the right to fly is free but the opportunity to land may not be because airport capacity is scarce. It is not hard to imagine that airlines would, if present airport management is not revised, try to secure valuable airport time slots ahead of others. Indeed, in the United States, bigger domestic airlines acquired smaller local ones with the aim to capture the airport time slots in their possession.
Going hand in hand with air rights, liberalization should be a pricing scheme for airport services. The pricing scheme should, in particular, reflect the scarcity value of airport capacity during different times of the day. Two pricing methods may be considered. Firstly, the landing time slots of each week may be put up for tender. The winning airline of each slot may use it or transfer it to be used by another airline within a specified number of years. A second alternative way of pricing is to more finely differentiate the landing fees during different hours of the day. This is still administered pricing. The drawback is that when airlines have captured their time slots, efficient reallocation of slots is difficult to undertake because any price revision could easily be attacked as discriminating against certain airlines.
Liberalization, complemented with rational airport pricing, would bring many advantages to Hong Kong. Here are the more notable ones.
Firstly, liberalization and rational pricing bring additional revenue to the airport. The new airport, due to high construction costs, is not likely to be profitable on a commercial basis if the management structure is inherited from Kai Tak and if air rights are not liberalized. Even if passenger departure tax is included as part of airport revenue, it would probably take more than ten years to recoup airport construction costs. However, liberalization would maximize flight frequency, which, in itself, would generate more revenue. In addition, rational pricing would further increase revenue. It is not unrealistic to expect the payback period to be thus reduced by two to three years. Under this scenario, even a private airport may be feasible. The public need not subsidize airport construction, and the fiscal impact of the project would be reduced substantially.
Secondly, the new strategy greatly enhances the role of Hong Kong as an international center of trade, finance, and tourism. With increased flight frequency and, more importantly, more efficient services in route sectors of high demand, access to Hong Kong becomes easier. Hong Kong could emerge as a major air hub in the Pacific Rim and a gateway to China.
Thirdly, air fares could become cheaper which means increased consumer welfare. Although airlines may have to bear higher airport charges, higher competitive pressure brought along by liberalization would limit fare increases. Moreover, flights during less popular hours must be priced correspondingly to attract passengers.
The fourth advantage of the new strategy is that as the global trend is towards liberalization, Hong Kong must liberalize effectively and soon enough to stay ahead. Failure to recognize this trend could result in not only losing an opportunity to develop as a center of trade, finance, and tourism but in grossly over-estimating traffic growth and substantially increasing the fiscal burden, as traffic bypasses Hong Kong.
Finally, it is not certain how much bargaining power Hong Kong has over air rights involving routes over Chinese cities. How many flights to Hong Kong should be served by CAAC? This is a tough decision at the bargaining table. But this is not an issue according to the new strategy. Every airline has equal access to Hong Kong subject to rational pricing. As smaller airports in Macau and Shenzhen would soon begin to operate, it would be ideal if they could serve as the "spokes" of the "hub".
When is the best time to consider the new strategy? It is now or never. With such a big shift in policy and with the aviation scene around the world changing so rapidly, it is never too early to consider the new strategy. If it is delayed until after the new airport comes into operation, most time slots would already be in the hands of airlines. Reallocation of slots is impossible because any such action, by pricing or otherwise, could be challenged and blocked at a diplomatic level as being discriminatory and inequitable.
Dr. Kai-sun Kwong is a lecturer in the Department of Economics at The Chinese University of Hong Kong.
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