Introduction

Over the past year there has been rising concern in Hong Kong over the role the new Airport is playing as a contributor to Hong Kong's economy and to the development of the territory as Asia's leading international aviation hub.

This concern focuses on the high costs imposed on airport users by comparison with costs at competitor hubs across Asia, and the spill over impact these costs have had on the wider economy.

Recent Concerns

• At a time of severe operating difficulty for Asia's aviation services attributable to the regional economic downturn, the introduction of new and higher charges at Chek Lap Kok has had a punishing impact on a wide range of Hong Kong-based airport users.
  
  
• The charges have aggravated the challenges facing Hong Kong's tourism industry (see Appendix A) - ranging from hotels to retail outlets and restaurants
  
  
• since they have demonstrably resulted in a paring back of flights at the margin. For every flight cancelled, the loss of to the industry and the economy as a whole is far greater than simply the loss of income to the Airport and the airlines. In addition, high charges are encouraging international tour operators (who are anxious to keep travel costs to a minimum in efforts to revive regional tourist activity) to use other cheaper hubs in the region as springboards for regional travel itineraries.
  
  
• They have contributed to reductions in frequency and therefore travelling ease, and have augmented the already-high operating costs in Hong Kong for international businesses that have traditionally used the territory as their regional headquarter base. Since executives in such companies travel extensively across Asia in their role of overseeing regional operations, ease of travel, frequencies and choice of flight have, in the past, been an important factor in their decision to locate in Hong Kong.

Questions Raised

These concerns have raised questions about whether the new airport should:

• operate as a commercial concern which recovers its costs from airport users (in this context, recouping costs within a 10- to 20-year time frame in many operational areas, and requiring a 5% real rate of return), or
  
  
• be regarded as a critical part of Hong Kong's competitive infrastructure, intended to provide benefits to the broad economy and intended to underpin the development of an aviation regime that (a) maximises the territory's role as a regional passenger and air cargo hub, (b) ensures that aviation-related services provide an optimal contribution to the economy at large, and (c) fosters the best possible services to business and private travellers based in the territory or visiting it.

The debate has been influenced by moves in other parts of Asia (in particular Singapore and Japan) since the crash in the region's economies in September 1997 to cut aviation-linked costs in efforts to protect local companies buffeted by the downturn, and to stimulate international tourism after sharp falls in tourist travel since autumn 1997. (see Appendix B)

Why are high charges depressing airport use?

Air service suspensions and cancellations
There is clear evidence that the higher airport charges at HKIA are deterring airlines from seeking to exploit the full potential of Hong Kong as Asia's key aviation hub, and in some instances even driving airlines away from the hub. In the last few months Scandinavian Airlines Systems (SAS), Varig Brazilian Airlines, and Transaero from Russia have suspended services. Other airlines, particularly those from within the region, have sharply reduced frequencies. While the total of flights into and out of Hong Kong is higher today than in 1998, a total of 82 flights per week have been lost since the new airport opened. The suspension of such a large number of services is unprecedented in the history of Hong Kong's aviation industry. (see Appendix C) In addition, the huge backlog of airlines requesting extra flights that existed at Kai Tak has evaporated. (see Appendix D). In addition, in summer 1999, HKIA will see a further 8% reduction in seat capacity offered into and out of Hong Kong

One needs to go no further than Hong Kong's "home carriers" for evidence of the depressing impact of high airport charges on airport use. Since the opening of the new airport, Dragonair and Cathay Pacific have accounted for two of every five flights cut. Cathay Pacific Airways has cut 28 frequencies. Hardest hit has been the Sydney route with frequencies cut from a twice-daily flight to a single daily flight. Six flights a week have been cut to Japanese destinations, while four flights a week have been cut to Jakarta and Los Angeles, and three to Bangkok. Dragonair has cut flights to Ningbo and Tianjin.

Macro impact on the economy of Hong Kong
It has been calculated that the airport alone would lose HK$250,000 for each Boeing 747 that did NOT fly into the airport (see Appendix E) - which would add up to a loss to the airport on an annualised basis of HK$91 million for every suspended flight. The CAD has also calculated that each daily flight into Hong Kong contributes at least HK$1 billion to the economy each year. If this calculation is accurate, then the loss of 82 weekly flights over the past 10 months is costing the economy an annualised HK$11.7 billion.

Undoubtedly, some of this decline can be attributed to the regional downturn in tourism, to the financial difficulties of numerous airlines, and even to some industry restructuring in progress as airline alliances begin to gel. But the observations of many aviation spokespeople identify high costs in Hong Kong as a significant aggravating factor.

The loss of flights carries a potentially high price for the economy as a whole. Tourism is the sector that inevitably has suffered the most obvious damage with a sharp downturn in visitors during 1998. Tourism plays a vital role in the local economy. Spending by visitors contributed HK$55.2 billion in 1998, or HK$8,200 for every man, woman and child in Hong Kong. The sector accounts directly and indirectly for some 330,000 jobs or about 10% of the workforce (down from 360,000 and 12% of the workforce at the end of 1997). Less visible, but perhaps more corrosive over time, will be the damage inflicted on Hong Kong as a business centre by the accumulated loss of direct connections and frequent flights as airlines continue to prune frequencies.

Hubs develop from an aggregation of feeder services that in time, due to efficiencies of scope and scale, replace point to point services across a network. Fundamental to their formation is the recognition that in the early stages of hub development services that are only marginally profitable can make an important contribution to overall hub development by increasing connectivity through the hub. These marginal services, and hence hub development, will tend to coalesce around the most cost efficient operating host in a particular region.

Conclusion

There is clear evidence that Hong Kong's pivotal role as Asia's leading international aviation hub is being eroded, with high airport charges being a significant contributor to this erosion. This is undermining the competitiveness of Hong Kong as a regional business centre and headquarter hub. While it will take some time for a permanent or long-term solution to be agreed, the critical challenges facing airlines using the Hong Kong hub, and Hong Kong's important travel and tourism industries, require urgent attention. Measures providing immediate stimulus need to be considered.



The points made in this short paper will be expanded in the Board of Airline Representatives presentation to The Economic Services Panel on the 24th of May. The Board of Airline Representatives will be happy to answer any further questions that you may have at that time.