By Siva Govindasamy
SINGAPORE (Reuters) - Jetstar Hong Kong has sold six of its nine new Airbus A320s and many of its pilots have either quit or been redeployed – all before the budget airline's first commercial flight.
Nearly 18 months after the low-cost carrier, backed by Australia's Qantas Airways (AX:QAN) and Shanghai-based China Eastern Airlines (SS:600115), lodged an application for a licence, Hong Kong authorities are still weighing its approval.
Budget airlines account for just 8 percent of the capacity out of Hong Kong, compared with 30 percent in Singapore and 50 percent in Kuala Lumpur and Jakarta, according to industry consultancy OAG.
The stalemate in Hong Kong illustrates the pitched battle between full-service carriers and their faster-growing budget rivals in Asia for a share of the rising demand for air travel.
Flag carrier Cathay Pacific (HK:0293), which along with its subsidiary Dragonair accounted for 47 percent of the seats out of Hong Kong in 2014, has been quietly pressing regulators on the importance of shielding the homegrown airline.
Sources close to Qantas believe that Cathay's opposition is the main reason behind the delay, and point out that even countries such as India, China and Japan – which are known for their red tape and protection of incumbent airlines – have approved applications from new budget airlines in a shorter time than that in recent years.
Other sources in Hong Kong, who are familiar with both Cathay Pacific and the government, could not say if the flag carrier was directly behind the delay. However, one source indicated that Cathay would do "everything it can" to stop Jetstar Hong Kong.
Cathay bristles at suggestions that it is against competition, pointing out that more than 100 airlines including 15 low-cost carriers operate out of Hong Kong's airport.
"We successfully compete for business in both Hong Kong and internationally each and every day," the airline told Reuters in a statement.
Central to the dispute is whether Jetstar Hong Kong is foreign-controlled and therefore ineligible to operate under Hong Kong law. Cathay argues that control over the budget carrier rests in Australia.
Jetstar disputes Cathay's assertion it is foreign controlled, arguing that its chairman, chief executive and majority shareholder are all from Hong Kong.
The carrier says while it will work with other Jetstar airlines in Asia on IT, sales and marketing issues, operational and financial responsibility will lie with the local management and board.
And in a move aimed at boosting the company's Hong Kong credentials, Qantas and China Eastern last year sold a stake in the venture to local investment group Shun Tak, a company founded by gambling billionaire Stanley Ho. The three companies now have an equal share in the carrier.
GROWING WEARY
Qantas chief Alan Joyce said last month he expected a hearing with Hong Kong authorities early next year.
The city's Transport Housing Bureau told Reuters that it was still considering the application and related objections.
"We maintain close dialogue with the various government departments in the process," said Jetstar Hong Kong's Chief Executive Edward Lau, who added in a statement to Reuters that the airline had not been "advised of a hearing date as yet".
Two sources close to the joint venture say that despite the drawn-out process, the three owners remain committed to the airline.
"However, they are growing increasingly weary. There has been only silence from the bureau. They expected Hong Kong's government to be more open and transparent," said an industry source who regularly talks to executives from both airlines.
Data shows the wait will probably be worth it. As with Europe and North America, low-cost carriers have transformed the commercial aviation sector in Asia. They have hundreds of aircraft on order.
Competition from Malaysia's AirAsia (KL:AIRA), Jetstar and Indonesia's Lion Air has led to lower profits at full-service carriers such as Malaysia Airlines (KL:MASM), Singapore Airlines (SI:Garuda Indones and Garuda Indonesia (JK:GIAA).
The legacy carriers have been forced to respond by dropping fares and some have started rival low-cost subsidiaries, moves which have hurt their bottom line and drained their balance sheets.
(Additional reporting by Donny Kwok in HONG KONG; Editing by Jeremy Laurence)